Item 1 BUSINESS
DESCRIPTION OF THE FARMERS BANCORP, FRANKFORT, INDIANA
The Farmers Bancorp, Frankfort, Indiana ("Bancorp"), an Indiana Corporation, was incorporated on May 26, 1983 for the purpose of acquiring all the outstanding common stock of The Farmers Bank, Frankfort, Indiana ("Bank"). All of the directors and executive officers of the Bancorp are also directors or executive officers of the Bank. On October 20, 1983, the Bancorp was approved by the FEDERAL RESERVE BOARD to become a bank holding company. The Bancorp is not aware of any persons or group which qualify as a parent, that is, have control over its operations.
There have been no material changes or developments in the business done or intended to be done by the Bancorp or by the Bank during this year.
BUSINESS
The Bancorp and the Bank are engaged in the business of banking. The principal source of income for the Bancorp is earnings generated by the Bank. The principal business activity of the Bancorp is to support the Bank. The Bancorp supports regulatory compliance, legal issues, and strategic planning for future expansion. See the Business Section of the Bank on page 5 for a detailed description of the Bank's activities.
REGULATION AND SUPERVISION
As a bank holding company, the Bancorp is regulated and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). It is required to file reports with the Federal Reserve and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). The Federal Reserve may also make examinations of the Bancorp and its subsidiary and subsidiaries which may be acquired in the future. The Federal Reserve has the authority to issue cease-and-desist orders against bank holding companies and their non-bank subsidiaries if the Federal Reserve determines that their actions represent an unsafe and unsound practice or a violation of law.
The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction, and requires the prior approval, of the Federal Reserve and, for institutions chartered in Indiana, the Indiana Department of Financial Institutions (the "Department"). Effective July 1, 1992 Indiana law permitted a bank holding company resident in the State of Indiana to acquire banking subsidiaries in any state or to be acquired by bank holding companies in any state, subject to certain limitations.
The non-bank activities of bank holding companies are also subject to the supervision of the Federal Reserve. Under the Holding Company Act, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of any voting shares of a corporation which is not a bank or engaging in any activity other than managing or controlling banks.
Page 3 of 81 Part I Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
A bank holding company, however, may engage in, or own shares of a corporation that engages solely in, activities which the Federal Reserve has determined to be so closely related to banking, or managing or controlling banks, as to be a proper incident thereto. If a bank holding company is of the opinion that other activities in the circumstances surrounding a particular case are closely related to banking, or managing or controlling banks, the bank holding company may apply to the Federal Reserve for approval to engage in the activity or acquire an interest in a corporation that engages in the activity.
A bank holding company and its subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the provision of any property or service. With certain exceptions, neither a bank holding company nor a bank, nor a subsidiary or affiliate of either, may extend credit, lease or sell property or furnish any services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some credit, property or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of credit extended.
DESCRIPTION OF BANK
The Bank, was chartered June 17, 1876 under the laws of the State of Indiana. The main office of the Bank is in Frankfort, Indiana. The Bank has two branch offices in Frankfort, Indiana, one in Kirklin, Indiana, one in Michigantown, Indiana, one in Mulberry, Indiana, and one in Sheridan, Indiana. The Bank has one remote ATM unmanned branch in Frankfort, Indiana. A free standing ATM is located in the Wal-Mart store located east of Frankfort.
Page 4 of 81 Part I Item 1 BUSINESS (cont.)
BUSINESS
The Bank conducts a general banking business embracing all the usual functions of a commercial bank. The Bank also operates a Trust Department serving in a fiduciary capacity with trusts, estates and guardianships.
The Bank makes and services both secured and unsecured loans to individuals, firms and corporations. The Bank's installment loan department makes both direct and indirect loans. The Bank makes a variety of residential, industrial, commercial and agricultural loans secured by real estate.
The Bank is the largest and oldest locally owned and headquartered commercial bank in Clinton County. The Bank operates under a conservative management philosophy and is dedicated to providing personal service coupled with competitive products and pricing. Management believes that local ownership allows the Bank to distinguish itself from competitors based on it's established reputation, and local decision making authority. The Bank is seeking to capitalize on this advantage by continuing an aggressive growth strategy throughout Clinton County and central Indiana. The Bank focuses on developing strong, primary banking relationships with businesses and individuals in its market area. The Bank's mission includes being a corporate leader in community service and supporting projects and organizations that enhance the quality of life through the utilization of the Bank's financial and human resources. The Bank's loan portfolio is diversified, locally oriented and does not include any foreign loans.
REGULATION AND SUPERVISION
The Bank, a subsidiary of the Bancorp, is a state bank and is supervised, regulated and examined by the Department. The Bank, which is not a member of the Federal Reserve System, is also supervised and regulated by the Federal Deposit Insurance Corporation ("FDIC"). The deposits of the Bank are insured by the FDIC. Each regulator has the authority to issue cease-and-desist orders if it determines that activities of a bank regularly represent an unsafe and unsound banking practice or violation of law.
Branching by banks in Indiana, either through establishment de novo or acquisition, is subject to the jurisdiction, and requires the prior approval, of the bank's primary federal regulatory authority, as well as the Department if the branching bank is a state bank. Under current Indiana law, as amended in 1991 by the Indiana General Assembly, banks may establish branches anywhere within the State of Indiana.
Subsidiaries of bank holding companies are also subject to certain restrictions imposed by the Federal Reserve on the extension of credit to the bank holding company or any of its subsidiaries, on investment in the stock or other securities of the bank holding company or any of its subsidiaries, and in taking such stock or securities as collateral for loans.
Page 5 of 81 Part I Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
The Bancorp and the Bank are subject to regulations that require the maintenance of a leverage ratio (tier one capital to adjusted total assets), a tier one risk-based capital (tier one capital to risk adjusted assets), and a total risk-based capital ratio (total capital to risk adjusted assets). During 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). In addition to addressing the insurance fund's financial needs, FDICIA required the FDIC to promulgate regulations outlining specific regulatory actions that would occur when the capital level of a financial institution deteriorated beyond a specified level. An "adequately capitalized" financial institution is defined as one which has a leverage ratio of at least 4 percent, a tier one risk-based capital ratio of at least 4 percent, and a total risk-based capital ratio of at least 8 percent. The level of deposit insurance assessments are also tied to the definitions prescribed by these regulations.
Compliance with these regulations limits the amount of dividends that may be paid by the companies. Refer to Note 13 of the Consolidated Financial Statements and management's discussion of Capital Resources (pages 63-64 and pages 35-36) for more information about these requirements and compliance with them at June 30, 1997.
The results of operations of the Bank are affected by the credit policies of monetary authorities, particularly the Federal Reserve System. The instruments of monetary policy employed by the Federal Reserve System include open market operations in United States Government securities, changes in the discount rate charged for member bank borrowing and changes in reserve requirements assessed on member bank deposits. Federal Reserve System monetary policies have had significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of the changing condition in the national economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.
Page 6 of 81
PART I ITEM 1 BUSINESS (cont.)
COMPETITION
The banking business is highly competitive. The Bank competes directly with one other bank located in Clinton County, Indiana, and with banks elsewhere. The main office and branch offices are located in a business/agricultural area of Clinton County and northwest Hamilton County. The Bank also competes with various savings banks, credit unions, finance companies and other non-bank financial institutions.
The trends of deregulation, increased competition among financial institutions, and increased competition with non-financial institutions seem likely to continue.
Part I Item 2
Item 2 PROPERTIES
The Bancorp owns no property. Its business requires minimal office space and uses the Bank's facilities.
The Bank's main office is located at 9 East Clinton Street, Frankfort, Indiana. The main office is owned by the Bank. The branches at Kirklin, Indiana, Michigantown, Indiana, and Mulberry, Indiana and one remote ATM branch in Frankfort, Indiana are also owned by the Bank. Two branch facilities in Frankfort, Indiana, and the branch at Sheridan, Indiana, are owned by the Bank but are located on leased property. A free standing ATM is located on leased property in the Wal-Mart store on the east edge of Frankfort.
Page 7 of 81
PART I ITEM 3
ITEM 3 LEGAL PROCEEDINGS
The Bancorp is not a party to any pending legal proceedings before any court, regulatory or administrative agency or other tribunal. Further, the Bancorp is not aware of any litigation which is threatened against it in any court, regulatory or administrative agency or other tribunal.
As part of its ordinary course of business, the Bank is a party to several lawsuits involving a variety of claims and in the collection of delinquent accounts. All such litigation is incidental to the Bank's business. Bank management believes that no litigation is threatened or pending against the Bank in which the Bank faces potential loss or exposure which would have a material effect upon the financial condition of the Bank. The Bancorp and the Bank are not involved in any administrative or judicial proceedings arising under any Federal, State or Local provisions which have been enacted or adopted to regulate the discharge of materials into the environment or otherwise relating to the protection of the environment.
PART I ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year 1997 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II ITEM 5
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
Shares of the common stock of the Bancorp are not traded on any established public trading market, but are purchased and sold privately by individual security holders primarily in the Clinton and surrounding county areas. While there have been some stock sales, privately traded at prices determined by individual buyer and seller, McDonald & Co. Securities, Inc. has been making a market for this stock. During the fiscal year ending June 30, 1997, there were various transfers of the common stock representing sales or exchanges, gifts, transfers to trust agreements, surviving joint tenants, transfers to decedents' estates and transfers resulting from the distribution of decedents' estates and trusts to heirs and beneficiaries. A total of 173,288 shares were transferred under the foregoing conditions during the fiscal year ended June 30, 1997.
Page 8 of 81
PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (cont.)
The following table reflects the price range of Bancorp's common stock for fiscal 1997 and 1996 (prices have been restated to give retroactive effect to the 2-for-1 stock split declared October 14, 1996). Management cannot verify these figures as they were furnished by McDonald & Co. Securities, Inc. The prices do reflect dealer markup which varies from 2 to 5 percent depending on each transaction.
Three Months Ended
Sept 30 December 31 March 31 June 30 Fiscal 1997 Price Range High $ 23 $ 24 $ 26.5 $ 28 Low 20 23 24 26.5
Fiscal 1996 Price Range High 17 20.5 21.5 23 Low 16.5 17 20.5 21.5
DIVIDENDS
The ability of the Bancorp to continue to pay dividends will depend on its earnings, financial condition and other factors as may be deemed appropriate in the determination of the Bancorp's dividend policy. Dividends paid by the Bancorp depend primarily on dividends paid by the Bank to Bancorp.
The dividends which the Bancorp may pay to its shareholders, and which the Bank may pay to the Bancorp are restricted by Indiana law and regulations of the Department, the FDIC, and the Federal Reserve Board. See Management's Discussion And Analysis Of Financial Condition And Results Of Operations - Capital Resources, pages 35 and 36. On June 30, 1997, there were 397 holders of record of Bancorp's common stock.
Page 9 of 81
PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (cont.)
The cash dividends per share declared by the Bancorp for fiscal years ended 1997 and 1996 are as follows (the per share data has been restated to give retroactive effect to the 2-for-1 stock split declared October 14, 1996): PAYMENT DATE: AMOUNT
August 15, 1996 $ .21 November 15, 1996 .22 February 14, 1997 .22 May 15, 1997 .25 July 15, 1997 1.00 ----- Total for 1997 $ 1.90 ===== August 15, 1995 $ .20 November 15, 1995 .20 February 15, 1996 .20 May 15, 1996 .21 ----- Total for 1996 $ .81 ======
Due to the increased earnings, the Board declared a special dividend totaling $1.00 per share on May 12, 1997, payable July 15, 1997 to shareholders of record as of May 30, 1997.
Page 10 of 81
Part II Item 6
Item 6 SELECTED FINANCIAL DATA (Dollars in thousands, except per share data and ratios. Per share data has been restated to give retroactive effect to the 2-for-1 stock split declared October 14, 1996.) YEAR ENDED JUNE 30 1997 1996 1995 1994 1993 Income Statement Summary: Interest Income $ 20,062 $ 18,111 $ 16,658 $ 15,771 $ 16,125 Interest Expense 8,671 8,253 7,225 6,320 6,977 -------------------------------------------- Net Interest Income 11,391 9,858 9,433 9,451 9,148 Provision for Loan Losses 570 480 218 500 1,455 Other Operating Income 1,839 1,486 1,468 1,586 1,718 Other Operating Expenses 7,255 7,172 7,069 7,196 6,666 -------------------------------------------- Income Before Income Taxes 5,405 3,692 3,614 3,341 2,745 Income Tax Expense 1,946 1,276 1,189 1,080 838 -------------------------------------------- NET INCOME $ 3,459 $ 2,416 $ 2,425 $ 2,261 $ 1,907 Per Share Data: ============================================ Earnings (1) $ 3.00 $ 2.09 $ 2.10 $ 1.96 $ 1.65 Dividends Declared 1.90 .81 .76 .70 .66 Book Value at Year End 22.07 20.91 19.77 18.36 17.10 RATIOS: Performance: Return on Avg. Assets 1.42% 1.05% 1.11% 1.05% .93% Return on Avg. Equity 13.71 10.31 11.11 11.15 10.00 Dividend Payout Ratio 63.33 38.76 36.19 35.71 40.00
Asset Quality: Net Charge-offs to Avg. Loans .04% .05% .23% .18% .91% Allowance for Loan Losses to Loans at Year-End 1.61 1.57 1.50 1.68 1.65 Allowance for Loan Losses to Non- performing Loans at Y/E 154.05 115.51 94.26 90.60 65.99 Non-performing Loans to Total Loans at Year-End 1.04 1.36 1.59 1.85 2.51
Capital Ratios: Avg. Shareholders' Equity to Avg. Assets 10.36% 10.18% 9.99% 9.43% 9.28% Leverage Ratio 10.21 10.21 10.06 9.79 9.53 Tot Risk-based Capital Ratio 13.47 14.21 13.83 13.30 14.26
Year End Balances: Assets $251,744 $237,044 $226,032 $216,390 $207,063 Earning Assets (2) 232,526 217,083 208,155 201,332 191,645 Loans, Net (3) 197,592 171,307 154,293 145,099 132,317 Deposits 202,607 191,488 175,554 169,457 163,437 Short-Term Borrowings 11,985 12,752 20,691 21,190 22,922 Other Borrowings 7,839 6,259 5,175 3,075 -0- Shareholders' Equity 25,476 24,127 22,821 21,191 19,738
(1) Earnings per share computations are based on the weighted average number of common shares outstanding during the years. The number of shares used in the computation was 1,154,116 for all years presented. (2) Includes nonaccrual loans. (3) Includes loans held for sale. Page 11 of 81
Part II Item 7
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to address the significant factors affecting the Bancorp's financial condition and results of operations. It is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from the analysis of the consolidated financial statements alone. It should, however, be read in conjunction with the consolidated financial statements and related notes and the Selected Financial Data included elsewhere herein. All per share amounts have been restated to give retroactive effect to the 2-for-1 stock split declared October 14, 1996.
OVERVIEW
Total assets of Bancorp increased $14,700,000, or 6.20 percent, from June 30, 1996 to June 30, 1997, and totaled $251,744,000 at June 30, 1997. Total loans, including loans held for sale, increased $26,776,000 or 15.38 percent, from June 30, 1996 to June 30, 1997, and totaled $200,824,000 as of June 30, 1997. Securities decreased $10,562,000 or 25.00 percent, from June 30, 1996 to June 30, 1997, and totaled $31,702,000 as of June 30, 1997. The increase in loans was funded by the decrease in securities, and an increase in deposits and short-term borrowings which, combined, increased $10,352,000, or 5.07 percent over the prior year end. Funding was also provided by a net $1.7 million increase in FHLB advances which totaled $7,477,000 as of June 30, 1997. These advances require periodic principal payments and are generally drawn to fund specific commercial loans originated by The Bank.
Bancorp reported net income of $3,459,000 in 1997, an increase of $1,043,000, or 43.17 percent from $2,416,000 earned in 1996. Earnings per share were $3.00 in 1997, up from $2.09 per share in 1996. The increase resulted primarily from increased net interest and other income. Net interest income increased by $1,533,000 or 15.55 percent over the previous year. Other income increased $353,000 or 23.76 percent over the previous year. Offsetting these revenue increases was the increase in income taxes from the previous year of $670,000 or 52.51 percent. This increase was due primarily to a 46.39 percent increase in income before taxes and by the relative decrease in tax free investments held by the Bank.
1996 net income was essentially the same as 1995 net income. Increases in the provision for loan losses, expenses related to the demolition of a branch and higher compensation expenses offset increased net interest income.
Page 12 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
In the following table, the different components of the income statement are divided by average total assets to provide year-to-date comparisons (on a non-tax equivalent basis).
PERCENTAGE OF AVERAGE ASSETS
Year Ended June 30
1997 1996 1995
Net Interest Income 4.68% 4.28% 4.31% Provision for Loan Losses .23 .21 .10 Other Operating Income .76 .65 .67 Other Operating Expenses 2.99 3.12 3.23 Income before Income Taxes 2.22 1.60 1.65 Income Taxes .80 .55 .54 Net Income 1.42 1.05 1.11
RESULTS OF OPERATIONS:
Net Interest Income:
Net interest income is the principal component of net income for the Bancorp. Net interest income is determined by the relative size and characteristics of interest-earning assets and interest-bearing liabilities and by the difference, or spread, between the yields earned on interest-earning assets and rates paid on interest-bearing liabilities. During the year ended June 30, 1996 there was a general decline in interest rates. During the years ending June 30, 1995 and June 30, 1997 there was a gradual increase in rates.
The following tables set forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest- bearing liabilities, the dollar amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. Average balances are also provided for non-interest-earning assets and non-interest- bearing liabilities and shareholders' equity. Average balances are determined from average daily balances.
Page 13 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Average Yield/ Balance Interest Rate (Dollars in Thousands)
Assets Interest earning assets: Loans(1): (net of unearned discount) Domestic(2) $187,732 17,628 9.39% Foreign -0- -0- -0- Securities: Taxable 28,510 1,892 6.64 Tax-exempt(2) 8,692 677 7.79 Interest bearing deposits: Domestic: -0- -0- -0- Foreign -0- -0- -0- Short term investments 2,146 114 5.31 ------- -------- ------ Total interest earning assets 227,080 20,311 8.94 Noninterest earning assets: Cash and due from banks 6,279 Premises and equipment, net 4,882 Other assets 8,202 Less allowance for loan losses (2,968) ------ $243,475 ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings and demand deposits $ 67,910 1,925 2.83 Time deposits 105,017 5,844 5.56 Deposits in foreign offices -0- -0- -0- Repurchase agreements & short term borrowings 11,651 450 3.86 Other borrowings 7,241 452 6.24 ------- ------ ------ Total interest bearing liabilities 191,819 8,671 4.52 Noninterest bearing liabilities: ----- Demand deposits 23,821 Other 2,612 -------- 218,252 Shareholders' equity 25,223 -------- $243,475 Net interest earnings (spread) ======== $11,640 Net interest margin on earning assets ======= 5.13 ===== (1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Net interest income includes tax equivalent adjustments computed using a 34 percent marginal federal tax rate of $249 for 1997.
Page 14 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Average Yield/ Balance Interest Rate (Dollars in Thousands)
Assets Interest earning assets: Loans(1): (net of unearned discount) Domestic(2) $161,663 14,820 9.17% Foreign -0- -0- -0- Securities: Taxable 31,299 2,076 6.63 Tax-exempt(2) 9,012 812 9.01 Interest bearing deposits: Domestic: -0- -0- -0- Foreign -0- -0- -0- Short term investments 12,627 709 5.61 ------- -------- ------ Total interest earning assets 214,601 18,417 8.58 Noninterest earning assets: Cash and due from banks 6,119 Premises and equipment, net 4,409 Other assets 7,678 Less allowance for loan losses (2,642) ------ $230,165 ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings and demand deposits $ 69,079 2,052 2.97 Time deposits 97,085 5,417 5.58 Deposits in foreign offices -0- -0- -0- Repurchase agreements & short term borrowings 11,100 487 4.36 Other borrowings 5,204 297 5.71 ------- ------ ------ Total interest bearing liabilities 182,468 8,253 4.52 Noninterest bearing liabilities: ----- Demand deposits 22,014 Other 2,259 -------- 206,741 Shareholders' equity 23,424 -------- $230,165 Net interest earnings (spread) ======== $10,164 Net interest margin on earning assets ======= 4.74 ===== (1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Net interest income includes tax equivalent adjustments computed using a 34 percent marginal federal tax rate of $306 for 1996.
Page 15 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Average Yield/ Balance Interest Rate (Dollars in Thousands)
Assets Interest earning assets: Loans(1): (net of unearned discount) Domestic(2) $151,984 $13,310 8.76% Foreign -0- -0- -0- Securities: Taxable 37,575 2,508 6.67 Tax-exempt(2) 8,622 838 9.72 Interest bearing deposits: Domestic: 142 8 5.63 Foreign -0- -0- -0- Short term investments 5,297 300 5.66 ------- ------- ----- Total interest earning assets 203,620 16,964 8.33 Noninterest earning assets: Cash and due from banks 6,087 Premises and equipment, net 4,454 Other assets 6,977 Less allowance for loan losses (2,563) ------- $218,575 ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings and demand deposits $ 71,323 2,052 2.88 Time deposits 88,501 4,571 5.16 Deposits in foreign offices -0- -0- -0- Repurchase agreements & short term borrowings 9,441 346 3.66 Other borrowings 4,580 256 5.59 ------- ------- ----- Total interest bearing liabilities 173,845 7,225 4.16 Noninterest bearing liabilities: ----- Demand deposits 21,656 Other 1,240 -------- 196,741 Shareholders' equity 21,834 -------- $218,575 Net interest earnings (spread) ======== $ 9,739 Net interest margin on earning assets ======= 4.78 ===== (1) For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Net interest income includes tax equivalent adjustments computed using a 34 percent marginal federal tax rate of $307 for 1995.
Page 16 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Net interest income on a tax equivalent basis increased to $11,640,000 for the year ended June 30, 1997 compared to $10,164,000 for 1996 and $9,739,000 for 1995. Net interest margin (net interest income divided by average earning assets), on a tax equivalent basis, increased to 5.13 percent for 1997 compared to 4.74 percent for 1996 and 4.78 percent for 1995. 1997's yield on average earning assets increased 36 basis points as compared to 1996. 1997's rate on average interest bearing liabilities remained the same as 1996's rate. 1996's yield on average earning assets increased 25 basis points as compared to 1995. Likewise, 1996's rate on average interest bearing liabilities increased 36 basis points as compared to 1995. The increase in net interest margin from 1996 to 1997 primarily resulted from an increase of 22 basis points in the yield on the loan portfolio. Average earning assets increased $12.5 million (5.81 percent) from 1996's balance of $214.6 million. A change in the mix of earning assets occurred as loan demand continued to be very strong. Average total loans increased $26,069,000, or 16.13 percent, while average securities decreased by $3,109,000 or 7.71 percent. By June 30, 1997 total loans, excluding loans held for sale, were $200,824,000 compared to $173,556,000 at June 30, 1996.
Total deposits and short-term borrowings increased $10,352,000 during 1997. This increase was due to increases in time deposits, demand deposits and savings accounts which increased by $17,384,000, or 11.41 percent from June 30, 1996 to June 30, 1997 while money market investment accounts, NOW accounts and short-term borrowings, combined, declined by $7,032,000, or 13.57 percent during the same period.
The following tables illustrate the changes in asset and liability mix that have taken place over the last three years, (ratios at year end).
Page 17 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Ratio to Total Earning Assets
1997 1996 1995
Loans 85.99% 80.18% 75.25% Investments/Taxable 10.81 15.14 15.50 Tax-Exempt 3.20 4.68 4.20 Federal Funds Sold -0- -0- 3.27 Money Market Investments -0- -0- 1.78
Ratio to Total Interest Bearing Liabilities
1997 1996 1995
Savings Deposits 34.88% 35.94% 32.83% Time Deposits 55.10 53.97 52.75 Repurchase agreements and 6.06 6.77 11.54 Short-Term Borrowings Other Borrowings 3.96 3.32 2.88
Page 18 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
An analysis of the changes in interest income and expense, segregated between changes in volume and rate, is shown comparing 1997 to 1996 and 1996 to 1995.
1997 Compared to 1996 1996 Compared to 1995 ---------------------- --------------------- Increase (Decrease) Increase (Decrease) due to (1) due to (1) ---------------------- --------------------- Volume Rate Net Volume Rate Net ---------------------- --------------------- (Dollars in Thousands) (Dollars in Thousands)
Interest earned on: Loans: Domestic $2,391 $ 417 $ 2,808 $ 848 $ 662 $1,510 Foreign -0- -0- -0- -0- -0- -0- Investment Securities: Taxable (185) 1 (184) (419) (13) (432) Tax-exempt (29) (106) (135) 38 (64) (26) Interest bearing deposits: Domestic -0- -0- -0- -0- -0- -0- Foreign -0- -0- -0- -0- -0- -0- Short term investments (588) (7) (595) 407 (6) 401 -------------------------------------------------- Total interest income 1,589 305 1,894 874 579 1,453 -------------------------------------------------- Interest paid on: Savings and demand deposits (35) (92) (127) (65) 65 -0- Time deposits 443 (16) 427 443 403 846 Deposits in foreign offices -0- -0- -0- -0- -0- -0- Repurchase agreements and short term borrowings 24 (61) (37) 61 80 141 Other borrowings 116 39 155 35 6 41 -------------------------------------------------- Total interest expense 548 (130) 418 474 554 1,028 -------------------------------------------------- Net interest income $1,041 $ 435 $ 1,476 $ 400 $ 25 $ 425 ==================================================
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Page 19 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses:
The provision for loan losses (a direct charge to operating expenses) provides a reserve (the allowance for loan losses) to which loan losses are charged as those losses become evident. The provision is determined in conjunction with management's review and evaluation of current economic conditions, changes in the character and size of the loan portfolio, estimated charge-offs and other pertinent information derived from a quarterly review of the loan portfolio.
In order to analyze the allowance for loan losses, management utilizes a quarterly report (watch list) containing loans with a more than normal degree of risk. This report is the by-product of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Utilizing this report, a "specific allocation" of the reserve is made for those loans which are considered to represent significant exposure to risk. In addition, estimates are made for the potential losses within each category of the loan portfolio, not specifically reviewed, based on a weighted five year historical loan loss experience, non-performing loan history, and other factors and trends.
The provision for loan losses in 1997 totaled $570,000 as compared to $480,000 for 1996 and $218,000 for 1995. The increase in provision for the year ended June 30, 1997 was due to the Bank's loan growth and management's desire to maintain the reserve at an appropriate level. Asset quality in general continues to improve compared to prior years. Management continues to closely monitor the financial condition of the Bank's agricultural borrowers and to forecast expected levels of crop yields and prices. Early predictions indicate that due to a dry summer in Clinton County the corn crop yields will be significantly lower than average, while the bean crop has the potential to reach average yields. For the year ended June 30, 1997 the Bank recorded a net recovery of $10,000 on commercial and agricultural loans, compared to a net recovery of $35,000 and a net charge-off of $299,000 for the years ended June 30, 1996 and June 30, 1995 respectively. A large portion ($280,000) of 1995's charge-offs were subsequently recovered in August 1995. Management constantly monitors the loan portfolio for any downward trends or weaknesses, and will continue to do so.
Page 20 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses (cont.)
The following table summarizes the activity in the allowance for loan losses for the years indicated.
1997 1996 1995 1994 1993
(Dollars in Thousands) Allowance for loan losses: Balance at July 1 $2,741 $2,348 $2,478 $2,226 $1,936 Loan losses: Domestic: Commercial, financial and agricultural 72 317 562 266 1,110 Real estate mortgages -0- -0- -0- -0- 66 Installment loans 244 230 173 205 217 Lease Financing -0- -0- -0- -0- -0- Foreign -0- -0- -0- -0- -0- ------------------------------------------- Total loan losses 316 547 735 471 1,393 ------------------------------------------- Loan recoveries: Domestic: Commercial, financial and agricultural 82 352 263 103 88 Real estate mortgages 43 -0- -0- 1 -0- Installment loans 112 108 124 119 140 Lease Financing -0- -0- -0- -0- -0- Foreign -0- -0- -0- -0- -0- ------------------------------------------- Total loan recoveries 237 460 387 223 228 ------------------------------------------- Net loan losses 79 87 348 248 1,165 Provision charged to current income 570 480 218 500 1,455 ------------------------------------------- Balance at June 30 $3,232 $2,741 $2,348 $2,478 $2,226 ===========================================
Approximately 22.10 percent of the Bancorp's total loan portfolio is oriented in agricultural or agri-business relationships. $14,000 of the $72,000 in commercial loan charge-offs for 1997 were agriculture related, compared to $224,000 of the $317,000 for fiscal 1996. $74,000 of the $82,000 in commercial loan recoveries for 1997 were agriculture related. The installment loan portfolio had gross charge-offs of $244,000 for 1997, compared to $230,000 in 1996 and $173,000 in 1995. Net charge offs on installment loans were $132,000 in 1997, up from $122,000 in 1996 and $49,000 in 1995.
Page 21 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements:
The following is a summary of nonperforming loans, all of which are domestic loans. JUNE 30 1997 1996 1995 1994 1993 (Dollars in Thousands) Nonaccrual: Commercial $ 726 $ 632 $1,173 $ 642 $ 377 Real Estate 97 420 47 83 -0- Installment 109 84 3 10 74 Lease Financing -0- -0- -0- -0- -0- ---------------------------------------------- Total 932 1,136 1,223 735 451
Past Due 90 Days: Commercial 153 394 541 187 776 Real Estate 335 44 -0- 85 623 Installment 97 51 19 59 65 Lease Financing -0- -0- -0- -0- -0- ---------------------------------------------- Total 585 489 560 331 1,464
Troubled Debt Restructurings: Commercial 581 748 708 1,466 1,246 Real Estate -0- -0- -0- 203 212 Installment -0- -0- -0- -0- -0- Lease Financing -0- -0- -0- -0- -0- ----------------------------------------------- Total 581 748 708 1,669 1,458 ---------------------------------------------- Total Nonperforming Loans $2,098 $2,373 $2,491 $2,735 $3,373 ===============================================
Income that would have been earned during 1997, had nonaccrual and restructured loans been accruing at their contractual rates, was $69,000. Income that was recorded totaled $37,000. Income foregone as a result of nonaccrual loans and troubled debt restructurings aggregated approximately $111,000 and $118,000 for 1996 and 1995, respectively.
Nonperforming loans totaled $2,098,000 at June 30, 1997 compared to $2,373,000 at June 30, 1996 and represent 1.04 percent of total loans at June 30, 1997, down from 1.36 percent and 1.59 percent at June 30, 1996 and 1995, respectively. The allowance for loan losses, as a percent of nonperforming loans, was 154.05 percent at year-end 1997, compared to 115.51 percent for 1996 and 94.26 percent for 1995.
Page 22 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Nonperforming loans are comprised of three major sub-divisions - nonaccrual loans, loans delinquent over 90 days and still accruing, and troubled debt restructurings. In the nonaccrual loan category are those loans where significant doubt exists as to the collectibility of all principal or accrued interest. The Bank follows the definition of nonaccrual loans established by the Federal Financial Institutions Examination Council. The following are the Bank's procedures for nonaccrual loans. When the status of a loan fits the criteria of nonaccrual status, including delinquency of principal and interest payment of 90 days or more, it is submitted to the Officers Loan Committee for final review before placement on nonaccrual status. Loans remain on nonaccrual status until a borrower's position improves as to ability to repay or until a determination is made for eventual charge- off. Regular monthly reviews of the nonaccrual loans are made by the Directors Loan Committee and reported to the Board of Directors. Following the guidelines Bancorp adopted for nonaccrual loans, twenty- seven individual borrowers with loan balances of $932,000 were in nonaccrual status at June 30, 1997. Negotiations continue with the respective customers to resolve their immediate financial difficulties. It is anticipated that losses from this category will not exceed $300,000.
Loans past due over 90 days and still accruing have increased $96,000, or 19.63 percent, to $585,000 at June 30, 1997 from the 1996 total of $489,000. This amount is comprised of the following; $153,000 in two commercial borrowers; $85,000 in twelve consumer loans; $12,000 in eight credit card related loans; $121,000 in two mortgage construction loans and $214,000 in four residential mortgage loans.
Management continues to work to resolve the Bank's problem loan situations and believes that the Bank's loan review and reserve analysis processes have successfully identified existing problem loans and intends to continue to work with these customers to resolve, either through work-out, foreclosure and/or charge off, those situations.
Page 23 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Troubled debt restructurings are those loans for which the contractual interest has been reduced, or other concessions granted because of a deterioration in the financial condition of the borrower, resulting in the inability of the borrower to meet the original contractual terms of the loans. Interest on such loans is included in income only to the extent of the reduced rate. Each borrower may be having varying degrees of financial difficulty. On a case-by-case basis negotiations are held to determine how to achieve the best results for both Bancorp and the customer without forcing the borrower into liquidation. Management will reach an agreement as to principal and interest concessions, collateral available, and term of repayment. At June 30, 1995, restructured loans totaled $708,000. They consisted of four agricultural borrowers and one commercial borrower. All loans were current as of June 30, 1995. At June 30, 1996 restructured loans totaled $748,000, consisting of four agricultural borrowers and two commercial borrowers. All six loans were current as of June 30, 1996. At June 30, 1997, restructured loans totaled $581,000, consisting of five borrowers. Three of these borrowers were agriculture-related and two were commercial borrowers. All were current as of June 30, 1997. Management does not expect this category to constitute an automatic loss risk, but rather a category to prevent or minimize future loan losses.
Effective July 1, 1995, Bancorp adopted FAS 114, "Accounting by Creditors for Impairment of a Loan", as amended by FAS 118. Loans are identified as impaired when management concludes that it is probable that the customer will not comply with the contractual terms of the loan agreement. Loans are evaluated for impairment during management's quarterly analysis of the reserve for loan losses. Generally, all commercial and agricultural loans that have been selected for evaluation in conjunction with the reserve analysis are evaluated for impaired status. Generally, no consumer or 1-4 family residential real estate loans would be evaluated. If a loan is deemed to be impaired, management will evaluate the need for an impairment reserve (simply an allocation of a portion of the allowance for loan losses) on that credit. Generally, the fair value of collateral is used to evaluate impairment. At June 30, 1997, management has determined that four commercial/agricultural loans totaling $747,000, all of which are on non-accrual status, are impaired and has allocated $125,000 of the allowance for loan losses to those loans. Two commercial loans past due more than 90 days in the amount of $153,000 and one restructured commercial loan in the amount of $187,000 have also been deemed to be impaired. One mortgage loan totaling $213,000, secured by several rental properties, is also included in the impaired loan total of $1,300,000 at June 30, 1997. No impairment reserves were deemed needed for the delinquent or restructured loans.
Page 24 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
In addition to these loans outlined previously, at June 30, 1997, the Bancorp has identified other loans which management has concerns relative to the ability of the borrowers to comply with loan repayment terms. These loans, which total $3,139,000, down from $7,075,000 at June 30, 1996, are classified as "watch" loans and receive ongoing management attention in excess of that provided to the remaining portfolio. The loans placed in "watch" status are as follows: four (4) borrowers with residential mortgage loans totaling $243,000; eleven (11) agricultural real estate loan borrowers totaling $1,083,000; three (3) commercial real estate loans totaling $388,000; twelve (12) agricultural operating and term loan borrowers totaling $1,033,000; five (5) commercial operating and term loan borrowers totaling $376,000; and one (1) personal loan borrower totaling $16,000. It is noted, however, that Bank policy states that in the event any single note of a borrower is placed on the "watch list", all notes of the borrower are placed on said list; regardless of the payment history or collateral valuation of individual notes.
Loan Loss Charge-off Procedures:
The Bank's Officers' Loan Committee meets weekly to discuss all significantly delinquent loans (regardless of size) and any other known loan problems that might affect customers. Specific review is assigned to an account officer to determine the reason for delinquency and the chances of rehabilitation and/or improvement for the particular credit. Once the account officer has made his review, he makes recommendations as to the collectibility of the loan. If the loan is considered a loss, it is approved for charge-off by the Officers' Loan Committee.
The Loan Review Committee meets monthly to evaluate the quality of the Bank's loan portfolio and administration of its lending activities. It also shares the responsibility for recommending transfer of credits to a loss category in its function of summarizing "watch loans" and preparing supporting information for the quarterly review of the adequacy of the reserve for loan losses. There are many elements of consideration that comprise the criteria for a "watch list." Each of the elements serve as a management tool to act as a monitor for potential problems. It does not indicate a loss as being imminent.
All approved charge-offs are submitted to the Directors' Loan Committee which is made up of four outside Directors and Senior Management. They review the findings of the Officers' Loan Committee and Loan Review Committee and tentatively approve the charge-off of the portion of the loan that is determined to be uncollectible.
Once the Directors' Loan Committee approves a loan for charge-off, it is then submitted to the Board of Directors on a monthly basis for their review and approval or rejection of the recommendation. In addition to these internal procedures, the Bank charges off loans as a result of regulatory examinations.
Page 25 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Income:
Other Operating Income Analysis % Change from prior year
1997 1996 1995 1997 1996
(Dollars in Thousands)
Trust Fees $ 315 $ 273 $ 244 15.38% 11.89 % Service Charge Income 792 727 676 8.94 7.54 Mortgage Banking Revenue 139 110 83 26.36 32.53 Other Income 593 376 465 57.71 (19.14) --------------------- -------------------- 1,839 1,486 1,468 Security Gains(losses) -0- -0- -0- --------------------- -------------------- $1,839 $1,486 $1,468 23.76% 1.23 % ====================== ====================
Other operating income increased during the year ended June 30, 1997, compared to 1996. Mortgage banking revenue increased 26.36 percent, to $139,000. The Bank continued to sell fixed rate first mortgage loans in the secondary market. The Bank realized gains of $52,000 during 1997, as compared to $36,000 in 1996 and $20,000 in 1995. Servicing income earned on sold loans increased to $87,000 for the year ended June 30, 1997, compared to $74,000 in 1996. At June 30, 1997, Bancorp was servicing $37,566,000 of loans for other investors compared to $29,309,000 at June 30, 1996. Other income increased by 57.71 percent, or $217,000, to $593,000 for the fiscal year ended June 30, 1997. The most significant factor causing this increase was a increase of $189,000 in the amount of cash surrender value income recognized on life insurance policies owned by the Bank.
Other Operating Expenses:
Other Operating Expenses Analysis % Change from prior year 1997 1996 1995 1997 1996 (Dollars in Thousands)
Salaries & Employee Benefits $3,866 $3,822 $3,511 1.15 % 8.86 % Occupancy Expense-Net 592 602 551 (1.66) 9.26 Equipment Expense 657 581 569 13.08 2.11 FDIC assessment 12 9 384 33.33 (97.66) Data Processing Expense 402 345 458 16.52 (24.67) Other Expenses 1,726 1,813 1,596 (4.80) 13.60 ------------------------ ----------------- $7,255 $7,172 $7,069 1.16 % 1.46 % ======================== =================
Page 26 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Expenses (cont.)
Other operating expenses increased 1.16 percent or $83,000 to total $7,255,000 for 1997 compared to $7,172,000 in 1996. Salaries and employee benefits, the largest component of other operating expenses, increased only $44,000, or 1.15 percent for 1997. Data processing expenses are primarily those paid to outside vendors and increased $57,000 from fiscal 1996 to 1997 but decreased $113,000 from fiscal 1995 to 1996, due to converting to an in-house system. The 1997 increase was due to a new teller platformation system, increased expenses related to credit card processing, and increased ATM processing charges.
The need to control noninterest expense has become a major focus for management because of the increased emphasis on regulatory compliance and its related cost. Management has very limited control over FDIC assessment expense, insurance cost, postage expense and taxes. Management has attempted to control labor costs by restricting new hires. Other expenses in 1996 include a nonrecurring charge of $180,000 related to the write off of the undepreciated value of a branch building that was demolished so it could be expanded.
Income Tax Expense:
Income tax expense for 1997 increased to $1,946,000 compared to $1,276,000 for 1996 and $1,189,000 for 1995. Increased tax expense resulted primarily from higher levels of income before tax and was also due to the decline in tax exempt income during the period.
Net deferred tax assets at June 30, 1997 total $662,000. The Bancorp's net deferred tax asset results primarily from a deferred tax asset related to book provisions for loan losses in excess of the amount deductible for tax purposes and deferred compensation accruals offset by a deferred tax liability related to tax depreciation in excess of the amount deducted for financial reporting purposes. Based on the Bancorp's historical levels of taxable income and the relatively small size of the net deferred tax asset, management does not believe a valuation allowance for deferred tax assets is needed at June 30, 1997.
Page 27 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
ANALYSIS OF BALANCE SHEET
Earning Assets:
Bancorp's average earning assets were 93.27 percent of average total assets for 1997, which is slightly higher than this same ratio for 1996 of 93.24 percent and 1995 of 93.16 percent. A factor that influences (lowers) the earning asset ratio is the purchase of life insurance, in conjunction with the formation of deferred compensation and death benefit programs. At June 30, 1997, the cash surrender value of this insurance totaled $4,774,000 as compared to $4,510,000 at June 30, 1996. Although this asset does not "earn" interest, it increases in value over time and that increase in value is reflected as a component of other income. If this asset was considered "earning" for the purpose of the above computation, the earning asset ratio for 1997 and 1996 would be approximately 95.16 and 95.11 percent, respectively.
Securities:
The combined carrying value of available-for-sale and held-to-maturity securities, by category, is as follows: JUNE 30
1997 1996 1995 (Dollars in Thousands)
U.S. Govt. Agencies and Corporations $12,491 $16,939 $17,660 States and Political Subdivisions 7,476 10,178 8,742 Corporate Obligations 3,495 3,960 4,026 Mortgage-backed Securities issued by U.S. Government Agencies 8,089 10,370 8,969 Other Asset-backed Securities 151 817 1,617 ------------------------------ $31,702 $42,264 $41,014 ==============================
Page 28 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Securities (cont.)
The Bancorp's securities portfolio acts as a source of liquidity and additional earnings. In order to accomplish the objective of liquidity, the weighted average maturity of the portfolio is kept relatively short. The Bancorp classifies its securities as available-for-sale securities or held-to-maturity securities. At June 30, 1997, the fair value of available-for-sale securities was less than their amortized cost by $18,000. Held-to-maturity securities are those which the Bancorp has the intent and ability to hold until maturity. These are reported at amortized cost. Available-for-sale securities are those which management may decide to sell, if needed, for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value with unrealized gains or losses included as a separate component of shareholders' equity, net of tax. No securities were sold during 1995, 1996 or 1997. The Bancorp's goal of increasing loan volume resulted in the contraction of the securities portfolio in 1997. As securities matured or were called, the Bancorp utilized these funds to fund the loan portfolio. Please refer to Note 2, pages 52-54 of the financial statements for additional information about the composition of the available-for-sale and held-to-maturity securities portfolios. At June 30, 1997 the Bancorp did not have a concentration of securities greater than 10 percent of its total equity in any one entity, exclusive of U.S. Government Agency obligations. Mortgage- backed securities issued by U. S. Government Agencies do represent 25.52 percent of the total portfolio and 3.21 percent of total assets. The level yield method of accounting is used to amortize premiums and accrete discounts on mortgage-backed securities.
Page 29 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio:
The composition of the loan portfolio, including loans held for sale, follows:
June 30
1997 1996 1995 1994 1993 (Dollars in Thousands)
Commercial, financial and agricultural $104,702 $ 90,824 $ 76,015 $ 75,041 $ 54,832 Real estate/Non-Farm 29,936 31,620 35,911 32,000 39,539 Real estate/Farmland 21,335 18,556 18,310 17,438 20,508 Consumer 43,807 32,140 25,922 23,016 19,636 Lease Financing 1,044 908 483 82 28 Foreign -0- -0- -0- -0- -0- -------- ------- ------- ------- ------- 200,824 174,048 156,641 147,577 134,543 Unearned discount -0- -0- -0- -0- -0- ------- ------- ------- ------- ------- 200,824 174,048 156,641 147,577 134,543 Allowance for loan losses (3,232) (2,741) (2,348) (2,478) (2,226) -------- -------- -------- -------- -------- Total loans, net $197,592 $171,307 $154,293 $145,099 $132,317 ========= ======== ======== ======== =========
Commercial loans have maintained a growth pattern since 1992. Outstandings averaged $95,750,000 in 1997, $77,329,000 in 1996 and $75,698,000 in 1995. While the Bank's commitment to agricultural- related financing remains, outstanding agricultural-operating lines have been on a gradual decline with balances at $23,050,000 for 1997, up slightly from 1996's total of $22,570,000; $25,831,000 for 1995 and $27,756,000 for 1994. New non-farm commercial credits have continued to increase, which will help diversify the entire commercial loan portfolio.
Consumer loans, which include installment, credit card and student loans increased the past four years. Average outstandings increased by approximately 43.31 percent or $11,970,000 for 1997 as compared to 12.27 percent or $3,025,000 for the year ended 1996. Credit card activity showed gradual growth throughout 1994 and 1995, after the Bank became an "issuing bank" for both Mastercard and Visa in 1990. Following a credit card promotion in 1996, balances increased $982,000 from the previous year and totaled $2,307,000 at June 30, 1996. Credit card balances in 1997 increased $496,000, or 21.50 percent from June 30, 1996 to total $2,803,000 at year-end. Management believes that the outstanding consumer loan totals will show continued growth in 1998.
Page 30 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
Real estate loans increased to $51,271,000 at June 30, 1997, as compared to $50,176,000 at June 30, 1996. This increase of $1,095,000 or 2.18 percent is due to an increase of $2,780,000 in the farmland real estate portfolio, offset by a decrease in the residential real estate portfolio of $1,684,000 due to scheduled payments and refinancing of 1-4 family residential mortgages. The majority of new originations are being sold into the secondary market. Construction loans, which are one year or less in length, are carried in the Bank's commercial loan portfolio and totaled $10,629,000 at June 30, 1997 as compared to $5,439,000 at June 30, 1996. Upon completion of construction, commitments for permanent financing are activated either within the Bank's real estate loan portfolio or with other financial institutions.
The Bank's portfolio doesn't include foreign loans, nor does there exist a concentration of borrowers engaged in the same industry that would exceed 10 percent of total loans except for the agricultural sector. Approximately 22 percent or $44,385,000 of the total loan portfolio of $200,824,000 represents agricultural-lending, both operations and long term debt. This compares to 24 percent, $41,126,000 at June 30, 1996, and 28 percent, $44,140,000 at June 30, 1995.
The size of the Bank's agricultural loan portfolio warrants a close working relationship with these customers. At least annually each customer presents projections, which include operating costs, anticipated crop yields and market prices, and capital expenditures required for their season's production. The Bank's farm lending officers meet with customers to review these projections to assure that they are reasonable and incorporate the repayment of principal and interest to the Bank, over a reasonable time period. The revised projections then provide a means for the Bank to monitor customer performance during the current period and from year to year.
Once the extension of credit decision is made, the Bank follows a program of monitoring the activities of their agricultural customers by making farm visits regularly. The condition of growing crops, review of market trends for both crops and livestock, and comparison of actual performance to projected goals are among issues considered at the time of visits, as well as throughout the year. The cooperation between the Bank and its agricultural customers has provided a satisfactory relationship over the years.
The results of the 1997 growing season in our trade area are mixed thus far. It is predicted that dry weather in July and August will cause lower than average yields in the corn crop, but beans have the potential to equal the average of 40 bushels/acre. Corn and bean prices in 1996 were higher than anticipated which offset lower yields, but it is predicted that 1997 prices will be significantly lower than in 1996.
Page 31 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
Commercial nonaccrual loans at June 30, 1997 were $726,000, $443,000 or 61 percent of which were agricultural-related. Management is acutely aware of the inherent risks associated with agricultural lending via weather and market. Our experience dictates that the risks are manageable and the Bancorp is prepared to assume them.
In 1996, the Bank's consumer loan emphasis was primarily in direct lending. In the latter part of 1996 and into 1997 more emphasis was placed on the indirect market. Contacts with auto dealerships and a new promotion caused an increase in the indirect market. Management continues to promote direct lending while increasing the indirect market also. Currently, approximately 36 percent of new originations are indirect. Indirect origination requests are received by the Bank on a regular basis. Indirect contracts are written based on the same underwriting standards that are used for writing direct contracts. The decision to write the contract rests with the Bank. Management expects consumer loan volume to show strong growth for 1998 and is anticipating that overall portfolio quality will continue as in the previous years. Sound underwriting standards and administration of the consumer loan function should continue to maintain this segment of the loan portfolio. Our credit card activity, both Mastercard and Visa, should continue to provide a favorable yield.
Bancorp expects loan demand to remain strong during 1998, driven by very competitive interest rates for both real estate mortgages and consumer loans; and by the acquisition of quality commercial and agricultural loans in the immediate surrounding areas.
Page 32 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Allowance for Loan Losses:
Loan Composition and Allowance Allocation as of June 30, 1997 - Loan composition and allowance allocation are presented in the table below.
June 30 1997 1996 1995 1994 Amt. Pct. Amt. Pct. Amt. Pct. Amt. Pct. (Dollars in Thousands) Loan Composition: Commercial, financial and agricultural $104,702 52% $ 90,824 52% $ 76,015 48% $ 75,041 51% Real estate/Farm 21,335 11 18,556 10 18,310 12 17,438 12 Non-Farm 29,936 14 31,620 19 35,911 23 32,000 22 Consumer 43,807 22 32,140 18 25,922 17 23,016 15 Lease Financing 1,044 1 908 1 483 -0- 82 -0- Foreign -0- -0- -0- -0- -0- -0- -0- -0- ------------------------------------------------------ Total $200,824 $174,048 $156,641 $147,577 ====================================================== Allowance Allocation:
Commercial, financial and agricultural $ 352 11% $ 759 28% $ 1,358 58% $ 1,343 54% Real estate/Farm 20 1 48 2 47 2 20 1 Non-Farm 11 -0- 85 3 93 4 139 6 Consumer 260 8 289 10 274 12 346 14 Lease Financing -0- -0- -0- -0- -0- -0- -0- -0- Foreign -0- -0- -0- -0- -0- -0- -0- -0- Unallocated 2,589 80 1,560 57 576 24 630 25 ----------------------------------------------------- Totals $ 3,232 100% $ 2,741 100% $ 2,348 100% $ 2,478 100% =====================================================
In the course of extending credit, management recognizes that a percentage of the loans will be uncollectible. Accordingly, an allowance for possible loan losses is established as an estimate of the loans which may ultimately have to be written off. During each month, a provision for loan losses is recorded to maintain the adequacy of the amount in the allowance for possible loan losses. When warranted, loans are charged off against this reserve.
Page 33 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
At June 30, 1997 the Bancorp's allowance for loan losses was $3,232,000, or 1.61 percent of total loans compared to $2,741,000, 1.57 percent of total loans in 1996 and $2,348,000, 1.50 percent of total loans in 1995. The tables above reflect the loan composition and allowance allocations for the past four years. While a portion of Bancorp's allowance for loan losses is allocated to specific loan categories, improved credit quality has resulted in a significant unallocated portion which provides a cushion against future loan losses. Management believes that the reserve, despite the large unallocated portion is not excessive based on norms for the industry and history of the Bank's loan portfolio prior to 1994.
Deposits:
The deposit base provides the major funding source for earning assets. The average daily deposit balance of $196,747,000 funded 86.64 percent of the 1997 average earning assets of $227,080,000. Average total deposits in 1997 increased $8,570,000 or 4.55 percent from 1996 deposit totals of $188,178,000. A shift from long term deposits to shorter term accounts continued in all retail deposit categories. Interest bearing deposits in denominations of $100,000 or greater totaled $23,361,000 at June 30, 1997 compared to $20,250,000 at June 30, 1996.
Short-term Borrowings:
Short-term borrowings at June 30, 1997 consist of retail repurchase agreements in the amount of $9,085,000 and borrowings in the amount of $2,900,000 from the Federal Reserve Bank's Seasonal Line of Credit. Repurchase agreements are borrowings from customers that are collateralized by a pledge of U.S. Government or Agency investments. Such borrowings provide alternatives for those customers who prefer this form of investment. The following table provides information about the Bank's Repurchase Agreements. 1997 1996 1995 (Dollars in Thousands)
Balance Outstanding as of June 30 $ 9,085 $12,752 $20,691 Weighted Average Rate as of June 30 4.31% 3.36% 5.26% Average Balance for year ended June 30 $10,660 $11,100 $ 9,420 Weighted Avg Rate for year ended June 30 4.02% 4.38% 3.56% Highest Month End Balance for Fiscal Year $12,752 $14,407 $20,891
At June 30, 1997 Bancorp had drawn $2,900,000 of its $5,000,000 agricultural seasonal line of credit with the Federal Reserve Bank of Chicago. The Bancorp annually arranges for the availability of this credit to temporarily fund seasonal agricultural loan demand. This seasonal line of credit is due to mature on December 31, 1997.
In addition, at June 30, 1997 the Bancorp had drawn $7,477,000 in various borrowings from the Federal Home Loan Bank of Indianapolis to match particular loan pools. These borrowings were matched to specific loan pools for comparable terms and at a favorable interest rate spread to the Bank. Details of these draws are found in Note #8, pages 57-58 of the accompanying financials. Page 34 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources:
The strength of a company's capital position influences management's willingness to take advantage of growth opportunities and provides the capacity to absorb unforeseen financial difficulties. Bancorp's capital position remains strong. Shareholders' equity was $25,476,000 on June 30, 1997 compared to $24,127,000 on June 30, 1996 and $22,821,000 on June 30, 1995.
The Bancorp and the Bank are subject to regulations that require the maintenance of a leverage ratio (tier one capital to adjusted total assets), a tier one risk-based capital ratio (tier one capital to risk adjusted assets), and a total risk-based capital ratio (total capital to risk adjusted assets). These regulations require the maintenance of a leverage ratio of at least 3 percent (for the best performing institutions), a tier one risk-based capital ratio of at least 4 percent, and a total risk-based capital ratio of a least 8 percent.
During 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). In addition to addressing the insurance fund's financial needs, FDICIA required the FDIC to promulgate regulations (which were issued in early 1993) outlining specific regulatory actions that would occur when the capital level of a financial institution deteriorated beyond a specified level. A "well capitalized" financial institution is defined as one which has a leverage ratio of at least 5 percent, a tier one risk-based capital ratio of at least 6 percent and a total risk-based capital ratio of at least 10 percent. The FDIC established five capital ranges (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Institutions that are not deemed to be "well" or "adequately" capitalized are subject to operational restrictions and higher deposit insurance assessments. These new regulations, effectively, establish minimum capital guidelines in excess of the 3 percent (leverage), 4 percent (tier one risk-based), and 8 percent (total risk-based) described above.
The Bancorp's ability to pay dividends to its shareholders depends substantially upon the Bank's ability to pay dividends to the Bancorp. Compliance with these regulations limits the amount of dividends that may be paid by the companies. At June 30, 1997, both the Bancorp and the Bank have capital levels substantially in excess of those required. Bancorp's capital and capital ratios, which do not differ significantly from bank-only ratios, were as follows at the dates indicated (dollars in thousands):
Page 35 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources (cont.)
At June 30, 1997 1996 1995
Tier I Capital $ 25,487 $ 24,221 $ 22,739 Total Capital 28,099 26,562 24,998 Risk Weighted Assets 208,700 186,905 180,687
Leverage Ratio 10.27% 10.21% 10.06% Tier One Risk-based Capital Ratio 12.21 12.96 12.58 Total Risk-based Capital Ratio 13.47 14.21 13.83
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The objective of liquidity management is to provide for the cash needs of the Bancorp at a reasonable cost. Liquidity resources include liquid assets and the Bancorp's ability to access additional sources of funds. Additional asset liquidity is provided by our ability to sell loans. Sales of real estate loans in the secondary market during 1997 generated proceeds of $11,974,000 compared to $10,978,000 during 1996 and $3,365,000 during 1995. In addition, the Bancorp sold $879,000 of student loans during the year ended June 30, 1996, compared to $298,000 during 1995.
The liquidity position is analyzed by comparing expected needs against planned resources. Quantitative analysis of historical trends, seasonal factors and cyclical influences are used to prepare forecasts of liquidity needs.
Asset liquidity is provided primarily by the maturity of loans. Additionally, Bancorp considers all securities that mature within one year or have a call feature within the next year, all time deposits in banks, bankers acceptances, and all federal funds sold to be sources of asset liquidity. The total of these resources at June 30, 1997 is $9,457,000, compared to $13,008,000 at June 30, 1996. The total of these resources is down 27.30 percent from June 30, 1996 to June 30, 1997. The level at June 30, 1997 is deemed by management to be adequate for funding purposes. In addition, the Bancorp has wholesale funding sources with Federal Home Loan Bank and the Federal Reserve.
Page 36 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (cont.)
Unfunded loan commitments and unused lines of credit at June 30, 1997 were $38,790,000 and letters of credit were $1,506,000. Many existing commitments will expire without being used. Consequently the outstandings do not necessarily represent future cash commitments. The reality of unknown credit demands challenges the Asset/Liability Committee to maintain funding sources sufficient to meet our requirements. If excess funds are available, the committee will strive to invest them to effectively match our funding sources. 1998 has been projected to be a year for an increased demand on funding levels as has been the experience of the past year.
The principal objectives of asset/liability management are to manage interest rate risk, ensure adequate liquidity, and coordinate sources and uses of funds. The Bancorp engages in a formal process of asset/liability management through an Asset/Liability ("A/L") Committee of the Bank. Through this committee, senior management actively participates in the process, ensuring that actions are communicated and implemented throughout the bank.
In the analysis of interest rate risk, the objective is to manage, within acceptable limits, the impact on the income statement caused by fluctuating interest rates and changing rate relationships. Our policy is to maintain a relatively neutral interest sensitive position and, if necessary, the A/L committee may deviate from the neutral position within our prescribed guidelines, which are reviewed by the Bancorp's Board of Directors. The A/L committee can then manage interest rate risk, while responding to change in the balance sheet and financial markets as they strive to improve net interest income.
Provided on the next page is various repricing and maturity information relative to securities, loans, and deposits at June 30, 1997, followed by a condensed summary of Bancorp's interest sensitivity analysis report.
Page 37 of 81
Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The maturity distribution, reflecting, at amortized cost, the scheduled maturities, or calls, and projected paydowns of asset-backed securities, and average tax equivalent yields for the securities at June 30, 1997 is shown in the following table.
Within one One to Five Five to Ten Year Years Years Amount Yield Amount Yield Amount Yield (Dollars in Thousands)
U.S. Govt. Agencies $ 2,997 7.81% $ 9,498 6.36% $ -0- -0-% State and Municipal 965 7.30 5,541 7.08 970 7.52 Corporate Obligations 1,505 5.38 1,998 6.03 -0- -0- Mortgage-backed securities issued by U.S. Govt. Agencies 2,582 5.99 4,576 6.92 500 5.50 Other Asset-backed securities -0- -0- 151 6.20 -0- -0- ------------------------------------------------ $ 8,049 $21,764 $ 1,470 ======= ======= =======
Over Ten Years Amount Yield (Dollars in Thousands)
U.S. Govt. Agencies $ -0- -0-% State and Municipal -0- -0- Corporate Obligations -0- -0- Mortgage-backed securities issued by U.S. Govt. Agencies 437 7.50 Other Asset-backed securities -0- -0- -------------- $ 437 ======
Yields are reflected on a federal tax equivalent basis, assuming a 34 percent tax rate.
As of June 30, 1997, time of deposits over $100,000 mature as follows: Amount Percent (Dollars in Thousands)
Three months or less $ 10,352 44.31% Over three through six months 1,129 4.83 Over six through twelve months 528 2.26 Over twelve months 11,352 48.60 ---------------------------- Total $ 23,361 100.00% ============================
Page 38 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The following table reflects interest rate sensitivity as of June 30, 1997 with dollar references in thousands.
ASSET AND LIABILITY MATURITY/REPRICING SCHEDULE
Within Four to One to Over Three Twelve Three Three Months Months Years Years Total ------ ------ ----- ----- ----- ASSETS
Short Term Investments $ -0- $ -0- $ -0- $ -0- $ -0- Securities 2,385 6,060 10,706 12,551 31,702 Loans 75,117 55,194 32,949 37,564 200,824 ----------------------------------------------- TOTAL EARNING ASSETS 77,502 61,254 43,655 50,115 232,526 ------------------------------------------------
LIABILITIES
Savings, NOW & Money Market Deposits 68,977 -0- -0- -0- 68,977 CDs Less Than $100,000 20,106 18,548 34,003 12,949 85,606 CDs Over $100,000 10,352 1,657 8,595 2,757 23,361 Short-term Borrowings 11,985 -0- -0- -0- 11,985 Other Borrowings 148 1,368 3,858 2,465 7,839 ------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 111,568 21,573 46,456 18,171 197,768 ------------------------------------------------
PERIOD GAP (RSA-RSL) $(34,066)$ 39,681 $ (2,801) $ 31,944 $ 34,758
Percent of Total Assets( 13.53)% 15.76% (1.11)% 12.69% 13.81% ================================================
CUMULATIVE GAP $(34,066)$ 5,615 $ 2,814 $ 34,758
Percent of Total Assets( 13.53)% 2.23% 1.12% 13.81% =====================================
Page 39 of 81 Part II Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The condensed GAP report (on the previous page) summarizes the Bank's interest rate sensitivity. Management projects that rates will remain relatively level during the first quarter of the next fiscal year and then expect a minor upward movement the remainder of the 1998 fiscal year. Should these projections be realized, a significant effect on earnings is not anticipated. Interest rates decreased slightly during fiscal 1997. With the decrease of rates, being negatively gapped has been an advantage to the Bank. Interest bearing liabilities have repriced more quickly, at lower rates, than have interest earning assets; resulting in an increase in the net interest margin. Management does believe that many of the deposit accounts and dollars are true core deposits, and as such will not react significantly to changes in interest rates. This will lessen the effect of interest rate changes. The Bank continues to position itself to be as flexible as possible in both earning assets and interest bearing liabilities by offering variable rate loan and deposit instruments. Although rate sensitivity gaps constantly change as funds are acquired and invested, the Bancorp's cumulative gaps at all intervals are viewed by management to be a relatively low percentage of total assets.
IMPACT OF ACCOUNTING ISSUES
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", was issued by the Financial Accounting Standards Board in 1996. It revised the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective prospectively for some transactions occurring after December 31, 1996 and others in 1998. The impact of partial adoption closing 1997 was not significant. Management does not expect that full adoption of the Standard in 1998 will significantly impact the Bancorp's financial position or results of operations.
Page 40 of 81
Part II Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The Bancorp currently does not enter into futures, forwards, swaps, or options. However, the Bancorp is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Bancorp. Standby letters of credit are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Bancorp until the instrument is exercised.
The Bank's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and a recently instituted interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. It appears the Bank's market risk is reasonable at this time. The condensed GAP report summarizing the Banks's interest rate sensitivity is as follows:
Page 41 of 81
Part II Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (cont.)
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled maturity of market risk sensitive instruments at June 30, 1997:
Maturing in: Year 1 Year 2 Year 3 Years Beyond Total 4-5 ASSETS Securities $ 9,457 $ 8,534 $ 2,172 $ 5,451 $ 6,088 $ 31,702 Loans 131,507 19,321 13,628 13,314 23,054 200,824 -------- -------- -------- -------- -------- -------- Total 140,964 27,855 15,800 18,765 29,142 232,526 ======== ======== ======== ======== ======== ========
LIABILITIES Savings, NOW and Money Market Dep. 68,977 CD's 50,663 37,728 4,870 15,676 30 108,967 Short-term Borrowings 11,985 -0- -0- -0- -0- 11,985 Long-term Borrowings 1,181 2,932 835 2,238 653 7,839 -------- -------- -------- -------- -------- -------- Total 132,806 40,660 5,705 17,914 683 197,768 ======== ======== ======== ======== ======== ========
Total Average Interest Rate Estimated Fair Value
ASSETS Securities $ 31,702 6.67% $ 31,847 Loans 200,824 9.48 196,220
LIABILITIES Savings, now and Money Market Dep. 68,977 2.86 68,977 CD's 108,967 5.68 108,881 Short-term Borrowings 11,985 4.95 11,985 Long-term Borrowings 7,839 5.54 7,755
Page 42 of 81 Part II Item 8
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders The Farmers Bancorp Frankfort, Indiana
We have audited the consolidated balance sheets of The Farmers Bancorp as of June 30, 1997 and 1996 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Farmers Bancorp as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana July 11, 1997
Page 43 of 81 CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1996 (Dollar amounts in thousands)
1997 1996
ASSETS Cash and due from banks (Note 12) $ 7,591 $ 9,889 Available-for-sale securities (Note 2) 11,374 18,610 Held-to-maturity securities (Note 2) (Market values of $ 20,473 and $ 23,535) 20,328 23,654 Loans held for sale - 492 Total loans (Note 3) 200,824 173,556 Less allowance for loan losses (Note 4) (3,232) (2,741) -------- -------- Loans, net 197,592 170,815 Premises and equipment - net (Note 5) 5,325 4,641 Restricted stock, at cost 1,013 771 Accrued income and other assets (Note 9) 8,521 8,172 -------- -------- $ 251,744 $ 237,044 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Non-interest-bearing deposits $ 24,663 $ 22,115 Interest-bearing deposits (Note 6) 177,944 169,373 -------- -------- Total deposits 202,607 191,488 Short-term borrowings (Note 7) 11,985 12,752 Other borrowings (Note 8) 7,839 6,259 Accrued expenses and other liabilities 3,837 2,418 -------- -------- 226,268 212,917
Commitments (Note 12)
Shareholders' equity Common stock, (no par value - 2,400,000 shares authorized, 1,154,116 shares issued and outstanding) 2,885 2,885 Additional paid-in capital 5,101 5,101 Retained earnings 17,501 16,235 Unrealized depreciation on available-for-sale securities, net of tax benefit of $7 and $62 (11) (94) --------- -------- 25,476 24,127
$ 251,744 $ 237,044 ========= =========
Page 44 of 81 CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share data)
1997 1996 1995
Interest income Loans, including related fees $ 17,605 $ 14,792 $ 13,289 Federal funds sold and short-term money market investments 114 709 308 Securities Taxable 1,892 2,076 2,508 Tax exempt 451 534 553 -------- -------- -------- 20,062 18,111 16,658 Interest expense Deposits 7,769 7,469 6,623 Short-term borrowings 450 487 346 Other borrowings 452 297 256 -------- -------- -------- 8,671 8,253 7,225 -------- -------- -------- Net interest income 11,391 9,858 9,433 Provision for loan losses (Note 4) 570 480 218 -------- -------- -------- Net interest income after provision for loan losses 10,821 9,378 9,215 Other operating income Trust fees 315 273 244 Service charge income 792 726 676 Mortgage banking revenue 139 110 83 Other 593 377 465 ------- ------- ------- 1,839 1,486 1,468 Other operating expenses Salaries and employee benefits (Note 9) 3,866 3,822 3,511 Occupancy - net 592 602 551 Equipment 657 581 569 Data processing 402 345 458 FDIC assessment 12 9 384 Other 1,726 1,813 1,596 ------- ------- ------- 7,255 7,172 7,069 ------- ------- ------- Income before income taxes 5,405 3,692 3,614 Less income taxes (Note 10) 1,946 1,276 1,189 ------- ------- ------- Net income $ 3,459 $ 2,416 $ 2,425 ======= ======= ======= Per share data (Note 11): Net income per share $ 3.00 $ 2.09 $ 2.10 ======= ======= =======
Page 45 of 81 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Years ended June 30, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share data)
Net Unrealized Appreciation/ (Depreciation) Additional on Available- Common Paid-in Retained for-Sale Stock Capital Earnings Securities Total
Balance, July 1, 1994 $ 2,885 $ 5,101 $ 13,205 $ - $ 21,191
Implementation of Financial Accounting Standard No. 115 - - - 34 34 Net income - - 2,425 - 2,425 Cash dividends ($.76 per share) - - (877) - (877) Change in net unrealized appreciation/(depreciation) - - - 48 48 ------- ------ -------- ----- ------- Balance, June 30, 1995 2,885 5,101 14,753 82 22,821
Net income - - 2,416 - 2,416 Cash dividends ($.81 per share) - - (934) - (934) Change in net unrealized appreciation/(depreciation) - - - (176) (176) ------ ------ ------- ----- ------ Balance, June 30, 1996 2,885 5,101 16,235 (94) 24,127
Net income - - 3,459 - 3,459 Cash dividends ($ 1.90 per share) - - (2,193) - (2,193) Change in net unrealized appreciation/(depreciation) - - - 83 83 ------ ------ ------ ---- ------ Balance, June 30, 1997 $ 2,885 $ 5,101 $ 17,501 $ (11) $ 25,476 ======= ======= ======== ====== ========
Page 46 of 81 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 1997, 1996 and 1995 (Dollar amounts in thousands)
1997 1996 1995
Cash flows from operating activities Net income $ 3,459 $ 2,416 $ 2,425 Adjustments to reconcile net income to net cash from operating activities Depreciation 580 515 477 Provision for loan losses 570 480 218 Net premium amortization on securities 55 72 109 Proceeds from sales of loans 11,974 11,893 3,683 Gain on sale of loans (52) (36) (20) Loans originated for sale (11,430) (11,486) (3,548) Write-off of building - 181 - Deferred taxes (212) (94) 64 Change in assets and liabilities Income taxes payable (20) (41) 49 Interest receivable (25) (216) 83 Interest payable 57 127 282 Other assets (123) (146) (186) Other liabilities 1,362 498 32 ------- ------- ------- Net cash from operating activities 6,195 4,163 3,668
Cash flows from investing activities Proceeds from maturities and principal repayments on available-for-sale securities 7,357 5,063 8,221 Purchase of available-for-sale securities - (7,461) (3,620) Proceeds from maturities and principal repayments on held-to-maturity securities 3,458 11,461 8,389 Purchase of held-to-maturity securities (170) (11,346) (3,108) Loans made to customers, net of principal collections thereon (27,347) (17,867) (9,526) Net change in interest-bearing balances with financial institutions - - 1,100 Purchase of life insurance policies (24) (243) (142) Property and equipment expenditures (1,264) (1,012) (45) Purchase of restricted stock (242) (100) (16) ------- ------- ------- Net cash from investing activities (18,232) (21,505) 1,253
Page 47 of 81 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 1997, 1996 and 1995 (Dollar amounts in thousands)
1997 1996 1995
Cash flows from financing activities Net increase/(decrease) in deposits $ 11,119 $ 15,935 $ 6,097 Net increase/(decrease) in short-term borrowings (767) (7,940) (499) Proceeds from other borrowings 3,835 2,875 1,528 Repayment of other borrowings (2,255) (1,790) (243) Dividends paid (2,193) (934) (877) ------- ------- ------- Net cash from financing activities 9,739 8,146 6,006 ------- ------- ------- Net change in cash and due from banks (2,298) (9,196) 10,927
Cash and due from banks at beginning of year 9,889 19,085 8,158 ------- ------- ------- Cash and due from banks at end of year $ 7,591 $ 9,889 $ 19,085 ======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for Interest $ 8,614 $ 8,126 $ 6,943 Income taxes 2,178 1,411 1,076
Noncash investing activities Transfer from held-to-maturity securities to available-for-sale securities - 5,011 16,739 Capital lease obligation - - 814
Page 48 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: The consolidated financial statements include the accounts of The Farmers Bancorp ("Bancorp") and its wholly owned subsidiary, The Farmers Bank ("Bank"). Upon consolidation, all significant intercompany accounts and transactions have been eliminated.
Description of Business: Bancorp operates primarily in the banking industry which accounts for more than 90% of its revenues, operating income and assets. The Bank generates commercial, installment and mortgage loans and receives deposits from customers located primarily in the Clinton County, Indiana area. Although the overall loan portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent upon the agricultural industry. The majority of the Bank's loans are secured by specific items of collateral including business assets, consumer assets and real property.
Use of Estimates: Management must make estimates and assumptions in preparing financial statements that affect the amounts reported therein and the disclosures provided. These estimates and assumptions may change in the future, and future results could differ. Significant areas involving the use of management s estimates and assumptions that are more susceptible to change in the near term include the allowance for loan losses, the fair values of certain securities and other financial instruments, the determination and carrying value of impaired loans and the carrying value of loans held for sale.
Securities: The Bancorp classifies its securities as held-to-maturity or available-for-sale. Held-to-maturity securities are those which the Bancorp has the intent and ability to hold until maturity. These are reported at amortized cost. Available-for-sale securities are those which management may decide to sell, if needed, for liquidity, asset- liability management, or other reasons. Available-for-sale securities are reported at fair value with unrealized appreciation or depreciation included as a separate component of shareholders equity, net of tax.
Realized gains or losses are determined based on the amortized cost of the specific security sold. Interest and dividend income, adjusted for the amortization of purchase premiums or discounts, is included in earnings.
Loans Held for Sale: The Bank originates certain fixed rate residential real estate loans for sale in the secondary market. Loans held for sale are carried at the lower of cost or aggregate market value. At June 30, 1996, the market value of these loans exceeded their cost. There were no loans held for sale at June 30, 1997.
Mortgage banking revenue on the statement of income consists of gains and losses realized when loans are sold, unrealized gains and losses related to loans held for sale and service fee revenue earned after loans are sold.
Page 49 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Income on Loans: Interest on loans is accrued over the term of the loans based on the principal outstanding. Loans are placed on non- accrual status when the collection of interest becomes doubtful. Loan fees, net of certain direct loan origination costs, are deferred and recognized into interest income over the term of the loan using the level yield method.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management s judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan s existing rate.
In general, loans classified as doubtful or loss are considered impaired while loans classified as substandard are individually evaluated for impairment. Depending on the relative size of the credit relationship, late or insufficient payments of 30 to 90 days will cause management to re-evaluate the credit under its normal evaluation procedures.
The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as reductions or increases to the provision for loan losses.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated on the straight-line and declining-balance methods over the estimated useful lives of the assets.
Other Real Estate: Real estate acquired through foreclosure is carried at the lower of cost (fair value at date of foreclosure) or fair value less estimated cost to sell. If it is later determined that the total capitalized cost of the property cannot be recovered through its sale or use, the loss is immediately recognized by a charge to income and the creation of a reserve. Expenses incurred in carrying other real estate are charged to operations as incurred. Page 50 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future amounts that will result from differences in the financial statement and tax bases of assets and liabilities. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that the assets will more likely than not result in future tax benefits to the Bancorp. Income tax expense equals the amount currently payable on the income tax return plus or minus the change in deferred tax assets and liabilities.
Statement of Cash Flows: For purposes of the statement of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and short-term money market investments. Bancorp reports net cash flows for customer loan and deposit transactions, for interest-bearing balances with financial institutions and for short-term borrowings.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.
Financial Statement Presentation: Certain items in the 1996 and 1995 financial statements have been reclassified to correspond with the 1997 presentation. These reclassifications had no effect on shareholders' equity or the results of operations.
Page 51 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES
The amortized cost and fair value of available-for-sale securities were as follows at June 30, 1997:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. Government agencies and corporations $ 4,495 $ 16 $ (20) $ 4,491 States and political subdivisions 575 - - 575 Corporate obligations 3,503 3 (11) 3,495 Mortgage-backed securities issued by U.S. Government agencies 2,668 13 (19) 2,662 Other asset-backed securities 151 - - 151 -------- -------- -------- ------- $ 11,392 $ 32 $ (50) $ 11,374 ======== ======== ======== =======
The following table presents the amortized cost and fair value of available-for-sale securities at June 30, 1997, by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value
Due in one year $ 3,004 $ 3,014 Due after one year through five years 4,494 4,469 Due after five years through ten years 360 360 Due after ten years 715 718 Mortgage-backed securities issued by U.S. Government agencies 2,668 2,662 Other asset-backed securities 151 151 -------- -------- $ 11,392 $ 11,374 ======== ========
Page 52 of 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities were as follows at June 30, 1996: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. Government agencies and corporations $ 8,993 $ 50 $ (91) $ 8,952 States and political subdivisions 630 - - 630 Corporate obligations 4,011 4 (55) 3,960 Mortgage-backed securities issued by U.S. Government agencies 4,314 5 (68) 4,251 Other asset-backed securities 818 - (1) 817 -------- -------- -------- -------- $ 18,766 $ 59 $ (215) $ 18,610 ======== ======== ======== ========
The amortized cost and fair value of held-to-maturity securities were as follows at June 30, 1997:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. Government agencies and corporations $ 8,000 $ 35 $ (35) $ 8,000 States and political subdivisions 6,901 127 (7) 7,021 Mortgage-backed securities issued by U.S. Government agencies 5,427 46 (21) 5,452 -------- -------- ------- -------- $ 20,328 $ 208 $ (63) $ 20,473 ======== ======== ======= ========
Page 53 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES (Continued)
The following table presents the amortized cost and fair value of held- to-maturity securities at June 30, 1997, by contractual maturity. Actual maturities may differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value
Due in one year $ 390 $ 393 Due after one year through five years 10,048 10,133 Due after five years through ten years 4,293 4,325 Due after ten years 170 170 Mortgage-backed securities issued by U.S. Government agencies 5,427 5,452 ------- ------- $20,328 $20,473 ======= =======
The amortized cost and fair value of held-to-maturity securities were as follows at June 30, 1996:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. Government agencies and corporations $ 7,987 $ 17 $ (157) $ 7,847 States and political subdivisions 9,548 129 (48) 9,629 Mortgage-backed securities issued by U.S. Government agencies 6,119 42 (102) 6,059 -------- -------- ------- -------- $ 23,654 $ 188 $ (307) $ 23,535 ======== ======== ======= ========
No securities were sold during 1997, 1996 or 1995.
Securities with an amortized cost of $ 16,658 and $14,183 at June 30, 1997 and 1996, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes required or permitted by law.
Page 54 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 3 - LOANS
Loans as presented on the balance sheet are comprised of the following:
1997 1996
Commercial loans $ 104,702 $ 90,824 Real estate loans 51,271 49,684 Installment loans 43,807 32,140 Lease financing 1,044 908 ---------- ---------- $ 200,824 $ 173,556 ========== ==========
Total loans at June 30, 1997 and 1996 include approximately $ 44,385 and $41,126, respectively, of loans to farmers or businesses related to the agricultural industry.
The Bank services mortgage loans sold to the Federal Home Loan Mortgage Corporation. These loans are not included in the above balances and totaled approximately $ 37,566 and $29,309 at June 30, 1997 and 1996, respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
1997 1996 1995
Beginning balance $ 2,741 $ 2,348 $ 2,478 Provision charged to operations 570 480 218 Loans charged off (316) (547) (735) Recoveries 237 460 387 -------- -------- --------
Ending balance $ 3,232 $ 2,741 $ 2,348 ======== ======== ========
Page 55 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows:
1997 1996
Average investment in impaired loans during the year $ 1,160 $ 1,233 ======= ======= Interest income recognized on impaired loans including interest income recognized on cash basis of $3 and $1 $ 15 $ 1 ======= ======= Balance of impaired loans at June 30: $ 1,300 $ 1,061 Less portion for which no allowance for loan losses is allocated 780 612 ------- ------- Portion of impaired loan balance for which an allowance for loan losses is allocated $ 520 $ 449 ======= ======= Portion of allowance for loan losses allocated to the impaired loan balance $ 125 $ 125 ======= =======
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment by major category follows:
1997 1996
Land $ 1,011 $ 1,011 Buildings and improvements 5,375 4,973 Furniture and equipment 4,012 3,336 -------- -------- 10,398 9,320 Accumulated depreciation (5,073) (4,679) -------- -------- $ 5,325 $ 4,641 ======== ========
NOTE 6 - DEPOSITS
Time deposits issued in denominations of $100 or greater totaled $ 23,361 and $20,250 at June 30, 1997 and 1996, respectively. Interest expense on such deposits for 1997, 1996 and 1995 was $1,252, $941 and $673, respectively.
Page 56 of 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 6 - DEPOSITS (Continued)
At June 30, 1997, the scheduled maturities of time deposits are as follows:
Years Ended June 30,
1998 $ 37,816 1999 37,728 2000 5,204 2001 4,847 2002 10,859 Thereafter - --------- $ 96,454 =========
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings at June 30, 1997 consist of $2,900 from the Federal Reserve Bank, through its seasonal line of credit program, and $9,085 of retail repurchase agreements. At June 30, 1996, short-term borrowings consisted solely of retail repurchase agreements. Essentially, repurchase agreements are borrowings from customers that are collateralized by a pledge of U.S. Government or agency securities. Bancorp retains possession of and control over such securities. Information regarding repurchase agreements for the years ended June 30, 1997 and 1996 is presented below:
1997 1996
Average balance during the year $ 10,660 $ 11,100 Average rate paid during the year 4.02% 4.38% Maximum month end balance during the year $ 12,752 14,407
NOTE 8 - OTHER BORROWINGS
Other borrowings consist of the following at June 30:
1997 1996
Federal Home Loan Bank (FHLB) advances $ 7,477 $ 5,735 Capital lease obligation 362 524 --------- --------- Total $ 7,839 $ 6,259 ========= =========
Page 57 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996, AND 1995
NOTE 8 - OTHER BORROWINGS (Continued)
FHLB advances are secured by a blanket pledge of the Bank s mortgage loans and other assets and require monthly interest payments and periodic principal reductions. The following advances are outstanding at June 30, 1997:
Maturity Date Interest Rate Balance
October 6, 1997 5.38% $ 550 January 13, 1998 5.90 450 February 1, 1999 5.28 1,200 February 16, 1999 5.38 1,551 August 23, 1999 6.13 835 September 15, 2000 5.12 238 November 20, 2001 5.92 2,000 June 15, 2006 7.09 653 --------
$ 7,477 ========
Required annual principal payments for those advances outstanding at June 30, 1997 are as follows:
Year ending June 30,
1998 $ 1,144 1999 2,745 2000 912 2001 84 2002 2,019 After 2002 573 -------- $ 7,477 ========
Generally, penalties, based on market rates at the time of prepayment, will be assessed if advances are prepaid. However, certain advances may be prepaid at specified times without penalty.
The capital lease obligation relates to EDP equipment. The term of the lease is sixty months and it expires in 1999. The gross amount of this asset is $814 and accumulated depreciation was $409 at June 30, 1997. Annual payments are $196 with aggregate remaining payments of $391 at June 30, 1997. The obligation reflected on the balance sheet at June 30, 1997 represents the aggregate amount payable less $29 of imputed interest.
Page 58 of 81 NOTE 9 - BENEFIT PLANS
The Bank has a non-contributory defined benefit pension plan which covers a majority of its employees. The Bank's funding policy is to contribute the amount allowable as a deduction under the Internal Revenue Code. The following sets forth the Plan's funded status and amounts recognized in the Bancorp's balance sheet and income statement:
As of June 30: 1997 1996
Accumulated benefit obligation $ 4,025 $ 3,746 ========== ========== Vested benefit obligation $ 3,727 $ 3,403 ========== ========== Plan assets at fair value $ 4,937 $ 4,582 Projected benefit obligation for service rendered to date (4,762) (4,421) Unrecognized prior service gain (75) (85) Unrecognized loss 273 460 Unrecognized transition asset (109) (134) ---------- ---------- Prepaid pension cost $ 264 $ 402 ========== ==========
For the year ended June 30: 1997 1996 1995
Net pension expense included the following:
Service cost for the year $ 203 $ 197 $ 195 Interest cost on projected benefit obligation 310 300 277 Actual return on plan assets (625) (334) (260) Net amortization and deferral 250 (32) (87) ------ ------ ------ Net pension expense $ 138 $ 131 $ 125 ====== ====== ======
Page 59 of 81
NOTE 9 - BENEFIT PLANS (Continued)
Significant actuarial assumptions which affect the Plan's obligations and funding requirements are as follows:
1997 1996 1995
Weighted average discount rate 7.00% 7.00% 7.00% Increase in annual compensation 5.00 5.00 5.00 Long-term rate of return on Plan assets 7.50 7.50 7.50
The unrecognized prior service gain relates to the effect of changes in the Plan's benefit formula. These gains are being amortized, using the straight line method, over the remaining average service lives of Plan participants.
Plan assets consist primarily of investments in interest-bearing balances with financial institutions, U.S. Treasury notes, U.S. Government agencies and corporate bonds and notes.
The Bank also maintains a 401(k) plan for the benefit of eligible employees. Employer contributions include discretionary contributions and the matching of a portion of employee contributions. Expense recognized for this plan was $36, $27 and $26 for 1997, 1996 and 1995, respectively.
The Bank maintains a deferred compensation plan for the benefit of certain directors, executive officers and independent contractors. In return for relinquishing the right to a portion of their current compensation, the Bank agrees to pay participants a retirement benefit, in the form of a monthly payment for up to 180 months. The liability accrued at June 30, 1997 and 1996 was $1,008 and $821, respectively and the expense recognized during 1997, 1996 and 1995 was $228, $310 and $211, respectively.
The Bank also maintains a death benefit plan for the benefit of officers. Under the plan, if the participant dies prior to retirement, the Bank agrees to pay a specified death benefit to designated beneficiaries.
In conjunction with the deferred compensation and death benefit plans, the Bank purchased life insurance on the participants. The cash surrender value of such insurance at June 30, 1997 and 1996 was $4,774 and $4,510, respectively, and is included in "accrued income and other assets" on the Bancorp's consolidated balance sheets.
Page 60 of 81 NOTE 10 - INCOME TAXES
Income taxes consist of the following components:
1997 1996 1995 Income tax expense/(benefit) Current $ 2,158 $ 1,370 $ 1,125 Deferred (212) (94) 64 -------- -------- -------- $ 1,946 $ 1,276 $ 1,189 ======== ======== ========
The following is a reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes:
1997 1996 1995 Statutory rate applied to income before income taxes $ 1,838 $ 1,255 $ 1,229 Add (deduct) tax effect of Tax exempt interest income (141) (175) (192) State income tax (net of federal tax benefit) 305 212 200 Other, net (56) (16) (48) -------- -------- -------- $ 1,946 $ 1,276 $ 1,189 ======== ======== ========
The net deferred tax asset reflected in the June 30, 1997 and 1996 consolidated balance sheets is comprised of the following components:
1997 1996 Deferred tax assets from: Provision for loan losses $ 1,004 $ 784 Deferred compensation plans 399 325 Available-for-sale securities 7 62 Other 38 103 -------- -------- 1,448 1,274 Deferred tax liabilities for: Depreciation (524) (509) Pension plan (105) (158) Deferred loan fees/costs (101) (64) Other (56) (38) -------- -------- (786) (769)
Valuation allowance for deferred tax assets - - $ 662 $ 505 ======== ========
Page 61 of 81 NOTE 11 - PER SHARE DATA
On October 14, 1996, the Board approved a 2-for-1 stock split effective October 28, 1996. All per share data has been restated to give retroactive effect to that stock split.
Earnings per common share have been computed based on the weighted average number of shares outstanding during the years presented. The number of shares used in the computation was 1,154,116 for all years presented.
NOTE 12 - COMMITMENTS AND OFF-BALANCE-SHEET ITEMS
The Bank has operating leases covering certain of its properties. Expense for leased premises was $66 for 1997, $64 for 1996 and $56 for 1995. Minimum lease payments at June 30, 1997 for all non-cancelable leases are as follows:
1998 $ 64 1999 22 2000 16 2001 17 2002 18 Thereafter 57 -------- $ 194 ========
The Bank, in the ordinary course of business, has commitments and contingent liabilities, such as guarantees and commitments to extend credit which are not reflected in the accompanying consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans, standby letters of credit, and financial guarantees is represented by the contractual amount of those instruments. The Bank uses the same credit policy to make such commitments as it uses for on-balance-sheet items.
Page 62 of 81 NOTE 12 - COMMITMENTS AND OFF-BALANCE-SHEET ITEMS (Continued)
At June 30, 1997 and 1996, these financial instruments are summarized as follows:
1997 1996 Financial instruments which contract amount represents credit risk: Unused commercial lines of credit $ 20,907 $ 15,732 Unused revolving lines of credit 13,924 11,503 Commitments to make loans 3,959 7,289 Stand by letters of credit 1,506 381
The unused revolving and commercial lines of credit are predominantly variable rate agreements. The commitments are agreements to lend to a customer, provided they accept the terms and conditions offered by the Bank. These commitments are generally extended for terms of up to 60 days and, in many cases, allow the customer to select from one of several financing options offered. At June 30, 1997, these commitments included $467 of fixed-rate loan commitments at rates ranging from 7.50% to 10.00%. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items.
At June 30, 1997 and 1996, the Bank was required to have $2,033 and $2,299 on deposit with the Federal Reserve or as cash on hand as reserve. These reserves do not earn interest.
The Bancorp is also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Bancorp.
NOTE 13 - CAPITAL REQUIREMENTS
The Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. These guidelines and the regulatory framework for prompt corrective action involve quantitative measures of capital, assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices as well as qualitative judgments by the regulators about components, risk weightings, and other factors.
Page 63 of 81 NOTE 13 - CAPITAL REQUIREMENTS (Continued)
Compliance with these regulations can limit dividends paid by either entity. Both entities must comply with regulations that establish minimum levels of capital adequacy. The Bank must also comply with capital requirements promulgated by the FDIC under its "prompt corrective action" rules. The Bank s deposit insurance assessment rate is based, in part, on these measurements. At June 30, 1997, the Bank s capital levels result in it being designated "well capitalized" under these guidelines.
The Bancorp consolidated and the Bank s (Bank only) capital amounts and ratios at June 30, 1997 are presented below:
Minimum Required To Be Well Minimum Required Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets) Consolidated $ 28,099 13.4% $ 16,722 8.0% $ 20,903 10.0% Bank $ 28,046 13.4% $ 16,717 8.0% $ 20,896 10.0%
Tier I Capital (to Risk Weighted Assets) Consolidated $ 25,487 12.2% $ 8,361 4.0% $ 12,542 6.0% Bank $ 25,434 12.2% $ 8,358 4.0% $ 12,537 6.0%
Tier I Capital (to Average Assets) Consolidated $ 25,487 10.3% $ 9,935 4.0% $ 12,419 5.0% Bank $ 25,434 10.2% $ 9,932 4.0% $ 12,415 5.0%
Page 64 of 81 NOTE 14 - RELATED PARTY TRANSACTIONS
Certain of the Bancorp's directors and executive officers were loan customers of the Bank. A schedule of the aggregate activity in such loans, when total customer borrowings exceed $60, follows:
Balance July 1, 1996 $ 1,493 New loans and draws 673 Loan reductions and principal payments (595) --------- Balance June 30, 1997 $ 1,571 =========
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value of financial instruments and their related carrying value at June 30, 1997 and 1996. Items which are not financial instruments are not included.
1997 1996 Carrying Carrying Amount Fair Value Amount Fair Value
Financial assets Cash and due from banks $ 7,591 $ 7,591 $ 9,889 $ 9,889 Securities 31,702 31,847 42,264 42,145 Net loans 197,592 196,220 171,307 168,008 Financial liabilities Deposits (202,607) (202,521) (191,488) (191,275) Short-term borrowings (11,985) (11,985) (12,752) (12,752) Other borrowings (7,839) (7,755) (6,259) (6,171)
Off-balance-sheet financial instruments Loan commitments and letters of credit -0- -0- -0- -0-
Page 65 of 81 NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value of each class of financial instruments at June 30, 1997 and 1996:
Cash and Due from Banks: The carrying amount is a reasonable estimate of the fair value of cash and short-term investments.
Securities: For securities, fair value equals quoted market value for the individual securities. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments.
Net Loans: The fair value of loans is estimated by discounting projected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for similar remaining maturities.
Deposits: The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting projected future cash flows using rates currently offered for deposits with similar remaining maturities.
Short-term Borrowings: These obligations are generally variable rate or are for very short terms. Accordingly, their carrying amount is a reasonable estimate of fair value.
Other Borrowings: The estimated fair value of other borrowings is based upon the current rate that the Bancorp would pay for similar borrowings, applied to the time period until maturity.
Loan Commitments and Letters of Credit: The carrying value of these commitments is a reasonable estimate of fair value. These investments are generally variable rate and/or short-term in nature with minimal fees charged.
Page 66 of 81 NOTE 16 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and statements of cash flows for the parent company:
CONDENSED BALANCE SHEETS
June 30, 1997 1996 ASSETS Cash on deposit with subsidiary $ 44 $ 21 Investment in Bank subsidiary 25,423 24,095 Other assets 1,179 23 --------- --------- $ 26,646 $ 24,139 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities $ 1,170 $ 12 Total shareholders' equity 25,476 24,127 --------- --------- $ 26,646 $ 24,139 ========= =========
CONDENSED STATEMENTS OF INCOME
Years ended June 30: 1997 1996 1995
Operating income Dividends from Bank subsidiary $ 2,218 $ 960 $ 877 Interest income 18 15 1 -------- --------- --------- 2,236 975 878
Operating expense 24 45 34 -------- --------- --------- Income before income tax and equity in undistributed income of subsidiary 2,212 930 844
Income tax benefit (2) (11) (13) -------- --------- ---------
Income before equity in undistributed income of subsidiary 2,214 941 857
Equity in undistributed income of subsidiary 1,245 1,475 1,568 -------- --------- --------- Net income $ 3,459 $ 2,416 $ 2,425 ========= ========= =========
Page 67 of 81 NOTE 16 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended June 30: 1997 1996 1995
Cash flows from operating activities Net income $ 3,459 $ 2,416 $ 2,425 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed income of subsidiary (1,245) (1,475) (1,568) Change in other assets (1,156) (12) (1) Change in other liabilities 1,158 8 - -------- --------- -------- Net cash from operating activities 2,216 937 856
Cash flows from financing activities Dividends paid (2,193) (934) (877) -------- -------- -------- Net change in cash 23 3 (21)
Cash at beginning of year 21 18 39 -------- -------- -------- Cash at end of year $ 44 $ 21 $ 18 ======== ======== ========
NOTE 17 - IMPACT OF NEW ACCOUNTING POLICIES
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", was issued by the Financial Accounting Standards Board in 1996. It revised the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective prospectively for some transactions occurring after December 31, 1996 and others in 1998. The impact of partial adoption in 1997 was not significant. Management does not expect that full adoption of the Standard in 1998 will significantly impact the Company s financial position or results of operations.
Page 68 of 81
Part II Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cont.)
DEPOSIT INTEREST EXPENSE BY TYPE
JUNE 30 ---------------------------------- 1997 1996 1995 ----------------------------------
(Dollars in Thousands)
Deposit Interest Expense:
NOW Accounts $ 619 $ 694 $ 676
Money Market Checking 96 162 173
Regular Savings 607 530 513
Advantage Savings 345 380 388
Christmas Club Savings 11 11 11
Money Market Investment 247 275 291
Total Certificates 5,844 5,417 4,571
------------------------------------
Total Deposit Interest Expense $7,769 $7,469 $6,623
=====================================
Page 69 of 81 Part II Item 9
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements to report under this item.
Part III Item 10
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
John Conway, Vice President and Secretary of Bancorp and Executive Vice President of Bank, announced his retirement from the Bank effective June 30, 1997. He served faithfully with dedication and distinction for the past fourteen years. The present executive officers and directors of the Bancorp include the following persons.
Years in Year First Name and Title or Officer Elected as Principal Address Age Position Position a Director Occupation (Year Term Expires) - ------------------------------------------------------------------------
Fred K Agnew 65 Chairman of the 2 1983 Retired 905 S O'Neil St. Board and Director (1999) Banker (1) Frankfort, IN
Ralph M. Butler 81 Director N/A 1983 Retired 3052 N Co Rd 1000 E (1997) (2) Forest, IN
Judson J. Costlow 54 Vice President 3 N/A Banker 906 S O'Neil St. and Trust Officer Frankfort, IN
Joe C. Doan 53 Director N/A 1990 Business- 801 Eastwood Drive (1999) man (3) Frankfort, IN
Daryl C. Fry 57 Vice President 3 N/A Banker 759 Maple Drive Frankfort, IN
Joseph V. Lahrman 66 Director N/A 1989 Farming (4) 5253 N Co Rd 850 W (1998) Mulberry, IN
C. Robert Lord 58 Senior Vice 3 N/A Banker 1550 S. Williams Rd. President Frankfort, IN
Page 70 of 81 Part III Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First Name and Title or Officer Elected as Principal Address Age Position Position a Director Occupation (Year Term Expires) - ------------------------------------------------------------------------
R. Ronald McClughen 54 Senior Vice 3 N/A Banker 1351 Forest Drive President Frankfort, IN
Karen I. Miller 41 Chief Financial 3 N/A Banker 1208 N. Jackson St. Officer Frankfort, IN
Jennifer L. Neal 43 Investment Officer 3 N/A Banker 4515 E. St. Rd. 38 Kirklin, IN
Edward R. Pluhar 50 Vice President 3 N/A Banker 309 Harvard Terrace Frankfort, IN
Jack W. Ransom 50 Director N/A 1994 Business- 958 Forest Drive S. (1999) man (5) Frankfort, IN
Rawl V. Ransom 77 Director N/A 1983 Retired 1555 N Main St. (1997) Business- Frankfort, IN man (6)
Steven C. Reynolds 45 Vice President 3 N/A Banker 4 S. Crescent Drive Frankfort, IN
Tom Rohrabaugh 63 President and 12 1992 Banker 1335 Coin Drive Director (1998) Frankfort, In
Stephen G. 51 Director N/A 1994 Farming Rothenberger (1997) (7) 1784 S. County Rd. 180E Frankfort, IN
R. Kent Ryan Jr. 54 Secretary to the 3 1995 Attorney 3490 State Road 75 N Board and Director (1997) (8) Frankfort, IN
Page 71 of 81 Part III Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First Name and Title or Officer Elected as Principal Address Age Position Position a Director Occupation (Year Term Expires) - ------------------------------------------------------------------------
Stanley K. Smith 48 Director N/A 1989 General 859 Forest Drive S. (1998) Contractor Frankfort, IN (9)
Robert F. Thorley 49 Vice President 3 N/A Banker 7628 E. Co. Rd. 500 S. Kirklin, IN
* "N/A" means not applicable and represents that the named individual is either not a director or not an executive officer.
1. Fred K Agnew retired as President of the Bank in September 1995.
2. Ralph M. Butler has been retired for the past 14 years. From 1960- 1981, he was part owner - operator of Fairground Implement Inc., Frankfort, Indiana, a farm implement dealer.
3. Joe C. Doan is President of Coapstick Insurance Agency, Frankfort, Indiana.
4. Joseph V. Lahrman is President of Joseph Lahrman Farms, Inc., Mulberry, Indiana.
5. Jack W. Ransom is President of Kramer Brothers Lumber Co., Inc., Frankfort, Indiana and is the son of director Rawl V. Ransom.
6. Rawl V. Ransom retired in 1985 as President of Kramer Brothers Lumber Co., Inc., Frankfort, Indiana and is the father of director Jack W. Ransom.
7. Stephen G. Rothenberger is owner and manager of Rothenberger Farms.
8. R. Kent Ryan Jr. is the managing partner of the law firm Ryan, Moore, Cook and Hunter in Frankfort, Indiana. Mr. Ryan's firm is retained by the Bank and performs services on behalf of the Bank.
9. Stanley K. Smith is President of Arthur A. Gill & Son Co. Inc., Frankfort, Indiana, a general contractor.
Page 72 of 81 Part III Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
All of Bancorp's directors are divided into 3 classes, whose term is three years or until their respective successors are duly elected and qualified. One class of Directors are elected annually. All executive officers hold office for a term of one year. There are no arrangements or understandings between any of the directors, executive officers, or any other persons pursuant to which any of the Bancorp's directors or executive officers have been selected for their respective position.
Part III Item 11
Item 11 EXECUTIVE COMPENSATION:
The following table contains information concerning the compensation paid by Bank and Bancorp for the fiscal years ended June 30, 1996 and 1997 to the two executive officers whose total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE:
Name and All Principal Year ended Other Position June 30, Salary Compensation (1)
Tom Rohrabaugh 1997 $129,182 $1,500 President of Bancorp 1996 $112,831 $1,410 and Bank 1995 $115,000 $1,181
John L. Conway 1997 $120,531 $1,413 Vice President and 1996 $ 94,500 $1,242 Secretary of Bancorp 1995 $ 90,000 $1,104 and Executive Vice President of Bank
(1) Bank contributions for fiscal year to Internal Revenue Code Section 401(k) savings plan.
Tom Rohrabaugh is a participant in a deferred compensation plan established during the year ended June 30, 1993, and will receive $21,419 per year for 15 years following his retirement or his death. Such benefit is to be paid in equal monthly installments and the amount he will receive is conditioned upon Mr. Rohrabaugh deferring receipt of 5 percent of his monthly base compensation, which he would otherwise be entitled to receive from the Bank, through the date of his retirement, expected to be December 1998. In addition to the benefit described above, Mr. Rohrabaugh shall be entitled to receive a one-time lump sum death benefit in the amount of $10,000.
John L. Conway is a participant in a deferred compensation plan established during the year ended June 30, 1993 and will receive $28,044 per year for 15 years following his retirement or his death. Such benefit is to be paid in equal monthly installments. In addition to the benefits described above, Mr. Conway shall be entitled to receive a one- time lump-sum death benefit in the amount of $10,000.
Page 73 of 81 Part III Item 11 EXECUTIVE COMPENSATION (cont.)
The Bank maintains a death benefit plan covering all officers. By the purchase of a whole life insurance product, the Bank would be owner and beneficiary of the policies. The Bank, in turn, executes an agreement with each officer to pay a specified death benefit to each officer's beneficiary if death occurs before retirement.
Upon retirement, the officer will have the option to continue the existing death benefit coverage through a split dollar agreement with the Bank. The Bank will assign the death benefit portion to the officer for the portion of death benefit they had at retirement, or a lesser amount if the officer chooses. The Bank retains the ownership of the cash surrender value of the policy plus the balance of the death benefit, if any. The retired Bank officer does assume the economic benefit accruing to the policy and is responsible to pay the taxes for such benefit. It thereby will make the proceeds received by the retired officers' beneficiary free of federal income tax under the current tax laws.
This program replaced the existing group term policy that had been in effect for many years. The former group plan resulted in an expense only and the new death benefit program is expected to provide a reasonable rate of return on the Bank's investment.
COMPENSATION OF DIRECTORS:
Each outside director of the Bank and Bancorp, who did not elect to participate in the deferred compensation program described below, received a $6,000 director's fee for the year ended June 30, 1997; except the Chairman of the Board received $9,600, and the Secretary received $8,400. In addition an attendance fee of $150 per board and committee meeting is paid to outside directors on a quarterly basis. Those outside directors serving on the Finance Committee receive $300 as an attendance fee.
The Bank maintains a deferred compensation program for the benefit of certain executive officers, directors and independent contractors who elect to participate. Directors Joe C. Doan, Joseph V. Lahrman, Jack W. Ransom, Rawl V. Ransom and Stanley K. Smith elected to participate in the plan. In return for deferring a percent of the directors fees they would otherwise be entitled to receive from the Bank and the Bancorp for a period of five years, they will receive annual benefits of $36,426, $9,494, $33,847, $8,650 and $45,724, respectively. Such benefits will be paid in equal monthly installments and will continue for 10 years. The payments will commence upon the later of their 65th birthday or their completion of five years' further service to the Bank and Bancorp as a director. In addition, each participant shall be entitled to receive a one-time lump-sum death benefit in the amount of $10,000.
Page 74 of 81
Part III Item 12
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 8, 1997 the total number of shares of common stock of Bancorp beneficially owned, and the percent of such shares so owned, by each person known to Bancorp to be beneficial owner of more than 5 percent of the common stock of Bancorp, by each director, by each executive officer named on page 73 and by directors and executive officers as a group. Bancorp has only one class of equity securities with a total 1,154,116 shares outstanding at September 8, 1997. Amount and Nature of Percent of Name and Address Beneficial Ownership (1) Class - ----------------------------------------------------------------------- Fred K Agnew 24,248 (2) 2.10% 905 S. O'Neil Street Frankfort, IN 46041
Ralph M. Butler 18,800 (3) 1.63% 3052 N. Co. Rd. 1000 E. Forest, IN 46039
John L. Conway 2,800 (4) .24% 701 S. Williams Road Frankfort, IN 46041
Joe C. Doan 6,150 (5) .53% 801 Eastwood Drive Frankfort, IN 46041
Joseph V. Lahrman 2,340 (6) .20% 5253 N. Co. Rd. 850 W. Mulberry, IN 46058
Jack W. Ransom 3,720 (7) .32% 958 Forest Drive S. Frankfort, IN 46041
Rawl V. Ransom 22,200 (8) 1.92% 1555 N. Main Street Frankfort, IN 46041
Tom Rohrabaugh 2,600 (9) .23% 901 Williams Road Frankfort, IN 46041
Stephen G. Rothenberger 200 .02% 1784 S. County Road 180 E. Frankfort, IN 46041
Robert K. Ryan 64,000 (10) 5.55% 600 Harvard Terrace Frankfort, IN 46041
R. Kent Ryan Jr. 4,296 (11) .37% 3490 State Road 75 North Frankfort, IN 46041
Page 75 of 81
Part III Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont.)
Amount and Nature of Percent of Name and Address Beneficial Ownership (1) Class - -----------------------------------------------------------------------
Stanley K. Smith 1,400 (12) .12% 859 Forest Drive South Frankfort, IN 46041
Total Directors and 92,888 8.05% Executive Officers as a Group (21 persons) ******
(1) The information contained in this column is based upon information furnished to the Bank by the individuals named above and the members of the designated group. Except as otherwise indicated, sole voting power and sole investment power with respect to the shares of common stock are held by the director, principal shareholders, or officer alone or by the director, principal shareholder or officer and his spouse.
(2) Includes 2,824 shares held in joint name with his wife Ann A. Agnew, 5,176 shares held in his wife's name only and 3,248 held in the name Carl W. Agnew, Revocable Trust.
(3) Includes 9,600 shares held in joint name with his wife, Mary E. Butler, and 2,000 shares held in his wife's name only.
(4) Includes 2,600 shares held in the name of his wife, Regina A. Conway.
(5) Includes 4,400 shares held in trust for Joe C. Doan.
(6) Includes 1,400 shares held in joint name with his wife, Jeanette Lahrman, and 740 shares held in his wife's name only.
(7) Includes 1,800 shares held in trust for his wife Susan J. Ransom and 1,600 shares held as Kramer Brothers Lumber Company Inc.
(8) Includes 13,848 shares held in trust for Rawl V. Ransom and 8,152 shares held in trust for his wife, Rosemary W. Ransom.
(9) Includes 2,400 shares held in joint name with his wife, Connie K. Rohrabaugh.
(10) Includes 6,520 shares held in the name of his wife, Eleanor Ryan.
(11) Includes 1,440 shares held in joint name with his wife, Linda E. Ryan, and 2,400 shares held in his wife's name only.
(12) Includes 1,000 shares held in joint name with his wife, Nancy Smith. Page 76 of 81
Part III Item 13
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, executive officers and principal shareholders of the Bank and Bancorp and their respective associates were customers of, and have had transactions with, the Bank in the ordinary course of business during 1997. Comparable transactions may be expected to take place in the future.
During 1997, certain directors and executive officers of the Bank and the Bancorp and their respective associates were indebted to the Bank from time to time. The outstanding balance due from such individuals whose aggregate indebtedness exceeded $60,000 at June 30, 1997 was $1,571,000, or 6.17 percent of Bancorp's total shareholders' equity. See Note #14 of the Notes to Consolidated Financial Statements, page 65 of this report. These loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for similar transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features.
Director R. Kent Ryan Jr. is a member of the law firm of Ryan, Moore Cook and Hunter. This firm, serving as legal counsel for the Bancorp, was paid $83,100 for services rendered during 1997. The Bancorp does anticipate the continued use of this law firm in the future.
Page 77 of 81 Part IV Item 14
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page of this Report (A) 1. Financial Statements: Where Located The Farmers Bancorp, Frankfort, Indiana and Subsidiary:
Report of Independent Auditor 43
Consolidated Balance Sheets June 30, 1997 and 1996 44
Consolidated Statements of Income, Years Ended June 30, 1997, 1996 and 1995 45
Consolidated Statements of Changes in Shareholders' Equity, Years Ended June 30, 1997, 1996 and 1995 46
Consolidated Statements of Cash Flows, Years Ended June 30, 1997, 1996 and 1995 47 - 48
Notes to Consolidated Financial Statements 49 - 68
2. Financial Statement Schedules: Deposit Interest Expense by Type 69
All other schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or related notes.
3. Exhibits:
Exhibit 3: The Articles of Incorporation and By-laws of The Farmers Bancorp, Frankfort, Indiana are incorporated by reference from the Registration filed on Form S-14 with the Commission on October 14, 1983. (Sec File No. 2-87246)
Exhibit 10: A. The Deferred Compensation Agreements with Fred K Agnew, Joe C. Doan, Joseph V. Lahrman, Rawl V. Ransom, and Stanley K. Smith are incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
B. The Farmers Bank, Frankfort Indiana, Death Benefit Only Plan of The Farmers Bancorp, Frankfort, Indiana is incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
Exhibit 21: Subsidiaries of The Farmers Bancorp 81
(B) Reports on Form 8-K: No reports on Form 8-K were filed during registrant's last fiscal quarter. Page 78 of 81 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 9th day of September 1996.
THE FARMERS BANCORP, FRANKFORT, INDIANA (Registrant)
By:/s/ Tom Rohrabaugh Tom Rohrabaugh, President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
September 8, 1997 /s/Fred K Agnew Date Fred K Agnew, Director and Chairman of the Board
September 8, 1997 /s/Ralph M. Butler Date Ralph M. Butler, Director
September 8, 1997 /s/Joe C. Doan Date Joe C. Doan, Director
September 8, 1997 /s/Joseph V. Lahrman Date Joseph V. Lahrman, Director
September 8, 1997 /s/Jack w. Ransom Date Jack W. Ransom, Director
September 8, 1997 /s/Rawl V. Ransom Date Rawl V. Ransom, Director
September 8, 1997 /s/Tom Rohrabaugh Date Tom Rohrabaugh, Director and President (Principal Executive Officer)
September 8, 1997 /s/Stephen G. Rothenberger Date Stephen G. Rothenberger, Director
September 8, 1997 /s/R. Kent Ryan Jr. Date R. Kent Ryan, Jr., Director and Secretary to the Board
Page 79 of 81
September 8, 1997 /s/Stanley K. Smith Date Stanley K. Smith, Director
September 8, 1997 /s/ Karen I. Miller Date Karen I. Miller, Vice President and Treasurer (Principal Financial and Accounting Officer)
Page 80 of 81
EXHIBIT 21 - SUBSIDIARY OF REGISTRANT
Name State of Incorporation
The Farmers Bank, Indiana Frankfort, Indiana
Page 81 of 81