SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10/A
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant To Section 12(b) or (g) Of The Securities
Exchange Act Of 1934
_______________
LAFAYETTE BANCORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1605492
(State or other jurisdiction (I.R.S. Employer
of incorporation or Employer Identification
organization) No.)
133 North 4th Street, Lafayette, Indiana 47902
(Address of principal executive offices) Zip Code
Registrant's telephone number, including
area code: (765) 423-7100
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class to Name of each exchange
be so registered on which each class is
to be registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE PER SHARE
(Title of Class)
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ITEM 1. BUSINESS
GENERAL
The Lafayette Bancorporation (the "Corporation") is a
registered one-bank holding company that holds all the outstanding
stock of Lafayette Bank and Trust Company (the "Bank"). The
Corporation was incorporated under Indiana law on February 16,
1984, at the direction of the Board of Directors of the Bank in
order to facilitate the Bank's adoption of a one-bank structure.
The Bank became a wholly-owned subsidiary of the Corporation on
April 30, 1985, pursuant to a Plan of Exchange in which all the
outstanding stock of the Bank was exchanged for stock of the
Corporation. Prior to its acquisition of the Bank's stock, the
Corporation conducted no business or operations. The Corporation's
principal executive offices are located at 133 North 4th Street,
Lafayette, Indiana 47902 and its telephone number is (765) 423-
7100.
As a bank holding company, the Corporation engages in
commercial banking through its sole banking subsidiary and can
engage in certain non-banking activities closely related to banking
and own certain other business corporations that are not banks,
subject to applicable laws and regulations. All references
hereinafter to the activities or operations of the Corporation
reflect the Corporation's acting or operating through the Bank.
The Bank was chartered as an Indiana state-chartered bank in
1899. The Bank's principal executive offices are also located at
133 North 4th Street, Lafayette, Indiana 47902 and its telephone
number is (765) 423-7100. At December 31, 1996, the Bank was the
largest bank headquartered in Tippecanoe County with total assets
of $414,391,000 and total deposits of $341,550,000.
OPERATIONS
The Corporation engages in a wide range of commercial and
personal banking activities, including accepting demand deposits,
(including Now, Super Now, and Money Market Accounts), accepting
savings and time deposit accounts, making secured and unsecured
loans to corporations, individuals, and others, issuing letters of
credit, originating mortgage loans, providing personal and
corporate trust services, providing investment advisory and
brokerage services and providing auto, homeowners, and other
insurance products.
The Corporation's lending services include commercial, real
estate, installment (direct and indirect), and credit card loans.
Revenues from the Corporation's lending activities constitute the
largest component of the Corporation's operating revenues.
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The loan portfolio constitutes the major earning asset of the
Corporation and offers the best alternative for maximizing interest
spread above the cost of funds. The Corporation's loan personnel
have the authority to extend credit under guidelines established
and approved by the Board of Directors. Any aggregate credit which
exceeds the authority of the loan officer is forwarded to the loan
committee for approval. The loan committee is composed of various
experienced loan officers and three Bank directors -- the President
and two outside directors, including the Chairman. Except for the
Chairman, each outside director participates on this committee on
a monthly rotating basis. All aggregate credits that exceed the
loan committee's lending authority are presented to the full Board
of Directors for ultimate approval or denial. The loan committee
not only acts as an approval body to ensure consistent application
of the Corporation's loan policy but also provides valuable insight
through communication and pooling of knowledge, judgment, and
experience of its members.
The Corporation's primary lending area generally includes
northwest Indiana, specifically Tippecanoe and White Counties, and
contiguous counties. The Corporation extends out-of-area credit
only to borrowers who are considered to be low risk, and only on a
very limited basis.
In an effort to be more competitive while attracting younger
customers for future growth, the Corporation, in 1995, expanded its
mortgage loan operation by establishing a secondary market mortgage
loan department. Through this department, the Corporation
originates fixed rate mortgage loans and sells them in the
secondary market. The creation of this department has allowed the
Corporation to offer VA, FHA, and other fixed rate and first time
home buyer loans. Currently, the Corporation does not retain
servicing rights when it sells these loans, although the
Corporation may retain servicing rights of certain of these loans
in the future.
The Corporation provides a wide range of personal and
corporate trusts and trust-related services, including serving as
executor of estates, as trustee under testamentary and intervivos
trusts and various pension and other employee benefit plans, as
guardian of the estates of minors and incompetents, and as escrow
agent under various agreements.
The Corporation offers insurance products through its
independent insurance agency that was established in the early
1900's. Through its affiliation with five insurance companies, the
insurance department primarily underwrites individual auto and
homeowners insurance policies.
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The Corporation offers discount brokerage services through the
Investment Center by means of an agreement entered into with Robert
Thomas Securities, Inc., a division of Raymond James, Inc. Through
the Investment Center, the Corporation offers a complete range of
brokerage services, including mutual funds, annuities, stocks,
bonds, and other similar securities, and other related investment
products. All operational support services are provided by Robert
Thomas for an agreed-upon fee.
The Corporation is continually introducing new products and
services as permitted by the regulatory authorities or desired by
the public. In early 1996, the Corporation opened its second
supermarket branch in Lafayette, which is open seven days a week,
with extended hours and features a 24-hour automated teller
machine. In September, 1996, the Corporation purchased a branch in
Monticello, Indiana, from a competitor and thereafter combined its
two Monticello locations. During the year, the Corporation also
installed several new ATM's in existing branches and in external
retail locations. The Corporation remains committed to meeting the
challenges that require technology. In addition to providing its
customers with access to the latest technological products, such as
"Quick Connect," a 24-hour banking service, Loan by Phone, and a
VISA debit card, the Corporation is accessible via a home page on
the Internet (http:\\www.lbtbank.com). Because changes and new
developments in technology will continue well into the next
century, management has entered into an agreement with a technology
consulting firm. The primary objective of this engagement will be
to provide general guidance to maximize efficiencies within the
current systems, in addition to providing assistance in the
development of a technology plan for the Corporation. Management
believes the results will enable customers to be better served by
increasing overall productivity, in addition to future cost savings
for the Corporation.
EMPLOYEES
The Corporation has no compensated employees. At December 31,
1996, the Bank employed 190 full-time employees and 25 part-time
employees. The Bank is not a party to any collective bargaining
agreements, and employee relations are considered to be good.
SUPERVISION AND REGULATION
The Bank is chartered under the banking laws of the State of
Indiana and is subject to the supervision of, and is regularly
examined by, the Department of Financial Institutions and the FDIC.
The Corporation is a bank holding company within the meaning
of the Bank Holding Company Act, "BHC Act," is registered as such
with and is subject to the supervision of the Federal Reserve Board
("FRB").
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Certain legislation and regulations affecting the businesses
of the Corporation and the Bank are discussed below.
GENERAL.
As a bank holding company, the Corporation is subject to the
BHC Act. The Corporation reports to, registers with, and is
examined by the FRB. The FRB also has the authority to examine the
Corporation's subsidiaries which includes the Bank.
The FRB requires the Corporation to maintain certain levels of
capital. See "Capital Standards" herein. The FRB also has the
authority to take enforcement action against any bank holding
company that commits any unsafe or unsound practice, violates
certain laws, regulations, or conditions imposed in writing by the
FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms" herein.
Under the BHC Act, a company generally must obtain the prior
approval of the FRB before it exercises a controlling influence
over, or acquires directly or indirectly, more than 5% of the
voting shares or substantially all of the assets of any bank or
bank holding company. Thus, the Corporation is required to obtain
the prior approval of the FRB before it acquires, merges or
consolidates with any bank, or bank holding company. Any company
seeking to acquire, merge or consolidate with the Corporation also
would be required to obtain the FRB's approval.
The Corporation is generally prohibited under the BHC Act from
acquiring ownership or control of more than 5% of the voting shares
of any company that is not a bank or bank holding company and from
engaging directly or indirectly in activities other than banking,
managing banks, or providing services to affiliates of the holding
company. A bank holding company, with the approval of the FRB, may
engage or acquire the voting shares of companies engaged, in
activities that the FRB has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto. A bank holding company must demonstrate that the benefits
to the public of the proposed activity will outweigh the possible
adverse effects associated with such activity.
The FRB generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue
pressure on the capital of subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The FRB's policy is
that a bank holding company should not continue its existing rate
of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
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Transactions between the Corporation, the Bank and any future
subsidiaries of the Corporation are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries
of management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market
exists, actual costs plus a reasonable profit). Additionally, a
bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the
extension of credit, sale or lease of property, or furnishing of
services. Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate,
provided that the aggregate of such transactions with affiliates
may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all
affiliates may not exceed 20% of the capital stock and surplus of
such institution. The Corporation may only borrow from depository
institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the
loan. Further, the Corporation may not sell a low-quality asset to
a depository institution subsidiary.
CAPITAL STANDARDS.
The FRB, FDIC and other federal banking agencies have risk-
based capital adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk associated with
a banking organization's operations for both transactions reported
on the balance sheet as assets, and transactions, such as letters
of credit and recourse arrangements, which are reported as off-
balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A banking organization's risk-based capital ratios are
obtained by dividing its qualifying capital by its total risk-
adjusted assets and off-balance sheet items. The regulators
measure risk-adjusted assets and off-balance sheet items against
both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1
capital consists of common stock, retained earnings, noncumulative
perpetual preferred stock and minority interests in certain
subsidiaries, less most other intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for loan losses
and certain other instruments with some characteristics of equity.
The inclusion of elements of Tier 2 capital are subject to certain
other requirements and limitations of the federal banking agencies.
Since December 31, 1992, the federal banking agencies have required
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a minimum ratio of qualifying total capital to risk-adjusted assets
and off-balance sheet items of 8%, and a minimum ratio of Tier 1
capital to risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a banking organization rated in the highest of
the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to
total assets is 3%. It is improbable, however, that an institution
with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of
the regulators' rating. For all banking organizations not rated in
the highest category, the minimum leverage ratio is at least 100 to
200 basis points above the 3% minimum. Thus, the effective minimum
leverage ratio, for all practical purposes, is at least 4% or 5%.
In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have
the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum
guidelines and ratios.
The following table presents the capital ratios for the
Corporation and the Bank as of December 31, 1996:
<TABLE>
<CAPTION>
The Corporation The Bank
Ratio Ratio Requirement
<S> <C> <C> <C>
RISK-BASED CAPITAL RATIO:
Total Capital... 13.25% 13.27% 8.00%
Tier 1 Capital... 12.11% 12.13% 4.00%
TIER 1 CAPITAL LEVERAGE RATIO: 8.58% 8.69% 4.00%
</TABLE>
As required by Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the federal financial
institution agencies solicited comments in September, 1993 on a
proposed rule and method of incorporating an interest rate risk
component into the current risk-based capital guidelines, with the
goal of ensuring that institutions with high levels of interest
rate risk have sufficient capital to cover their exposures.
Interest rate risk is the risk that changes in market interest
rates might adversely affect a bank's financial condition or future
profitability. Under the proposal, interest rate risk exposures
would be quantified by weighting assets, liabilities and off-
balance sheet items by risk factors which approximate sensitivity<PAGE>
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to interest rate fluctuations. As proposed, institutions
identified as having an interest rate risk exposure greater than a
defined threshold would be required to allocate additional capital
to support this higher risk. Higher individual capital allocations
could be required by the bank regulators based upon supervisory
concerns. The agencies adopted a final rule effective September 1,
1995 which is substantially similar to the proposed rule, except
that the final rule does not establish (1) a measurement framework
for assessing the level of a bank's interest rate exposure; nor (2)
a minimum level of exposure above which a bank will be required to
hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management
process. The agencies also solicited comments on and are
continuing their analysis of a proposed policy statement which
would establish a framework to measure and monitor interest rate
exposure.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS.
FDICIA requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository
institutions, including but not limited to those that fall below
one or more of the prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured
depository institution will be placed, based on the level of its
capital ratios: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued uniform
final regulations implementing the prompt corrective action
provisions of FDICIA. An insured depository institution generally
will be classified in the following categories based on capital
measures indicated below:
"Well-Capitalized":
Total risk-based capital of 10% or more;
Tier 1 risk-based ratio capital of 6% or more; and
Leverage ratio of 5% or more.
"Adequately Capitalized":
Total risk-based capital of at least 8%;
Tier 1 risk-based capital of at least 4%; and
Leverage ratio of at least 4%.
"Undercapitalized":
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
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Leverage ratio less than 4%.
"Significantly Undercapitalized":
Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is
classified as well-capitalized, adequately capitalized, or
undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, determines that an unsafe or
unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat an institution as
"critically undercapitalized" unless its capital ratio actually
warrants such treatment.
If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking
agency. Undercapitalized institutions must submit an acceptable
capital restoration plan with a guarantee of performance issued by
the holding company. Further restrictions and sanctions are
required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure
is that the appropriate federal banking agency is required to
either appoint a receiver for the institution within 90 days or
obtain the concurrence of the FDIC in another form of action.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be subject
to potential enforcement actions by the federal regulators for
unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in
writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits (in
the case of a depository institution), the imposition of civil
money penalties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the issuance of
removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or
restraining orders based upon a prima facie showing by the agency
that such relief is appropriate. Additionally, a holding company's<PAGE>
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inability to serve as a source of strength to its subsidiary
banking organizations could serve as an additional basis for a
regulatory action against the holding company.
The Corporation and the Bank are classified as "well-
capitalized" under the above guidelines.
SAFETY AND SOUNDNESS STANDARDS.
FDICIA also implemented certain specific restrictions on
transactions and required the regulators to adopt overall safety
and soundness standards for depository institutions related to
internal control, loan underwriting and documentation, and asset
growth. Among other things, FDICIA limits the interest rates paid
on deposits by undercapitalized institutions, the use of brokered
deposits and the aggregate extension of credit by a depository
institution to an executive officer, director, principal
stockholder or related interest, and reduces deposit insurance
coverage for deposits offered by undercapitalized institutions for
deposits by certain employee benefits accounts.
The federal financial institution agencies published a final
rule effective on August 9, 1995, implementing safety and soundness
standards. The FDICIA added a new Section 39 to the Federal
Deposit Insurance Act which required the agencies to establish
safety and soundness standards for insured financial institutions
covering (1) internal controls, information systems and internal
audit systems; (2) loan documentation; (3) credit underwriting; (4)
interest rate exposure; (5) asset growth; (6) compensation, fees
and benefits; (7) asset quality, earnings and stock valuation; and
(8) excessive compensation for executive officers, directors or
principal shareholders which could lead to material financial loss.
The agencies issued the final rule in the form of guidelines only
for operational, managerial and compensation standards and reissued
for comment proposed standards related to asset quality and
earnings which are less restrictive than the earlier proposal in
November, 1993. Unlike the earlier proposal, the guidelines under
the final rule do not apply to depository institution holding
companies and the stock valuation standard was eliminated. If an
agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial
institution to submit to the agency an acceptable plan to achieve
compliance with the standard. If the agency requires submission of
a compliance plan and the institution fails to timely submit an
acceptable plan or to implement an accepted plan, the agency must
require the institution to correct the deficiency. Under the final
rule, an institution must file a compliance plan within 30 days of
a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement
action in certain cases rather than rely on an existing plan,
particularly where failure to meet one or more of the standards
could threaten the safe and sound operation of the institution.
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RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with
respect to capital is subject to statutory and regulatory
restrictions which limit the amount available for such distribution
depending upon the earnings, financial condition and cash needs of
the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited
exceptions, making capital distributions, including dividends, if,
after such transaction, the institution would be undercapitalized.
An FRB policy statement provides that a bank holding company
should not declare or pay a cash dividend to its stockholders if
the dividend would place undue pressure on the capital of its
subsidiary banks or if the dividend could be funded only through
additional borrowings or other arrangements that might adversely
affect the financial position of the bank holding company.
Specifically, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each consistent with its capital
needs, asset quality, and overall financial condition. Further,
the Corporation is expected to act as a source of financial
strength for each of its subsidiary banks and to commit resources
to support its subsidiary bank in circumstances when it might not
do so absent such policy.
The Corporation's ability to pay dividends depends in large
part on the ability of the Bank to pay dividends to the
Corporation. The ability of the Bank to pay dividends is subject
to restrictions set forth in the Indiana banking laws and
regulations of the FDIC.
The payment of dividends by an Indiana state bank is further
restricted by additional provisions of state law. As a general
rule, the Bank may declare a dividend in an amount deemed expedient
by the Board of Directors of the Bank. Any such dividend, however,
may not (i) impair the capital stock of the Bank, (ii) be in an
amount greater than the remainder of undivided profits then on hand
after deducting losses, bad debts, depreciation, and all other
expenses, or (iii) constitute a withdrawal of any portion of the
capital stock of the Bank. In addition, the Bank must obtain the
prior approval of the Indiana Department of Financial Institutions
for the payment of any dividend if the total of all dividends
declared by the Bank during the calendar year, including the
proposed dividend would exceed the sum of (i) the total of the net
profits of the Bank and (ii) the retained net profits of the Bank
for the previous two years. The amount of "net profits" is
determined by subtracting all current operating expenses, actual
losses, and all federal, state and local taxes from all earnings
from current operations plus actual recoveries on loans,<PAGE>
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investments and other assets.
Additionally, under FDICIA, the Bank may not make any capital
distribution, including the payment of dividends, if after making
such distribution the Bank would be in any of the "under-
capitalized" categories under the FDIC's Prompt Corrective Action
regulations.
Also, under the Financial Institution's Supervisory Act, the
FDIC also has the authority to prohibit the Bank from engaging in
business practices which the FDIC considers to be unsafe or
unsound. It is possible, depending upon the financial condition of
the Bank and other factors, that the FDIC could assert that the
payment of dividends or other payments in some circumstances might
be such an unsafe or unsound practice and thereby prohibit such
payment.
FDIC INSURANCE ASSESSMENTS.
The FDIC has established several mechanisms to increase funds
to protect deposits insured by the Bank Insurance Fund ("BIF") and
the Savings Association Insurance Fund ("SAIF"), both of which are
administered by the FDIC. The Bank's deposits are insured through
BIF except for those deposits the Bank acquired from the Resolution
Trust Corporation in December, 1990. This acquisition consisted of
two branches of the former Hometown Federal Savings Bank in Delphi,
Indiana, and these deposits remain insured through SAIF. The FDIC
is authorized to borrow up to $30 billion from the U.S. Treasury;
borrow from the Federal Financing Bank up to 90% of the fair market
value of assets of institutions acquired by the FDIC as receiver;
and borrow from depository institutions that are members of the
BIF. Any borrowings not repaid by asset sales are to be repaid
through insurance premiums assessed to member institutions. Such
premiums must be sufficient to repay any borrowed funds within 15
years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. FDICIA also provides authority for special
assessments against insured deposits.
As required by FDICIA, the FDIC has adopted a risk-based
assessment system for deposit insurance premiums. Under this
system, depository institutions are charged anywhere from zero to
$.27 for every $100 in insured domestic deposits, based on such
institutions' capital levels and supervisory subgroup assignment.
The FDIC's rules set forth which supervisory subgroup assignments
are made by the FDIC, the assessment classification review
procedure, provide for the assignment of new institutions to the
"well-capitalized" assessment group, set forth when an institution
is to make timely adjustments as appropriate, and set forth the
basis, and report data, on which capital group assignments are made
for insured branches of foreign banks, and expressly address the
treatment of certain lifeline accounts for which special assessment
treatment is given.
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The BIF reached its required 1.25 reserve ratio in 1995, and
in response the FDIC reduced deposit insurance assessment rates on
BIF-insured deposits to historic low levels. Legislation enacted
in September, 1996 included provisions for the recapitalization of
the SAIF. The legislation imposed a one-time assessment in the
amount of 65.7 basis points on all SAIF-insured deposits held as of
March 31, 1996. The Bank paid an assessment in the amount of
$31,000 on the small portion of its deposits that are SAIF-insured.
As a result of the payment of the special assessment and the
adoption of regulations implementing the legislation, rates for
deposits insured through SAIF have been brought into parity with
BIF rates. The BIF and SAIF deposit insurance assessment rates in
effect for the first six months of 1997 range from zero to $.27 per
$100 of insured deposits, with the healthiest financial
institutions, including the Bank, not being required to pay any
deposit insurance premiums for the period.
INTERSTATE BANKING AND BRANCHING.
On September 29, 1994, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") was signed
into law. The Interstate Act effectively permits nationwide
banking. As of September 30, 1995, the Interstate Act provides
that adequately capitalized and adequately managed bank holding
companies may acquire banks in any state, even in those
jurisdictions that had previously barred acquisitions by out-of-
state institutions, subject to deposit concentration limits. The
deposit concentration limits provide that regulatory approval by
the Federal Reserve Board may not be granted for a proposed
interstate acquisition if after the acquisition, the acquiror on a
consolidated basis would control more than 10% of the total
deposits nationwide or would control more than 30% of deposits in
the state where the acquiring institution is located. The deposit
concentration state limit does not apply for initial acquisitions
in a state and, in every case, may be waived by the state
regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are
permitted to impose age requirements not to exceed five years on
target banks for interstate acquisitions.
Branching between states may be accomplished either by merging
separate banks located in different states into one legal entity,
or by establishing de novo branches in another state. Interstate
branching by consolidation of banks will be permitted beginning
June 1, 1997, except in states that have passed legislation prior
to that date "opting-out" of interstate branching. If a state
opts-out prior to June 1, 1997, then banks located in that state
may not participate in interstate branching. A state may opt in to
interstate branching by bank consolidation or by de novo branching
by passing appropriate legislation earlier than June 1, 1997. The
laws of the host state regarding community reinvestment, fair
lending, consumer protection (including usury limits) and<PAGE>
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establishment of branches shall apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted
unless the host state expressly permits de novo branching by banks
from out-of-state. The establishment of an initial de novo branch
in a state is subject to the same conditions as apply to initial
acquisition of a bank in the host state other than the deposit
concentration limits.
Effective March 14, 1996, Indiana "opted in" to the interstate
branching provision of the Interstate Act.
The Interstate Act permits bank subsidiaries of a bank holding
company to act as agents for affiliated depository institutions in
receiving deposits, renewing time deposits, closing loans,
servicing loans and receiving payments on loans and other
obligations. A bank acting as agent for an affiliate is not
considered a branch of the affiliate. Any agency relationship
between affiliates must be on terms that are consistent with safe
and sound banking practices. The authority for an agency
relationship for receiving deposits includes the taking of deposits
for an existing account but is not meant to include the opening or
origination of new deposit accounts. Subject to certain
conditions, insured saving associations that were affiliated with
banks as of June 1, 1994, may act as agents for such banks. An
affiliate bank or saving association may not conduct any activity
as an agent which such institution is prohibited from conducting as
principal.
If an interstate bank decides to close a branch located in a
low-or moderate-income area, it must comply with additional branch
closing notice requirements. The appropriate regulatory agency is
authorized to consult with community organizations to explore
options to maintain banking services in the affected community
where the branch is to be closed.
To ensure that interstate branching does not result in taking
deposits without regard to a community's credit needs, the
regulatory agencies are directed to implement regulations
prohibiting interstate branches from being used as "deposit
production offices." The regulations to implement this provision
are due by June 1, 1997. The regulations must include a provision
to the effect that if loans made by an interstate branch are less
than fifty percent of the average of all depository institutions in
the state, then the regulator must review the loan portfolio of the
branch. If the regulator determines that the branch is not meeting
the credit needs of the community, it has the authority to close
the branch and to prohibit the bank from opening new branches in
the state.
<PAGE>
<PAGE>15
COMMUNITY REINVESTMENT ACT.
In October, 1994, the federal financial institution regulatory
agencies proposed a comprehensive revision of their regulations
implementing the Community Reinvestment Act ("CRA"), enacted in
1977 to promote lending by financial institutions to individuals
and businesses located in low and moderate income areas. In May,
1995, the proposed CRA regulations were published in final form
effective as of July 1, 1995. The revised regulations included
transitional phase-in provisions which generally require mandatory
compliance not later than July 1, 1997, although earlier voluntary
compliance is permissible. Under the former CRA regulations,
compliance was evaluated by an assessment of the institution's
methods for determining, and efforts to meet, the credit needs of
such borrowers. This system was highly criticized by depository
institutions and their trade groups as subjective, inconsistent and
burdensome, and by consumer representatives for its alleged failure
to aggressively penalize poor CRA performance by financial
institutions. The revised CRA regulations emphasize an assessment
of actual performance rather than of the procedures followed by a
bank, to evaluate compliance with the CRA. Overall CRA compliance
continues to be rated across a four-point scale from "outstanding"
to "substantial noncompliance," and continues to be a factor in
review of applications to merge, establish new branches or form
bank holding companies. In addition, any bank rated in
"substantial noncompliance" with the revised CRA regulations may be
subject to enforcement proceedings. Different evaluation methods
are used depending on the asset size of the bank.
The "lending, investments and service test method" is
applicable to all banks with more than $250 million in assets which
are not wholesale or limited purpose banks and do not elect to be
evaluated by the "strategic plan assessment method" which is
discussed below. Central to this method is the requirement that
such banks collect and report to their primary federal banking
regulators detailed information regarding home mortgage, small
business and farm and community development loans which is then
used to evaluate CRA compliance. At the bank's option, data
regarding consumer loans and any other loan distribution it may
choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i)
lending performance according to the geographic distribution of its
loans, the characteristics of its borrowers, the number and
complexity of its community development loans, the innovativeness
or flexibility of its lending practices to meet low and moderate
income credit needs and, at the bank's election, lending by
affiliates or through consortia or third-parties in which the bank
has an investment interest; (ii) investment performance by measure
of the bank's "qualified investments," that is, the extent to which
the bank's investments, deposits, membership shares in a credit
<PAGE>
<PAGE>16
union, or grants primarily to benefit low or moderate income
individuals and small businesses and farms, address affordable
housing or other needs not met by the private market, or assist any
minority or women-owned depository institution by donating, selling
on favorable terms or provisioning on a rent-free basis any branch
of the bank located in a predominately minority neighborhood; and
(iii) service performance by evaluating the demographic
distribution of the bank's branches and ATMs, its record of opening
and closing them, the availability of alternative retail delivery
systems (such as telephone banking, banking by mail or at work, and
mobile facilities) in low and moderate income geographies and to
low and moderate income individuals, and (given the characteristics
of the bank's service area(s) and its capacity and constraints) the
extent to which the bank provides "community development services"
(services which primarily benefit low and moderate income
individuals or small farms and businesses or address affordable
housing needs not met by the private market) and their
innovativeness and responsiveness.
Any bank may request to be evaluated by the "strategic plan
assessment method" by submitting a strategic plan for review and
approval. Such a plan must involve public participation in its
preparation, and contain measurable goals for meeting low and
moderate income credit needs through lending, investments and
provision of services. Such plans generally will be evaluated by
measuring strategic plan goals against standards similar to those
which will be applied in evaluating a bank according to the
"lending, investments and service test method."
The federal financial institution regulatory agencies issued
a final rule effective as of January 1, 1996, to make certain
technical corrections to the revised CRA regulations. Among other
matters, the rule clarifies the transition from the former CRA
regulations to the revised CRA regulations by confirming that when
an institution either voluntarily or mandatorily becomes subject to
the performance tests and standards of the revised regulations, the
institution must comply with all of the requirements of the revised
regulations and is no longer subject to the provisions of the
former CRA regulations.
INTER-CORPORATION BORROWINGS.
Bank holding companies are also restricted as to the extent to
which they and their subsidiaries can borrow or otherwise obtain
credit from one another or engage in certain other transactions.
The "covered transactions" that an insured depository institution
and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts: (1)
in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its
subsidiaries cannot exceed 10% of the capital stock and the surplus
<PAGE>
<PAGE>17
of the insured depository institution; and (ii) in the case of all
affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed
20% of the capital stock and surplus of the insured depository
institution. In addition, extensions of credit that constitute
covered transactions must be collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a
loan or extension of credit to the affiliate, a purchase of
securities issued by an affiliate, a purchase of assets from the
affiliate (unless otherwise exempted by the Federal Reserve Board),
the acceptance of securities issued by the affiliate as collateral
for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate. Further, a bank holding
company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
IMPACT OF MONETARY POLICIES.
Banking is a business which depends on interest rate
differentials. In general, the difference between the interest
paid by a bank on its deposits and other borrowings, and the
interest rate earned by banks on loans, securities and other
interest-earning assets comprises the major source of banks'
earnings. Thus, the earnings and growth of banks are subject to
the influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United
States and its agencies, particularly the FRB. The FRB implements
national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States
government securities, by adjusting the required level of reserves
for financial institutions subject to reserve requirements and
through adjustments to the discount rate applicable to borrowings
by banks which are members of the FRB. The actions of the FRB in
these areas influence the growth of bank loans, investments and
deposits and also affect interest rates. The nature and timing of
any future changes in such policies and their impact on the
Corporation cannot be predicted. In addition, adverse economic
conditions could make a higher provision for loan losses a prudent
course and could cause higher loan loss charge-offs, thus adversely
affecting the Bank's net earnings.
COMPETITION
The banking business is highly competitive. The Corporation's
market area consists principally of Tippecanoe and White Counties
in Indiana, although the Bank also competes with other financial
institutions in those counties and in surrounding counties in
Indiana in obtaining deposits and providing many types of financial
services. The Corporation competes with larger regional banks for
the business of companies located in the Corporation's market area.<PAGE>
<PAGE>18
The Bank also competes with savings and loan associations,
credit unions, production credit associations and federal land
banks and with finance companies, personal loan companies, money
market funds and other non-depository financial intermediaries.
Many of these financial institutions have resources many times
greater than those of the Bank. In addition, new financial
intermediaries such as money-market mutual funds and large
retailers are not subject to the same regulations and laws that
govern the operation of traditional depository institutions.
Recent changes in federal and state law have resulted in and
are expected to continue to result in increased competition. The
reductions in legal barriers to the acquisition of banks by out-of-
state bank holding companies resulting from implementation of the
Interstate Act and other recent and proposed changes are expected
to continue to further stimulate competition in the markets in
which the Bank operates, although it is not possible to predict the
extent or timing of such increased competition.
FORWARD-LOOKING STATEMENTS
This Form 10 and future filings made by the Corporation with
the Securities and Exchange Commission, as well as other filings,
reports and press releases made or issued by the Corporation and
the Bank, and oral statements made by executive officers of the
Corporation and Bank, may include forward-looking statements
relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in
general and on the markets in which the Corporation and the Bank do
business, and (b) expectations for increased revenues and earnings
for the Corporation and Bank through growth resulting from
acquisitions, attraction of new deposit and loan customers and the
introduction of new products and services. Such forward-looking
statements are based on assumptions rather than historical or
current facts and, therefore, are inherently uncertain and subject
to risk.
To comply with the terms of a "safe harbor" provided by the
Private Securities Litigation Reform Act of 1995 that protects the
making of such forward-looking statements from liability under
certain circumstances, t The Corporation notes that a variety of
factors could cause the actual results or experience to differ
materially from the anticipated results or other expectations
described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance,
development and results of the Corporation's and Bank's business
include the following: (a) the risk of adverse changes in business
conditions in the banking industry generally and in the specific
markets in which the Bank operates; (b) changes in the legislative
and regulatory environment that negatively impact the Corporation
and Bank through increased operating expenses; (c) increased
competition from other financial and non-financial institutions; <PAGE>
<PAGE>19
(d) the impact of technological advances; and (e) other risks
detailed from time to time in the Corporation's filings with the
Securities and Exchange Commission. The Corporation and Bank do
not undertake any obligation to update or revise any forward-
looking statements subsequent to the date on which they are made.
<PAGE>
<PAGE>20
ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to
facilitate the understanding of the Corporation's financial
condition as of December 31, 1996 and 1995 and results of
operations for each of the three years in the period ended December
31, 1996. The information should be used in conjunction with the
accompanying consolidated financial statements and footnotes
contained elsewhere in this document. Dollar amounts in tables are
presented in thousands.
INTRODUCTION AND OVERVIEW.
The Corporation, through the Bank as its sole subsidiary,
conducts business in thirteen offices located in Tippecanoe and
White Counties, Indiana. The Bank is engaged in a variety of
financial services, including accepting deposits; making commercial
and consumer loans; originating mortgage loans; providing personal
and corporate trust services; providing investment advisory and
brokerage services; and providing auto, homeowners, and other
insurance products.
The two Indiana counties which the Corporation primarily
serves, Tippecanoe and White, have benefited from increasingly
strong economies over the past few years. Tippecanoe County has
continued to be dependent upon Purdue University, one of the area's
largest employers. In the past few years, however, the community
has experienced growth in the industrial and retail sectors, which
has led to additional job creation. Estimates indicate
approximately 10,000 people commute daily to work from the
surrounding seven contiguous counties. Tippecanoe County also
posts one of the lowest unemployment rates in the state, which is
another leading indicator of the prosperous economy. In fact, in
each of the last five years, the unemployment rate in Tippecanoe
County has been lower than both the state and national average.
The City of Lafayette earned the designation as an "All-America
City" in 1995 by the National Civic League, and has also been
recognized by Money Magazine as one of the best places to live in
the United States. White County, unlike Tippecanoe County, relies
heavily on the agricultural industry, as it is one of the largest
producers of corn and soybeans in the state of Indiana.
A healthy economy, such as these two counties are currently
enjoying, invites certain challenges, especially that of
competition. All financial institutions today are faced with the
challenge of competing for customers' deposits. Brokerage houses
offer a diverse number of non-traditional deposit products, the
most common being mutual funds. Direct competition from banks,
thrifts, and credit unions has increased dramatically over the<PAGE>
<PAGE>21
years. Currently, there are approximately twenty different
financial institutions in this market competing from the same
customer base. Given these challenges, the Corporation has been
able to not only maintain its current market share, but increase it
in recent years.
Prior to October 1, 1994, the Corporation was a multi-bank
holding company with two wholly-owned subsidiary banks, Lafayette
Bank and Trust Company and Bank of Reynolds. On October 1, 1994,
Bank of Reynolds was merged into Lafayette Bank and Trust Company
in order to increase operational efficiencies and reduce expenses
of the Corporation.
In an effort to be more competitive while attracting younger
customers for future growth, the Corporation recently expanded its
mortgage loan operations by establishing a secondary market
mortgage loan department. The creation of this department has
allowed the Corporation to offer VA, FHA, and other fixed rate and
first-time home buyer loans. This department began operations in
1995 and was only operational the last five months of the year.
Currently, the Corporation does not retain the servicing rights
related to these sold loans, but it may begin retaining servicing
rights for certain of these loans in the future.
On December 6, 1995, the Corporation launched a new venture in
opening a full-service supermarket banking facility. In response
to meeting the convenience and needs of its customers, the branch
is open seven days a week, with extended hours, and features a 24-
hour automatic teller machine. The supermarket setting provides a
unique environment for interacting with customers while they shop.
The sales staff creates exciting on-going promotions while also
spending time in the aisles visiting with customers. A second
supermarket banking facility was opened on March 20, 1996.
On September 6, 1996, the Bank acquired a branch from National
City Bank, Indiana, located in Monticello, Indiana. The Bank
received approximately $16,298,000 in cash at settlement, and in
return acquired approximately $923,000 in tangible assets, assumed
$18,114,000 of deposit liabilities, and acquired $893,000 of
goodwill and core deposit intangible. The transaction was recorded
using the purchase method of accounting. Intangible assets and
core deposit intangibles are being amortized to expense on a
straight-line basis over a 15 year time period.
The Corporation does not have any pending mergers or
acquisitions, but does plan to aggressively pursue any such
opportunities, either branch locations or entire banks, as they may
become available. Management anticipates additional acquisitions
or mergers with like-minded community banks may occur in the
future. The statements in this paragraph relating to potential
mergers or acquisitions are forward-looking statements which may or<PAGE>
<PAGE>22
may not be accurate due to the impossibility of predicting future
events.
As technology continues to make its impact in the world and
effect the way we operate on a daily basis, both on a professional
and personal level, the Corporation remains committed to meeting
the challenges that require technology. In addition to providing
its customers with access to the latest technological products,
such as "Quick Connect", a 24-hour banking service, Loan by Phone,
and a VISA debit card, the Bank is accessible via a home page on
the Internet (http://www.lbtbank.com). Because changes and new
developments in technology will continue well into the next
century, management has entered into an agreement with a technology
consulting firm. The primary objective of this engagement will be
to provide general guidance to maximize efficiencies within the
current systems, in addition to providing assistance in the
development of a technology plan for the Corporation. Management
believes the results will enable customers to be better served by
increasing overall productivity, in addition to future cost savings
for the Corporation.
The Corporation is aware of the possible consequences the year
2000 may bring with regard to the computer systems utilized to
conduct business on a daily basis. Management has conducted a
preliminary review of its current systems, and although certain
adjustments may be required, the costs associated in resolving this
issue are not expected to have a material impact on the
Corporation's earnings.
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED STATISTICS.
(Dollar references in thousands except per share data)
The following selected data has been taken from the
Corporation's consolidated financial statements and should be read
in conjunction with the consolidated financial statements and
related notes included elsewhere. Reference should be made to Note
18 to the consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for information regarding the 1996 branch acquisition
which affects the comparability of data.
OVERVIEW OF OPERATIONS.
The major components of the Corporation's operating results
for the past five years are summarized in Table 1 - Five Year
Financial Summary.<PAGE>
<PAGE>23
TABLE 1 - FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $28,739 $26,267 $23,981 $23,352 $24,530
Interest expense 14,012 13,115 11,016 10,810 11,996
--------- --------- --------- --------- ---------
Net interest income - tax equivalent (1) 14,727 13,152 12,965 12,542 12,534
Tax equivalent adjustment (1) (524) (376) (330) (185) (65)
--------- --------- --------- --------- ---------
Net interest income 14,203 12,776 12,635 12,357 12,469
Provision for loan losses 240 180 600 1,136 905
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 13,963 12,596 12,035 11,221 11,564
Noninterest income 3,422 2,790 2,580 3,893 2,813
Noninterest expenses 11,191 10,220 9,689 10,198 9,656
--------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principles 6,194 5,166 4,926 4,916 4,721
Income tax expense 2,103 1,791 1,693 1,736 1,228
--------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principles 4,091 3,375 3,233 3,180 3,493
Cumulative effect of change in accounting
principles - - - (11) -
--------- --------- --------- --------- ---------
NET INCOME $4,091 $3,375 $3,233 $3,169 $3,493
========= ========= ========= ========= =========
PER SHARE DATA (2)
Income before cumulative effect of change in
accounting principles $2.08 $1.72 $1.64 $1.62 $1.78
Net income 2.08 1.72 1.64 1.61 1.78
Cash dividends 0.50 0.40 0.36 0.34 0.35
Shareholders' equity, end of year 17.63 16.22 14.39 13.60 12.33
SELECTED ACTUAL YEAR-END BALANCES
Total assets $414,391 $372,265 $360,221 $340,402 $316,899
Earning assets 378,345 333,153 323,904 316,505 287,189
Investment securities available-for-sale 88,206 90,881 41,339 3,823 (3) -
Investment securities held-to-maturity 6,156 2,161 53,554 81,287 74,553
Loans held for sale 5,877 2,473 - - -
Loans 268,940 228,643 224,680 217,784 194,438
Allowance for loan losses (3,198) (3,200) (3,309) (3,459) (2,866)
Total deposits 341,550 308,652 296,763 285,363 268,491
Noninterest-bearing demand deposits 43,579 43,950 37,875 34,251 29,730
Interest-bearing demand deposits 47,945 46,940 49,081 50,039 44,691
Savings deposits 87,938 77,287 67,607 69,028 62,113
Time deposits 162,088 140,475 142,200 132,045 131,957
Long-term borrowings 9,265 8,905 9,738 10,351 1,479
Shareholders' equity 34,646 31,875 28,294 26,737 24,258
SELECTED AVERAGE BALANCES
Total assets $377,623 $351,782 $338,537 $320,913 $309,002
Earning assets 348,218 323,495 313,684 292,102 272,371
Securities 91,802 90,749 88,697 79,222 77,960
Loans held for sale 4,989 1,092 - - -
Loans 242,286 220,117 213,722 199,943 189,400
Allowance for loan losses (3,210) (3,269) (3,461) (2,938) (2,628)
Total deposits 313,621 293,916 282,746 274,084 271,674
Noninterest-bearing demand deposits 35,655 35,822 33,622 30,015 34,782
Interest-bearing demand deposits 45,086 45,614 46,757 43,274 39,399
Savings deposits 82,535 71,406 69,558 66,883 63,580
Time deposits 150,345 141,074 132,809 133,912 133,913
Long-term borrowings 8,458 9,216 10,289 7,667 670
Shareholders' equity 33,133 30,125 27,684 25,566 23,240
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits (4) 77.25% 74.89% 75.59% 72.95% 69.72%
Return on average assets 1.08% 0.96% 0.95% 0.99% 1.13%
Return on average equity 12.35% 11.20% 11.68% 12.40% 15.03%
Dividend payout ratio 24.18% 23.05% 21.81% 21.11% 19.50%
Leverage capital ratio 8.58% 8.77% 8.27% 8.01% 7.90%
Efficiency ratio (5) 61.66% 64.11% 62.33% 62.05% 62.92%
OTHER DATA
Number of employees (FTE) 205 192 185 163 163
Average common shares outstanding 1,965,179 1,965,320 1,965,360 1,966,352 1,967,633
Cash Dividends declared $989 $778 $705 $669 $681
/TABLE
<PAGE>
<PAGE>24
(1) Net interest income has been presented on both a tax equivalent and
non-tax equivalent basis. Tax equivalent basis was calculated using a 34%
tax rate for all periods presented. The tax equivalent adjustment
reverses the tax equivalent basis in order to present net interest income
in accordance with generally accepted accounting principles (GAAP), as
reflected in the consolidated financial statements.
(2) Per share data has been retroactively adjusted to give effect for stock
dividends and splits.
(3) Prior to the adoption of SFAS 115, two securities were classified as
held-for-sale and carried at the lower of amortized cost or estimated fair
value determined on an aggregate basis.
(4) The loan to deposit ratio calculation excludes loans held for sale.
(5) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income, on a fully tax equivalent basis, and
noninterest income.
<PAGE>
<PAGE>25
The Corporation earned $4,091,000, or $2.08 per share, for
1996, compared to $3,375,000, or $1.72 per share, for 1995. The
21.2% increase in earnings in 1996 over the prior year period
reported in 1995 is largely a result of an increase in net interest
income. The first full year of operation of the secondary market
mortgage department along with the decrease of the federal deposit
insurance requirement were additional factors in the earnings
increase. Partially offsetting the improvement in earnings were
increases in the required level of loan loss provision and in
salaries and employee benefits, primarily as a result of the two
supermarket banking facilities opened, in addition to the added
personnel in the branch acquisition mentioned previously.
Earnings in 1995 were 4.4% higher than the $3,233,000, or
$1.64 per share recorded in 1994. The Corporation experienced an
increase in its cost of funds during 1995 which resulted in only a
slight increase in net interest income. Earnings were enhanced
through a decline in both the required level of the loan loss
provision and deposit insurance. The secondary market mortgage
department became operational and contributed slightly to earnings
during the latter half of the year. These increases to net
earnings were largely offset by start-up costs in the secondary
market mortgage department and the first supermarket banking
facility. Salaries and employee benefits were largely affected by
these two new ventures as a result of meeting the proper staffing
and training needs. Other real estate owned (OREO) expense
declined during the year as a result of OREO sales.
NET INTEREST INCOME.
Net interest income is the most significant component of the
Corporation's earnings. Net interest income is the difference
between interest and fees realized on earning assets, primarily
loans and securities, and interest paid on deposits and other
borrowed funds. The net interest margin is this difference
expressed as a percentage of average earning assets. Net interest
income is determined by several factors, including the volume of
earning assets and liabilities, the mix of earning assets and
liabilities and interest rates. Although there are a certain
number of these factors which can be controlled by management
policies and actions, certain other factors, such as the general
level of credit demand, Federal Reserve Board monetary policy, and
changes in tax law are beyond the control of management. Tables 1
through 4 are an integral part in analyzing the components of net
interest income and the changes which have occurred between the
time periods presented. Table 1 - Five Year Financial Summary
shows the Corporation's net interest income from 1992 through 1996.
Table 2 - Average Balance Sheets and Interest Rates represent the
major components of interest earning assets and interest-bearing
liabilities. For analytical purposes, interest income presented in
the table has been adjusted to a tax equivalent basis assuming a
34% tax rate for all years. The tax equivalent adjustment<PAGE>
<PAGE>26
recognizes the income tax savings when comparing taxable and tax-
exempt assets.<PAGE>
<PAGE>27
TABLE 2 - AVERAGE BALANCE SHEETS AND INTEREST RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
------------------------------------ -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Securities
Taxable $71,716 $4,219 5.88% $76,082 $4,538 5.96%
Tax-exempt (1) 20,805 1,424 6.84% 15,471 1,038 6.71%
Unrealized loss on A.F.S. (719) - (804) -
-------- -------- ---- -------- -------- ----
Total securities 91,802 5,643 6.15% 90,749 5,576 6.14%
Loans (2)
Commercial and agricultural (1) 89,545 8,493 9.48% 76,175 7,341 9.64%
Real estate 102,257 8,772 8.58% 89,238 7,501 8.41%
Installment and other consumer 54,870 5,281 9.62% 55,525 5,133 9.24%
Other 603 32 5.31% 271 18 6.64%
-------- -------- ---- -------- -------- ----
Total loans 247,275 22,578 9.13% 221,209 19,993 9.04%
Federal Home Loan Bank stock 1,106 87 7.87% 1,055 83 7.87%
Federal funds sold 8,035 431 5.36% 10,482 615 5.87%
-------- -------- ---- -------- -------- ----
TOTAL EARNING ASSETS 348,218 $28,739 8.25% 323,495 $26,267 8.12%
======== ==== ======== ====
NONINTEREST EARNING ASSETS
Allowance for loan losses (3,210) (3,269)
Premises and equipment 5,752 5,325
Cash and due from banks 14,785 14,515
Accrued interest and other assets 12,078 11,716
-------- --------
TOTAL ASSETS $377,623 $351,782
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $45,086 $831 1.84% $45,614 $863 1.89%
Savings deposits 82,535 3,134 3.80% 71,406 2,664 3.73%
Time deposits 150,345 8,743 5.82% 141,074 8,271 5.86%
-------- -------- ---- -------- -------- ----
Total interest-bearing deposits 277,966 12,708 4.57% 258,094 11,798 4.57%
Borrowed funds
Short-term borrowings 15,430 781 5.06% 14,315 744 5.20%
Long-term debt 8,458 523 6.18% 9,216 573 6.22%
-------- -------- ---- -------- -------- ----
Total borrowed funds 23,888 1,304 5.46% 23,531 1,317 5.60%
-------- -------- ---- -------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 301,854 $14,012 4.64% 281,625 $13,115 4.66%
======== ==== ======== ====
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 35,655 35,822
Accrued interest and other liabilities 6,981 4,210
Shareholders' equity 33,133 30,125
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $377,623 $351,782
======== ========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $14,727 3.61% $13,152 3.46%
======== ==== ======== ====
NET INTEREST MARGIN 4.23% 4.07%
==== ====
</TABLE>
<PAGE>
<PAGE>28
TABLE 2 -- CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994
---------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
------- -------- -------
ASSETS
<S> <C> <C> <C>
INTEREST EARNING ASSETS
Securities
Taxable $75,609 $4,360 5.77%
Tax-exempt (1) 13,757 844 6.14%
Unrealized loss on A.F.S. (669) -
-------- -------- ----
Total securities 88,697 5,204 5.87%
Loans (2)
Commercial and agricultural (1) 74,708 6,585 8.81%
Real estate 82,078 6,797 8.28%
Installment and other consumer 54,303 4,797 8.83%
Other 2,633 117 4.44%
-------- -------- ----
Total loans 213,722 18,296 8.56%
Federal Home Loan Bank stock 1,042 62 5.95%
Federal funds sold 10,223 419 4.10%
-------- -------- ----
TOTAL EARNING ASSETS 313,684 $23,981 7.64%
======== ====
NONINTEREST EARNING ASSETS
Allowance for loan losses (3,461)
Premises and equipment 5,557
Cash and due from banks 14,857
Accrued interest and other assets 7,900
--------
TOTAL ASSETS $338,537
========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $46,757 $873 1.87%
Savings deposits 69,558 2,115 3.04%
Time deposits 132,809 6,839 5.15%
-------- -------- ----
Total interest-bearing deposits 249,124 9,827 3.94%
Borrowed funds
Short-term borrowings 14,490 572 3.95%
Long-term debt 10,289 617 6.00%
-------- -------- ----
Total borrowed funds 24,779 1,189 4.80%
-------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 273,903 $11,016 4.02%
======== ====
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 33,622
Accrued interest and other liabilities 3,328
Shareholders' equity 27,684
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $338,537
========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $12,965 3.62%
======== ====
NET INTEREST MARGIN 4.13%
====
</TABLE>
(1) Interest income on tax-exempt securities and loans has been adjusted
to a tax equivalent basis using a marginal federal income tax rate
of 34% for all years. Tax equivalent security adjustments were
$484 for 1996, $353 for 1995, and $287 for 1994. Tax equivalent
loan adjustments were $40 for 1996, $23 for 1995, and $43 for
1994.
(2) Nonaccrual loans are included in average loan balances and loan fees
are included in interest income. Loan fees were $928 for 1996,
$703 for 1995, and $774 for 1994.
<PAGE>
<PAGE>29
Table 3 - Net Interest Earning Assets illustrates net interest
earning assets and liabilities for 1996, 1995 and 1994.
TABLE 3 - NET INTEREST EARNING ASSETS
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Average interest earning assets....... $348,218 $323,495 $313,684
Average interest bearing liabilities.. 301,854 281,625 273,903
-------- -------- --------
Net interest earning assets $46,364 $41,870 $39,781
======== ======== ========
</TABLE>
Table 4- Volume and Rate Analysis depicts the dollar effect of
volume and rate changes from 1994 through 1996. Variances which
were not specifically attributable to volume or rate were allocated
proportionately between rate and volume using the absolute values
of each for a basis for the allocation. Nonaccruing loans were
included in the average loan balances used in determining the
yields.
Interest income on tax-exempt securities and loans has been
adjusted to a tax equivalent basis using a marginal federal income
tax rate of 34%. Loan interest income includes loan fees of
$928,000, $703,000, and $774,000 for 1996, 1995, and 1994.
TABLE 4 - VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
1996 change from 1995 due to 1995 change from 1994 due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Loans $2,378 $207 $2,585 $655 $1,041 $1,696
Securities
Taxable (258) (61) (319) 27 151 178
Tax-exempt 365 21 386 111 83 194
Federal Home Loan Bank stock 4 0 4 1 20 21
Federal funds sold (135) (49) (184) 11 185 196
------ ---- ------ ---- ------ ------
TOTAL INTEREST INCOME 2,354 118 2,472 805 1,480 2,285
INTEREST EXPENSE
- ----------------
Interest-bearing demand deposits (10) (22) (32) (22) 12 (10)
Savings deposits 422 48 470 58 491 549
Time deposits 540 (68) 472 444 988 1,432
Short-term borrowings 57 (20) 37 (7) 179 172
Long-term debt (47) (3) (50) (66) 22 (44)
------ ---- ------ ---- ------ ------
TOTAL INTEREST EXPENSE 962 (65) 897 407 1,692 2,099
------ ---- ------ ---- ------ ------
NET INTEREST INCOME $1,392 $183 $1,575 $398 ($212) $186
====== ==== ====== ==== ====== ======
</TABLE>
<PAGE>
<PAGE>30
Net interest income for 1996 on a tax equivalent basis was
11.98% higher than that for 1995, while the net interest margin for
1996 was 4.23% compared to 4.07% for 1995. Tax equivalent net
interest income for 1995 was 9.53% higher versus that for 1994,
while the net interest margin decreased to 4.07% from 4.13% in
1994.
The increase in net interest income during 1996 was
predominantly a result of increases in earning asset volume. The
loan growth experienced in 1996 was due to a concentrated effort in
changing the mix of the Corporation's earning assets in order to
enhance overall earnings. This increase in interest income was
partially offset by volume increases in interest-bearing
liabilities. The earning asset yield increased to 8.25% in 1996,
compared to 8.12% in the previous year, predominately through the
loan portfolio, where the increase in loan volume as a percent of
earning assets provided a higher yield relative to the yield on
other earning assets. The average yield on loans increased to
9.13% in 1996 compared to the 1995 yield of 9.04%. Although there
was a slight increase in the investment securities average balance,
the average yield remained virtually unchanged at 6.15% and 6.14%
in 1996 and 1995, respectively. Total interest-bearing liabilities
increased during 1996 primarily as a result of the deposits
acquired in the Monticello branch transaction which occurred in
September. The deposit growth combined with slightly lower
interest rates paid resulted in a 4.64% total interest-bearing rate
for 1996, compared to the 4.66% rate in 1995.
Net interest income in 1995 increased only slightly compared
to 1994 due to a combination of net changes in rate and volume in
earning assets and interest-bearing liabilities. The earning asset
yield increased to 8.12% in 1995 compared to the 7.64% yield in
1994, as a result of the slight increases in the loan and security
average balances, but predominately due to the rise in general
interest rates. Like earning assets, interest-bearing liabilities
showed little growth in average balances, but the interest rates
paid on deposits and other borrowed funds increased significantly
during the year, increasing the rate on total interest-bearing
liabilities to 4.66% in 1995 compared to the 1994 rate of 4.02%.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY.
The provision for loan losses represents charges made to
earnings to maintain an adequate allowance for loan losses. The
allowance is maintained at an amount believed by management to be
sufficient to absorb losses inherent in the credit portfolio.
Factors considered in establishing an appropriate allowance
include: a careful assessment of the financial condition of the
borrower; a realistic determination for the value and adequacy of
underlying collateral; the condition of the local economy and the
condition of the specific industry of the borrower; a comprehensive
analysis of the levels and trends of loan categories; and a review<PAGE>
<PAGE>31
of delinquent and classified loans.
The Corporation maintains a comprehensive loan review program
to evaluate loan administration, credit quality, and loan
documentation. This program also includes a regular review of
problem loan ("watch") reports, delinquencies, and charge-offs.
The adequacy of the allowance for loan losses is evaluated on a
quarterly basis. This evaluation focuses on specific loan reviews,
changes in the type and volume of the loan portfolio given the
current and forecasted economic conditions, and historical loss
experience. Any one of the following conditions may necessitate a
review of a specific loan: a question of whether the customer's
cash flow or net worth may not be sufficient to repay the loan;
the loan has been criticized in a regulatory examination; the
accrual of interest has been suspended; serious delinquency; or
other reasons where either the ultimate collectibility of the loan
is in question or the loan has other special or unusual
characteristics which require special monitoring.
Activity in the allowance for loan losses is reflected in
Table 5 - Analysis of Allowance for Loan Losses. The recorded
values of loans and leases actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting
out recoveries on previously charged-off assets, become net charge-
offs. The Corporation's policy is to charge-off loans, when, in
management's opinion, the loan is deemed uncollectible, although
concerted efforts are made to maximize recovery.
<PAGE>
<PAGE>32
TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $3,200 $3,309 $3,459 $2,866 $2,709
LOANS CHARGED-OFF
- -----------------
Commercial and agricultural (202) (294) (796) (389) (685)
Real estate 0 0 0 (32) 0
Installment (343) (262) (172) (326) (267)
------ ------ ------ ------ ------
TOTAL CHARGE-OFFS (545) (556) (968) (747) (952)
------ ------ ------ ------ ------
CHARGE-OFFS RECOVERED
- ---------------------
Commercial and agricultural 250 190 179 84 146
Real estate 0 0 0 55 0
Installment 53 77 39 65 58
------ ------ ------ ------ ------
TOTAL RECOVERIES 303 267 218 204 204
------ ------ ------ ------ ------
Net loans charged-off (242) (289) (750) (543) (748)
Current year provision 240 180 600 1,136 905
------ ------ ------ ------ ------
BALANCE AT END OF YEAR $3,198 $3,200 $3,309 $3,459 $2,866
====== ====== ====== ====== ======
Loans at year end, excluding
loans held for sale $268,940 $228,643 $224,680 $217,784 $194,438
Ratio of allowance to loans
at year end 1.19% 1.40% 1.47% 1.59% 1.47%
Average loans $247,275 $221,209 $213,722 $199,943 $189,400
Ratio of net loans charged-off
to average loans -0.10% -0.13% -0.35% -0.27% -0.39%
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $1,245 $942 $1,106 $1,667 $1,611
Real Estate 50 50 50 20 20
Installment 550 550 550 290 235
Unallocated 1,353 1,658 1,603 1,482 1,000
------ ------ ------ ------ ------
Total $3,198 $3,200 $3,309 $3,459 $2,866
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
COMPOSITION OF LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
1996 1995 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural 40.33% 37.52% 35.91% 38.01% 37.47%
Real estate - mortgage 38.87% 38.33% 34.57% 33.63% 34.73%
Installment 20.42% 24.15% 25.52% 23.86% 23.17%
Other 0.37% 0.00% 4.00% 4.49% 4.62%
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
<PAGE>33
Nonperforming assets and relative percentages to loan balances
are presented in Table 6 - Nonperforming Assets. The level of
nonperforming loans and leases is an important element in assessing
asset quality and the relevant risk in the credit portfolio.
Nonperforming loans include nonaccrual loans, restructured loans,
and loans delinquent 90 days or more. Loans are classified as
nonaccrual when management believes that collection of interest is
doubtful, typically when payments are past due over 90 days, unless
well secured and in the process of collection. Another element
associated with asset quality is other real estate owned (OREO),
which represents properties acquired by the Corporation through
loan defaults by customers.
TABLE 6 - NONPERFORMING ASSETS
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
PRINCIPAL BALANCE ---- ---- ---- ---- ----
- -----------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $178 $381 $474 $1,179 $1,583
Restructured 482 661 761 964 1,152
90 days or more past due 735 796 228 843 703
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS $1,395 $1,838 $1,463 $2,986 $3,438
====== ====== ====== ====== ======
Nonperf. as a percent of loans 0.52% 0.80% 0.65% 1.37% 1.77%
Other real estate owned $116 $436 $1,092 $1,205 $3,753
OREO as a percent of loans 0.04% 0.19% 0.49% 0.55% 1.93%
Allowance as a percent of
nonperforming loans 229.25% 174.10% 226.18% 115.84% 83.36%
For the year ended
December 31:
Interest income under
original terms $74 $113 $95 $79 $114
Interest income which
was recorded 56 50 51 46 85
</TABLE>
The consolidated provision for loan losses was $240,000 for
1996, $180,000 for 1995, and $600,000 for 1994. During that time
period, asset quality continued to improve as indicated by the
downward trend in net charge-offs and nonperforming loans. This
downward trend can be specifically attributed to the improvement in
the agricultural economy. The allowance as a percent of loans has
declined during the past five years due to the improvement in
nonperforming loans and net charge-off levels.
The $420,000 decrease in the provision for 1995 was a
combination of lower net agricultural charge-offs experienced
during the year along with the upturn in the local economy. The
amount of the future year's provision for loan losses will be
subject to adjustment based on the future evaluations of the loan
loss reserve adequacy.
<PAGE>
<PAGE>34
Total nonperforming loans and nonperforming loans as a percent
of loans have been in a declining trend over the past five years,
causing significant increases in the allowance as a percent of
nonperforming loans. During this period, nonaccrual and
restructured loan balances declined. The majority of these
nonaccrual and restructured loans were commercial and agricultural
loans. Many of the restructured loans are agricultural-related and
were restructured prior to 1992 due to the deteriorating conditions
in the farm economy. Low unemployment, an upturn in the local
economy, and increased strength in farm prices were all important
factors in the increased asset quality.
Statements of Financial Accounting Standard No. 114 and 118,
"Accounting by Creditors for Impairment of a Loan," became
effective January 1, 1995. These statements changed the way loan
loss allowance estimates were to be made for problem loans. In
general, when it is determined that all principal and interest due
under the contractual terms of a loan are not fully collectible,
management must value the loan using discounted future expected
cash flows.
Management believes three credits totaling approximately
$178,000 as of December 31, 1996 met the impaired loan criteria.
A specific reserve allocation was made in the allowance for loan
losses for the excess of the loan balance over the estimated future
cash flows. Application of this statement has not had a material
effect on the Corporation's financial statements.
The significant decrease in other real estate owned was
primarily the result of the sale of two large land tracts of a
foreclosed residential subdivision, and the sale of a foreclosed
shopping center. All other real estate owned is carried by the
Corporation at the lower of cost or fair value.
Management believes loans classified for regulatory purposes
as loss, doubtful, substandard, or special mention that are not
included in nonperforming or impaired loans do not represent or
result from trends or uncertainties which will have a material
impact on future operating results, liquidity, or capital
resources.
In addition to loans classified for regulatory purposes,
management also designates certain loans for internal monitoring
purposes in a watch category. Loans may be placed on management's
watch list as a result of delinquent status, concern about the
borrower's financial condition or the value of the collateral
securing the loan, substandard classification during regulatory
examinations, or simply as a result of management's desire to
monitor more closely a borrower's financial condition and
performance. Watch category loans may include loans with loss
potential that are still performing and accruing interest and may
be current under the terms of the loan agreement; however,
<PAGE>
<PAGE>35
management may have a significant degree of concern about the
borrowers' ability to continue to perform according to the terms of
the loan. Loss exposure on these loans is typically evaluated
based primarily upon the estimated liquidation value of the
collateral securing the loan. Also, watch category loans may
include credits which, although adequately secured and performing,
reflect a past delinquency problem or unfavorable financial trends
exhibited by the borrower.
All watch list loans are subject to additional scrutiny and
monitoring. The Corporation's philosophy encourages loan officers
to identify borrowers that should be monitored in this fashion and
believe this process ultimately results in the identification of
problem loans in a more timely fashion.
At December 31, 1996, the Corporation had a total of
$1,896,000 of loans on its watch list which were not included in
impaired or nonperforming loans.
NONINTEREST INCOME AND EXPENSE.
A listing of noninterest income and expense from 1994 through
1996 and percentage changes between years is included in Table 7 -
Noninterest Income and Expense.
TABLE 7 - NONINTEREST INCOME & EXPENSE
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1996 FROM '95 1995 FROM '94 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
NONINTEREST INCOME
Income from fiduciary activities $812 2.40% $793 4.07% $762
Service charges on deposit accounts 1,116 11.94% 997 1.22% 985
Other operating income 1,013 19.04% 851 12.72% 755
------ ------ ------ ------ ------
2,941 11.36% 2,641 5.56% 2,502
Net gain on loan sales 398 192.65% 136 N/A -
Net realized gain on securities 83 538.46% 13 -83.33% 78
------ ------ ------ ------ ------
TOTAL NONINTEREST INCOME $3,422 22.65% $2,790 8.14% $2,580
====== ====== ====== ====== ======
% CHANGE % CHANGE
1996 FROM '95 1995 FROM '94 1994
---- -------- ---- -------- ----
NONINTEREST EXPENSE
Salaries and employee benefits $6,331 13.28% $5,589 10.11% $5,076
Occupancy expenses, net 834 19.48% 698 3.25% 676
Equipment expenses 1,009 -1.46% 1,024 2.30% 1,001
Deposit insurance 45 -86.80% 341 -46.64% 639
Other operating expenses 2,972 15.73% 2,568 11.80% 2,297
------- ------ ------- ------ ------
TOTAL NONINTEREST EXPENSE $11,191 9.50% $10,220 5.48% $9,689
======= ====== ======= ====== ======
</TABLE>
Noninterest income increased 22.65% to $3,422,000 in 1996
compared to $2,790,000 in 1995. The primary source of noninterest
income was income from fiduciary activities, service charges on
<PAGE>
<PAGE>36
deposit accounts, and net gains on loan sales from the secondary
market mortgage department.
Service charges on deposit accounts grew 11.94% as a result of
the new accounts and increased number of fee-generating
transactions originated from the two supermarket banking facilities
and, to a lesser extent, the additional depositors gained in the
Monticello branch transaction. Other income increased 19.04%
during 1996 due to more fees generated at automatic teller machines
("ATM"), an increase in the fees associated with the Investment
Center, the Corporation's full service brokerage operation, and as
a result of a $96,000 gain recorded on the sale of a branch
facility.
As noted previously, 1996 was the first full year of operation
for the secondary market mortgage department. The income generated
from the origination and sale of mortgage loans is extremely
dependent upon the current interest rate environment as well as
customer demand. The Corporation has been developing relationships
with builders and real estate agents, and management expects this
area of activity to be a continued source of significant income.
The statements in this paragraph relating to the secondary market
mortgage department and its operations are forward-looking
statements which may or may not be accurate due to the
impossibility of predicting future economic and business events.
Noninterest income increased 8.14% in 1995 compared to 1994.
Service charges on deposit accounts increased 1.22%, mainly because
of an increase in the fee schedule, effective in March, 1995.
Other income increased 12.72% during the year. This increase was
a combination of a reduction in Investment Center income, along
with the net increase associated with the first full year of life
insurance earnings on life insurance purchased by the Bank in
October, 1994, on behalf of the directors. These life insurance
policies were used in conjunction with a deferred compensation plan
established at the same time in 1994. Additional details regarding
the director's deferred compensation plan is disclosed in Item 6
and in Note 9 to the consolidated financial statements.
Total noninterest expense increased 9.50% to $11,191,000 in
1996 compared to $10,220,000 in 1995. As a percentage of average
total assets, total noninterest expense was 2.96% in 1996 compared
to 2.91% in 1995. Salaries and employee benefits increased 13.28%
during 1996 and represent the largest component of noninterest
expense. Aside from annual salary adjustments, this increase can
be attributed to additional personnel required to operate the
second supermarket banking facility opened during the year in
addition to the added personnel obtained as a result of the
Monticello branch acquisition. Commissions paid to mortgage loan
originators are also included in this expense category and were
significantly more in 1996 as a result of its being the
department's first full year of operation. The Corporation also
<PAGE>
<PAGE>37
experienced notably higher employee group insurance costs,
primarily due to an increase in the number of claims submitted
during the year.
Occupancy expense increased 19.48% during 1996, again as a
result of the first full year of operation of the secondary market
mortgage department, the first full year of the two supermarket
banking facilities, and the acquisition of the Monticello branch.
Equipment expense experienced a 1.46% decrease in 1996 when
compared to the prior year. During the year, a large number of
equipment items became fully-depreciated, thus, reducing
depreciation expense. Although a decrease in depreciation expense
often accompanies an increase in maintenance costs, there was a
larger decline in depreciation expense than increased maintenance
costs for the year.
The 86.80% decline in the FDIC deposit insurance for 1996 was
a direct result of the BIF reaching its congressionally mandated
capitalization level of 1.25% of insured deposits during 1995. As
a result of the BIF reaching its capitalization goal, subsequent
ongoing deposit insurance premiums were greatly reduced. During
the third quarter of 1996, the FDIC instituted a one-time special
assessment against all deposits insured by the SAIF. A small
portion of the Corporation's deposits are insured under SAIF as a
result of two branches acquired from the Resolution Trust
Corporation in December, 1990. The Corporation, therefore, was
subject to approximately $31,000 in this special assessment. Given
the current level of deposits, premiums are not expected to
significantly increase in the future. The statements in this
paragraph are forward-looking which may or may not be accurate due
to the impossibility of predicting future congressional or
regulatory actions or the future capitalization levels of the
insurance funds.
Other noninterest expense increased 15.73% in 1996, primarily
as a result of increased overhead items associated with the two
supermarket banking facilities, the Monticello branch acquisition,
and the full year effect of the secondary market mortgage
department. Furthermore, there was a significant increase in
contributions arising from the donation of a former drive-up
banking facility to the City of Monticello. The Corporation also
engaged a consulting firm to assist with employment searches which
caused professional fees to increase during the year.
Noninterest expense increased 5.48% in 1995 compared to 1994.
The 10.11% increase in salaries and employee benefits during 1995
can be attributed to annual salary adjustments and to the staffing
of the first supermarket banking facility and the secondary market
mortgage department. Health insurance costs also increased
approximately 15.0% during this period. As noted earlier, the BIF
reached its required capitalization goal during 1995. Refunds,
<PAGE>
<PAGE>38
therefore, were calculated based on the second and third
assessments paid in 1995, and the Corporation received a refund of
approximately $182,000, which significantly reduced the FDIC
insurance expense.
The 11.80% change from 1995 to 1994 in other noninterest
expense relates to other real estate activity in 1994. Net income
or loss on other real estate owned activity is a component of total
noninterest expense. During 1994, the Corporation recorded a
$180,000 gain on the sale of an OREO parcel which, in turn,
substantially reduced the expenses for that year. Had that
particular transaction not occurred, the change in other
noninterest expense would have been 3.67%. The majority of that
3.67% increase related to additional advertising during that time
period.
INCOME TAXES.
The Corporation records a provision for income taxes currently
payable, along with a provision for those taxes payable in the
future. Such deferred taxes arise from differences in timing of
certain items for financial statement reporting rather than income
tax reporting. The major difference between the effective tax rate
applied to the Corporation's financial statement income and the
federal statutory rate of 34% is interest on tax-exempt securities
and loans.
At December 31, 1996, the Corporation had regular tax and
alternative minimum tax net operating loss carryforwards of
$160,000 and $127,000, respectively, resulting from the
Corporation's acquisition of the Bank of Reynolds in June, 1988.
Utilization of these tax carryforwards are limited to $83,000
annually and expire in the year 2002.
The Corporation's effective tax rate was 33.95%, 34.67%, and
34.37% in 1996, 1995, and 1994, respectively. Further tax
information regarding the Corporation can be found in Note 1 and
Note 12 to the consolidated financial statements.
FINANCIAL CONDITION.
SECURITIES.
On January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and accordingly
classified certain of its securities as available-for-sale. This
reclassification increased equity $145,000 on January 1, 1994, the
after-tax effect of the adjustment from amortized cost to fair
value.
<PAGE>
<PAGE>39
Securities held-to-maturity are those which the Corporation
has both the positive intent and ability to hold to maturity, and
are reported at amortized cost. Securities available-for-sale are
those which the Corporation may decide to sell if needed for
liquidity, asset/liability management, or other reasons.
Securities available-for-sale are reported at fair value, with
unrealized gains and losses included as a separate component of
equity, net of tax. The Corporation does not maintain any
securities for trading purposes.
Table 8 - Securities and Securities Maturity Schedule
summarizes the carrying value of securities from 1994 through 1996
and the maturity distribution at December 31, 1996, by
classification. Interest on tax-exempt securities has been
adjusted to a tax equivalent basis using a marginal federal tax
rate of 34% for all years.
TABLE 8 - SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
- -----------------------------
U.S. Government & Agencies $35,938 $40,613 $22,074
States and political subdivisions 17,480 18,948 -
Corporate obligations 1,301 4,143 2,002
Mortgage-backed and asset-backed 33,487 27,177 17,263
------- ------- -------
TOTAL SECURITIES AVAILABLE-FOR-SALE $88,206 $90,881 $41,339
SECURITIES HELD-TO-MATURITY
- ---------------------------
U.S. Government & Agencies $ - $ - $15,705
States and political subdivisions 6,156 2,161 15,635
Corporate obligations - - 4,261
Mortgage-backed and asset-backed - - 17,953
------- ------- -------
TOTAL SECURITIES HELD-TO-MATURITY $ 6,156 $ 2,161 $53,554
------- ------- -------
TOTAL SECURITIES $94,362 $93,042 $94,893
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SECURITIES MATURITY SCHEDULE
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
----------------------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
U.S. Treasury $1,005 6.75% $ 8,030 6.11% $ 0 $ 0
Federal agencies 5,005 5.53 16,459 6.14 5,439 6.46% -
State and municipal (1) 2,249 7.16 4,989 7.57 7,374 7.98 2,868 9.80%
Corporate obligations - 1,301 8.00 - -
Mortgage-backed and asset-backed - 11,739 6.74 3,842 6.48 17,906 6.50
------ ------- ------- -------
TOTAL AVAILABLE-FOR-SALE $8,259 $42,518 $16,655 $20,774
====== ======= ======= =======
HELD-TO-MATURITY
- ----------------
<PAGE>40
State and municipal (1) $1,905 6.44% 1,340 6.91% $ 1,691 7.73% $ 1,220 8.73%
------ ------- ------- -------
TOTAL HELD-TO-MATURITY $1,905 $ 1,340 $ 1,691 $ 1,220
====== ======= ======= =======
</TABLE>
(1) Average rates were calculated on a tax equivalent basis using
a marginal federal income tax rate of 34%.
<PAGE>
<PAGE>41
The majority of the securities portfolio is composed of U. S.
Treasury securities, Federal agency securities, state municipal
securities (tax exempt), and mortgage-backed and asset-backed
securities.
The securities portfolio carries varying degrees of risk.
Investments in U. S. Treasury and Federal agency securities have
little or no credit risk. Mortgage-backed and asset-backed
securities are substantially issues of Federal agencies.
Obligations of states and political subdivisions and corporate
securities are the areas of highest potential credit exposure in
the portfolio. This risk is minimized through the purchase of high
quality investments. When purchased, obligations of states and
political subdivisions and corporate bonds must have a credit
rating by Moody's or Standard & Poors of A or better.
Substantially all of these investments were rated A or better at
December 31, 1996. The risk of non-rated municipal bonds is
minimized by limiting the amounts invested and by investing in
local issues. Management believes the non-rated securities are of
high quality. No securities of an individual issuer, excluding
U.S. government and its agencies, exceeded 10% of the Corporation's
shareholders' equity as of December 31, 1996. The Corporation does
not use off-balance sheet derivative financial instruments as
defined in SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments."
Although total earning assets have increased over the past
years, the security portfolio balances have remained relatively
stable. Total securities were $94,362,000, $93,042,000, and
$94,893,000 as of December 31, 1996, 1995, and 1994, respectively.
During the early stages of 1996 interest rates continued to
decline, as they did much throughout 1995, while bond prices
increased. In an attempt to increase the total portfolio yield,
$11,600,000 in securities were sold in February, 1996, which
involved corporate, agency, and mortgage-backed securities
available-for-sale, both fixed and adjustable rates. These
proceeds were reinvested into intermediate-term mortgage-backed
securities with higher rates.
The shift in balances between 1994 and 1995 in the held-to-
maturity and available-for-sale classifications were a result of a
one-time transfer of securities from held-to-maturity to available-
for-sale in accordance with Financial Accounting Standards Board
Special Report on Implementation of SFAS 115.
U.S. Governments and agencies increased approximately
$2,800,000, or 7.50% between 1995 and 1994, while mortgage-backed
and asset-backed securities decreased approximately $8,000,000, or
22.83% during this same period. This change in portfolio mix was
due to the interest rate environment. During this period of
declining interest rates and increasing bond prices, the
<PAGE>
<PAGE>42
Corporation reduced the prepayment risk associated with holding
mortgage-backed securities by rotating out of such securities and
investing in U.S. Government and agency category securities with
comparable yields and more predictable prepayment characteristics.
As the tax equivalent yields on municipal securities became
more attractive during the latter stages of 1995, additional
municipal securities were purchased, as indicated by the
approximately $3,300,000 increase between 1995 and 1994.
As of December 31, 1996, 1995, and 1994, the security
portfolio held structured notes totaling $3,000,000, $4,000,000,
and $4,500,000, respectively. The investment policy has specific
guidelines describing total holdings, maturity, and price
volatility parameters regarding these types of security
instruments. All structured notes are U.S. government agency
issues.
Management's security strategy includes utilizing proceeds
from the maturity or sale of short-term securities, adjustable rate
instruments, and easily marketable securities to fund a portion of
the continuing growth of the loan portfolio. Tax-free and
intermediate taxable bonds are used to further enhance earnings.
As of December 31, 1996, approximately 93% of the total investment
security portfolio was classified in the available-for-sale
category, which allows flexibility in the asset/liability
management function. As noted earlier, sell strategies are
executed, on occasion, when the interest rate environment provides
the opportunity to boost the overall portfolio performance.
Although the change in equity due to market value fluctuations
in the available-for-sale portfolio is not used in the Tier 1
capital calculation, the change which occurred in the unrealized
gain/loss on securities between 1996 and 1995 was a result of the
swing in the interest rate environment during that period, in
conjunction with the change in the portfolio mix. Although there
was a significant change in the unrealized gain/loss on securities
between 1996 and 1995, management considers these changes to be
temporary in nature.
LOANS.
The loan portfolio constitutes the major earning asset of the
Corporation and offers the best alternative for maximizing interest
spread above the cost of funds. The Corporation's loan personnel
have the authority to extend credit under guidelines established
and approved by the Board of Directors. Any aggregate credit which
exceeds the authority of the loan officer is forwarded to the
Bank's loan committee for approval. The loan committee is composed
of various experienced loan officers and three Bank directors --
the President, and two outside directors, including the Chairman.
Except for the Chairman, each outside Bank director participates on
<PAGE>
<PAGE>43
this committee on a monthly rotating basis. All aggregate credits
which exceed the loan committee's lending authority are presented
to the full Board of Directors for ultimate approval or denial.
The loan committee not only acts as an approval body to ensure
consistent application of the Corporation's loan policy but also
provides valuable insight through communication and pooling of
knowledge, judgment, and experience of its members.
The Corporation's primary lending area generally includes
Northwest Indiana, specifically Tippecanoe and White Counties, and
contiguous counties. The Corporation extends out-of-area credit
only to borrowers who are considered to be low risk, and only on a
very limited basis.
In general, the loan growth experienced in 1996 was due to a
concentrated management effort in changing the mix of the
Corporation's earning assets in order to enhance overall earnings.
Total loans increased $40,297,000, or 17.62% between 1996 and 1995.
Approximately 98% of this growth occurred in two categories:
commercial and agricultural in addition to real estate - mortgage.
Substantially all of the $22,681,000, or 26.44% increase in
commercial and agricultural loans relate to the commercial loan
area. This increase, along with the $16,910,000, or 19.30%
increase in the real estate mortgage loans, which were
predominately one-to-four family residential loans, were linked to
the growth and expansion of the Greater Lafayette area. While
outstanding loan balances have escalated, the loan portfolio
remains well diversified by loan type, borrower, and industry, and
as a result, there was no concentration of credits in excess of 10%
of the loan balances as of December 31, 1996.
The commercial and agricultural loans are the largest segment
of the loan portfolio and, by nature, bear a higher degree of risk.
Management is aware of the increasing trend in this category and
believes the lending practices, policies, and procedures
surrounding this loan category are adequate to manage this risk.
A significant portion of the installment loan portfolio consists of
indirect auto loans which the Corporation has purchased from
various auto dealers in and around the Lafayette area. At December
31, 1996 and 1995, approximately $39,000,000 and $40,000,000,
respectively, consisted of such indirect paper. Because of the
higher risk associated with indirect lending, there is a specific
policy applicable to and separate reporting of these indirect
loans.
Table 9 - Loans Outstanding reflects outstanding balances by
loan type for the past five years. Additional loan information is
presented in Note 3 to the consolidated financial statements.
<PAGE>
<PAGE>44
TABLE 9 - LOANS OUTSTANDING
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $108,470 $ 85,789 $ 80,687 $ 82,790 $ 72,863
Real estate - mortgage 104,547 87,637 77,662 73,247 67,530
Installment 54,924 55,217 57,337 51,964 45,053
Other 999 0 8,994 9,783 8,992
-------- -------- -------- -------- --------
TOTAL LOANS $268,940 $228,643 $224,680 $217,784 $194,438
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE>45
Table 10 - Loan Liquidity and Sensitivity to Changes in
Interest Rates reflects the maturity schedule of commercial and
agricultural loans. Also indicated are fixed and variable rate
loans maturing after one year for the same loan categories.
TABLE 10 - LOAN LIQUIDITY
<TABLE>
<CAPTION>
LOAN MATURITIES AT DECEMBER 31, 1996
----------------------------------------------------
1 year 1 - 5 Over 5
and less years Years Total
-------- ------- ------- --------
<S> <C> <C> <C> <C>
-------- ------- ------- --------
Commercial and agricultural $61,716 $41,034 $ 5,720 $108,470
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
SENSITIVITY TO CHANGES IN INTEREST RATES
- ----------------------------------------
<S> <C> <C>
Fixed rates $12,347 $5,720
Variable rates 28,687 -
------- ------
Total selected loans $41,034 $5,720
======= ======
</TABLE>
DEPOSITS.
The Corporation offers a wide variety of deposit services to
individual and commercial customers, such as noninterest-bearing
and interest-bearing checking accounts, savings accounts, money
market accounts, and certificates of deposit. The deposit base
provides the major funding source for earning assets. Total
average deposits have shown steady growth over the past few years,
increasing 6.70% and 3.95% in 1996 and 1995, respectively. The
deposits acquired in the Monticello branch transaction accounted
for approximately one-third of the 1996 growth in average deposits.
Despite the growth experienced, the deposit mix has remained
relatively unchanged. Time deposits continue to be the largest
single source of the Corporation's deposit base.
A five year schedule of deposits by type and maturities of
time deposits greater than $100,000 is presented in Table 11 -
Deposit Information.
TABLE 11 - DEPOSIT INFORMATION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing $ 35,655 $ 35,822 $ 33,622
Interest-bearing demand 45,086 1.84% 45,614 1.89% 46,757 1.87%
Savings 82,535 3.80% 71,406 3.73% 69,558 3.04%
Time 150,345 5.82% 141,074 5.86% 132,809 5.15%
-------- ----- -------- ----- -------- -----
TOTAL DEPOSITS $313,621 4.05% $293,916 4.01% $282,746 3.48%
======== ===== ======== ===== ======== =====
/TABLE
<PAGE>
<PAGE>46
MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100K OR MORE AT DECEMBER 31,
----------------------------------------------
1996
-------
3 months or less $15,390
3 through 6 months 3,223
6 through 12 months 3,777
over 12 months 4,850
-------
$27,240
=======
To provide temporary liquidity and as an alternative to
borrowing federal funds, the Corporation will acquire, from time to
time, large balance certificates of deposit, generally from public
entities, for short-term time periods. There were no funds of this
nature as of December 31, 1995; however, the December 31, 1996 and
December 31, 1994 balances were $8,300,000 and $13,400,000,
respectively.
BORROWINGS.
Aside from the core deposit base and large denomination
certificates of deposit mentioned above, the remaining funding
sources include short-term and long-term borrowings. Short-term
borrowings consist of federal funds purchased from other financial
institutions on an overnight basis, retail repurchase agreements
which generally mature within thirty days, and U.S. Treasury demand
notes.
TABLE 12 - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Year-end balance of repurchase agreements outstanding $23,497 $16,818 $18,923
Year-end balance of treasury tax and loan open-end note 1,024 2,274 3,321
------- ------- -------
Total short-term borrowings $24,521 $19,092 $22,244
======= ======= =======
Average balance of repurchase agreements during year $15,143 $12,395 $12,149
Maximum month-end balance of repurchase agreements
during year 23,497 18,581 20,225
Weighted average interest rate of repurchase
agreements during year 4.61% 5.11% 3.97%
Weighted average interest rate of repurchase
agreements at end of year 4.47% 4.64% 4.96%
</TABLE>
As of December 31, 1996 and 1995, the Corporation's short-term
borrowings consisted of retail repurchase agreements and a treasury
tax open-end note. For both years, the retail repurchase
agreements accounted for substantially the entire outstanding
balance. As of December 31, 1996, the Corporation had overnight
repurchase agreements of $8,879,000 with White County, Indiana
Treasurer, and $3,856,000 with the City of Lafayette, Indiana. The
repurchase agreement with White County paid-off in February of
<PAGE>
<PAGE>47
1997. The Corporation foresees short-term borrowings to be a
continued source of liquidity, especially with the widespread
acceptance of repurchase agreements, and will continue to seek
municipal bids and contracts of this nature in the future.
Conversely, although the Corporation has the capacity to borrow up
to $20 million from the Federal Home Loan Bank of Indianapolis
("FHLB"), there are no current plans to increase significantly the
use of this source, unless special circumstances would warrant such
action. The statements in this paragraph relating to repurchase
agreements are forward-looking statements which may or may not be
accurate due to the impossibility of predicting future events.
Long-term debt balances have been rather constant over the
past few years. The balance as of December 31, 1996 was
$9,265,000, an increase of $360,000, or 4.04%, over the prior year.
The Corporation's long-term debt primarily consists of two
components: a note payable to a correspondent bank and mortgage
advances from the FHLB. The note payable to the correspondent bank
represents funds borrowed in the Corporation's acquisition of the
Bank of Reynolds. This note was paid-off during 1996.
The Bank became a member of the FHLB of Indianapolis in 1992
and immediately began participating in its mortgage advance
program. The FHLB mortgage advances allowed the Bank to develop a
fixed rate mortgage product to compete in the market during periods
of low interest rates. Since the FHLB mortgage advances have a
fixed rate, the Bank priced its mortgage product to ensure a
positive interest spread. In addition to the fixed interest rate
of the mortgage advances, each advance has a ten year maturity and
requires an annual principal payment. All advances are secured by
a blanket collateral pledge of the Bank's U.S. Government and U.S.
Government agency securities, along with one-to-four family
residential loans. The entire December 31, 1996 balance of long-
term debt consisted of the FHLB mortgage advances. Note 7 and Note
8 to the consolidated financial statements provide additional
information regarding borrowings.
LIQUIDITY AND RATE SENSITIVITY.
Liquidity management is the process by which the Corporation
ensures that adequate liquid funds are available to meet financial
commitments on a timely basis. These commitments include honoring
withdrawals by depositors, funding credit obligations to borrowers,
servicing long-term obligations, making shareholder dividend
payments, paying operating expenses, funding capital expenditures,
and maintaining reserve requirements.
Interest rate risk is the exposure to Corporation earnings and
capital from changes in future interest rates. All financial
institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring the interest rate risk
is the process that ranges from reducing the exposure of the
<PAGE>
<PAGE>48
Corporation's interest margin regarding swings in interest rates to
assuring that there are sufficient capital and liquidity to support
future balance sheet growth.
The asset/liability committee is responsible for managing
liquidity issues and interest rate risk, among other matters.
Various interest rate movements are factored into a simulation
model to assist the asset/liability committee in assessing interest
rate risk. The committee analyzes the results of the simulation
model to formulate strategies to effectively manage the interest
rate risk that may exist.
The liquidity of the parent company is dependent on the
receipt of dividends from the banking subsidiary. Certain
restrictions exist regarding the transfer of funds from the
subsidiary as explained in Item 1 and Note 14 to the consolidated
financial statements. Management expects that in the aggregate,
the banking subsidiary will continue to have the ability to
dividend adequate funds to the parent company.
The banking subsidiary's source of funding is predominantly
core deposits consisting of both commercial and individual
deposits, maturities of securities, repayments of loan principal
and interest, and federal funds purchased, securities sold under
agreements to repurchase, and long-term borrowings from the FHLB.
The deposit base is diversified between individual and commercial
accounts which helps avoid dependence on large concentrations of
funds. The Corporation does not solicit certificates of deposit
from brokers. The primary sources of liquidity on the asset side
of the balance sheet are federal funds sold and securities
classified as available-for-sale. Although approximately 93% of
the investment securities portfolio are classified in the
available-for-sale category, it is not likely that a significant
portion of these securities will be sold. They are available,
however, should liquidity needs arise. Table 13 - Funding Uses and
Sources details the main components of cash flows for 1996 and
1995.
<PAGE>
<PAGE>49
TABLE 13 - FUNDING USES AND SOURCES
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES
- ------------
Loans $247,275 $26,066 11.78% $221,209 $7,487 3.50%
Taxable securities 71,716 (4,366) -5.74% 76,082 473 0.63%
Tax exempt securities 20,805 5,334 34.48% 15,471 1,714 12.46%
Federal Home Loan Bank stock 1,106 51 4.83% 1,055 13 1.25%
Federal funds sold 8,035 (2,447) -23.34% 10,482 259 2.53%
-------- ------- ------- -------- ------ -------
TOTAL USES $348,937 $24,638 7.60% $324,299 $9,946 3.16%
======== ======= ======= ======== ====== =======
FUNDING SOURCES
- ---------------
Noninterest bearing deposits $ 35,655 ($167) -0.47% $ 35,822 $2,200 6.54%
Interest bearing demand and
savings deposits 127,621 10,601 9.06% 117,020 $705 0.61%
Time deposits 150,345 9,271 6.57% 141,074 $8,265 6.22%
Short-term borrowings 15,430 1,115 7.79% 14,315 ($175) -1.21%
Long-term debt 8,458 (758) -8.22% 9,216 ($1,073) -10.43%
-------- ------- ------- -------- ------ -------
TOTAL SOURCES $337,509 $20,062 6.32% $317,447 $9,922 3.23%
======== ======= ======= ======== ====== =======
</TABLE>
Rate sensitivity gap is defined as the difference between the
repricing of interest earning assets and the repricing of interest
bearing liabilities within certain defined time frames. The
Corporation's interest rate sensitivity position is influenced by
the distribution of interest earning assets and interest-bearing
liabilities among the maturity categories. Table 14 - Liquidity
and Interest Rate Sensitivity reflects interest earning assets and
interest-bearing liabilities by maturity distribution. Product
lines repricing in time periods predetermined by contractual
agreements are included in the respective maturity categories.
<PAGE>
<PAGE>50
TABLE 14 - LIQUIDITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 Years Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Loans, including loans held for sale $ 57,319 $41,532 $141,341 $34,625 $274,817
Securities held-to-maturity
Tax-exempt 105 1,800 1,340 2,911 6,156
Securities available-for-sale
Taxable 3,001 3,009 37,528 27,188 70,726
Tax-exempt 825 1,424 4,989 10,242 17,480
Total Securities 3,931 6,233 43,857 40,341 94,362
-------- ------- -------- ------- --------
Federal Home Loan Bank stock 0 0 0 1,116 1,116
Federal funds sold 8,050 0 0 0 8,050
-------- ------- -------- ------- --------
TOTAL EARNING ASSETS $ 69,300 $47,765 $185,198 $76,082 $378,345
======== ======= ======== ======= ========
INTEREST BEARING LIABILITIES
- ----------------------------
Interest-bearing demand deposits $ 47,945 $ 0 $ 0 $ 0 $ 47,945
Savings deposits 87,938 0 0 0 87,938
Time deposits 46,510 59,455 55,966 157 162,088
Long-term borrowings 434 445 3,079 5,307 9,265
-------- ------- -------- ------- --------
TOTAL INTEREST BEARING LIABILITIES $182,827 $59,900 $ 59,045 $ 5,464 $307,236
======== ======= ======== ======= ========
Rate sensitive gap (113,527) (12,135) 126,153 70,618 71,109
Rate sensitive cumulative gap (113,527) (125,662) 491 71,109
Cumulative gap as a percentage of total earning assets -30.01% -33.21% 0.13% 18.79%
</TABLE>
The purpose of the above table is to measure interest rate
risk utilizing the repricing intervals of interest sensitive assets
and liabilities. Rate sensitive gaps constantly change as funds
are acquired and invested and as rates change. Rising interest
rates are likely to increase net interest income in a positive gap
position while falling interest rates are beneficial in a negative
gap position.
The above rate sensitivity analysis places interest-bearing
demand and savings deposits in the shortest maturity category
because these liabilities do not have defined maturities. If these
deposits were placed in a maturity distribution representative of
the Corporation's deposit base history, the shortfall of the
negative rate sensitive gap position would be reduced in the 1-to-
90 day timeframe.
In addition to interest-bearing and savings deposits being
classified in the 1-90 day category, the Corporation's large
negative gap position as of December 31, 1996 was also due to
approximately 65% of certificate of deposits maturing during the
next twelve months and a significant portion of the Corporation's
loans maturing after one year. A decline in the interest rate
<PAGE>
<PAGE>51
environment would enhance earnings, while an increase in interest
rates would have the opposite effect on corporate earnings. The
effect would be mitigated by the fact that interest-bearing demand
and savings deposits may not be immediately affected by changes in
general interest rates.
CAPITAL ADEQUACY.
The Corporation and Bank are subject to various regulatory
capital guidelines as required by federal and state banking
agencies. These guidelines define the various components of core
capital and assign risk weights to various categories of assets.
Tier 1 capital consists of shareholders' equity less goodwill,
core deposit intangible, and the unrealized gain or loss on
securities available-for-sale, as defined by bank regulators. The
definition of Tier 2 capital includes the amount of allowance for
loan losses which does not exceed 1.25% of gross risk-weighted
assets. Total capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under the capital guidelines are a
4.00% leverage ratio (Tier 1 capital divided by average assets less
intangible assets and unrealized gains/losses), a 4.00% Tier 1
risk-based capital ratio (Tier 1 capital divided by risk-weighted
assets), and a 8.00% total capital ratio (Tier 1 capital plus Tier
2 capital divided by risk-weighted assets).
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") requires federal regulatory agencies to define
capital tiers. These are: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Under these regulations, a "well-
capitalized" institution must achieve a Tier 1 risk-based capital
ratio of at least 6.00%, and a total capital ratio of at least
10.00%, and a leverage ratio of at least 5.00% and not be under a
capital directive order. Failure to meet capital requirements can
initiate regulatory action that could have a direct material effect
on the Corporation's financial statements. If adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions, asset
growth, and expansion is limited, in addition to the institution
being required to submit a capital restoration plan.
Management believes the Corporation and the Bank meet all the
capital requirements as of December 31, 1996, as noted below in
Table 15 - Capital Ratios, and is well-capitalized under the
guidelines established by the banking regulators. To be well-
capitalized, the Corporation and Bank must maintain the prompt
corrective action capital guidelines described above.
<PAGE>
<PAGE>52
Exclusive of the effect of the unrealized gains/losses on
securities component, which is driven by the interest rate
environment, the Corporation's shareholders' equity increased
$3,099,000, or 9.73% in 1996. The Corporation increased the amount
of dividends paid to $989,000 in 1996 compared to $778,000 in 1995,
an increase of $211,000, or 27.12%. The higher dividend payout, in
addition to the stock dividends declared in the past few years,
represent management's effort to increase the value and return of
each shareholder's investment in the Corporation.
At December 31, 1996, management was not aware of any current
recommendations by banking regulatory authorities which, if they
were to be implemented, would have, or are reasonably likely to
have, a material effect on the Corporation's consolidated
liquidity, capital resources or operations.
TABLE 15 - CAPITAL RATIOS
<TABLE>
<CAPTION>
At December 31,
1996 1995
-------------------------
<S> <C> <C>
Tier 1 capital
Shareholders' equity $ 34,646 $ 31,875
Less: Intangibles (948) (46)
Add/less: Unrealized loss/(gain) on securities 311 (17)
--------- ---------
TOTAL TIER 1 CAPITAL $ 34,009 $ 31,812
========= =========
Total capital
Tier 1 capital 34,009 31,812
Allowable allowance for loan losses 3,198 3,030
--------- ---------
TOTAL CAPITAL $ 37,207 $ 34,842
========= =========
RISK WEIGHTED ASSETS $280,860 $242,244
========= =========
AVERAGE ASSETS (FOURTH QUARTER) $396,534 $362,728
========= =========
RISK-BASED RATIOS
TIER 1 12.11% 13.13%
========= =========
TOTAL CAPITAL 13.25% 14.38%
========= =========
LEVERAGE RATIOS 8.58% 8.77%
========= =========
</TABLE>
PENDING CHANGES.
Statement of Financial Accounting Standards No. 125 (SFAS
125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," has been issued and will apply
to some transactions in 1997 and others in 1998. SFAS 125
establishes standards for determining the circumstances under which
transfers of financial assets should be considered sales or as
secured borrowings and when a liability should be considered
extinguished, and addresses the accounting requirements for
servicing financial assets, including mortgage servicing rights.
The Corporation does not expect SFAS 125 to have a material impact
on the consolidated financial statements in 1997; however, the
Statement will be followed in the future should the Corporation<PAGE>
<PAGE>53
begin to originate mortgage servicing rights.
In March, 1997, the accounting requirements for calculating
earnings per share were revised. Basic earnings per share for 1997
and later will be calculated solely on average common stock
outstanding. Diluted earnings per share will reflect the potential
dilution of stock options and other common stock equivalents. All
prior calculations will be restated to be comparable to the new
methods. As the Corporation's stock options have not been
significantly dilutive, the new calculation methods will not
significantly affect future earnings per share reporting.
INFLATION.
For a financial institution, effects of price changes and
inflation vary considerably from an industrial organization.
Changes in the prices of goods and services are the primary
determinant of an industrial company's profit, whereas changes in
interest rates have a major impact on a financial institution's
profitability. Inflation affects the growth of total assets, but
it is difficult to assess its impact because neither the timing nor
the magnitude of the changes in the consumer price index directly
coincide with changes in interest rates.
During periods of high inflation there are normally
corresponding increases in the money supply. During such times
financial institutions often experience above average growth in
loans and deposits. Also, general increases in the price of goods
and services will result in increased operation expenses. Over the
past few years the rate of inflation has been relatively low, and
its impact on the growth in the balance sheets and increased levels
of income and expense has been nominal.
<PAGE>
<PAGE>54
ITEM 3. PROPERTIES
The Corporation, through the Bank, currently operates from its
main office in downtown Lafayette and from 12 additional branches
in Tippecanoe and White Counties in Indiana. Information about
those branches is set forth in the table below:
<TABLE>
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NO. OFFERED
______________ ______________ _________
<S> <C> <C>
Downtown Main Office 133 North 4th Street *Trust Department
Lafayette, Indiana *Secondary Market
(765) 423-7100 Mortgage Department
Downtown Motor Bank 401 North 4th Street *24-Hour MAC
Lafayette, Indiana Automatic Teller
(765) 423-7165 Machine
Elston Branch 2862 U.S. 231 South *24-Hour MAC
Lafayette, Indiana Automatic Teller
(765) 423-7166 Machine
Lafayette Square 2504 Teal Road *24-Hour Mac
Branch Lafayette, Indiana Automatic Teller
(765) 423-7164 Machine
Market Square Branch 2200 Elmwood Avenue *Installment Loan
Lafayette, Indiana Department
(765) 423-7163 *24-Hour MAC
Automatic Teller
Machine
Tippecanoe Court Pay Less Super Market *24-Hour MAC
Branch Lafayette, Indiana Automatic Teller
(765) 423-3821 Machine
West Lafayette Branch 2329 N. Salisbury Street *24-Hour MAC
West Lafayette, Indiana Automatic Teller
(765) 423-7162 Machine
26 East Branch 3901 S.R. 26 East *Investment Center
Lafayette, Indiana *Insurance Department
(765) 423-7167 *24-Hour MAC
Automatic Teller
Machine
Elmwood Avenue Pay Less Super Market *24-Hour MAC
Branch Lafayette, Indiana Automatic Teller
(765) 423-3931 Machine
Brookston Branch S.R. 18 West and *24-Hour MAC
HWY 43 Automatic Teller
Brookston, Indiana Machine
(765) 563-6400
<PAGE>
<PAGE>55 BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NO. OFFERED
______________ ______________ _________
Chalmers Branch Main Street
Chalmers, Indiana
(219) 984-5670
Monticello Branch 116 East Washington St. *24-Hour Mac
Monticello, Indiana Automatic Teller
(219) 583-5137 Machine
Reynolds Branch U.S. 24 West *24-Hour MAC
Reynolds, Indiana Automatic Teller
(219) 984-5471 Machine
</TABLE>
The Bank owns its main office and all its branch offices,
except the Market Square, Tippecanoe Court Pay Less, and Elmwood
Pay Less branches, all of which are leased. The West Lafayette and
26 East branch facilities are owned by the Bank, however both are
subject to land leases. The main office facility, which is used
predominantly by the Corporation and the Bank, contains
approximately 63,000 square feet. The remaining space is leased to
various unrelated business operations. The other branches range in
size from nearly 7,000 square feet down to approximately 450 square
feet. The Bank's Data Center is located at 320 North Street in
Lafayette, Indiana, and houses the Bank's data processing
operations in addition to the proof and checking departments.
<PAGE>
<PAGE>56
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) PRINCIPAL HOLDERS OF COMMON SHARES
At March 31, 1997, the Corporation does not know of any
shareholder who is the beneficial owner of more than five percent
of the common shares of the Corporation (the "Common Shares").
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number and percentage of
Common Shares beneficially owned by each Director of the
Corporation and the Bank and by all the Corporation's and the
Bank's Directors and executive officers as a group at March 31,
1997. Unless indicated otherwise in a footnote, the Directors and
executive officers possess sole voting and investment power with
respect to all shares shown.
<TABLE>
<CAPTION>
COMMON SHARES
NAME OF BENEFICIALLY OWNED
BENEFICIAL OWNER AT MARCH 31, 1997 PERCENT OF CLASS
_________________ __________________ _________________
<S> <C> <C>
Richard Boehning 4,914 (1) .24%
Joseph A. Bonner 16,540 (2) .84
Vernon N. Furrer 6,468 (3) .31
Wilbur Lee Hancock 4,906 (4) .24
Robert T. Jeffares 7,052 (5) .34
Charles E. Maki 7,023 (6) .34
Eric P. Meister 8,474 (7) .41
Roy D. Meeks 20,264 (8) .99
Robert J. Weeder 8,498 (9) .41
All Directors and executive
Officers as a group (16 persons) 90,597 (10) 4.61
_______________________
</TABLE>
(1) Includes 3,960 shares that Mr. Boehning has the right to
acquire upon the exercise of stock options.
(2) Includes 7,850 shares jointly owned by Mr. Bonner and his
spouse; 2,160 shares owned by Mr. Bonner's spouse; also
includes 6,528 shares that Mr. Bonner has the right to acquire
upon the exercise of stock options.
(3) Includes 2,200 shares jointly owned by Mr. Furrer and his
spouse; also includes 3,960 shares that Mr. Furrer has the
right to acquire upon the exercise of stock options.
(4) Includes 577 shares jointly owned by Mr. Hancock and his
spouse; also includes 3,960 shares that Mr. Hancock has the
right to acquire upon the exercise of stock options.
<PAGE>
<PAGE>57
(5) Includes 200 shares jointly owned by Mr. Jeffares and his
spouse and 2,328 shares owned by his stepdaughters; also
includes 3,960 shares that Mr. Jeffares has the right to
acquire upon the exercise of stock options.
(6) Includes 3,056 shares jointly owned by Mr. Maki and his
spouse; also includes 3,960 shares that Mr. Maki has the right
to acquire upon the exercise of stock options.
(7) Includes 1,528 shares jointly owned by Mr. Meister and his
spouse; also includes 3,960 shares that Mr. Meister has the
right to acquire upon the exercise of stock options.
(8) Includes 11,463 shares jointly owned by Mr. Meeks and his
spouse and 4,841 shares owned by his spouse; also includes
3,960 shares that Mr. Meeks has the right to acquire upon the
exercise of stock options.
(9) Includes 570 shares jointly owned by Mr. Weeder and his
spouse, and 1,429 shares owned by his spouse; also includes
4,449 shares that Mr. Weeder has the right to acquire upon the
exercise of stock options.
(10) Includes 40,640 shares owed jointly with or of record by
others with Directors and executive officers; also includes
41,633 shares that the Directors and executive officers have
the right to acquire upon the exercise of stock options.
<PAGE>
<PAGE>58
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the
Directors and executive officers of the Corporation. Unless
otherwise indicated in a footnote, each person has held the same or
a comparable position with his present employer for the last five
years. Effective in 1997, the Directors of the Corporation are
elected for a term of three years with one-third of the Directors
elected in any one year. The Directors of the Bank and the
officers of the Bank and the Corporation are all elected for terms
of one year.
<TABLE>
POSITIONS CURRENTLY DIRECTOR OR
HELD WITH THE EXECUTIVE OTHER PRINCIPAL
NAME AND AGE CORPORATION AND BANK OFFICER SINCE (1) OCCUPATION
_________________________ _____________________ ______________ ________________
<S> <C> <C> <C>
Richard A. Boehning, 59 Director of the 1992 Partner, Bennett,
Corporation and the Boehning, & Clary
Bank
Joseph A. Bonner, 65 Director and Chairman 1969 Director and Chairman
of the Corporation and of the Board of the
the Bank Corporation and the Bank
Vernon N. Furrer, 60 Director of the Bank 1994 (2) Self-employed farmer
Wilbur L. Hancock, 58 Director of the 1989 General Manager, Customer
Corporation and the Operations, PSI Energy, A
Bank CINERGY Company
Robert T. Jeffares, 61 Director of the Bank 1985 Executive Vice President and
CFO of Great Lakes Chemical
Corporation
Charles E. Maki, 69 Director of the Bank 1987 Retired Executive Vice
President and General Manager
of Landis & Gyr Utility
Services, Inc., a
manufacturing company
Eric P. Meister, 54 Director of the Bank 1993 Retired Central Division
Manager of GTE North, Inc.
Roy D. Meeks, 64 Director of the 1981 President and Owner of
Corporation and the Nelmeeks, Inc. d/b/a Radisson
Bank Inn
Robert J. Weeder, 59 Director and President 1985 President and Director of
of the Corporation, the Corporation and the Bank
Director and President of
the Bank
Lawrence A. Anthrop, 52 Senior Vice President 1972 (3) Senior Vice President and
and Senior Trust Senior Trust Officer of
Officer of the Bank the Bank
E. James Brisco, 44 Senior Vice President and 1995 (4) Senior Vice President and
Sec. Market Manager of Sec. Market Manager
the Bank
Michael C. Moulton, 55 Senior Vice President, 1993 (5) Senior Vice President,
Operations Officer and Operations Officer and
Data Processing Data Processing
Manager of the Bank Manager of the Bank
Robert J. Ralston, 55 Executive Vice President, 1978 (6) Executive Vice President,
Senior Operations Officer Senior Operations Officer
and Secretary/Treasurer of and Secretary/Treasurer of
the Bank the Bank
<PAGE>
<PAGE>59
POSITIONS CURRENTLY DIRECTOR OR
HELD WITH THE EXECUTIVE OTHER PRINCIPAL
NAME AND AGE CORPORATION AND BANK OFFICER SINCE (1) OCCUPATION
_________________________ _____________________ ______________ ________________
Michelle D. Turnpaugh, 31 Secretary/Treasurer of the 1991 (7) Secretary/Treasurer of the
Corporation and Assistant Corporation and Assistant
Secretary of the Bank Secretary of the Bank
Marvin S. Veatch, 32 Controller of the Bank 1992 Controller of the Bank
Charles E. Wise, 50 Senior Vice President 1979 (8) Senior Vice President of
of the Bank Bank
</TABLE>
______________________________
1. Includes, where applicable, service as a Director and/or
Officer of the Bank prior to the incorporation of the
Corporation.
2. Mr. Furrer was a Director of the Bank of Reynolds from
September 17, 1990 until the two banks were merged in 1994.
3. Mr. Anthrop became Senior Vice President of the Bank in
December, 1996.
4. Mr. Brisco became Senior Vice President of the Bank in
December, 1996.
5. Mr. Moulton became Senior Vice President of the Bank in
December, 1996.
6. Mr. Ralston became Executive Vice President of the Bank in
December, 1996 and was appointed Secretary/Treasurer of the
Bank in September, 1996.
7. Ms. Turnpaugh was appointed Secretary/Treasurer of the
Corporation in September, 1996.
8. Mr. Wise became Senior Vice President of the Bank in December,
1996.
<PAGE>
<PAGE>60
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information regarding
compensation paid for the fiscal years indicated to the
Corporation's and Bank's Chief Executive Officer and other most
highly compensated executive officers, based on salary and bonus
earned during fiscal 1996. Officers of the Corporation receive
their salary from the Bank.
<TABLE>
SUMMARY COMPENSATION TABLE
___________________________
Long Term
Compensation
Annual Compensation Awards
_______________________________ ____________
Securities
Underlying
Name and Options/ All Other
Principal Position Year Salary Bonus SARS (1)(2) Compensation (2)
____________________ ____ ______ _____ __________ ________________
<S> <C> <C> <C> <C> <C>
Joseph A. Bonner, 1996 $146,600 $25,000 2,040 $11,835 (3)
Chairman 1995 $140,250 $15,000 N/A N/A
1994 $125,962 $15,000 N/A N/A
Robert J. Weeder, 1996 $105,893 $15,000 1,920 $11,288 (4)
President of the 1995 $ 96,300 $10,000 N/A N/A
Corporation 1994 $ 90,000 $10,000 N/A N/A
Robert J. Ralston, 1996 $ 90,570 $10,000 1,800 $ 1,408 (5)
Executive Vice 1995 $ 86,670 $ 7,500 N/A N/A
President of the 1994 $ 81,000 $ 7,500 N/A N/A
(1) Represents options awarded during 1996; no SARs were awarded
during 1996.
(2) Information for previous years not required to be disclosed.
(3) Represents matching contributions of $2,324 under Lafayette
Bank and Trust Company Employees' Salary Savings Plan (the
401(k) Plan), Director fees in the amount of $9,300, and
above-market interest credited on deferred Director fees in
the amount of $211.
(4) Represents matching contributions of $1,693 under the 401(k)
Plan, Director fees in the amount of $9,300, and above-market
interest credited on deferred Director fees in the amount of
$295.
(5) Represents matching contributions of $1,408 under the 401(k)
Plan.<PAGE>
<PAGE>61
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table presents information on the stock option
grants that were made during 1996 pursuant to the Lafayette
Bancorporation Non-Qualified Stock Option Plan (the "Option Plan").
(Numbers of options and per share exercise prices have been
adjusted to reflect the 20 percent stock dividend paid on November
1, 1996.)
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants (2) Option Term (1)
____________________________________________________________________ _______________________
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% 10%
___________________ ____________ _____________ ______________________ ________ ________
<S> <C> <C> <C>
Joseph A. Bonner 2,040 8.4% $22.33 5/13/2006 $28,642 $72,604
Robert J. Weeder 1,920 7.9% $22.33 5/13/2006 $26,957 $68,333
Robert J. Ralston 1,800 7.4% $22.33 5/13/2006 $25,272 $64,062
</TABLE>
(1) The amounts in the table are not intended to forecast possible
future appreciation, if any, of the Corporation's Common
Shares. Actual gains, if any, are dependent upon the future
market price of the Corporation's Common Shares and there can
be no assurance that the amounts reflected in this table will
be achieved.
(2) All of the options granted during 1996 to Messrs. Bonner,
Weeder and Ralston have the same terms. The options were
granted on May 13, 1996, at the estimated fair market value of
one Common Share on that date. The Stock Option Agreements
provided that the granted options become exercisable in twenty
percent increments, with twenty percent becoming exercisable
one year from the grant date and an additional twenty percent
becoming exercisable on the four subsequent anniversaries of
the grant date; provided, however, that all options become
immediately exercisable upon the earlier occurrence of (a) the
optionee's 65th birthday, if the optionee is an employee; (b)
<PAGE>
<PAGE>62
the optionee's 70th birthday, if the optionee is a Director;
or (c) an "Applicable Event," which is defined in the Option
Plan as (i) the expiration of a tender offer or exchange offer
(other than an offer by the Corporation) pursuant to which at
least 50 percent of the Corporation's issued and outstanding
stock has been purchased, or (ii) the approval by the
shareholders of the Corporation of an agreement to merge or
consolidate the Corporation with or into another entity where
the Corporation is not the surviving entity, or an agreement
to sell or otherwise dispose of all or substantially all of
the Corporation's assets (including a plan of liquidation).
The options expire ten years from the date of grant unless
terminated earlier upon the death, retirement or termination
of employment of the optionee. The options are
nontransferable and may be exercised only by the optionee
during his lifetime. No SARs were granted during 1996.
<PAGE>
<PAGE>63
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to
options that have been granted to Messrs. Bonner, Weeder and
Ralston pursuant to the Lafayette Bancorporation Non-Qualified
Stock Option Plan and the option exercises that occurred during
1996. (Numbers of options and per share exercise prices have been
adjusted to reflect the stock dividend paid November 1, 1996.)
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/SARs at
Year-End (#) (1) Fiscal Year-End ($)
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (2)
_________________________________ ____________ _________________________ _____________________________
<S> <C> <C> <C> <C>
Joseph A. Bonner -0- -0- 32,246/2,462 $463,304/$3,257
Robert J. Weeder -0- -0- 22,458/6,742 $306,816/$76,630
Robert J. Ralston -0- -0- 14,503/6,019 $230,783/$61,153
</TABLE>
(1) The Option Plan provides for the grant of non-qualified
options to Directors and key employees. Options granted to
Directors vest immediately upon grant. Options granted to key
employees vest in twenty percent increments, with twenty
percent vesting one year from the date of grant and an
additional twenty percent vesting on each of the four
subsequent anniversaries of the grant date. See also the
discussion of the options in Note 1 to the Option/SAR Grants
In Last Fiscal Year table above. Messrs. Bonner and Weeder
have received option grants in their capacities as both
Directors and key employees. The Lafayette Bancorporation
Officers' Stock Appreciation Rights Plan, as amended (the "SAR
Plan"), provides for the grant of SARs from time to time to
executive and senior management officers of the Corporation in
the sole discretion of the SAR Plan Committee. Each SAR is
granted at a base value equal to the fair market value of one
Common Share on the date of grant and has a subsequent value
equal to 100 percent (or such other percentage specified by
the SAR Plan Committee) of the excess of the then-current fair
market value of one Common Share over the base price of the
SAR. SARs become fully exercisable without regard to vesting
<PAGE>
<PAGE>64
restrictions, however, upon the occurrence of (i) the
expiration of a tender offer or exchange offer (other than an
offer by the Corporation) pursuant to which at least 5 percent
of the Corporation's issued and outstanding stock has been
purchased, or (ii) the approval by the shareholders of the
Corporation of an agreement to merge or consolidate the
Corporation with or into another corporation where the
Corporation is not the surviving corporation, or an agreement
to sell or otherwise dispose of all or substantially all of
the Corporation's assets (including a plan of liquidation).
(2) Represents the difference between the last per share sales
price of a Common Share during 1996 known to the Corporation's
management ($23.38) and the exercise price of options/SARs
having an exercise price less than that sales price,
multiplied by the number of options/SARs.
DIRECTOR COMPENSATION.
During 1996, Directors of the Corporation received $250 per
month regardless of committee participation or attendance at
meetings. Non-employee Directors of the Bank received $1,350 per
month and employee Directors received $525 per month.
All of the Bank's directors participate in one of two deferred
compensation plans maintained by the Bank. In December, 1987, the
Bank established an unfunded deferred compensation plan for
directors of the Bank (the "1987 Plan"). The 1987 Plan provides
that on or before December 31 of any year, a director of the Bank
may elect in writing to defer receipt of his director fees for the
succeeding calendar year. At the end of each quarter for which a
Director has elected to defer fees under the 1987 Plan, the Bank
credits interest on the deferred fees at the rate of interest the
Bank paid on twelve-month certificates of deposit issued by the
Bank. The interest rate on the 1987 Plan is adjusted on the first
business day of such year. Mr. Maki was the only director who
participated in the 1987 Plan during 1996. In October, 1994, the
Bank adopted a deferred compensation plan for Directors through
Bank Compensation Strategies Group, Inc. (the "1994 Plan"). To
fund the 1994 Plan, the Bank purchased single-premium universal
life insurance policies for each of the participants. The interest
rate payable under the 1994 Plan is tied to the Wall Street Prime
Rate plus 150 basis points, and is adjusted on September 30 of each
calendar year. The adjusted interest rate as of September 30,
1996, is 9.75% (Wall Street Prime Rate (8.25%) plus 150 basis
points).
<PAGE>
<PAGE>65
PENSION PLAN
The Bank maintains a noncontributory defined benefit pension
plan, the Lafayette Bank and Trust Company Employees' Pension Plan
(the "Pension Plan"). All employees who have attained the age of
21 and have completed one year of service are eligible to
participate in the Pension Plan. The following table indicates the
estimated annual benefits payable under the Pension Plan to a
participant at the normal retirement age of 65 who has the
specified remuneration and years of service.
<TABLE>
_________________________________________________________________
PENSION PLAN TABLE (1)
Years of Service
__________________________________________________
Remuneration 15 20 25 30 35
_____________ ___ ___ ___ ___ ___
<S> <S> <S> <S> <S> <S>
125,000 40,440 53,920 67,400 80,880 94,360
150,000 48,690 64,920 81,150 97,380 113,610
200,000 51,990 69,320 86,650 103,980 121,310
225,000 51,990 69,320 86,650 103,980 121,310
250,000 51,990 69,320 86,650 103,980 121,310
300,000 51,990 69,320 86,650 103,980 121,310
400,000 51,990 69,320 86,650 103,980 121,310
450,000 51,990 69,320 86,650 103,980 121,310
500,000 51,990 69,320 86,650 103,980 121,310
______________________________________________________________________________
</TABLE>
<PAGE>
<PAGE>66
(1) Pay limited to statutory IRC Sec. 401(a)(17) limit in
calculation of benefits. Federal law limits annual
compensation taken into account for benefit purposes to
$160,000 for plan years beginning 1/1/97 and thereafter, until
indexed to the next $10,000 increment. (IRC Sec. 401(a)(17)).
The retirement benefit formula used for the Pension Plan is based
upon a participant's average compensation during the last five
years prior to retirement and the participant's years of service
with the Bank. The retirement benefit formula is composed of two
parts, a "base benefit" and an "excess benefit." The base benefit
is equal to 1.6 percent of a participant's average monthly
compensation during the five years prior to retirement multiplied
by the participant's number of years of service. The excess
benefit is equal to 0.6 percent of the amount by which the
participant's average monthly compensation exceeds $750.00
multiplied by the participant's number of years of service (not to
exceed 35 years). A participant's compensation is based on total
taxable wages or salary (including any overtime and bonuses) plus
any salary reduction contributions made by the participant under
the Bank's 401(k) plan and any contribution made to a section 125
plan maintained by the Bank. Federal law limits the amount of
annual compensation that can be counted for some highly compensated
employees. The years of credited service for years of service
through the end of 1996 applicable for determining the retirement
benefits for the executive officers named in the Summary
Compensation Table are as follows: Mr. Bonner: 27 years; Mr.
Weeder: 11 years; and Mr. Ralston: 18 years.
<PAGE>
<PAGE>67
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with Directors,
officers, and their associates. These transactions have been on
substantially the same terms, including interest rates, collateral,
and repayment terms on extensions of credit, as those prevailing at
the same time for comparable transactions with others and did not
involve more than the normal risk of collectibility or present
other unfavorable features.
During 1996 the Bank made payments for title services to
Tippecanoe Title Services, Inc., a company owned by Mr. Boehning,
who serves as a Director of the Corporation and the Bank. The Bank
expects to continue the use of such title services during 1997.
Mr. Boehning is a partner in the law firm of Bennett, Boehning &
Clary, which represented the Corporation as legal counsel in
certain matters during 1996, and the Corporation expects that the
firm will continue to represent the Corporation in similar matters
in 1997.
<PAGE>
<PAGE>68
ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
routine litigation incidental to their business, to which the
Corporation or the Bank is a party or of which any of its property
is subject.
<PAGE>
<PAGE>69
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET PRICE
The Common Shares of Lafayette Bancorporation are traded on
the Over-the-Counter ("OTC") Bulletin Board under the symbol LAYB.
As many of the current shareholders are heirs or descendants of the
founding shareholders, the shares are fairly closely held and are
not traded on a regular basis.
According to information received from the OTC's historical
department and to the best of the knowledge of the corporate
management, there were 176 sales transactions in Common shares
during 1995 at prices ranging from $18.25 to $22.00 per share.
During 1996, there were 220 sale transactions at prices ranging
from $21.00 to $25.00 per share. The most recent trade known to
management of the Corporation occurred April 3, 1997 at a price of
$24.125 per share. All market price data has been restated to
reflect the 10 percent stock dividend paid to shareholders on
December 1, 1995, and the 20 percent stock dividend paid to
shareholders on November 1, 1996.
Management has not verified the accuracy of the prices that
have been reported. Because of the lack of active trading of the
Common Shares, these prices do not necessarily reflect the prices
at which the Common Shares would trade in an active market.
The Common Shares are currently held of record by
approximately 510 shareholders.
<PAGE>
<PAGE>70
(b) DIVIDENDS
The Corporation paid cash dividends totaling $.40 per share in
1995 and $.50 per share in 1996 (adjusted for stock dividends).
The Corporation declares dividends on a quarterly basis in March,
June, September and December, payable in the following April, July,
October, and January.
Funds for the payment by the Corporation of cash dividends are
obtained from dividends received by the Corporation from the Bank.
Accordingly, the declaration and payment of dividends by the
Corporation depend upon the Bank's earnings and financial
condition, general economic conditions, compliance with regulatory
requirements, and other factors.
Payment of dividends and other distributions by an Indiana
corporation is restricted by Indiana law. The Corporation can pay
dividends only if, after paying such dividend, (i) the Company
would be able to pay its debts as they become due in the usual
course of business, and (ii) the Corporation's total assets would
not be less than the sum of its total liabilities. In addition,
the payment of dividends by an Indiana state bank is further
restricted by additional provisions of state law. As a general
rule, a bank may declare a dividend in an amount deemed expedient
by the board of directors of the bank. Any such dividend, however,
may not (i) impair the capital stock of the bank, (ii) be in an
amount greater than the remainder of undivided profits then on hand
after deducting losses, bad debts, depreciation, and all other
expenses, or (iii) constitute a withdrawal of any portion of the
capital stock of the bank. In addition, the bank must obtain the
prior approval of the Indiana Department of Financial Institutions
for the payment of any dividend if the total of all dividends
declared by the bank during the calendar year, including the
proposed dividend would exceed the sum of (i) the total of the net
profits of the bank and (ii) the retained net profits of the bank
for the previous two years. The amount of "net profits" is
determined by subtracting all current operating expenses, actual
losses, and all federal, state and local taxes from all earnings
from current operations plus actual recoveries on loans,
investments and other assets.
Additionally, under FDICIA, a bank may not make any capital
distribution, including the payment of dividends, if after making
such distribution the bank would be in any of the "under-
capitalized" categories under the FDIC's Prompt Corrective Action
regulations. The amount of unrestricted funds that would have been
available for distribution to the Corporation as dividends at
December 31, 1996, was approximately $7,797,000.
<PAGE>
<PAGE>71
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE>
<PAGE>72
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The following summary of the terms of the capital shares of
the Corporation does not purport to be complete and is qualified in
its entirety by reference to the Corporation's Articles of
Incorporation and Bylaws, which are filed as Exhibits to this Form
10.
AUTHORIZED BUT UNISSUED SHARES
The Corporation's Articles of Incorporation authorize the
issuance of 5,000,000 Common Shares, no par value, of which
1,975,973 shares were issued and 1,965,050 were outstanding at
March 31, 1997.
The remaining authorized but unissued Common Shares may be
issued upon authorization of the Board of Directors without prior
shareholder approval. If additional shares of the Corporation are
issued, the shareholders are not entitled to subscribe for such
additional shares in proportion to the number of Common Shares
owned by them prior to such issuance. Accordingly, the
shareholders of the Corporation could have their percentage
ownership interest in the Corporation diluted if these shares are
issued in the future.
COMMON SHARES
VOTING RIGHTS
Except for (a) supermajority votes required to approve certain
business combinations and certain other matters (see "Antitakeover
Provisions," below), and (b) certain corporate actions that must be
approved by a majority of the outstanding votes of the relevant
voting group under the Indiana Business Corporation Law, the
affirmative vote of the holders of the majority of the votes cast
at a meeting at which a quorum is present is sufficient to approve
matters submitted for shareholder approval, except that Directors
are elected by a plurality of the votes cast.
<PAGE>
<PAGE>73
DIVIDEND RIGHTS
The holders of Common Shares are entitled to receive dividends
as and when declared by the Board of Directors from funds legally
available for their payment. A dividend may be paid by the
Corporation only if, after paying such dividend, (a) the
Corporation would be able to pay its debts as they become due in
the usual course of business, and (b) the Corporation's total
assets would not be less than the sum of its total liabilities.
Furthermore, because funds for the payment of dividends by the
Corporation must come primarily from the earnings of the Bank,
restrictions on the amount of dividends that the Bank may pay also
restrict the amount of funds available for payment of dividends by
the Corporation. See Item 1. DESCRIPTIONS OF BUSINESS --
"Regulation and Supervision," and Item 9. MARKET PRICE OF AND
DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS -- "Dividends."
LIQUIDATION
Upon any liquidation, dissolution, or winding up of the
affairs of the Corporation, the holders of Common Shares are
entitled to share ratably in the assets legally available for
distribution to the Common Shareholders.
OTHER MATTERS
Holders of the Common Shares do not have preemptive rights
with respect to the issuance of any securities of the Corporation.
There are no sinking fund provisions applicable to the Common
Shares. All outstanding Common Shares are, when issued, fully paid
and nonassessable. Such shares are not redeemable at the option of
the Corporation or holders thereof.
The Corporation presently serves as the registrar and transfer
agent of the Corporation's Common Shares.
<PAGE>
<PAGE>74
ANTITAKEOVER PROVISIONS IN THE ARTICLES AND BYLAWS
The Corporation's Articles of Incorporation and Bylaws contain
certain antitakeover provisions described below. These provisions
may discourage or prevent tender or exchange offers by a
corporation or group that intends to use the acquisition of a
substantial number of shares of the Corporation to initiate a
two-step takeover culminating in a merger or other business
combination. In recent years a number of other companies have
adopted similar charter or bylaw provisions for the same or similar
reasons. These provisions may also have the effect of making the
removal of current management more difficult.
POSSIBLE ISSUANCE OF COMMON SHARES
As of March 31, 1997, there were 5,000,000 authorized Common
Shares of which 1,965,050 were outstanding. The Board could use
the authorized but unissued shares at its discretion to resist the
consummation of certain takeover attempts by, for example, diluting
the ownership interest of a substantial shareholder or
substantially increasing the amount of consideration necessary for
a shareholder to obtain control.
SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS
COMBINATIONS
The Articles of Incorporation of the Corporation include a
provision which applies to any "Business Combination" (broadly
defined) with a "Related Person" (as defined) except in certain
circumstances. In the absence of such circumstances, a Business
Combination with a Related Person would require the approval of 80
percent of the outstanding voting shares plus 75 percent of the
outstanding shares that are not controlled by the Related Person.
In general terms, the term "Business Combination" is defined to
include mergers or consolidations of the Corporation, transfers or
encumbrances of all or any substantial part of the assets of the
Corporation, transfers by a Related Person to the Corporation of
any assets of a Related Person subject to certain percentage of
limitations of the Corporation's assets, any reclassification of or
involving the common stock of the Corporation consummated within
five years after a shareholder becomes a Related Person, and any
agreement or arrangement providing for any of the above. Related
Person is defined to mean any shareholder (including affiliates and
associates) who is the beneficial owner of more than 10 percent of
the then outstanding shares entitled to vote on any matter. The
supermajority voting requirements shall not be applicable if (i)
the Directors of the Corporation have approved by a three-fourths
vote the acquisition by the Related Person of the outstanding
shares of the Corporation that cause such person to become a
Related Person, (ii) the Directors by a three-fourths vote have
approved the Business Combination prior to the Related Person
<PAGE>
<PAGE>75
involved in a Business Combination having become a Related Person,
(iii) the Business Combination is solely between the Corporation
and a wholly-owned subsidiary, (iv) the Business Combination is a
merger or consolidation and the total consideration received by the
Corporation's shareholders is not less than the highest per share
price paid by the Related Person in acquiring any of its holdings
of the Corporation's common stock, or (v) the Business Combination
involves a Related Person which has been a Related Person for at
least five years.
Absent the provision regulating Business Combinations,
mergers, consolidations, and sales of all or substantially all
assets would require only the approval of a majority of the Board
of Directors and (subject to the rights of any Preferred Shares
issued in the future) the affirmative vote of a majority of the
total number of outstanding shares of the Corporation entitled to
vote on the matter.
CLASSIFIED BOARD
The Articles also permit the Bylaws to provide for the Board
to be divided into classes of Directors serving staggered terms.
The Bylaws of the Corporation currently divide the Board into three
classes with three-year staggered terms. In addition, the Bylaws
provide that any vacancy shall be filled by a majority vote of the
remaining Directors. Any Director elected to fill such vacancy
shall hold office for the unexpired term of the class of which he
is a member.
AMENDMENT, CHANGE OR REPEAL OF CERTAIN ARTICLES
The Articles provide that any amendment, change, or repeal of
certain of the articles of the Articles of Incorporation described
above would require the approval of (a) at least 80 percent of the
outstanding voting power, and (b) the approval by 75 percent of the
shares not controlled by the Related Person.
POTENTIAL DISADVANTAGES TO SHAREHOLDERS
Although the purpose of these provisions is to ensure fair
treatment of all shareholders in the event of certain mergers,
tender offers, or other attempts to acquire control of the
Corporation (a "takeover"), the provisions regarding Business
Combinations (as well as the provisions providing for the division
of the Board of Directors into classes of Directors serving
staggered terms) may have certain adverse effects in that they may
make more difficult the accomplishment of certain takeovers at
prices or on terms that some shareholders may consider beneficial,
impede the assumption of control by principal shareholders in some
cases, or make more difficult the removal of current management
even if favorable by a majority of the shareholders.
<PAGE>
<PAGE>76
ANTITAKEOVER PROVISIONS IN THE INDIANA BUSINESS CORPORATION LAW
The Indiana Business Corporation Law (the "IBCL") includes two
chapters that may have a direct effect on change of control
transactions. These are Chapters 42 (IC 23-1-42), the Control
Share Acquisitions Chapter (see "Chapter 42 -- Control Share
Acquisitions," below), and Chapter 43 (IC 23-1-43), the Business
Combinations Chapter (see "Chapter 43 -- Business Combinations,"
below).
CHAPTER 42 -- CONTROL SHARE ACQUISITIONS
The Control Share Acquisitions Chapter of the IBCL (Chapter
42), limits the voting rights of shares acquired by a person or
group if the total number of shares the votes of which are
controlled by such acquiring shareholder or group after such
acquisition exceeds certain specified levels of ownership, unless
and until certain independent shareholders have adopted a
resolution granting the right to vote the excess acquired shares to
the acquiring shareholder. Upon appropriate request, an acquiring
shareholder can demand that the corporation submit to its
shareholders within 50 days the issue of the right of the acquiring
shareholder or group to vote the excess shares acquired. If no
proper request is made by the acquiring shareholder, then Chapter
42 provides that the issue of voting rights is to be considered at
the next shareholders' meeting. The restrictions on the right to
vote, and the obligation to seek independent shareholder authority
for voting, arises at three levels of shareholder ownership or
voting power: when the acquiring shareholder owns or has voting
power in excess of 20 percent, 33 1/3 percent and 50 percent of the
outstanding voting securities of the Corporation. Assuming the
authority exists in a corporation's articles of incorporation or
bylaws in advance of the control share acquisition (the
Corporation's Bylaws presently contain such a provision), unless
the acquiring shareholder files with the corporation an appropriate
informational statement, the corporation can redeem the shares
acquired by the acquiring shareholder within a period of 60 days
following the last acquisition of shares. If, on the other hand,
the acquiring shareholder files an appropriate informational
statement, then its shares can only be redeemed in the event that
the independent shareholders refuse the acquiring shareholder the
right to vote. If the shareholders grant the acquiring shareholder
the right to vote and the acquiring shareholder owns or controls
the votes of a majority of the outstanding voting securities of the
corporation, then shareholders may exercise dissenters' rights of
appraisal and receive the "fair value" of their shares, as defined
in the IBCL.
<PAGE>
<PAGE>77
CHAPTER 43 -- BUSINESS COMBINATIONS
The Business Combinations Chapter of the IBCL (Chapter 43)
provides that persons who own or control (directly or through their
affiliates or associates), voting power over at least 10 percent of
the voting shares of a corporation are, under certain
circumstances, prohibited from engaging in certain mergers, stock
purchases, asset purchases, loans, or other financial transactions
with the corporation in which they own their 10 percent interest,
unless that corporation's Board of Directors expressly approved the
acquisition of the 10 percent interest BEFORE the 10 percent
shareholder acquires his interest. For those 10 percent
shareholders who do not obtain their interest with prior approval
of the Board of Directors, Chapter 43 will freeze such financial
transactions for five years from the share acquisition date,
regardless of whether the Board of Directors or shareholders then
favors the transaction, and after the five-year period the
transaction will be permissible only if certain "fair price"
requirements or "disinterested shareholder approval" requirements
are observed.
Prior to the Corporation's registration of its Common Shares
with the Securities and Exchange Commission pursuant to this
Registration Statement, Chapter 43 was not applicable to the
Corporation. At the effective date of this Registration Statement,
however, Chapter 43 will become applicable. Thereafter, the
Corporation can elect not to be governed by Chapter 43 by the
adoption of an amendment to its Articles of Incorporation provided
such amendment does not become effective until 18 months after the
vote of shareholders to approve the amendment.
<PAGE>
<PAGE>78
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Article IX of the Corporation's Articles
filed as Exhibit 3.1 to this Form 10, which contains certain
indemnification provisions pursuant to authority contained in the
Indiana Business Corporation Law.
Insofar as indemnification or liabilities arising under the
Federal Securities Laws may be permitted to Directors, officers and
controlling persons of the Corporation pursuant to the foregoing
provisions, or otherwise, the Corporation has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore,
unenforceable.
In addition, the Corporation also maintains insurance coverage
for the benefit of Directors and officers with respect to many
types of claims that may be made against them, some of which claims
are in addition to those described in Article IX of the Articles.
<PAGE>
<PAGE>79
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
<PAGE>80
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Lafayette Bancorporation
Lafayette, Indiana
We have audited the accompanying consolidated balance sheets of Lafayette
Bancorporation as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation'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 Lafayette
Bancorporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 7, 1997
1
<PAGE>
<PAGE>81
<TABLE>
<CAPTION>
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Amounts in thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (Note 15) $ 21,330 $ 26,314
Federal funds sold 8,050 7,915
----------- -----------
Total cash and cash equivalents 29,380 34,229
Securities available-for-sale (at market) (Note 2) 88,206 90,881
Securities held-to-maturity (market value $6,147
and $2,151) (Note 2) 6,156 2,161
Loans held for sale 5,877 2,473
Loans (Note 3) 268,940 228,643
Less: Allowance for loan losses (Note 4) (3,198) (3,200)
----------- -----------
Loans, net 265,742 225,443
Federal Home Loan Bank stock (at cost) 1,116 1,080
Premises, furniture and equipment, net (Note 5) 6,355 5,465
Accrued interest receivable and other assets (Note 9) 11,559 10,533
----------- -----------
Total assets $ 414,391 $ 372,265
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 43,579 $ 43,950
Interest-bearing demand and savings deposits 135,883 124,227
Interest-bearing time deposits (Note 6) 162,088 140,475
----------- -----------
Total deposits 341,550 308,652
Short-term borrowings (Note 7) 24,521 19,092
Long-term debt (Note 8) 9,265 8,905
Accrued interest payable and other liabilities (Notes 9 and 10) 4,409 3,741
----------- -----------
Total liabilities 379,745 340,390
Commitments and contingent liabilities (Note 15)
Shareholders' equity
Common stock, no par value: 5,000,000 and 2,500,000
shares authorized; 1,975,973 and 1,646,644 shares
issued; and 1,965,050 and 1,637,659 shares outstanding 1,976 1,646
Additional paid-in capital 19,368 12,288
Retained earnings 13,705 18,013
Unrealized gain (loss) on securities available-for-sale,
net of tax (($204) and $11) (311) 17
Less: Treasury stock, at cost (10,923 and 8,985 shares) (92) (89)
----------- -----------
Total shareholders' equity 34,646 31,875
----------- -----------
Total liabilities and shareholders' equity $ 414,391 $ 372,265
=========== ===========
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<PAGE>82
<TABLE>
<CAPTION>
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 22,538 $ 19,970 $ 18,253
Taxable securities 4,219 4,538 4,360
Tax exempt securities 940 685 557
Other 518 698 481
--------- --------- ---------
Total interest income 28,215 25,891 23,651
INTEREST EXPENSE
Deposits 12,708 11,798 9,827
Short-term borrowings 781 744 572
Long-term debt 523 573 617
--------- --------- ---------
Total interest expense 14,012 13,115 11,016
--------- --------- ---------
NET INTEREST INCOME 14,203 12,776 12,635
Provision for loan losses (Note 4) 240 180 600
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,963 12,596 12,035
Noninterest income
Income from fiduciary activities 812 793 762
Service charges on deposit accounts 1,116 997 985
Net realized gain on securities 83 13 78
Net gain on loan sales 398 136 -
Other service charges and fees 454 426 440
Other operating income 559 425 315
--------- --------- ---------
Total noninterest income 3,422 2,790 2,580
--------- --------- ---------
Noninterest expense
Salaries and employee benefits (Notes 9 and 10) 6,331 5,589 5,076
Occupancy expenses, net 834 698 676
Equipment expenses 1,009 1,024 1,001
Other real estate expenses, net 58 141 (172)
Deposit insurance 45 341 639
Other operating expenses 2,914 2,427 2,469
--------- --------- ---------
Total noninterest expense 11,191 10,220 9,689
--------- --------- ---------
INCOME BEFORE INCOME TAXES 6,194 5,166 4,926
Income taxes (Note 12) 2,103 1,791 1,693
--------- --------- ---------
NET INCOME $ 4,091 $ 3,375 $ 3,233
========= ========= =========
Earnings per share (Note 13):
Net income per share $ 2.08 $ 1.72 $ 1.64
========= ========= =========
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
</TABLE>
<PAGE>
<PAGE>83
<TABLE>
<CAPTION>
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
Additional on Securities Total
Common Paid-in Retained Available- Treasury Shareholders'
Stock Capital Earnings for-Sale Stock Equity
----- ------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 $ 499 $ 8,683 $ 17,640 $ - $ (85) $ 26,737
3-for-1 stock split
997,966 shares 998 (998) -
Net income for 1994 3,233 3,233
Cash dividends
($.36 per share) (705) (705)
Unrealized gain upon
adopting FAS 115 145 145
Change in unrealized
gain(loss) on securities
available-for-sale (1,116) (1,116)
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1994 1,497 8,683 19,170 (971) (85) 28,294
10% stock dividend
149,695 shares 149 3,605 (3,754) -
Net income for 1995 3,375 3,375
Cash dividends
($.40 per share) (778) (778)
Unrealized gain on
transfer of securities
(Note 2) 234 234
Change in unrealized
gain (loss) on
securities available-
for-sale 754 754
Purchase 141 treasury
shares (4) (4)
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1995 1,646 12,288 18,013 17 (89) 31,875
20% stock dividend
329,329 shares 330 7,080 (7,410) -
Net income for 1996 4,091 4,091
Cash dividends
($.50 per share) (989) (989)
Change in unrealized
gain (loss) on
securities available-
for-sale (328) (328)
Purchase 141 treasury
shares (3) (3)
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1996 $ 1,976 $ 19,368 $ 13,705 $ (311) $ (92) $ 34,646
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<PAGE>84
<TABLE>
<CAPTION>
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,091 $ 3,375 $ 3,233
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 693 726 740
Unrealized loss on other real estate 64 90 -
Premium amortization, net of discount accretion 302 127 210
Provision for loan losses 240 180 600
Net realized gain on securities (83) (13) (78)
Net realized (gain) loss on sale of :
Fixed assets (96) - -
Other real estate - 21 (180)
Change in assets and liabilities:
Loans held for sale (3,404) (2,473) -
Accrued interest receivable and other assets (1,173) (797) (3,771)
Accrued interest payable and other liabilities 668 559 107
-------- -------- -------
Net cash from operating activities 1,302 1,795 861
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (41,957) (22,512) (21,587)
Proceeds from sales of securities available-for-sale 25,532 16,190 10,650
Proceeds from maturities of securities available-for-sale 18,349 5,302 12,208
Purchase of securities held-to-maturity (4,013) (3,813) (18,170)
Proceeds from maturities of securities held-to-maturity 5 8,193 4,382
Loans made to customers, net of payments collected (40,539) (4,252) (7,646)
Purchase of Federal Home Loan Bank stock (36) (99) -
Property and equipment expenditures (1,612) (804) (345)
Proceeds from sale of fixed assets 125 - -
Proceeds from sales of other real estate 300 588 336
-------- -------- -------
Net cash from investing activities (43,846) (1,207) (20,172)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 16,600 11,889 11,400
Cash received in branch acquisition for liabilities assumed,
net of assets acquired 16,298 - -
Net change in short-term borrowings 5,429 (3,152) 6,753
Proceeds from long-term debt 1,500 - -
Payments on long-term debt (1,140) (833) (613)
Dividends paid (989) (778) (705)
Purchase of treasury stock (3) (4) -
-------- -------- -------
Net cash from financing activities 37,695 7,122 16,835
-------- -------- -------
Net change in cash and cash equivalents (4,849) 7,710 (2,476)
Cash and cash equivalents at beginning of year 34,229 26,519 28,995
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,380 $ 34,229 $ 26,519
======== ======== =======
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 13,877 $ 12,952 $ 10,919
Income taxes 1,992 1,803 1,597
Non-cash investing activity
Loans transferred to other real estate $ 99 $ 190 $ -
Securities transferred from held-to-maturity to available-for-
sale (Note 2) - 46,971 -
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
/TABLE
<PAGE>
<PAGE>85
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The consolidated financial statements include the
accounts of Lafayette Bancorporation (Corporation) and its wholly-owned
subsidiary, Lafayette Bank and Trust Company (Bank), after elimination of
significant intercompany transactions and accounts.
The Bank is engaged in the business of commercial and retail banking and trust
and investment services, with operations conducted through its main office and
12 branches located in Tippecanoe and White Counties in Indiana. The majority
of the Bank s income is derived from commercial and retail business lending
activities and investments. Although the overall loan portfolio is diversified,
the economy of Tippecanoe County is heavily dependent on Purdue University, one
of the area s largest employers, and the economy of White County is heavily
dependent on the agricultural industry. The majority of the Bank s loans are
secured by specific items of collateral including business assets, real property
and consumer assets.
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. Estimates that are more susceptible to change
in the near term include the allowance for loan losses, the fair value of
certain securities and other financial instruments, and the determination and
carrying value of impaired loans.
Securities: The Bank classifies securities into held-to-maturity and
available-for-sale categories. Securities held-to-maturity are those which the
Bank has the positive intent and ability to hold to maturity, and are reported
at amortized cost. Securities available-for-sale are those which the Bank may
decide to sell if needed for liquidity, asset-liability management, or other
reasons. Securities available-for-sale are reported at fair value, with
unrealized gains or losses included as a separate component of 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 by amortization
of purchase premium or discount, is included in earnings.
Loans Held for Sale: The Bank sells certain fixed-rate first mortgage loans in
the secondary market. Mortgage loans held for sale are carried at the lower of
cost or estimated market value determined on an aggregate basis. At December
31, 1996 and 1995 the estimated market value of loans held for sale exceeded
their cost.
(Continued)
6
<PAGE>
<PAGE>86
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Interest on real estate, commercial and most installment loans is
accrued over the term of the loans based on the principal outstanding. The
recognition of interest income is discontinued when, in management's judgment,
the interest will not be collectible in the normal course of business, typically
when payments are past due over 90 days. The Bank defers loan fees, net of
certain direct loan origination costs. The net amount deferred is reported in
the balance sheet as part of loans and is recognized into interest income over
the term of the loan using a method which approximates a level-yield.
Under FAS 114 and 118 (as explained below in "Allowance for Loan Losses"), 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 bad debt expense, if reductions, or otherwise as interest income.
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.
Financial Accounting Standards No. 114 and No. 118 require recognition of loan
impairment if a loan s full principal or interest payments are not expected to
be received. Loans considered to be impaired are reduced to the present value
of expected future cash flows using the loans existing rate or to the fair value
of collateral if repayment is expected solely from the collateral, by allocating
a portion of the allowance for loan losses to such loans.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential real estate loans secured by one-to-four family
residences and installment loans to individuals for household, family and other
personal expenditures. Commercial and agricultural loans are evaluated
individually for impairment. When analysis of borrower operating results and
financial condition indicates that underlying cash flows of the borrower s
business are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in
payments of more than 60 days. Nonaccrual loans are generally also considered
impaired. Impaired loans, or portions thereof, are charged-off when deemed
uncollectible. The nature of disclosures for impaired loans is considered
generally comparable to prior nonaccrual loan disclosures. The present value of
loans identified as impaired in Note 3 was determined using fair value of
collateral.
(Continued)
7
<PAGE>
<PAGE>87
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises, Furniture and Equipment: Premises, furniture and equipment are stated
at cost less accumulated depreciation. Depreciation expense is recognized over
the estimated useful lives of the assets, principally on the straight-line
method. These assets are reviewed for impairment under Financial Accounting
Standard No. 121 when events indicate the carrying amount may not be
recoverable. Maintenance and repairs are expensed and major improvements are
capitalized.
Other Real Estate: Real estate acquired through foreclosure or acceptance of a
deed in lieu of foreclosure is recorded at the lower of cost (fair value at date
of foreclosure) or fair value less estimated selling costs. Expenses incurred
in carrying other real estate are charged to operations as incurred.
Intangibles: Goodwill and core deposit intangibles are amortized on the
straight-line method over 15 years and are included in other assets. Intangibles
are assessed for impairment based on estimated undiscounted cash flows, and
written down if necessary.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Opinion 25, with expense reported only if options are granted below
market price at grant date. Pro forma disclosures of net income and earnings
per share are provided as if the fair value method of Financial Accounting
Standard No. 123 were used for stock-based compensation.
Income Taxes: Deferred tax liabilities and assets are determined at each
balance sheet date. They are measured by applying enacted tax laws to future
taxable income or expense resulting from differences in the financial statement
and tax basis of assets and liabilities. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the period
plus or minus the change during the period on deferred tax assets and
liabilities.
Statement of Cash Flows: Cash and cash equivalents are defined to include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are sold for one-day periods. The Corporation reports net cash flows for
customer loan transactions, deposit transactions, and short-term borrowings.
(Continued)
8
<PAGE>
<PAGE>88
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reclassifications: Certain items in the 1995 and 1994 financial statements have
been reclassified to correspond with the 1996 presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
- -----------------------------
U.S. Government and its agencies $ 36,116 $ 32 $ (210) $ 35,938
Obligations of states and political
subdivisions 17,358 184 (62) 17,480
Corporate obligations 1,249 52 - 1,301
Mortgage-backed and other
asset-backed securities 33,998 45 (556) 33,487
--------- --------- --------- ---------
Total $ 88,721 $ 313 $ (828) $ 88,206
========= ========= ========= =========
SECURITIES HELD-TO-MATURITY
- ---------------------------
Obligations of states and political
subdivisions $ 6,156 $ 34 $ (43) $ 6,147
========= ========= ========= =========
</TABLE>
(Continued)
9
<PAGE>
<PAGE>89
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated market values of securities are as follows at
December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
- -----------------------------
U.S. Government and its agencies $ 40,667 $ 148 $ (202) $ 40,613
Obligations of states and political
subdivisions 18,889 264 (205) 18,948
Corporate obligations 4,052 107 (16) 4,143
Mortgage-backed and other
asset-backed securities 27,245 290 (358) 27,177
-------- -------- ------- --------
Total $ 90,853 $ 809 $ (781) $ 90,881
======== ======== ======= ========
SECURITIES HELD-TO-MATURITY
- ---------------------------
Obligations of states and political
subdivisions $ 2,161 $ 25 $ (35) $ 2,151
======== ======== ======= ========
</TABLE>
Proceeds from sales of securities available-for-sale during 1996, 1995 and 1994
were $25,532, $16,190 and $10,650. Gross gains of $175, $37 and $90 and gross
losses of $92, $24 and $12 were realized on those sales.
The amortized cost and estimated market value of securities at December 31,
1996, by contractual maturity, are shown below. Securities not due at a single
maturity date are shown separately.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 8,252 $ 8,259 $ 1,905 $ 1,903
Due after one year through five years 30,838 30,779 1,340 1,330
Due after five years through ten years 12,768 12,813 1,691 1,693
Due after ten years 2,865 2,868 1,220 1,221
---------- ---------- ---------- ----------
Subtotal 54,723 54,719 6,156 6,147
Mortgage-backed and other asset-
backed securities 33,998 33,487 - -
---------- ---------- ---------- ----------
Total $ 88,721 $ 88,206 $ 6,156 $ 6,147
========== ========== ========== ==========
</TABLE>
(Continued)
10
<PAGE>
<PAGE>90
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES (Continued)
Securities with a carrying value of $29,201 and $23,956 at December 31, 1996 and
1995, respectively, were pledged to secure public deposits and securities sold
under agreements to repurchase and for other purposes required or permitted by
law.
During December 1995, securities with an amortized cost of $46,971 and an
unrealized gain of $234 were transferred from held-to-maturity to
available-for-sale in accordance with the Financial Accounting Standards Board
Special Report on Implementation of Statement of Financial Accounting Standards
No. 115 (FAS 115).
At December 31, 1996, U.S. Government agency structured notes with an amortized
cost of $3,000 and market value of $2,991 are included in securities
available-for-sale, consisting of step-up bonds.
At December 31, 1996, mortgage-backed securities include collateralized mortgage
obligations (CMO s) and real estate mortgage investment conduits (REMIC s) with
an amortized cost of $15,994 and fair value of $15,637, all of which are issued
by U.S. Government agencies and of which approximately $10,606 are variable rate
and approximately $5,388 are fixed rate.
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial and agricultural loans $ 108,470 $ 85,789
Residential real estate loans 104,547 87,637
Installment loans to individuals 54,924 55,217
Commercial paper 999 -
----------- -----------
Total loans $ 268,940 $ 228,643
=========== ===========
</TABLE>
Nonperforming loans consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans past due 90 days or more $ 735 $ 796
Nonaccrual loans 178 381
Restructured loans 482 661
----------- -----------
Total nonperforming loans $ 1,395 $ 1,838
=========== ===========
</TABLE>
(Continued)
11
<PAGE>
<PAGE>91
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 3 - LOANS (Continued)
Information regarding impaired loans is as follows at and for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Average investment in impaired loans during year $ 230 $ 288
========= =========
Interest income recognized on impaired loans, including
cash basis income of $0 for each year $ - $ -
========= =========
Balance of impaired loans at December 31 $ 178 $ 282
Less portion for which no allowance for loan losses is allocated - -
--------- ---------
Portion of impaired loan balance for which an allowance
for loan losses is allocated $ 178 $ 282
========= =========
Portion of allowance for loan losses allocated to the
impaired loan balance $ 70 $ 81
========= =========
</TABLE>
The Bank had $0 and $99 of loans on nonaccrual at December 31, 1996 and 1995,
that management did not deem to be impaired.
Certain directors and officers of the Corporation and Bank were customers of the
Bank in the ordinary course of business. Loan activity with these related
parties is as follows:
Balance as of January 1, 1996 $ 4,151
New loans 615
Loan payments (639)
----------
Balance as of December 31, 1996 $ 4,127
==========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $ 3,200 $ 3,309 $ 3,459
Provision charged to operations 240 180 600
Loans charged-off (545) (556) (968)
Recoveries on loans previously charged-off 303 267 218
--------- --------- ---------
Balance, December 31 $ 3,198 $ 3,200 $ 3,309
========= ========= =========
</TABLE>
(Continued)
12
<PAGE>
<PAGE>92
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 789 $ 787
Buildings and improvements 6,543 5,700
Leasehold improvements 1,081 1,081
Furniture and equipment 7,116 6,804
---------- ----------
Total 15,529 14,372
Accumulated depreciation (9,174) (8,907)
---------- ----------
Premises, furniture and equipment, net $ 6,355 $ 5,465
========== ==========
</TABLE>
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Interest-bearing time deposits issued in denominations of one hundred thousand
dollars or greater totaled $27,240 and $15,012 at December 31, 1996 and 1995.
At December 31, 1996, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 105,965
1998 31,347
1999 17,068
2000 5,474
2001 2,077
Thereafter 157
-----------
Total interest-bearing time deposits $ 162,088
===========
</TABLE>
(Continued)
13
<PAGE>
<PAGE>93
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of retail repurchase agreements and a
treasury tax and loan open-end note. Repurchase agreements represent borrowings
by the Bank from its customers. The Bank pledges certain of its securities as
collateral for those borrowings (see Note 2), which securities are maintained in
safekeeping under the Bank s control. Repurchase agreements generally mature
within thirty days. The following presents information about short-term
borrowings at the dates indicated:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance of repurchase agreements outstanding $ 23,497 $ 16,818
Balance of treasury tax and loan open-end note 1,024 2,274
---------- ----------
Total short-term borrowings $ 24,521 $ 19,092
========== ==========
Average balance of repurchase agreements during year $ 15,143 $ 12,395
Maximum month-end balance of repurchase agreements
during year 23,497 18,581
Weighted average interest rate of repurchase agreements
during year 4 .61% 5.11%
</TABLE>
At December 31, 1996 the Corporation had overnight repurchase agreements for
$8,879 with White County, Indiana Treasurer and $3,856 with City of Lafayette,
Indiana.
NOTE 8 - LONG-TERM DEBT
Long-term debt outstanding at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable correspondent bank; payable $20 quarterly;
due December 31, 1998; interest rate at prime; unsecured. $ - $ 224
Federal Home Loan Bank advances; annual principal payments;
various maturities with final maturity November 15, 2006; interest
payable monthly at various fixed interest rates from 5.45% -
6.82%; secured by a blanket pledge of the Bank s obligations of the
U.S. Government and U.S. Government agencies and one-to-four
family residential mortgage loans. 9,265 8,681
---------- ----------
Total long-term debt $ 9,265 $ 8,905
========== ==========
</TABLE>
(Continued)
14
<PAGE>
<PAGE>94
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 8 - LONG-TERM DEBT (Continued)
Annual principal payments required on long-term debt are as follows:
1997 $ 879
1998 832
1999 789
2000 748
2001 710
2002 and thereafter 5,307
----------
Total long-term debt $ 9,265
==========
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. The Bank s funding policy is to contribute the
minimum amount required by applicable regulations. Plan assets consist
primarily of investments in interest-bearing balances with financial
institutions, U.S. government bonds, corporate bonds and other various
marketable equity securities.
The following sets forth the Plan's funded status and amount recognized in the
balance sheet at December 31 (amounts computed as of September 30, 1996 and
1995):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of obligations:
Accumulated benefit obligation, including vested
benefits of $7,811 and $7,121 in 1996 and 1995 $ 8,017 $ 7,352
========== ==========
Plan assets at fair value $ 12,351 $ 11,377
Projected benefit obligation for service rendered to date (10,091) (9,396)
Unrecognized loss 858 1,271
Prior service cost not yet recognized, amortized straight-line 25 26
Unrecognized transition asset (1,234) (1,385)
---------- ----------
Prepaid pension cost included in other assets $ 1,909 $ 1,893
========== ==========
</TABLE>
Net pension benefit for 1996, 1995 and 1994 included the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned $ 505 $ 374 $ 461
Interest cost on projected benefit obligation 691 612 464
Actual return on plan assets (1,303) (1,444) (191)
Net amortization and deferral 91 420 (817)
--------- --------- ---------
Net periodic pension benefit $ (16) $ (38) $ (83)
========= ========= =========
</TABLE>
(Continued)
15
<PAGE>
<PAGE>95
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)
Significant assumptions made in computing pension liability and expense were as
follows:
1996 1995 1994
Weighted average discount rate 7.50% 7.50% 8.25%
Increase in future compensation 4.00 4.00 4.00
Long-term rate of return 9.25 9.25 9.25
The Bank maintains a retirement savings plan covering substantially all
employees. The Plan requires employees to complete one year of service and be
21 years of age before entering the Plan. Employee contributions are limited to
a maximum of 15% of their salary. The Plan allows for a 35% matching of the
first 4% of employee salary contributions and an annual discretionary
contribution. Participants are fully vested in salary deferral contributions
and employer matching contributions. Total 401(k) contributions charged to
expense were $73, $60 and $57 for 1996, 1995 and 1994.
The Bank maintains a deferred compensation plan for the benefit of certain
directors. Under the Plan, the Bank agrees, in return for the directors
deferring the receipt of a portion of their current compensation, to pay a
retirement benefit computed as the amounts of the compensation deferred plus
accrued interest at a variable rate. Accrued benefits payable totaled $525 and
$381 at December 31, 1996 and 1995. Deferred compensation expense was $84, $84
and $14 for 1996, 1995 and 1994. In conjunction with the Plan formation, the
Bank purchased life insurance on the directors. The cash surrender value of
that insurance is carried as an other asset on the consolidated balance sheet,
and was approximately $3,210 and $3,058 at December 31, 1996 and 1995.
NOTE 10 - POSTRETIREMENT BENEFITS
The Bank sponsors a postretirement benefit plan which provides defined medical
benefits. Employees who have medical coverage prior to retirement are eligible
to receive postretirement medical benefits for themselves and their spouse,
provided they have completed 10 years of service and attained age 55.
The Plan is contributory. Retirees contribute an amount equal to their
individual applicable premium to provide the coverage, less 30%, which is paid
monthly by the Bank. Retirees must pay 100% of medical premiums for all
dependent coverage.
(Continued)
16
<PAGE>
<PAGE>96
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 10 - POSTRETIREMENT BENEFITS (Continued)
The following sets forth the Plan s funded status and amounts recognized in the
balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ 64 $ 71
Fully eligible active participants 90 84
Other active plan participants 242 205
-------- --------
Accumulated postretirement benefit obligation in
excess of plan assets 396 360
Unrecognized gain due to change in assumptions 201 217
-------- --------
Accrued postretirement benefit obligation $ 597 $ 577
======== ========
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the period $ 22 $ 37 $ 35
Interest cost on accumulated post-
retirement benefit obligation 25 31 28
-------- -------- --------
Postretirement benefit cost $ 47 $ 68 $ 63
======== ======== ========
</TABLE>
Benefit payments of $11 for 1996 and $13 for 1995 and 1994, were made for
postretirement medical benefits.
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits assumed was 11.5% for 1996 and 1995 and 13% for
1994, with the rate assumed to gradually decrease to 5.5% effective January 1,
2002. The health care cost trend assumption has a significant effect on the
amounts reported. However, an increase in the assumed health care cost trend
rates by 1% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1996 and the aggregate service and interest cost
components of net periodic postretirement benefit cost for the year then ended
by amounts not considered to be material.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7% for 1996 and 1995.
(Continued)
17
<PAGE>
<PAGE>97
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN
The Corporation maintains an Officers' Stock Appreciation Rights Plan for
granting rights to certain officers. Upon exercise of a stock appreciation
right, the holder may receive cash equal to the excess of the fair market value
of common stock at the date of exercise over the option price. Stock
appreciation rights are vested at 20% per year and must be exercised within ten
years of grant. The Plan expires May, 2002. Granted rights outstanding were
69,166 at $7.32 per share for 1996 and 1995 (as restated for the effect of stock
dividends). Compensation expense charged to operations in 1996, 1995 and 1994
was $112, $229 and $263 and is based on an increase in market value. The
liability at December 31, 1996 and 1995 was $1,022 and $910.
Effective May 1, 1995, the Corporation authorized a nonqualified stock option
plan providing stock options to directors and key members of management. A
total of 43,560 shares of common stock for directors and 62,040 shares for
management are available for grant at a price equal to the market price of the
stock at the date of grant. Options granted to directors at the effective date
are exercisable any time after the date of grant, and subsequent options granted
to directors are exercisable after two years. Options granted to management
become 20% exercisable after one year and 20% each subsequent year. The Plan is
effective for five years and options must be exercised within ten years from the
date of grant.
A summary of the Corporation s stock option activity, and related information
for the years ended December 31, follows (adjusted for stock dividends):
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding beginning of year 47,784 $ 20.74 - $ -
Granted 24,288 22.33 47,784 20.74
Exercised - - - -
Forfeited - - - -
--------- --------- -------- ---------
Outstanding-end of year 72,072 $ 21.28 47,784 $ 20.74
========= ========= ======== =========
Exercisable at end of year 38,069 $ 20.74 35,640 $ 20.74
========= ========= ======== =========
Weighted-average fair value per
option granted during the year $ 4.08 $ 3.75
</TABLE>
Options outstanding at December 31, 1996 have a weighted average remaining life
of 9.3 years, with exercise prices ranging from $20.74 to $22.33.
(Continued)
18
<PAGE>
<PAGE>98
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN (Continued)
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options because the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No. 123 (FAS 123), "Accounting for Stock-Based Compensation," requires use of
option valuation models which management believes are not necessarily reliable
in valuing the Corporation s stock options. Under APB 25, because the exercise
price of the Corporation s stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Corporation had accounted for its
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for the years 1996
and 1995, respectively: risk-free interest rates of 6.5% and 6.4%; dividend
yields of 2%; volatility factors of the expected market price of the Corporation
s common stock of .05 and .06, and a weighted average expected life of the
options of five years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Corporation s pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pro forma net income $ 4,034 $ 3,220
Pro forma earnings per share
Net income per share $ 2.05 $ 1.64
</TABLE>
In future years, the pro forma effect of not applying this standard
may increase if additional options are granted.
(Continued)
19
<PAGE>
<PAGE>99
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 12 - INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Currently payable $ 2,165 $ 1,610 $ 1,670
Deferred income taxes (benefit) (62) 181 23
-------- -------- --------
Total $ 2,103 $ 1,791 $ 1,693
======== ======== ========
</TABLE>
The following is a reconciliation of statutory federal income taxes and the
amount computed by applying the statutory rate of 34% to income before income
taxes:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before
income taxes $ 2,106 $ 1,756 $ 1,675
Add/(deduct)
Tax exempt interest income (301) (218) (221)
State tax expense (net of federal benefit) 346 300 286
Other (48) (47) (47)
-------- -------- --------
Total $ 2,103 $ 1,791 $ 1,693
======== ======== ========
</TABLE>
The net deferred tax asset reflected in the consolidated balance sheet is
comprised of the following components as of December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 404 $ 419
Accrued stock appreciation rights 405 361
Accrued postretirement benefit obligation 236 229
Deferred compensation 169 105
Deferred loan fees 225 225
Net operating loss carryforward 54 83
Net unrealized loss on securities available-for-sale 204 -
-------- --------
Total deferred tax assets 1,697 1,422
Deferred tax liabilities:
Depreciation (234) (252)
Net pension benefit (756) (750)
Other (90) (80)
-------- --------
Total deferred tax liabilities (1,080) (1,082)
Valuation allowance - -
-------- --------
Net deferred tax asset $ 617 $ 340
======== ========
</TABLE>
(Continued)
20
<PAGE>
<PAGE>100
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 12 - INCOME TAXES (Continued)
The Corporation has the following tax carryforwards at December 31, 1996:
<TABLE>
<CAPTION>
Tax Carryforward Expiration
---------------- ----------
2001 2002
---- ----
<S> <C> <C> <C>
Regular tax
Net operating loss $ 160 $ 32 $ 128
Alternative minimum tax
Net operating loss $ 127 $ 32 $ 95
</TABLE>
Federal tax laws restrict the use of the net operating loss carryforwards listed
above. Utilization is limited to $83 each year until fully used and is also
dependent upon future taxable income of the Bank exceeding such amounts.
NOTE 13 - PER SHARE DATA
In September 1996, the Corporation issued 329,329 shares of common stock in
connection with a 20% stock dividend. In October 1995, the Corporation issued
149,695 shares of common stock in connection with a 10% stock dividend. In
August 1994, the Board of Directors authorized a three-for-one stock split
effected in the form of a stock dividend. Earnings and dividend per share
amounts have been retroactively restated for the stock split and stock
dividends. The weighted average number of shares used in calculating earnings
and dividends per share amounts were 1,965,179, 1,965,320 and 1,965,360 for
1996, 1995 and 1994, respectively. Stock options (see Note 11) are not
materially dilutive and have been excluded from weighted average shares.
NOTE 14 - CAPITAL REQUIREMENTS
The Corporation and Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
(Continued)
21
<PAGE>
<PAGE>101
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 14 - CAPITAL REQUIREMENTS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes the Corporation
and Bank meet all applicable capital adequacy requirements as of December 31,
1996.
As of December 31, 1996, the Corporation and Bank were categorized well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Corporation and Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table.
The Corporation s actual consolidated capital amounts and ratios are presented
in the following table. The Bank s actual capital amounts and ratios are not
materially different from the consolidated amounts below.
<TABLE>
<CAPTION>
Capital Adequacy Well Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital
(to average
assets) $ 34,009 8.6% $ 15,861 4.0% $ 19,827 5.0%
Tier I Capital
(to risk
weighted
assets) $ 34,009 12.1% $ 11,234 4.0% $ 16,852 6.0%
Total Capital
(to risk
weighted
assets) $ 37,207 13.2% $ 22,469 8.0% $ 28,086 10.0%
</TABLE>
(Continued)
22
<PAGE>
<PAGE>102
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases branch facilities under operating leases expiring in various
years through 2006. Expense for leased premises was $181, $143 and $141 for
1996, 1995 and 1994.
Future minimum lease payments are as follows:
1997 $ 169
1998 146
1999 134
2000 114
2001 33
2002 through 2006 142
---------
Total $ 738
=========
In the ordinary course of business, the Bank has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the consolidated balance sheet. 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 and standby letters of credit
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.
At December 31, off-balance sheet financial instruments whose contract amount
represents credit risk are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Unused lines of credit $ 28,752 $ 29,653
Commitments to make loans 8,965 3,256
Standby letters of credit 1,426 1,634
Commercial letters of credit 89 76
</TABLE>
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. These commitments are generally variable rate or carry a term of
one year or less.
The cash balance required to be maintained on hand or on deposit with the
Federal Reserve was $4,785 and $4,017 at December 31, 1996 and 1995. These
reserves do not earn interest.
(Continued)
23
<PAGE>
<PAGE>103
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of the Corporation's financial
instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,380 $ 29,380 $ 34,229 $ 34,229
Securities available-for-sale 88,206 88,206 90,881 90,881
Securities held-to-maturity 6,156 6,147 2,161 2,151
Loans held for sale 5,877 5,979 2,473 2,496
Loans, net 265,742 266,359 225,443 226,491
Federal Home Loan Bank stock 1,116 1,116 1,080 1,080
Accrued interest receivable 3,929 3,929 3,664 3,664
Financial liabilities:
Deposits $ (341,550) $ (342,751) $ (308,652) $ (310,515)
Short-term borrowings (24,521) (24,521) (19,092) (19,092)
Long-term debt (9,265) (9,145) (8,905) (8,956)
Accrued interest payable (1,284) (1,284) (1,149) (1,149)
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. The carrying amount is considered to estimate fair value for cash and
short-term instruments, demand deposits, short-term borrowings, accrued
interest, and variable rate loans or deposits that reprice frequently and fully.
Securities fair values are based on quoted market prices or, if no quotes are
available, on the rate and term of the security and on information about the
issuer. For loans held for sale, the fair value of loans held for sale is based
on quoted market prices. For commercial, real estate, consumer, and other
loans, fair value is estimated by discounting future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Federal Home Loan Bank
stock is restricted in nature and is not actively traded on a secondary market
and the carrying amount is a reasonable estimate of fair value. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. For long-term debt, rates
are currently available to the Corporation for debt with similar terms and
remaining maturities. The estimated fair value for off-balance sheet loan
commitments approximates carrying value and are not considered significant to
this presentation.
(Continued)
24
<PAGE>
<PAGE>104
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 17 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and cash
flows for the parent company:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
(Dollar amounts in thousands)
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 722 $ 261
Investment in bank 34,819 32,512
Other assets 461 449
---------- ----------
Total assets $ 36,002 $ 33,222
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Long-term debt $ - $ 224
Other liabilities 1,356 1,123
---------- ----------
Total liabilities 1,356 1,347
Shareholders' equity 34,646 31,875
---------- ----------
Total liabilities and shareholders' equity $ 36,002 $ 33,222
========== ==========
</TABLE>
(Continued)
25
<PAGE>
<PAGE>105
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 17 - PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING INCOME
Dividends received from subsidiary bank $ 1,570 $ 920 $ 800
Interest income 3 - 1
-------- -------- --------
1,573 920 801
-------- -------- --------
OPERATING EXPENSES 192 335 337
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY 1,381 585 464
Income tax benefit 75 134 133
-------- -------- --------
Income before equity in undistributed earnings of bank 1,456 719 597
Equity in undistributed earnings of bank 2,635 2,656 2,636
-------- -------- --------
NET INCOME $ 4,091 $ 3,375 $ 3,233
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(Dollar amounts in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,091 $ 3,375 $ 3,233
Adjustments to reconcile net income to net cash
from operating activities
Amortization of deferred costs 6 6 6
Equity in undistributed earnings of bank (2,635) (2,656) (2,636)
Other assets and other liabilities 215 177 177
-------- -------- --------
Net cash from operating activities 1,677 902 780
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (224) (81) (93)
Dividends paid (989) (778) (705)
Purchase of treasury shares (3) (4) -
-------- -------- --------
Net cash from financing activities (1,216) (863) (798)
-------- -------- --------
Net change in cash and cash equivalents 461 39 (18)
Cash and cash equivalents at beginning of year 261 222 240
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 722 $ 261 $ 222
======== ======== ========
</TABLE>
(Continued)
26
<PAGE>
<PAGE>106
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Dollar amounts in thousands, except share and per share data)
NOTE 18 - BRANCH ACQUISITION
In September 1996, the Bank purchased a branch in Monticello, Indiana from
another institution. The fair value of assets acquired was $923, the fair value
of liabilities assumed was $18,114, and the Bank received $16,298 of cash at
settlement. Goodwill and core deposit intangibles associated with this purchase
amounted to $893.
NOTE 19 - INDUSTRY SEGMENT INFORMATION
The Corporation operates primarily in the banking industry which accounts for
more than 90% of its revenues, operating income and assets.
NOTE 20 - PENDING CHANGES IN ACCOUNTING POLICIES
Statement of Financial Accounting Standards No. 125 (FAS 125), Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
has been issued and will apply to some transactions in 1997 and others in 1998.
FAS 125 establishes standards for determining the circumstances under which
transfers of financial assets should be considered sales or as secured
borrowings and when a liability should be considered extinguished, and addresses
the accounting requirements for servicing financial assets, including mortgage
servicing rights. The Corporation does not expect FAS 125 to have a material
impact on the consolidated financial statements in 1997; however, the Statement
will be followed in the future should the Corporation begin to originate
mortgage servicing rights.
27
<PAGE>
<PAGE>107
ITEM 14. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There was no change in accountants of the Corporation or the
Bank during the 24-month period prior to December 31, 1996, or
subsequently.
<PAGE>
<PAGE>108
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS FILED AS PART OF THIS FORM 10
The following are included in Item 13 of this Form 10:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and
1995
Consolidated Statements of Income for the years
ended December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995,
and 1994
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(b) EXHIBITS FILED AS PART OF THIS FORM 10
The Exhibits described in the Exhibit List immediately
following the signature page of this Form 10 (which is incorporated
by reference) are hereby filed as part of this Form 10.
<PAGE>
<PAGE>109
(c) FINANCIAL STATEMENT SCHEDULES - NONE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
LAFAYETTE BANCORPORATION
By /s/ Robert J. Weeder
_________________________________
Robert J. Weeder
President
Date: April 29, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
3.1+ Amended Articles of Incorporation
of the Corporation
3.2+ Bylaws of the Corporation, as amended
10.1*+ Lafayette Bancorporation Non-Qualified
Stock Option Plan, including schedule
identifying material terms of options
granted to Directors and named executive
officers
10.2*+ Lafayette Bancorporation Officers' Stock
Appreciation Rights Plan, including
schedule identifying material terms of
stock appreciation rights granted to named
executive officers
10.3*+ Lafayette Bank and Trust Company Directors
Deferred Compensation Plan and Form of Agreement
(1987)
10.4*+ Lafayette Bank and Trust Company Directors
Deferred Compensation Form of Agreement (1994)
11+ Computation of Per Share Earnings
21+ Subsidiaries of Registrant
27+ Financial Data Schedule
*Indicates Exhibits that describe or evidence management contracts
or compensatory plans or arrangements required to be filed as
Exhibits to this Form 10.
+Indicates Exhibits that were filed on April 30, 1997.
1595\04\FORM10.EDG
