UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended: December 31, 1997
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission File Number 0-22469
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 organization) Identification 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 registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
NONE Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No Par Value
(Title of Class)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are affiliates) valued at the price of
the last trade price of $37.50 reported on the OTC Bulletin Board as of March
17, 1998, was approximately $79,453,762.
As of March 17, 1998, there were outstanding 2,164,195 common shares, no par
value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders of Lafayette
Bancorporation for 1997, to the extent stated herein, are incorporated by
reference into Parts I and II.
(2) Portions of the Proxy Statement of Lafayette Bancorporation for the
Annual Meeting of its Shareholders to be held April 13, 1998, to the extent
stated herein, are incorporated by reference into Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
<PAGE>
PART I
Item 1. Business
General
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 to
facilitate the Bank's adoption of a one-bank holding company 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, the Bank, 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, 1997, the Bank was the largest bank headquartered in Tippecanoe County with
total assets of $439,029,000 and total deposits of $355,195,000.
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 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.
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 interstate banking legislation 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.
<PAGE>
Employees
The Corporation has no compensated employees. At December 31, 1997, the
Bank employed 196 full-time employees and 29 part-time employees. The Bank is
not a party to any collective bargaining agreements, and employee relations are
considered to be good.
Regulation and Supervision
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 (the "DFI") and the Federal Deposit
Insurance Corporation (the "FDIC"). The Corporation is a bank holding company
within the meaning of the Bank Holding Company Act (the "BHC Act") and is
registered as such with, and is subject to the supervision of, the Federal
Reserve Board (the "FRB"). 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.
<PAGE>
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.
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.
<PAGE>
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 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.
As of December 31, 1997, the Corporation was in compliance with the
risk-based capital guidelines. For a detailed discussion of the regulatory
capital requirements and the Corporation's and Bank's compliance with those
requirements, see "Capital Adequacy" in Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 14 of Notes to
Consolidated Financial Statements.
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 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.
<PAGE>
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.
The federal banking agencies have issued uniform 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 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%.
<PAGE>
"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 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.
As of December 31, 1997, the Corporation and the Bank were 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.
<PAGE>
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 federal financial
institution agencies published a final rule effective on August 9, 1995,
implementing safety and soundness standards. 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.
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 the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy.
<PAGE>
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.
Under Indiana law, 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 DFI 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, 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.
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.
<PAGE>
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 currently in effect 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. See "Noninterest Income
and Expense" in Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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
was permitted beginning in June 1, 1997, except in states that passed
legislation prior to that date "opting-out" of interstate branching. Banks
located in states that opted out of interstate branching may not participate in
interstate branching. The laws of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and
establishment of branches shall apply to the interstate branches.
<PAGE>
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.
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 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 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.
<PAGE>
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 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.
<PAGE>
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.
FORWARD-LOOKING STATEMENTS
This Form 10-K 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.
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; (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>
Item 2. 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>
ADDITIONAL
LOCATION/ BANKING
NAME OF OFFICE TELEPHONE NO. FUNCTIONS
OFFERED
-------------- ------------- -------
<S> <C> <C>
Downtown Main Office 133 North 4th Street oTrust Department
Lafayette, Indiana oMortgage Loan Department
(765) 423-7100 oCommercial Loan Department
Downtown Motor Bank 401 North 4th Street o24-Hour MAC
Lafayette, Indiana Automatic Teller
(765) 423-7165 Machine
Elston Branch 2862 U.S. 231 South o24-Hour MAC
Lafayette, Indiana Automatic Teller
(765) 423-7166 Machine
Lafayette Square 2504 Teal Road o24-Hour MAC
Branch Lafayette, Indiana Automatic Teller
(765) 423-7164 Machine
Market Square Branch 2200 Elmwood Avenue oInstallment Loan
Lafayette, Indiana Department
(765) 423-7163 o24-Hour MAC
Automatic Teller
Machine
Tippecanoe Court Pay Less Super Market o24-Hour MAC
Branch Lafayette, Indiana Automatic Teller
(765) 423-3821 Machine
West Lafayette Branch 2329 N. Salisbury Street o24-Hour MAC
West Lafayette, Indiana Automatic Teller
(765) 423-7162 Machine
26 East Branch 3901 S.R. 26 East oInvestment Center
Lafayette, Indiana oInsurance Department
(765) 423-7167 o24-Hour MAC
Automatic Teller
Machine
Elmwood Avenue Pay Less Super Market o24-Hour MAC
Branch Lafayette, Indiana Automatic Teller
(765) 423-3931 Machine
Valley Lakes Branch 1803 E. 350 S. o24-Hour MAC
Lafayette, Indiana Automatic Teller
(765) 423-3841 Machine
Brookston Branch S.R. 18 West and o24-Hour MAC
HWY 43 Automatic Teller
Brookston, Indiana Machine
(765) 563-6400
<PAGE>
Chalmers Branch Main Street
Chalmers, Indiana
(219) 984-5670
Monticello Branch 116 East Washington St. o24-Hour MAC
Monticello, Indiana Automatic Teller
(219) 583-5137 Machine
Reynolds Branch U.S. 24 West o24-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, Elmwood Pay Less and Valley Lakes
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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
There was no matter submitted during the fourth quarter of 1997 to a vote of
security holders, by solicitation of proxies or otherwise.
<PAGE>
Special Item. Executive Officers of the Registrant.
<TABLE>
Name Age Offices Held
---- --- ------------
<S> <C> <C>
Joseph A. Bonner 66 Chairman of the Corporation and the Bank
Robert J. Weeder 60 Chief Executive Officer and President of the
Corporation and the Bank
Robert J. Ralston 56 Executive Vice President/Senior Operations Officer
and Secretary/Treasurer of the Bank
Lawrence A. Anthrop 53 Senior Vice President and Senior Trust Officer of
the Bank
E. James Brisco 45 Senior Vice President and Manager, Mortgage Loan
Department of the Bank
Michael C. Moulton 56 Senior Vice President and Data Processing Manager of
the Bank
Michelle D. Turnpaugh 32 Secretary/Treasurer of the Corporation and Assistant
Secretary of the Bank
Marvin S. Veatch 33 Controller of the Bank
Charles E. Wise 51 Senior Vice President and Manager of the Reynolds
and Monticello offices of the Bank
</TABLE>
Officers are elected annually by the Board of Directors and serve for a
one-year period and until their successors are elected. No officers have
employment contracts. There are no family relationships between any of the
officers of the Corporation.
Except as indicated below, each of the officers has held the same or
similar position with the Corporation or the bank or the past five (5) years.
Mr. Bonner retired as President and Chief and Executive Officer of the
Corporation and the Bank effective January 31, 1997.
Mr. Weeder has served as President of the Bank since August, 1996 and as
President of the Corporation since September, 1996. He assumed the positions of
Chief Executive Officer of the Corporation and the Bank upon Mr. Bonner's
retirement in January, 1997. Mr. Weeder had served as Executive Vice President
since 1992.
<PAGE>
Mr. Brisco became Senior Vice President of the Bank in December, 1996,
prior to which time he had served as Vice President of the Bank. Prior to his
employment by the Bank in April, 1995, he was employed by Huntington Bank of
Indiana as Vice President, Secondary Market Operations.
Mr. Ralston became Executive Vice President of the Bank in December, 1996,
and was appointed Secretary/Treasurer of the Bank in September, 1996.
Mr. Moulton became Senior Vice President of the Bank in December, 1996.
Ms. Turnpaugh was appointed Secretary/Treasurer of the Corporation in
September, 1996.
Mr. Wise became Senior Vice President of the Bank in December, 1996.
PART II
The information in Part II of this report is incorporated by reference to
the indicated sections of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (page numbers in brackets are page numbers
in Exhibit 13 of Edgar filing).
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Annual Report to
Shareholders
Page
(a) Market 39 [59]
(b) Holders 39 [59]
(c) Dividends 39 [59]
ITEM 6. Selected Financial Data
Annual Report to
Shareholders
Page
Selected Financial Data 13 [13]
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Annual Report to
Shareholders
Page
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 12-25 [1-12]
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Annual Report to
Shareholders
Page
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations--Quantitative and
Qualitative Disclosures About
Market Risk 22-23 [10-11]
ITEM 8. Financial Statements and Supplementary Data
Annual Report to
Shareholders
Page
Financial Statements and
Supplementary Data 26-37 [32-58]
ITEM 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Except as set forth below in "Directors and Executive Officers of the
Corporation," the information for Items 10 through 13 of this Report is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for its Annual Meeting of Shareholders to be held April 13, 1998,
which was filed with the Commission pursuant to Regulation 14A on March 9, 1998.
ITEM 10. Directors and Executive Officers of the Corporation
The information required by this item relating to Executive Officers is
found under the heading "Special Item. Executive Officers of the Registrant" in
Part I of this Report and the information required by this item relating to
Directors is included under the caption "Election of Directors" in the
Corporation's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held April 13, 1998, which has been filed with the Commission and is
incorporated herein by reference in this Form 10-K.
ITEM 11. Executive Compensation
The information required by this item is included under the caption
"Executive Compensation" in the Corporation's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held April 13, 1998, which has been filed
with the Commission and is incorporated by reference in this Form 10-K.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included under the caption
"Election of Directors" in the Corporation's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held April 13, 1998, which has been filed
with the Commission and is incorporated by reference in this Form 10-K.
ITEM 13. Certain Business Relationships and Related Transactions
The information required by this item is included under the caption
"Certain Business Relationships and Transactions" in the Corporation's
definitive Proxy Statement for its Annual Meeting of Shareholders to be held
April 13, 1998, which has been filed with the Commission and is incorporated by
reference in this Form 10-K.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The documents listed below are either filed as a part of this Report or
incorporated by reference from the Annual Report to Shareholders or the
Corporation's Registration Statement as indicated (page numbers in brackets are
page numbers in Exhibit 13 of Edgar filing).
(a)1. Financial Statements.
Annual Report to
Shareholders
Page
Report of Independent Auditors 26 [30]
Consolidated Balance Sheets as of
December 31, 1997 and 1996 27 [33]
Consolidated Statements of Income for
the years ended December 31, 1997,
1996 and 1995 28 [34]
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1997,
1996 and 1995 29 [35]
Consolidated Statements of Cash Flows
for the years ended December 31,
1997, 1996 and 1995 30 [36]
Notes to Consolidated Financial
Statements 31-37 [37-58]
All other schedules have been omitted because the required information
is either inapplicable or has been included in the Corporation's consolidated
financial statement or notes thereto.
(a)2. Schedules.
All schedules have been omitted because the required information is
either inapplicable or has been included in the Corporation's consolidated
financial statements or notes thereto.
<PAGE>
(a)3. Exhibits.
The exhibits filed as part of this Report on Form 10-K are identified
in the Exhibit Index, which Exhibit Index specifically identifies those exhibits
that describe or evidence all management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Report. Such Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf, by the undersigned,
thereunto duly authorized.
Dated: March 23, 1998 LAFAYETTE BANCORPORATION
By /s/ Robert J. Weeder
Robert J. Weeder, President
In accordance with the Exchange Act, this report was signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Dated: March 23, 1998 /s/ Robert J. Weeder
Robert J. Weeder, President (Principal
Executive Officer) and Director
Dated: March 23, 1998 /s/ Marvin S. Veatch
Marvin S. Veatch, Controller (Principal
Accounting Officer and Principal
Financial Officer)
Dated: March 23, 1998 /s/ Richard A. Boehning
Richard A. Boehning, Director
Dated: March 23, 1998 /s/ Joseph A. Bonner
Joseph A. Bonner, Director
Dated: March 23, 1998 /s/ Wilbur L. Hancock
Wilbur L. Hancock, Director
Dated: March 23, 1998 /s/ Roy D. Meeks
Roy D. Meeks, Director
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
3.1 Restated Articles of Incorporation
of the Corporation are incorporated
by reference to Exhibit 3.1 to
Registrant's Form 10, which
became effective on June 30, 1997.
3.2 Bylaws of the Corporation, as
amended, are incorporated by
reference to Exhibit 3.2 to the
Registrant's Form 10, which became
effective June 30, 1997
10.1* Lafayette Bancorporation
Non-Qualified Stock Option Plan,
including schedule identifying
material terms of options granted
to Directors and named executive
officers, is incorporated by
reference to Exhibit 10.1 in the
Registrant's Form 10, which became
effective on June 30, 1997.
10.2* Lafayette Bancorporation Officers'
Stock Appreciation Rights Plan,
including schedule identifying
material terms of stock
appreciation rights granted to
named executive officers, is
incorporated by reference to
Exhibit 10.2 in the Registrant's
Form 10, which became effective on
June 30, 1997.
10.3* Lafayette Bank and Trust Company
Directors Deferred Compensation
Plan and Form of Agreement (1987),
is incorporated by reference to
Exhibit 10.3 of Registrant's Form
10, which became effective on June
30, 1997.
10.4* Lafayette Bank and Trust Company
Directors Deferred Compensation
Form of Agreement (1994), is
incorporated by reference to
Exhibit 10.4 of Registrant's Form
10, which became effective on June
30, 1997.
13 Registrant's 1997 Annual Report to
Shareholders (includes only portions
incorporated by reference)
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-K.
EXHIBIT 13
Managements Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION AND OVERVIEW OF OPERATIONS
Lafayette Bancorporation ("Corporation") is a one-bank holding company located
in Lafayette, Indiana. The Corporation's wholly-owned subsidiary, Lafayette Bank
and Trust Company ("Bank"), conducts business 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 major components of the Corporation's operating results for the past five
years are summarized in Table 1 - Five Year Financial Summary.
(insert table 1)
The Corporation earned $4,808,000, or $2.22 per share, for 1997, compared to
$4,091,000, or $1.89 per share, for 1996. The 17.5% earnings increase in 1997
compared to 1996 is largely due to an increase in net interest income. Realized
gains on the sale of mortgage loans along with improved earnings from the Bank's
investment brokerage department were also positive factors in the earnings
increase. The increase in the loan loss provision and salaries and employee
benefits were partially responsible for offsetting 1997 profits.
Earnings in 1996 were 21.2% higher than the $3,375,000, or $1.56 per share
recorded in 1995. The first full year of operation of the secondary market
mortgage department along with the decrease of the federal deposit insurance
requirement were factors in the earnings increase. Items having a negative
effect on earnings included 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 Monticello branch acquisition.
Return on average assets (ROA) was 1.15% and 1.08% for the periods ending
December 31, 1997 and 1996, respectively, while return on average equity (ROE)
was 13.16% and 12.35% for those same time periods.
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 the overall level of
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 laws 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 shows
the Corporation's net interest income from 1993 through 1997. 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 recognizes the income tax savings when comparing taxable and
tax-exempt assets.
(insert table 2)
<PAGE> 2
Table 3 - Net Interest Earning Assets illustrates net interest-earning assets
and liabilities for 1997, 1996 and 1995.
(insert table 3)
Table 4 - Volume and Rate Analysis depicts the dollar effect of volume and rate
changes from 1995 through 1997. 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.
Nonaccrual 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 tax rate of 34%. Loan interest income includes
loan fees of $912,000, $928,000, and $703,000 for 1997, 1996, and 1995,
respectively.
(insert table 4)
Net interest income on a tax equivalent basis for 1997 was 14.69% higher than
that for 1996, while the net interest margin for 1997 was 4.36%, or 13 basis
points higher than the prior year. Tax equivalent net interest income was 11.98%
higher in 1996 compared to 1995, as the net interest margin increased 16 basis
points to 4.23% from that of 1995.
The increase in 1997 net interest income was predominately due to the increase
in the volume of earning assets, in addition to the continued shift from
securities to loans in the earning asset mix. Increases in interest-bearing
liabilities, primarily time deposits and long-term debt, partially offset the
earning asset increases. The average earning asset yield increased 12 basis
points to 8.37% in 1997 compared to the prior year, mainly as a result of the
increased loan portfolio activity. This loan volume increase during the year
more than adequately compensated for the decline in the overall loan yields to
augment net interest income. Although the average yield on the securities
portfolio increased 11 basis points to 6.26% during the year, management
enhanced overall earnings through the higher yields gained in the loan
portfolio. Total average interest-bearing liabilities increased during 1997
mainly as a result of the full year effect of the deposits acquired in the
September 1996 Monticello branch acquisition, along with the increase in the
Corporation's long-term debt. Although the average balance of total
interest-bearing liabilities increased during the year, lower interest rates
paid on those deposits resulted in a reduction in the total interest-bearing
rate of 4.58% for the year.
Net interest income in 1996 increased significantly compared to 1995 due to the
combination of loan growth experienced by the Corporation in addition to the
beginning of the shift in earning asset mix from securities to higher yielding
loans. Management was able to effectively employ the deposits acquired in the
Monticello branch transaction by lending those funds in a rather short time
period after the branch transaction occurred. The earning asset yield increased
13 basis points to 8.25% in 1996 predominately as a result of this strategy.
Like earning assets, interest-bearing liabilities increased during 1996,
primarily as a result of the deposits acquired in the Monticello branch
transaction. The deposit growth realized coupled with lower interest rates paid
on certain deposits resulted in a 4.62% average interest-bearing liability
yield, a decrease of 4 basis points from the prior year.
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 to be sufficient to absorb possible losses that may be experienced 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 of delinquent and classified loans.
<PAGE> 3
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 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 has been
raised whether the customer's cash flow or net worth are sufficient to repay the
loan; the loan has been criticized in a regulatory examination; the accrual of
interest has been suspended; 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.
(insert table 5)
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.
(Insert Table 6)
The consolidated provision for loan losses was $620,000, $240,000, and $180,000
for 1997, 1996, and 1995, respectively. Management believes the overall asset
quality of the loan portfolio continues to improve, as evidenced by the fact
that total nonperforming loans were at a five year low in 1997, while the
average loan portfolio increased 44.64% over that same five year period. Though
management considers the level of net charge-offs to be manageable, the 1997
level is at its highest point since 1994, primarily as a result of the indirect
lending function. Management plans to control and monitor growth of this
particular area in an effort to reduce future charge-offs.
While overall asset quality continued to improve, the allowance as a percent of
loans has declined over the last five years due to the combination of increased
loan volume and the increase in the 1997 net charge-off amount as previously
explained. The provision for loan losses was raised to $620,000 for 1997,
primarily to keep pace with the Corporation's continued loan growth.
The $60,000 increase in the 1996 provision was attributed solely to the 10.07%
average growth experienced in the overall loan portfolio. The amount of future
year provisions for loan losses will be subject to adjustment based on the
future evaluations of the loan loss reserve adequacy.
Total nonperforming loans and nonperforming loans as a percent of total loans
have declined over the past five years, which has caused significant increases
in the allowance as a percent of nonperforming loans. Although each component of
nonperforming loans decreased as of December 31, 1997 from the prior year-end,
nonaccrual and restructured loans have had the most significant reduction over
the past five years, due in large part to by the rising farm prices and overall
healthy farm economy.
<PAGE> 4
Statements of Financial Accounting Standard No. 114 and 118, AAccounting by
Creditors for Impairment of a Loan,@ became effective January 1, 1995. These
statements change the way loan loss allowance estimates are 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 $127,000 as of December
31, 1997 met the criteria for an impaired loan. A specific reserve allocation
has been 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 Corporation's financial statements
The $114,000 increase in other real estate owned (AOREO@) relates to a valuation
allowance account established in 1995 as a result of certain infrastructure
obligations the Corporation agreed to pay on an existing OREO property. These
obligations were honored and paid in-full during the course of 1997 which
reversed the valuation allowance account, and ultimately increased the
outstanding principal balance. As of December 31, 1997 there are only two
parcels of other real estate held by the Corporation.
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, 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 believes this process ultimately results
in the identification of problem loans in a more timely fashion.
At December 31, 1997, the Corporation had a total of $2,577,000 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 1995 through 1997 and
percentage changes between years is included in Table 7 Noninterest Income and
Expense.
(insert table 7)
Noninterest income increased 21.80% to $4,168,000 in 1997 compared to $3,422,000
in 1996. The primary sources of noninterest income were income from fiduciary
activities, service charges on deposit accounts, and net gain on secondary
market loan sales.
<PAGE> 5
Income from fiduciary activities increased 8.99% due to the combination of new
accounts opened and an increase in the fee structure. Service charges on deposit
accounts increased 12.37%, primarily as a result of a higher volume of accounts
being assessed fees, in addition to an increase in the deposit fee structure
which was implemented November 1, 1997. Other operating income also posted a
24.98% increase over the prior year predominately as a result of two items.
First, the Investment Center, a full service brokerage operation offered through
Robert Thomas Securities, Inc., member NASD/SIPC, recorded an increase in fees
of $104,000, or 64.28% over the prior year mainly due to an increase in volume
during another exceptional year in the stock market. Also, ATM fee income
increased $161,000, or 75.78% as a result of surcharges that were assessed
beginning in May, 1997 on all non-bank customers conducting transactions at
various ATM locations.
Net gain on secondary market loan sales posted an 84.92% increase over the prior
year. Additional loan originators and support staff were added which led to a
71.16% increase in loan originations and a 86.15% increase in the dollar amount
of loans sold during the year. Any increase from the origination and sales 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, provided a stable or declining
interest rate environment, 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, and the level
of future interest rates.
Noninterest income during 1996 increased 22.65% compared to 1995. Service
charges on deposit accounts grew 11.94% as the number of fee-generating accounts
at the supermarket banking facilities increased. Other operating income also
increased 19.04%, attributable to increases in general ATM fees and fees
generated at the Investment Center. Also included as part of other operating
income was a $96,000 gain recorded on the sale of a branch facility.
Since 1996 was the first full year of operations for the secondary market
mortgage department, net gain on loan sales soared 192.65% in that year compared
to those recorded in 1995.
Total noninterest expense increased 12.21% to $12,557,000 in 1997 compared to
$11,191,000 in 1996. As a percentage of total average assets, total noninterest
expense was 3.01% and 2.96% for 1997 and 1996, respectively. Salaries and
employee benefits increased 18.21% and represent not only the largest component
of noninterest expense, but represent the largest increase from the prior year.
The most significant reasons for this increase include the additional personnel
added to the secondary market mortgage department, the addition of a marketing
manager and private banking representative, the increase in commissions paid to
secondary mortgage and Investment Center personnel as a result of their record
efforts, the full year effect of personnel gained in the Monticello branch
transaction, and the increased value of the stock appreciation rights granted to
the executive management team.
Occupancy expense increased 5.76% during 1997, primarily as a result of higher
depreciation and maintenance and repair costs associated with the first full
year of the Monticello branch.
Equipment expense declined for a second straight year due to depreciation
expense decreasing 17.26% from the prior year. Many of the items that became
fully depreciated during 1996 were not replaced in 1997, therefore causing lower
depreciation expense for the year.
Other noninterest expense increased 7.00% in 1997. Increase in general overhead
operating expenses such as telephone and postage, in addition to higher expenses
associated with marketing, repossession and collection expenses, and higher
goodwill recorded account for 71.15% of the total increase for the year.
Noninterest expense increased 9.50% in 1996 compared to 1995 as a result of
higher salary costs related to staffing needs required of the secondary market
mortgage department, the partial year effect of the personnel obtained in the
Monticello branch acquisition, and the increase in commissions paid as a result
of the secondary market's first full year of operation. Occupancy and other
noninterest expenses increased in 1996 primarily due to the secondary market
mortgage department and the Monticello branch acquisition. Equipment expenses
were relatively flat, while deposit insurance dramatically declined as a result
of the Bank Insurance Fund (BIF) achieving its 1.25% capitalization level, as
mandated by Congress, during the prior year.
<PAGE> 6
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 the result of interest on tax-exempt
securities and loans.
The Corporation has regular tax and alternative minimum tax net operating loss
carryforwards of $77,000 and $44,000, respectively. Utilization of these tax
carryforwards are limited to $83,000 annually and expire in the year 2002.
The Corporation's effective tax rate was 34.82%, 33.95%, and 34.67% in 1997,
1996, and 1995, respectively. Further tax information regarding the Corporation
can be found in Note 1 and Note 12 to the consolidated financial statements.
INTERIM FINANCIAL DATA
Table 8 - Interim Financial Data is a detailed summary on a quarterly basis of
the results of operations for the years ended December 31, 1997 and 1996. For a
fair and consistent presentation, these results contain all necessary
restatements in connection with stock dividends that have occurred in the
periods presented.
(insert table 8)
FINANCIAL CONDITION
SECURITIES
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 9 - Securities and Securities Maturity Schedule summarizes the carrying
values of securities from 1995 through 1997 and the maturity distribution at
December 31, 1997, by classification. Interest on tax-exempt securities have
been adjusted to a tax equivalent basis using a marginal federal tax rate of 34%
for all years.
<PAGE> 7
(insert table 9)
The majority of the securities portfolio is comprised of U. S. Treasury
securities, federal agency securities, state municipal securities (tax exempt),
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 rating of A or better. The majority of these investments were rated
A or better at December 31, 1997. 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 in the Corporation's portfolio are
of high quality. No securities of an individual issuer, excluding U.S.
government and its agencies, exceed 10% of the Corporation's shareholders'
equity as of December 31, 1997. The Corporation does not use off-balance sheet
derivative financial instruments as defined in SFAS No. 119, ADisclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments.@
Total securities were $71,845,000, $94,362,000, and $93,042,000 as of December
31, 1997, 1996, and 1995, respectively. As a result of the redeployment of
securities to the loan portfolio, total investment securities in 1997 decreased
$22,517,000, or 23.86% from the prior year. The majority of the decrease
involved two sectors - U.S. Government agencies declined approximately
$14,000,000, or 39.05%, while states and political subdivisions were reduced
approximately $7,500,000, or 42.90% from the prior year.
The general level of interest rates increased during the first quarter of 1997
and then began to decline during the latter half of the year. This general
decline in interest rates accounted for an increase in the liquidity of the
investment portfolio, specifically with regard to callable bonds and prepayment
activity associated with mortgage-related securities.
Approximately $9,000,000, or 64.29% of the total 1997 reduction in the
government agency sector was the result of bonds called prior to maturity. The
remaining 35.71%, or approximately $5,000,000 reduction in securities were
scheduled maturities. Approximately one-half of the total state and political
subdivision reduction that occurred during the year was due to scheduled
maturities or called bonds. Additionally, a bond swap was executed during the
first quarter of 1997 which involved selling $4,100,000 of municipal bonds with
an average life of 4.7 years and reinvesting those proceeds into government and
agency bonds. Because interest rates had been rising in the treasury markets,
and given a lag in similar price declines for the municipal markets, the
Corporation took advantage of the opportunity to increase credit quality, reduce
the average life to 3.9 years, and increase the yield from 6.78% to 6.84% on the
reinvested funds.
As of December 31, 1997, 1996, and 1995, the security portfolio held structured
notes totaling $1,892,000, $3,000,000, and $4,000,000, 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 short-term securities,
adjustable rate instruments, and easily marketable securities to primarily fund
the continuing growth of the loan portfolio. Tax-free and intermediate taxable
bonds are used to further enhance earnings. As of December 31, 1997,
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.
<PAGE> 8
Although the change in equity due to market value fluctuations in the
available-for-sale portfolio are not used in the regulatory capital calculation,
the change which occurred in the unrealized gain/loss on securities between 1997
and 1996 was a result of the swing in the interest rate environment during that
time period, in conjunction with the change in the portfolio mix. Although there
was a significant change in the unrealized gain/loss on securities between 1997
and 1996, management considers these changes to be temporary in nature. It is
not likely the Corporation will realize any losses in the security portfolio to
satisfy loan growth or liquidity needs. This paragraph includes forward-looking
statements that are based on management's assumptions regarding future economic
and business conditions. Such economic and business assumptions are inherently
uncertain and subject to risk and may prove to be invalid, causing management to
respond to the present circumstances and conditions.
LOANS
The loan portfolio constitutes the major earning assets 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 credit
which exceeds the authority of the loan officer is forwarded to the Bank's loan
committee for approval. The loan committee is comprised of various experienced
loan officers and three bank directors -- the President, and two outside
directors, one of which is the Chairman. Each outside director participates on
this committee on a monthly rotating basis. All 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.
Table 10 - 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.
(insert table 10)
The Corporation has achieved significant loan growth in the past two years.
Specifically, total loans increased $43,287,000, or 16.10% in 1997, while 1996
saw a $40,297,000, or 17.62% increase from the prior year. The most significant
loan portfolio increase in 1997 occurred in the real estate - mortgage category,
where this loan type increased $30,667,000, or 29.33% compared to 1996. On a
percentage basis, real estate - construction loans increased 40.37%, or
$4,923,000 over the prior year. Substantially all of the loan growth in the last
two years is linked to the ongoing development and expansion of the Greater
Lafayette area. The installment loan area grew less than 1% in 1997, which was
by design, as management did not actively pursue these types of loans in an
attempt to control the level of net charge-offs that have been recently
recorded. The loan portfolio has remained relatively well diversified by loan
type, borrower, and industry, although loan balances have climbed in the last
few years. There were no concentrations of credits in excess of 10% of loan
balances as of December 31, 1997.
The real estate - mortgage loans were the largest segment of the loan portfolio
as of December 31, 1997 and also at the end of the prior three years. Management
believes these loans carry a lower degree of risk, as reflected by the $23,000
net recovery over the last five years. The commercial and agricultural and real
estate - construction loan categories are both associated with a much higher
degree of risk, simply by the nature of the credits. Management believes a
higher degree of risk warrants a higher interest rate for assuming such risk
and, as such, is able to receive a higher rate of return on these credits. At
the same time, however, certain risks surrounding these two loan categories are
mitigated by the lending practices, policies, and procedures that are currently
in place. The indirect lending function is a significant portion of the consumer
loan portfolio. A specific policy surrounding these loan types, including
separate reporting requirements are in place for monitoring purposes. The total
outstanding balance of indirect loans was approximately $38,000,000 and
$39,000,000 as of December 31, 1997 and 1996, respectively, but established a
lesser percentage of the overall loan portfolio.
<PAGE> 9
Table 11 - 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.
(insert table 11)
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
deposits have shown steady growth of 10.24% and 6.70% during 1997 and 1996,
respectively. A portion of the current year growth can be attributed to the
full-year effect of the deposits acquired in the Monticello branch acquisition;
however, the Corporation has experienced an upward trend in the number of new
deposit accounts being opened notwithstanding that acquisition. Even with the
$32,118,000 growth in the current year deposit base, the mix has remained
relatively unchanged over the years. Time deposits, however, continue to be the
largest single source of the Corporation's funds.
A five year schedule of deposits by type and maturities of time deposits greater
than $100,000 is presented in Table 12 - Deposit Information.
(insert table 12)
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, 1997
and December 31, 1996 balances were $2,000,000 and $8,300,000, 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.
(insert table 13)
As presented in Table 13 - Short-term Borrowings, the balance of the
Corporation's short-term borrowings were comprised of retail repurchase
agreements and a treasury tax open-end note as of December 31, 1997, 1996 and
1995. For the years presented, the retail repurchase agreements accounted for
substantially the entire outstanding balance. As of December 31, 1997, the
Corporation had overnight repurchase agreements of $5,300,000 with the Catholic
Diocese of Lafayette which were scheduled to mature in January, 1998.
The Bank became a member of the Federal Home Loan Bank of Indianapolis (AFHLBI@)
in 1992 and has the authority of the Board of Directors to borrow up to $40
million. Any and all borrowings 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. Long-term debt as of December 31, 1997 and
1996 was $19,886,000 and $9,265,000, respectively. Along with the annual
mortgage advance principal repayments, the Corporation increased its borrowings
from the FHLBI by $11,500,000 during 1997 primarily to fund the continued loan
growth. The attractive interest rates along with the fixed rate feature of the
advances made this a more desirable source of funds, as opposed to the
short-term nature of certain repurchase agreement contracts. Additional
information regarding short-term borrowings and long-term debt can be found in
Note 7 and Note 8 of the consolidated financial statements.
<PAGE> 10
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk of the Corporation encompasses exposure to both liquidity risk and
interest rate risk and is reviewed quarterly by the asset/liability committee
(AALCO@) and the Board of Directors.
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 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 FHLBI. 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 deposits from brokers. Table 14 -
Funding Uses and Sources details the main components of cash flows for 1997 and
1996.
(insert table 14)
The Corporation's interest rate risk is measured by computing estimated changes
in net interest income and the net portfolio value (ANPV@) of its cash flows
from assets and liabilities in the event of adverse movements in interest rates.
Interest rate risk exposure is measured using an interest rate sensitivity
analysis to determine the change in NPV in the event of hypothetical changes in
interest rates. Another method also used to enhance the overall process is
interest rate sensitivity gap analysis. This method is utilized to determine the
repricing characteristics of the Corporation's assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities. This particular analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 1% - 2% increase and decrease in interest rates. The
Corporation's Board of Directors adopted an interest rate risk policy which
established a 45% minimum and maximum increase and decrease in the NPV in the
event of a sudden and sustained 1% - 2% increase or decrease in interest rates.
The following table represents the Corporation's projected change in NPV for the
various rate shock levels as of December 31, 1997.
----------------------- Net Portfolio Value --------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change
- -------- ------ ------ -------
+ 200 $ 26,229 $ (12,275) (31.88) %
+ 100 32,288 (6,216) (16.14)
Base 38,504 - -
- - 100 42,111 3,607 9.37
- - 200 47,090 8,586 22.30
<PAGE> 11
The above table indicates that as of December 31, 1997, the Corporation's
estimated NPV would be expected to decrease in the event of sudden and sustained
increases in prevailing interest rates. Conversely, in the event of sudden and
sustained decreases in prevailing interest rates, the Corporation's estimated
NPV would be expected to increase. As of December 31, 1997, the Corporation's
estimated changes in NPV were within the approved guidelines established by the
Board of Directors.
Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate any
actions management may undertake in response to changes in interest rates. The
NPV calculation is based on the net present value of discounted cash flows
utilizing certain prepayment assumptions and market interest rates.
Certain shortcomings are inherent in the method of computing the estimated NPV.
Actual results may differ from that information presented in the table above,
should market conditions vary from the assumptions used in preparation of the
table information. If interest rates remain or decrease below current levels,
the proportion of adjustable rate loans in the loan portfolio could decrease in
future periods due to refinancing activity. Also, in the event of an interest
rate change, prepayment and early withdrawal levels would likely be different
from those assumed in the table. Lastly, the ability of many borrowers to repay
their adjustable rate debt may decline during a rising interest rate
environment.
Used in conjunction with the NPV analysis is the interest rate sensitivity gap
analysis. This analysis monitors the relationship between the maturity and
repricing of interest earning assets and interest earning liabilities, while
maintaining an acceptable interest rate spread. Interest rate sensitivity gap is
defined as the difference between the amount of maturing or repricing of
interest earning assets and interest earning liabilities within specific and
defined time frames. A positive gap occurs when the amount of interest rate
sensitive assets exceed the amount of interest rate sensitive liabilities.
Conversely, a gap is considered negative when the amount of interest rate
liabilities exceed the interest rate sensitive assets. Generally, during a time
of rising interest rates, a negative gap would adversely affect net interest
income, while a positive gap would enhance net interest income. On the other
hand, during a time period of falling interest rates, a negative gap would
increase net interest income, while a positive gap would decrease net interest
income. It is the ALCO's responsibility to maintain a reasonable balance between
the exposure to interest rate fluctuations and earnings.
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 and core deposit
intangibles, as defined by bank regulators. The definition of Tier 2 capital
includes the amount of allowance for loan losses which does not exceed 1.25% of
gross risk weighted assets. Total capital is the sum of Tier 1 and Tier 2
capital.
The minimum requirements under the capital guidelines are a 4.00% leverage ratio
(Tier 1 capital divided by average assets less intangible assets and unrealized
gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1 capital divided
by risk-weighted assets), and 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
Awell-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 an
institution is only 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.
<PAGE> 12
Management believes the Corporation and the Bank met all the capital
requirements as of December 31, 1997, as noted below in Table 15 - Capital
Ratios, and was 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.
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 $3,602,000, or 10.30% in 1997 compared to the
$3,099,000, or 9.73% increase posted in 1996. The amount of dividends paid by
the Corporation increased to $1,201,000, or 21.44% above the prior year amount.
The higher dividend payout, in addition to the continued stock dividends
declared in the past few years, reflects management's effort to increase the
value and return of each shareholder's investment in the Corporation.
At December 31, 1997, 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.
(insert table 15)
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 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 last
few years the inflation rate has been relatively low, and its impact on the
balance sheets and increased levels of income and expense has been nominal.
YEAR 2000
The Corporation is aware of the possible consequences the year 2000 may pose
with regard to the computer systems utilized to conduct business on a daily
basis. Management has assembled a formal AYear 2000 Committee@ to address and
resolve such concerns as they relate to the Corporation. The committee has
conducted a preliminary review of the Corporation's current systems. While the
preliminary findings indicate the need to resolve certain issues as they relate
to current operating systems, management does not believe the necessary steps
will significantly impair the organization's ability to operate. The preliminary
costs identified to remedy this situation are not expected to have a material
impact on the Corporation's earnings.
<PAGE> 13
Table 1 - FIVE YEAR FINANCIAL SUMMARY
<TABLE>
For the years ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $ 32,415 $ 28,739 $ 26,267 $ 23,981 $ 23,352
Interest expense 15,525 14,012 13,115 11,016 10,810
------ ------ ------- ------ ------
Net interest income - tax equivalent (1) 16,890 14,727 13,152 12,965 12,542
Tax equivalent adjustment (1) (504) (524) (376) (330) (185)
------- ------- ------- ------- ------
Net interest income 16,386 14,203 12,776 12,635 12,357
Provision for loan losses (620) (240) (180) (600) (1,136)
Noninterest income 4,168 3,422 2,790 2,580 3,893
Noninterest expense 12,557 11,191 10,220 9,689
------ ------ ------ ------ 10,198
Income before income taxes and cumulative
effect of changes in accounting principles 7,377 6,194 5,166 4,926 4,916
Income tax expense 2,569 2,103 1,791 1,693 1,736
------ ------ ------ ------ ------
Income before cumulative effect of changes
in accounting principles 4,808 4,091 3,375 3,233 3,180
Cumulative effect of changes in
accounting principles -- -- -- -- (11)
------ ------ ------ ------ ------
NET INCOME $ 4,808 $ 4,091 $ 3,375 $ 3,233 $ 3,169
====== ====== ====== ====== ======
PER SHARE DATA (2)
Income before cumulative effect of
changes in accounting principles $2.22 $1.89 $1.56 $1.50 $1.47
Net income 2.22 1.89 1.56 1.50 1.46
Cash dividends 0.56 0.46 0.36 0.33 0.31
Shareholders' equity, end of year 17.80 16.03 14.75 13.09 12.36
SELECTED ACTUAL YEAR-END BALANCES
Total assets $439,029 $414,391 $372,265 $360,221 $340,402
Earning assets 406,954 378,345 333,153 323,904 316,505
Investment securities available-for-sale 66,577 88,206 90,881 41,339 3,823
Investment securities held-to-maturity 5,268 6,156 2,161 53,554 81,287
Loans held for sale 7,640 5,877 2,473 - -
Loans 312,227 268,940 228,643 224,680 217,784
Allowance for loan losses (3,464) (3,198) (3,200) (3,309) (3,459)
Total deposits 355,195 341,550 308,652 296,763 285,363
Noninterest-bearing demand deposits 42,752 43,579 43,950 37,875 34,251
Interest-bearing demand deposits 47,054 47,945 46,940 49,081 50,039
Savings deposits 96,974 87,938 77,287 67,607 69,028
Time deposits 168,415 162,088 140,475 142,200 132,045
Long-term borrowings 19,886 9,265 8,905 9,738 10,351
Shareholders' equity 38,469 34,646 31,875 28,294 26,737
SELECTED AVERAGE BALANCES
Total assets $416,957 $377,623 $351,782 $338,537 $320,913
Earning assets 387,277 348,218 323,495 313,684 292,102
Securities 80,606 91,802 90,749 88,697 79,222
Loans held for sale 5,522 4,989 1,092 - -
Loans 289,197 242,286 220,117 213,722 199,943
Allowance for loan losses (3,254) (3,210) (3,269) (3,461) (2,938)
Total deposits 345,739 313,621 293,916 282,746 274,084
Noninterest-bearing demand deposits 35,728 35,655 35,822 33,622 30,015
Interest-bearing demand deposits 47,945 45,086 45,614 46,757 43,274
Savings deposits 94,360 82,535 71,406 69,558 66,883
Time deposits 167,706 150,345 141,074 132,809 133,912
Long-term borrowings 13,940 8,458 9,216 10,289 7,667
Shareholders' equity 36,530 33,133 30,125 27,684 25,566
<PAGE> 14
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits (3) 83.65% 77.25% 74.89% 75.59% 72.95%
Return on average assets 1.15% 1.08% 0.96% 0.95% 0.99%
Return on average equity 13.16% 12.35% 11.20% 11.68% 12.40%
Dividends payout ratio 24.98% 24.18% 23.05% 21.81% 21.11%
Leverage capital ratio 8.76% 8.59% 8.77% 8.27% 8.01%
Efficiency ratio (4) 59.63% 61.66% 64.11% 62.33% 62.05%
OTHER DATA
Number of employees (FTE) 213 205 192 185 163
Average common shares outstanding (2) 2,161,386 2,161,518 2,161,659 2,161,699 2,162,691
Cash dividends declared $1,201 $989 $778 $705 $669
</TABLE>
(1) Net interest income has been presented on both a tax equivalent and non-tax
equivalent basis. The 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 reflect stock dividends
and splits. Amounts do not consider the dilutive effect of stock options
outstanding.
(3) The loan to deposit ratio calculation excludes loans held for sale.
(4) 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> 15
Table 2 - Average Balance Sheets and Interest Rates
<TABLE>
Years ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- ------- ------- ------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Securities
Taxable $64,119 $3,857 6.02% $71,716 $4,219 5.88% $76,082 $4,538 5.96%
Tax-exempt (1) 17,160 1,185 6.91% 20,805 1,424 6.84% 15,471 1,038 6.71%
Unrealized loss on
AFS securities (673) - (719) - (804) -
------ ----- ----- ------ ----- ----- ------ ----- -----
Total securities 80,606 5,042 6.26% 91,802 5,643 6.15% 90,749 5,576 6.14%
Loans (1)(2)
Commercial 121,295 11,206 9.24% 89,545 8,493 9.48% 76,175 7,341 9.64%
Real estate 118,156 10,173 8.61% 102,257 8,772 8.58% 89,238 7,501 8.41%
Installment and
other consumer 55,254 5,311 9.61% 54,870 5,281 9.62% 55,525 5,133 9.24%
Other 14 1 7.14% 603 32 5.31% 271 18 6.64%
------ ----- ----- ------ ----- ----- ------ ----- -----
Total loans 294,719 26,691 9.06% 247,275 22,578 9.13% 221,209 19,993 9.04%
Federal Home Loan
Bank stock 1,210 96 7.93% 1,106 87 7.87% 1,055 83 7.87%
Federal funds sold 10,742 586 5.46% 8,035 431 5.36% 10,482 615 5.87%
------- ------ ----- ------- ------ ----- ------- ------- -----
Total earning assets 387,277 $32,415 8.37% 348,218 $28,739 8.25% 323,495 $26,267 8.12%
====== ===== ====== ===== ====== ====
Noninterest earning assets
Allowance for loan losses (3,254) (3,210) (3,269)
Premises and equipment 6,177 5,752 5,325
Cash and due from banks 15,520 14,785 14,515
Accrued interest and
other assets 11,237 12,078 11,716
------- ------- -------
Total assets $416,957 $377,623 $351,782
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing
demand deposits $47,945 $657 1.37% $45,086 $831 1.84% $45,614 $863 1.89%
Savings deposits 94,360 3,702 3.92% 82,535 3,134 3.80% 71,406 2,664 3.73%
Time deposits 167,706 9,578 5.71% 150,345 8,743 5.82% 141,074 8,271 5.86%
------- ----- ----- ------- ----- ----- ------- ----- -----
Total interest-
bearing deposits 310,011 13,937 4.50% 277,966 12,708 4.57% 258,094 11,798 4.57%
Borrowed funds
Short-term borrowings 15,129 711 4.70% 16,661 781 4.69% 14,315 744 5.20%
Long-term debt 13,940 877 6.29% 8,458 523 6.18% 9,216 573 6.22%
Total borrowed funds 29,069 1,588 5.46% 25,119 1,304 5.19% 23,531 1,317 5.60%
------ ----- ----- ------ ----- ----- ------ ----- -----
Total interest-
bearing liabilities 339,080 $15,525 4.58% 303,085 $14,012 4.62% 281,625 $13,115 4.66%
====== ==== ====== ==== ====== ====
Noninterest-bearing
liabilities
Noninterest-bearing
demand deposits 35,728 35,655 35,822
Accrued interest and
other liabilities 5,619 5,750 4,210
Shareholders' equity 36,530 33,133 30,125
------ ------ ------
Total liabilities and
shareholders' equity $416,957 $377,623 $351,782
======== ======== ========
Interest margin recap
Net interest income and
interest rate spread $16,890 3.79% $14,727 3.63% $13,152 3.46%
======= ===== ======= ===== ======= =====
Net interest income margin 4.36% 4.23% 4.07%
===== ===== =====
</TABLE>
<PAGE> 16
(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.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $912 for 1997, $928 for 1996,
and $703 for 1995.
<PAGE> 17
Table 3 - Net Interest-Earning Assets
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average interest-earning assets $387,277 $348,218 $323,495
Average interest-bearing liabilities 339,080 303,085 281,625
------- ------- -------
Net interest-earning assets $48,197 $45,133 $41,870
======= ======= =======
</TABLE>
<PAGE> 18
Table 4 - Volume/Rate Analysis
<TABLE>
1997 - 1996 1996 - 1995
------------------------------ ---------------------------
Change Change Change Change
Total Due To Due To Total Due to Due To
Change Volume Rate Change Volume Rate
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Loans 4,113 4,298 (185) 2,585 2,378 207
Securities
Taxable (362) (457) 95 (319) (255) (64)
Tax-exempt (239) (252) 13 386 365 21
FHLB stock 9 8 1 4 4 -
Federal funds sold 155 148 7 (184) (135) (49)
------ ----- ---- ------ ------ ----
TOTAL INTEREST INCOME 3,676 3,745 (69) 2,472 2,357 115
===== ===== == ===== ===== ===
INTEREST EXPENSE
Interest-bearing DDA (174) 50 (224) (32) (10) (22)
Savings deposits 568 461 107 470 422 48
Time deposits 835 994 (159) 472 540 (68)
Short-term borrowings (70) (72) 2 37 114 (77)
Long-term borrowings 354 345 9 (50) (47) (3)
------ ----- ----- ---- ----- -----
TOTAL INTEREST EXPENSE 1,513 1,778 (265) 897 1,019 (122)
===== ===== ===== ==== ===== ===
NET INTEREST INCOME 2,163 1,967 196 1,575 1,338 237
===== ===== === ===== ===== ===
</TABLE>
<PAGE> 19
Table 5 - Analysis of Allowance for Loan Losses
<TABLE>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $3,198 $3,200 $3,309 $3,459 $2,866
Loans charged-off
Commercial and agricultural (126) (202) (294) (796) (389)
Real estate 0 0 0 0 (32)
Installment (424) (343) (262) (172) (326)
----- ----- ----- ----- -----
Total charge-offs (550) (545) (556) (968) (747)
----- ----- ----- ----- -----
Charge-offs recovered
Commercial and agricultural 126 250 190 179 84
Real estate 0 0 0 0 55
Installment 70 53 77 39 65
--- --- --- --- ---
Total recoveries 196 303 267 218 204
--- --- --- --- ---
Net loans charged-off (354) (242) (289) (750) (543)
Current year provision 620 240 180 600 1,136
------ ------ ------ ------ ------
Balance at end of year $3,464 $3,198 $3,200 $3,309 $3,459
===== ===== ===== ===== =====
Loans at year end, excluding
loans held for sale $312,227 $268,940 $228,643 $224,680 $217,784
Ratio of allowance to loans
at year end 1.11% 1.19% 1.40% 1.47% 1.59%
Average loans $289,197 $242,286 $220,117 $213,722 $199,943
Ratio of net loans charged-off
to average loans 0.12% 0.10% 0.13% 0.35% 0.27%
</TABLE>
<TABLE>
Allocation of allowance for loan losses at December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $1,200 $1,245 $942 $1,106 $1,667
Real estate 340 50 50 50 20
Installment 560 550 550 550 290
Unallocated 1,364 1,353 1,658 1,603 1,482
------ ------ ------ ------ ------
Total $3,464 $3,198 $3,200 $3,309 $3,459
====== ====== ====== ====== =======
</TABLE>
<PAGE> 20
Table 6 - Nonperforming Assets
<TABLE>
As of December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Principal balance
Nonaccrual $127 $178 $381 $474 $1,179
Restructured 350 482 661 761 964
90 days or more past due 505 735 796 228 843
---- ------ ------ ------ -----
Total nonperforming loans $982 $1,395 $1,838 $1,463 2,986
==== ====== ====== ====== =====
Nonperforming loans as a percent
of loans 0.31% 0.52% 0.80% 0.65% 1.37%
Other real estate owned $230 $116 $436 $1,092 $1,205
OREO as a percent of loans 0.07% 0.04% 0.19% 0.49% 0.55%
Allowance as a percent of
nonperforming loans 352.75% 229.25% 174.10% 226.18% 115.84%
For nonaccrual and restructured
loans for the years ended December 31:
Interest income under
original terms $55 $74 $113 $95 $79
Interest income which
was recorded 27 56 50 51 46
</TABLE>
<PAGE> 21
Table 7 - NONINTEREST INCOME & EXPENSE
<TABLE>
% change % change
1997 from '96 1996 from '95 1995
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Income from fiduciary activities $885 8.99% $812 2.40% $793
Service charges on deposit accounts 1,254 12.37% 1,116 11.94% 997
Other operating income 1,266 24.98% 1,013 19.04% 851
----- ------- ----- ------ ----
3,405 15.78% 2,941 11.36% 2,641
Net gain on loan sales 736 84.92% 398 192.65% 136
Net realized gain on securities 27 -67.47% 83 538.46% 13
------ ------ ----- ------ -----
Total noninterest income $4,168 21.80% $3,422 22.65% $2,790
===== ===== ===== ===== =====
</TABLE>
<TABLE>
% change % change
1997 from '96 1996 from '95 1995
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Noninterest Expense
Salaries and employee benefits $7,484 18.21% $6,331 13.28% $5,589
Occupancy expenses, net 882 5.76% 834 19.48% 698
Equipment expenses 970 -3.87% 1,009 -1.46% 1,024
Deposit insurance 41 -8.89% 45 -86.80% 341
Other operating expenses 3,180 7.00% 2,972 15.73% 2,568
------ ----- ------ ----- ------
Total noninterest expense $12,557 12.21% $11,191 9.50% $10,220
======= ===== ======= ===== ======
</TABLE>
<PAGE> 22
Table 8 - INTERIM FINANCIAL DATA
<TABLE>
Quarter Ended
December September June March
1997 31 30 30 31
------ -------- --------- ---- -----
<S> <C> <C> <C> <C>
Interest income $ 8,357 $ 8,138 $ 7,865 $ 7,551
Interest expense 4,070 3,943 3,766 3,746
------ ------ ----- -----
Net interest income 4,287 4,195 4,099 3,805
Provision for loan losses 350 120 90 60
Noninterest income 1,250 1,090 952 876
Noninterest expense 3,377 3,137 3,111 2,932
----- ----- ----- -----
Income before income taxes 1,810 2,028 1,850 1,689
Income taxes 627 723 650 569
----- ----- ------ -----
Net income $ 1,183 $ 1,305 $ 1,200 $ 1,120
===== ===== ===== =====
Net income per share
Basic earnings per share $ 0.55 $ 0.60 $ 0.55 $ 0.52
Diluted earnings per share $ 0.54 $ 0.60 $ 0.55 $ 0.51
Weighted average shares (1)
Weighted average shares 2,161,386 2,161,386 2,161,386 2,161,386
Diluted average shares 2,182,657 2,182,657 2,182,657 2,182,657
Stock price (2) $ 31.75 $ 27.00 $ 24.09 $ 21.82
1996
------
Interest income $7,424 $7,215 $6,841 $6,735
Interest expense 3,696 3,620 3,378 3,318
----- ----- ----- -----
Net interest income 3,728 3,595 3,463 3,417
Provision for loan losses 60 60 60 60
Noninterest income 990 844 761 827
Noninterest expense 3,064 2,787 2,686 2,654
----- ----- ----- -----
Income before income taxes 1,594 1,592 1,478 1,530
Income taxes 540 530 504 529
----- ----- ----- -----
Net income $1,054 $1,062 $974 $1,001
===== ===== === =====
Net income per share
Basic earnings per share $0.49 $0.49 $0.45 $0.46
Diluted earnings per share $0.49 $0.49 $0.45 $0.46
Weighted average shares (1)
Weighted average shares 2,161,518 2,161,518 2,161,518 2,161,518
Diluted average shares 2,165,068 2,165,068 2,165,068 2,165,068
Stock price (2) $21.25 $19.55 $20.08 $20.64
</TABLE>
(1) - All share amounts have been restated to reflect stock dividend activity
in each of the periods presented.
(2) - The stock price above represents the sales price of the last actual
trade in each respective quarter as adjusted for stock dividends.
<PAGE> 23
Table 9 - SECURITIES
<TABLE>
At December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Securities available-for-sale
U.S. Government & agencies $21,906 $35,938 $40,613
States and political subdivisions 9,981 17,480 18,948
Corporate obligations 250 1,301 4,143
Mortgage-backed and asset-backed 34,440 33,487 27,177
------ ------ ------
Total securities available-for-sale $66,577 $88,206 $90,881
Securities held-to-maturity
States and political subdivisions $5,268 $6,156 $2,161
------ ------ ------
Total securities held-to-maturity $5,268 $6,156 $2,161
------ ------ ------
Total securities $71,845 $94,362 $93,042
======= ======= =======
</TABLE>
SECURITIES MATURITY SCHEDULE
<TABLE>
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
Balance Rate Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $5,005 5.94% $4,044 5.50% - - - -
Federal agencies 2,491 5.55% 6,368 5.95% 3,998 6.60% 0 -
State and municipal (1) 2,112 7.68% 1,927 6.69% 4,407 7.15% 1,535 7.05%
Corporate obligations 250 6.00% - - - - - -
Mortgage-backed and asset-backed - - 3,846 6.36% 4,869 6.07% 25,725 6.31%
----- ----- ----- ----- ----- ---- ------ ----
Total available-for-sale $9,858 $16,185 $13,274 $27,260
====== ======= ======= =======
Held-to-maturity
State and municipal (1) $798 7.24% $756 6.70% $2,191 7.92% $1,523 8.51%
---- ---- ------ ------
Total held-to-maturity $798 $756 $2,191 $1,523
==== ==== ====== ======
</TABLE>
(1) - Average rates were calculated on a tax equivalent basis using a marginal
federal income tax rate of 34%.
<PAGE> 24
Table 10 - Loans Outstanding
<TABLE>
At December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $104,946 $96,276 $75,317 $74,303 $74,567
Real estate - construction 17,117 12,194 10,472 6,384 8,223
Real estate - mortgage 135,214 104,547 87,637 77,662 73,247
Installment 54,950 54,924 55,217 57,337 51,964
Other 0 999 0 8,994 9,783
------- ------- ------ ------ ------
Total loans $312,227 $268,940 $228,643 $224,680 $217,784
======= ======= ======= ======= =======
Composition of loan portfolio by type at December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Commercial and agricultural 33.61% 35.80% 32.94% 33.07% 34.24%
Real estate - construction 5.49% 4.53% 4.58% 2.84% 3.78%
Real estate - mortgage 43.31% 38.87% 38.33% 34.57% 33.63%
Installment 17.60% 20.42% 24.15% 25.52% 23.86%
Other 0.00% 0.37% 0.00% 4.00% 4.49%
----- ----- ----- ------ -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<PAGE> 25
Table 11 - Loan Liquidity
<TABLE>
Loan Maturities at December 31, 1997
1 Year 1 - 5 Over 5
and Less Years Years Total
-------- ------ ------ -----
<S> <C> <C> <C> <C>
Commercial and agricultural $56,714 $44,014 $4,218 $104,946
Real estate - construction 15,015 1,582 520 17,117
------- ------ ------ -------
Total selected loans $71,729 $45,596 $4,738 $122,063
======= ======= ====== ========
</TABLE>
Sensitivity to Changes in Interest Rates
Fixed rates $11,627 $4,366
Variable rates 33,969 372
------ -----
Total selected loans $45,596 $4,738
<PAGE> 26
Table 12 - Deposit Information
<TABLE>
1997 1996 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing $35,728 $35,655 $35,822
Interest-bearing demand 47,945 1.37% 45,086 1.84% 45,614 1.89%
Savings deposits 94,360 3.92% 82,535 3.80% 71,406 3.73%
Time deposits 167,706 5.71% 150,345 5.82% 141,074 5.86%
------- ---- ------- ---- ------- -----
Total deposits $345,739 4.03% $313,621 4.05% $293,916 4.01%
</TABLE>
Maturity Ranges of Time Deposits
with Balances of $100,000 or More at December 31,
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------ ------ ------
3 months or less $7,015 $15,390 $4,416
3 through 6 months 2,423 3,223 1,192
6 through 12 months 3,676 3,777 1,201
Over 12 months 11,648 4,850 8,203
------ ------ ------
Total $24,762 $27,240 $15,012
====== ====== ======
</TABLE>
<PAGE> 27
Table 13 - Short-term Borrowings
<TABLE>
As of December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Repurchase agreements outstanding $17,340 $23,497 $16,818
Treasury tax and loan open-end note 3,032 1,024 2,274
------ ------ ------
Total short-term borrowings $20,372 $24,521 $19,092
====== ====== ======
Average balance of repurchase agreements
during year $13,926 $15,143 $12,395
Maximum month-end balance of repurchase
agreements during year 17,621 23,497 18,581
Weighted-average interest rate of
repurchase agreements during year 4.67% 4.61% 5.11%
Weighted-average interest rate of
repurchase agreements at end of year 4.98% 4.47% 4.64%
</TABLE>
<PAGE> 28
Table 14 - Funding Uses and Sources
<TABLE>
1997 1996
1995
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES
Loans, total $294,719 $47,444 19.19% $247,275 $26,066 11.78%
Taxable securities 64,119 (7,597) -10.59% 71,716 (4,366) -5.74%
Tax-exempt securities 17,160 (3,645) -17.52% 20,805 5,334 34.48%
Federal Home Loan Bank stock 1,210 104 9.40% 1,106 51 4.83%
Federal funds sold 10,742 2,707 33.69% 8,035 (2,447) -23.34%
------ ------ ----- ------ ------ -----
Total uses $387,950 $39,013 11.18% $348,937 $24,638 7.60%
======= ====== ===== ======= ====== ====
FUNDING SOURCES
Noninterest-bearing
deposits $35,728 $73 0.20% $35,655 ($167) -0.47%
Interest-bearing demand 47,945 2,859 6.34% 45,086 (528) -1.16%
Savings deposits 94,360 11,825 14.33% 82,535 11,129 15.59%
Time deposits 167,706 17,361 11.55% 150,345 9,271 6.57%
Short-term borrowings 15,129 (1,532) -9.20% 16,661 2,346 16.39%
Long-term borrowings 13,940 5,482 64.81% 8,458 (758) -8.22%
------- ------ ------ ------- ------ ------
Total sources $374,808 $36,068 10.65% $338,740 $21,293 6.71%
======= ====== ===== ======= ====== ====
</TABLE>
NOTE: The other category in the uses section has the percnetage change column
hard-coded as -0-.
<PAGE> 29
Table 15 - Capital Ratios
<TABLE>
At December 31,
1997 1996
------ ------
<S> <C> <C>
Tier 1 capital
Shareholders' equity $38,469 $34,646
Less: Intangibles (908) (948)
Add: Unrealized loss on securities 90 311
------ ------
Total Tier 1 capital $37,651 $34,009
======= =======
Total risk-based capital
Tier 1 capital $37,651 $34,009
Allowance for loan losses 3,464 3,198
------ ------
Total risk-based capital $41,115 $37,207
====== ======
Risk weighted assets $310,170 $280,860
======= =======
Average assets $430,555 $396,534
======= =======
Risk-based ratios
Tier 1 12.14% 12.11%
===== =====
Total risk-based capital 13.26% 13.25%
===== =====
Leverage Ratios 8.76% 8.59%
==== ====
</TABLE>
<PAGE> 30
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, 1997 and 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 29, 1998
<PAGE> 31
LAFAYETTE BANCORPORATION
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
<PAGE> 32
LAFAYETTE BANCORPORATION
Lafayette, Indiana
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS................................................
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS..............................................
CONSOLIDATED STATEMENTS OF INCOME........................................
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY...................................................
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...............................
<PAGE> 33
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in thousands, except share data)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,901 $ 21,330
Federal funds sold 14,000 8,050
---------------- ---------------
Total cash and cash equivalents 30,901 29,380
Securities available-for-sale, at market 66,577 88,206
Securities held-to-maturity, at cost (market value
$5,378 and $6,147) 5,268 6,156
Loans held for sale 7,640 5,877
Loans 312,227 268,940
Less: Allowance for loan losses (3,464) (3,198)
---------------- ---------------
Loans, net 308,763 265,742
Federal Home Loan Bank stock, at cost 1,242 1,116
Premises, furniture and equipment, net 6,183 6,355
Accrued interest receivable and other assets 12,455 11,559
---------------- ---------------
Total assets $ 439,029 $ 414,391
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 42,752 $ 43,579
Interest-bearing demand and savings deposits 144,028 135,883
Interest-bearing time deposits 168,415 162,088
---------------- ---------------
Total deposits 355,195 341,550
Short-term borrowings 20,372 24,521
Long-term debt 19,886 9,265
Accrued interest payable and other liabilities 5,107 4,409
---------------- ---------------
Total liabilities 400,560 379,745
Shareholders' equity
Common stock, no par value: 5,000,000 shares
authorized; 2,173,570 and 1,975,973 shares issued;
and 2,161,370 and 1,965,050 shares outstanding 2,174 1,976
Additional paid-in capital 24,555 19,368
Retained earnings 11,927 13,705
Unrealized loss on securities available-for-sale,
net of tax ($(59) and $(204)) (90) (311)
Less: Treasury stock, at cost (12,200 and 10,923 shares) (97) (92)
---------------- ---------------
Total shareholders' equity 38,469 34,646
---------------- ---------------
Total liabilities and shareholders' equity $ 439,029 $ 414,391
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share data)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 26,590 $ 22,538 $ 19,970
Taxable securities 3,857 4,219 4,538
Tax exempt securities 782 940 685
Other 682 518 698
------------- ------------- -------------
Total interest income 31,911 28,215 25,891
Interest expense
Deposits 13,937 12,708 11,798
Short-term borrowings 711 781 744
Long-term debt 877 523 573
------------- ------------- -------------
Total interest expense 15,525 14,012 13,115
------------- ------------- -------------
Net interest income 16,386 14,203 12,776
Provision for loan losses 620 240 180
------------- ------------- -------------
Net interest income after provision for loan losses 15,766 13,963 12,596
Noninterest income
Income from fiduciary activities 885 812 793
Service charges on deposit accounts 1,254 1,116 997
Net realized gain on securities 27 83 13
Net gain on loan sales 736 398 136
Other service charges and fees 645 454 426
Other operating income 621 559 425
------------- ------------- -------------
Total noninterest income 4,168 3,422 2,790
------------- ------------- -------------
Noninterest expense
Salaries and employee benefits 7,484 6,331 5,589
Occupancy expenses, net 882 834 698
Equipment expenses 970 1,009 1,024
Deposit insurance 41 45 341
Other operating expenses 3,180 2,972 2,568
------------- ------------- -------------
Total noninterest expense 12,557 11,191 10,220
------------- ------------- -------------
Income before income taxes 7,377 6,194 5,166
Income taxes 2,569 2,103 1,791
------------- ------------- -------------
Net income $ 4,808 $ 4,091 $ 3,375
============= ============= =============
Basic earnings per share $ 2.22 $ 1.89 $ 1.56
================================================
Diluted earnings per share $ 2.20 $ 1.89 $ 1.56
================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 35
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
<TABLE>
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, 1995 $ 1,497 $ 8,683 $ 19,170 $ (971) $ (85) $ 28,294
10% stock dividend
149,695 shares 149 3,605 (3,754) -
Net income for 199 3,375 3,375
Cash dividends
($.36 per share) (778) (778)
Unrealized gain on
transfer of securities 234 234
Change in unrealized
gain (loss) on securities
available-for-sale 754 754
Purchase 141 treasury
shares (4) (4)
----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1995 1,646 12,288 18,013 17 (89) 31,875
20% stock dividend
329,329 shares 330 7,080 (7,410) -
Net income for 1996 4,091 4,091
Cash dividends
($.46 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
10% Stock dividend
197,597 shares 198 5,187 (5,385) -
Net income for 1997 4,808 4,808
Cash dividends
($.56 per share) (1,201) (1,201)
Change in unrealized
gain (loss) on securities
available-for-sale 221 221
Purchase 185 treasury
shares (5) (5)
----------- ----------- ----------- ----------- ------------ -----------
Balance
December 31, 1997 $ 2,174 $ 24,555 $ 11,927 $ (90) $ (97) $ 38,469
=========== =========== =========== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 36
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,808 $ 4,091 $ 3,375
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 631 693 726
Unrealized loss on other real estate - 64 90
Premium amortization, net of discount accretion 271 302 127
Provision for loan losses 620 240 180
Net realized gain on securities (27) (83) (13)
Net realized (gain) loss on sale of :
Fixed assets - (96) -
Other real estate 21 - 21
Change in assets and liabilities:
Loans originated for sale (52,206) (30,502) (15,572)
Loans sold 50,443 27,098 13,099
Accrued interest receivable and other assets (1,241) (1,173) (797)
Accrued interest payable and other liabilities 698 668 559
----------- ----------- -----------
Net cash from operating activities 4,018 1,302 1,795
Cash flows from investing activities
Purchase of securities available-for-sale (19,798) (41,957) (22,512)
Proceeds from sales of securities available-for-sale 17,453 25,532 16,190
Proceeds from maturities of securities available-for-sale 24,155 18,349 5,302
Purchase of securities held-to-maturity (2,370) (4,013) (3,813)
Proceeds from maturities of securities held-to-maturity 3,242 5 8,193
Loans made to customers, net of payments collected (43,641) (40,539) (4,252)
Purchase of Federal Home Loan Bank stock (126) (36) (99)
Property and equipment expenditures (459) (1,612) (804)
Proceeds from sale of fixed assets - 125 -
Proceeds from sales of other real estate 136 300 588
----------- ----------- -----------
Net cash from investing activities (21,408) (43,846) (1,207)
Cash flows from financing activities
Net change in deposit accounts 13,645 16,600 11,889
Cash received in branch acquisition for liabilities assumed,
net of assets acquired - 16,298 -
Net change in short-term borrowings (4,149) 5,429 (3,152)
Proceeds from long-term debt 16,500 1,500 -
Payments on long-term debt (5,879) (1,140) (833)
Dividends paid (1,201) (989) (778)
Purchase of treasury stock (5) (3) (4)
------------ ----------- -----------
Net cash from financing activities 18,911 37,695 7,122
----------- ----------- -----------
Net change in cash and cash equivalents 1,521 (4,849) 7,710
Cash and cash equivalents at beginning of year 29,380 34,229 26,519
----------- ----------- -----------
Cash and cash equivalents at end of year $ 30,901 $ 29,380 $ 34,229
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 15,477 $ 13,877 $ 12,952
Income taxes 2,757 1,992 1,803
Non-cash investing activity
Loans transferred to other real estate $ - $ 99 $ 190
Securities transferred from held-to-maturity to available-for-sale - - 46,971
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 Corporation operates primarily in the banking industry which accounts for
more than 90% of its revenues, operating income and assets. 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 on a servicing-released basis. Mortgage loans held for sale
are carried at the lower of cost or estimated market value determined on an
aggregate basis. At December 31, 1997 and 1996 the estimated market value of
loans held for sale exceeded their cost.
<PAGE> 38
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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.
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.
Loan impairment is recognized 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 present value of loans identified as impaired in Note 3 was
determined using fair value of collateral.
<PAGE> 39
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 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. The Corporation reports
net cash flows for customer loan transactions, deposit transactions, and
short-term borrowings.
<PAGE> 40
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 prior financial statements have been
reclassified to correspond with the 1997 presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities are as follows at
December 31, 1997:
<TABLE>
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 $ 21,946 $ 25 $ (65) $ 21,906
Obligations of states and political
subdivisions 9,892 95 (6) 9,981
Corporate obligations 250 - - 250
Mortgage-backed and other
asset-backed securities 34,637 68 (265) 34,440
------------ ----------- ------------ -----------
Total $ 66,725 $ 188 $ (336) $ 66,577
============ =========== ============== ===========
Securities Held-to-Maturity
Obligations of states and political
subdivisions $ 5,268 $ 118 $ (8) $ 5,378
============ =========== ============ ===========
</TABLE>
<PAGE> 41
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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, 1996:
<TABLE>
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>
Gross gains of $95, $175 and $37 and gross losses of $68, $92 and $24 were
realized on sales of securities available-for-sale.
The amortized cost and estimated market value of securities at December 31,
1997, by contractual maturity, are shown below. Securities not due at a single
maturity date are shown separately.
<TABLE>
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 $ 9,857 $ 9,858 $ 798 $ 799
Due after one year through five years 12,371 12,339 756 760
Due after five years through ten years 8,341 8,405 2,191 2,278
Due after ten years 1,519 1,535 1,523 1,541
------------- ------------- ------------- -------------
Subtotal 32,088 32,137 5,268 5,378
Mortgage-backed and other asset-
backed securities 34,637 34,440 - -
------------- ------------- ------------- -------------
Total $ 66,725 $ 66,577 $ 5,268 $ 5,378
============= ============= ============= =============
</TABLE>
<PAGE> 42
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES (Continued)
Securities with a carrying value of $21,807 and $29,201 at December 31, 1997 and
1996, 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, 1997 and 1996, mortgage-backed securities include collateralized
mortgage obligations (CMO's) and real estate mortgage investment conduits
(REMIC's) with an amortized cost of $15,829 and $15,994 and fair value of
$15,658 and $15,637, all of which are issued by U.S. Government agencies. At
December 31, 1997 and 1996, approximately $11,646 and $10,606 are variable rate,
with the remainder fixed rate.
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Commercial and agricultural loans $ 104,946 $ 96,276
Real estate construction 17,117 12,194
Residential real estate loans 135,214 104,547
Installment loans to individuals 54,950 54,924
Commercial paper - 999
---------------- ---------------
Total loans $ 312,227 $ 268,940
================ ===============
</TABLE>
<PAGE> 43
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 3 - LOANS (Continued)
Nonperforming loans consist of the following at December 31:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Loans past due 90 days or more $ 505 $ 735
Non accrual loans 127 178
Restructured loans 350 482
---------------- ---------------
Total nonperforming loans $ 982 $ 1,395
================ ===============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Year end impaired loans:
with no allowance for loan losses allocated $ 19 $ -
with allowance for loan losses allocated 108 178
Amount of the allowance allocated 30 70
Average balance of impaired loans during the year 153 230
Interest income recognized during impairment - -
Cash-basis interest income recognized - -
</TABLE>
The Bank had no loans on nonaccrual at December 31, 1997 or 1996, 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, 1997 $ 4,223
New loans 1,041
Loan payments (984)
-----------------
Balance as of December 31, 1997 $ 4,280
================
<PAGE> 44
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $ 3,198 $ 3,200 $ 3,309
Provision charged to operations 620 240 180
Loans charged-off (550) (545) (556)
Recoveries on loans previously charged-off 196 303 267
--------------- ---------------- ---------------
Balance, December 31 $ 3,464 $ 3,198 $ 3,200
=============== ================ ===============
</TABLE>
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Land $ 789 $ 789
Buildings and improvements 6,484 6,543
Leasehold improvements 1,081 1,081
Furniture and equipment 6,885 7,116
---------------- ---------------
Total 15,239 15,529
Accumulated depreciation (9,056) (9,174)
----------------- ---------------
Premises, furniture and equipment, net $ 6,183 $ 6,355
================ ===============
</TABLE>
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Interest-bearing time deposits issued in denominations of one hundred thousand
dollars or greater totaled $24,762 and $27,240 at December 31, 1997 and 1996.
At December 31, 1997, the scheduled maturities of time deposits are as follows:
1998 $ 79,511
1999 52,609
2000 22,106
2001 3,351
2002 10,654
Thereafter 184
--------------
Total interest-bearing time deposits $ 168,415
================
<PAGE> 45
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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), for 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>
1997 1996
---- ----
<S> <C> <C>
Balance of repurchase agreements outstanding $ 17,340 $ 23,497
Balance of treasury tax and loan open-end note 3,032 1,024
---------------- ---------------
Total short-term borrowings $ 20,372 $ 24,521
================ ===============
</TABLE>
At December 31, 1997 the Corporation had overnight repurchase agreements for
$5,300 with the Catholic Diocese of Lafayette, and $715 in related party
repurchase agreements.
NOTE 8 - LONG-TERM DEBT
Long-term debt outstanding at December 31 consists of the following:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
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. $ 8,386 $ 9,265
Federal Home Loan Bank advances; principal payments due at maturity; various
maturities during the year 2000, with final maturity December 16, 2000;
interest payable monthly at various fixed interest rates from 5.71%-6.17%;
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. 11,500 -
--------- --------
Total long-term debt $ 19,886 $ 9,265
========= ========
</TABLE>
Annual principal payments required on long-term debt are as follows:
1998 $ 832
1999 789
2000 12,248
2001 710
2002 951
2003 and thereafter 4,356
-----------
Total long-term debt $ 19,886
===========
<PAGE> 46
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
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, 1997 and
1996):
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of obligations:
Accumulated benefit obligation, including vested
benefits of $8,528 and $7,811 in 1997 and 1996 $ 8,778 $ 8,017
============== =============
Plan assets at fair value $ 14,675 $ 12,351
Projected benefit obligation for service rendered to date (11,252) (10,091)
Unrecognized net (gain)/loss (433) 858
Prior service cost not yet recognized, amortized straight-line 23 25
Unrecognized transition asset (1,083) (1,234)
--------------- -------------
Prepaid pension cost included in other assets $ 1,930 $ 1,909
============== =============
</TABLE>
Net pension benefit for 1997, 1996 and 1995 included the following:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned $ 511 $ 505 $ 374
Interest cost on projected benefit obligation 744 691 612
Actual return on plan assets (2,733) (1,303) (1,444)
Net amortization and deferral 1,457 91 420
------------- -------------- -------------
Net periodic pension benefit $ (21) $ (16) $ (38)
============== ============== =============
</TABLE>
Significant assumptions made in computing pension liability and expense were as
follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.50% 7.50%
Increase in future compensation 4.00 4.00 4.00
Long-term rate of return 9.25 9.25 9.25
</TABLE>
<PAGE> 47
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)
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 matching percentage
determined annually by the Board of Directors 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 $106, $73 and $60 for 1997,
1996 and 1995.
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 $683 and
$525 at December 31, 1997 and 1996. Deferred compensation expense was $90, $84
and $84 for 1997, 1996 and 1995. 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 $3,367 and $3,210 at December 31, 1997 and 1996.
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.
<PAGE> 48
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ 83 $ 64
Fully eligible active participants 124 90
Other active plan participants 236 242
-------------- -------------
Accumulated postretirement benefit obligation in
excess of plan assets 443 396
Unrecognized gain due to change in assumptions 179 201
-------------- -------------
Accrued postretirement benefit obligation $ 622 $ 597
============== =============
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
included the following components:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the period $ 24 $ 22 $ 37
Interest cost on accumulated
postretirement benefit obligation 28 25 31
Net amortization and deferral (15) (16) -
-------------- --------------- -------------
Postretirement benefit cost $ 37 $ 31 $ 68
============= ============== =============
</TABLE>
Benefit payments of $12 for 1997 and $11 for 1996 and $13 for 1995, 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 1997, 1996 and 1995, 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, 1997 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 1997, 1996 and 1995.
<PAGE> 49
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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, under which all available rights have been
granted. 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 fully-vested and consisted of 45,085 at
$6.65 per share for 1997, and 69,166 at $7.32 per share for 1996 and 1995 (as
restated for the effect of stock dividends). In 1997, prior to the stock
dividend, 28,180 rights were exercised at $7.32 per share. Compensation expense
charged to operations in 1997, 1996 and 1995 was $657, $112 and $229 and is
based on an increase in market value. The liability at December 31, 1997 and
1996 was $1,132 and $1,022.
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 47,916 shares of common stock for directors and 68,244 shares for management
were 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 options granted to directors
elected after the effective date 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>
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding beginning of year 79,220 $ 19.34 52,539 $ 18.85
Granted 28,160 24.20 26,681 20.30
Exercised - - -
Forfeited (624) 19.69 - -
-------- ---------- ------- ------
Outstanding end of year 106,756 $ 20.62 79,220 $ 19.34
======== ========== ======= ==========
Exercisable at end of year 49,697 $ 19.00 41,818 $ 18.85
======== =========== ======= ==========
Weighted average fair value per
option granted during the year $ 5.31 $ 3.71
</TABLE>
Options outstanding at December 31, 1997 have a weighted average remaining life
of 8.8 years, with exercise prices ranging from $18.86 to $24.20.
<PAGE> 50
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 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 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.6%, 6.5% and 6.4%; dividend yields
of 2%; volatility factors of the expected market price of the Corporation's
common stock of .16, .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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $ 4,706 $ 4,034 $ 3,220
Pro forma earnings per share
Basic $ 2.18 $ 1.87 $ 1.49
Diluted $ 2.16 $ 1.86 $ 1.49
</TABLE>
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
<PAGE> 51
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 12 - INCOME TAXES
Income taxes consist of the following:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable $ 2,626 $ 2,165 $ 1,610
Deferred income taxes (benefit) (57) (62) 181
-------------- -------------- -------------
Total $ 2,569 $ 2,103 $ 1,791
============= ============== =============
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before
income taxes $ 2,508 $ 2,106 $ 1,756
Add/(deduct)
Tax exempt interest income (303) (301) (218)
State tax expense (net of federal benefit) 405 346 300
Other (41) (48) (47)
-------------- -------------- -------------
Total $ 2,569 $ 2,103 $ 1,791
============= ============== =============
</TABLE>
The net deferred tax asset reflected in the consolidated balance sheet is
comprised of the following components as of December 31:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 510 $ 404
Accrued stock appreciation rights 448 405
Accrued postretirement benefit obligation 271 236
Deferred compensation 237 169
Deferred loan fees 132 225
Net operating loss carryforward 26 54
Net unrealized loss on securities available-for-sale 59 204
-------------- -------------
Total deferred tax assets 1,683 1,697
Deferred tax liabilities:
Depreciation (220) (234)
Net pension benefit (765) (756)
Other (169) (90)
--------------- -------------
Total deferred tax liabilities (1,154) (1,080)
Valuation allowance - -
-------------- -------------
Net deferred tax asset $ 529 $ 617
============== =============
</TABLE>
<PAGE> 52
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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, 1997:
<TABLE>
Tax Carryforward Expiration
---------------- ----------
2001 2002
---- ----
<S> <C> <C> <C>
Regular tax
Net operating loss $ 77 $ 32 $ 45
Alternative minimum tax
Net operating loss $ 44 $ 32 $ 12
</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 November 1997, the Corporation issued 197,597 shares of common stock in
connection with a 10% stock dividend. 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. Earnings and dividend per share amounts
have been retroactively restated for the stock dividends. Stock options
outstanding in 1995 were antidilutive and have been excluded from weighted
average shares. The following illustrates the computation of basic and diluted
earnings per share.
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share
Net income $ 4,808 $ 4,091 $ 3,375
Weighted average shares outstanding 2,161,386 2,161,518 2,161,659
------------- -------------- -------------
Basic earnings per share $ 2.22 $ 1.89 $ 1.56
============= =============== =============
Diluted earnings per share
Net income $ 4,808 $ 4,091 $ 3,375
Weighted average shares outstanding 2,161,386 2,161,518 2,161,659
Stock Options 106,756 79,220 -
Assumed shares repurchased upon exercise (85,485) (75,670) -
-------------- --------------- -------------
Diluted average shares outstanding 2,182,657 2,165,068 2,161,659
-------------- --------------- -------------
Diluted earnings per share $ 2.20 $ 1.89 $ 1.56
============== ============== =============
</TABLE>
<PAGE> 53
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
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.
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 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes the Corporation and
Bank meet all applicable capital adequacy requirements as of December 31, 1997.
As of December 31, 1997, the Corporation and Bank were categorized as
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 1 risk-based, and Tier 1 leverage ratios as set
forth in the table.
The Corporation's actual consolidated capital amounts and ratios are presented
in the following table (in millions). The Bank's actual capital amounts and
ratios are not materially different from the consolidated amounts below.
<TABLE>
Minimum Required
To Be Well-
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk weighted assets) $ 41.1 13.3% $ 24.8 8.0% $ 31.0 10.0%
Tier 1 capital (to risk weighted assets) 37.7 12.1 12.4 4.0 18.6 6.0
Tier 1 capital (to average assets) 37.7 8.8 17.2 4.0 21.5 5.0
1996
- ----
Total capital (to risk weighted assets) $ 37.2 13.3% $ 22.5 8.0% $ 28.1 10.0%
Tier 1 capital (to risk weighted assets) 34.0 12.1 11.2 4.0 16.9 6.0
Tier 1 capital (to average assets) 34.0 8.6 15.9 4.0 19.8 5.0
</TABLE>
The Bank is also subject to state regulations restricting the amount of
dividends payable to the Corporation. At December 31, 1997, these regulations
pose no practical restriction on the Bank's ability to pay dividends at
historical levels.
<PAGE> 54
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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 2007. Expense for leased premises was $188, $181 and $143 for
1997, 1996 and 1995.
Future minimum lease payments are as follows:
1998 $ 212
1999 205
2000 185
2001 104
2002 101
2003 through 2007 311
---------
Total $ 1,118
=========
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>
1997 1996
---- ----
<S> <C> <C>
Unused lines of credit $ 33,686 $ 28,752
Commitments to make loans 4,964 8,965
Standby letters of credit 2,189 1,426
Commercial letters of credit 78 89
</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 $4,931 and $4,785 at December 31, 1997 and 1996. These
reserves do not earn interest.
<PAGE> 55
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 30,901 $ 30,901 $ 29,380 $ 29,380
Securities available-for-sale 66,577 66,577 88,206 88,206
Securities held-to-maturity 5,268 5,378 6,156 6,147
Loans held for sale 7,640 7,768 5,877 5,979
Loans, net 308,763 310,115 265,742 266,359
Federal Home Loan Bank stock 1,242 1,242 1,116 1,116
Accrued interest receivable 4,359 4,359 3,929 3,929
Financial liabilities:
Deposits $ (355,195) $ (356,623) $ (341,550) $ (342,751)
Short-term borrowings (20,372) (20,372) (24,521) (24,521)
Long-term debt (19,886) (20,076) (9,265) (9,145)
Accrued interest payable (1,332) (1,332) (1,284) (1,284)
</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.
<PAGE> 56
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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:
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 758 $ 722
Investment in bank 38,576 34,819
Other assets 720 461
-------------- -------------
$ 40,054 $ 36,002
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 1,585 1,356
Shareholders' equity 38,469 34,646
-------------- -------------
$ 40,054 $ 36,002
============== =============
</TABLE>
<PAGE> 57
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
NOTE 17 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating income
Dividends received from subsidiary bank $ 1,714 $ 1,570 $ 920
Interest income 10 3 -
----------- ----------- -----------
1,724 1,573 920
Operating expenses 742 192 335
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary 982 1,381 585
Income tax benefit 290 75 134
----------- ----------- -----------
Income before equity in undistributed earnings of bank 1,272 1,456 719
Equity in undistributed earnings of bank 3,536 2,635 2,656
----------- ----------- -----------
Net income $ 4,808 $ 4,091 $ 3,375
=========== =========== ===========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,808 $ 4,091 $ 3,375
Adjustments to reconcile net income to net cash
from operating activities
Amortization of deferred costs 6 6 6
Equity in undistributed earnings of bank (3,536) (2,635) (2,656)
Other assets and other liabilities (36) 215 177
------------ ----------- -----------
Net cash from operating activities 1,242 1,677 902
Cash flows from financing activities
Principal payments on long-term debt - (224) (81)
Dividends paid (1,201) (989) (778)
Purchase of treasury shares (5) (3) (4)
------------ ----------- -----------
Net cash from financing activities (1,206) (1,216) (863)
------------ ----------- -----------
Net change in cash and cash equivalents 36 461 39
Cash and cash equivalents at beginning of year 722 261 222
----------- ----------- -----------
Cash and cash equivalents at end of year $ 758 $ 722 $ 261
=========== =========== ===========
</TABLE>
<PAGE> 58
LAFAYETTE BANCORPORATION 27.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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.
<PAGE> 59
STOCK INFORMATION
The common stock of Lafayette Bancorporation, Lafayette, Indiana, is
traded on the OTC Bulletin Board under the trading symbol of LAYB (Cusip No.
505893-10-7). At the close of business on December 31, 1997, there were
2,161,370 shares outstanding held by approximately 500 shareholders. Management
does not have knowledge of the prices paid in all transactions and has not
verified the accuracy of those prices that have been reported. Because of the
lack of an established market for the Common Shares of the corporation, these
prices would not necessarily reflect the prices which the Shares would trade in
an active market.
<TABLE>
Price Per Share Dividend
--------------- --------
High Low Declared
---- --- --------
<S> <C> <C> <C>
1997
- ----
First Quarter $ 21 7/8 $ 21 1/4 $ .11
Second Quarter 24 1/16 21 7/8 .12
Third Quarter 27 24 1/16 .12
Fourth Quarter 31 3/4 27 .21
1996
- ----
First Quarter $ 20 5/8 $ 18 3/4 $ .10
Second Quarter 20 7/16 20 1/16 .10
Third Quarter 20 7/16 19 1/2 .11
Fourth Quarter 20 1/4 19 9/16 .15
</TABLE>
* Data adjusted for all stock dividends, including a 10% stock dividend to
shareholders of record on September 30, 1997, paid on November 1, 1997.
The following firms have transacted business in Lafayette Bancorporation
common stock during the past year:
Chicago Corporation
City Securities Corporation
JJB Hilliard, WL Lyons, Inc.
McDonald & Company Securities, Inc.
Merrill Lynch
Monroe Securities, Inc.
Robert Thomas Securities located at Lafayette Bank & Trust Co.
Salomon Smith Barney
Transfer Agent: Lafayette Bancorporation, 133 North Fourth Street, P.O. Box
1130, Lafayette, Indiana 47902-1130.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
NAME STATE OF INCORPORATION
Lafayette Bank and Indiana
Trust Company
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001035373
<NAME> LAFAYETTE BANCORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,901
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,577
<INVESTMENTS-CARRYING> 5,268
<INVESTMENTS-MARKET> 5,378
<LOANS> 312,227
<ALLOWANCE> 3,464
<TOTAL-ASSETS> 439,029
<DEPOSITS> 355,195
<SHORT-TERM> 20,372
<LIABILITIES-OTHER> 5,107
<LONG-TERM> 19,886
0
0
<COMMON> 2,174
<OTHER-SE> 36,295
<TOTAL-LIABILITIES-AND-EQUITY> 439,029
<INTEREST-LOAN> 26,590
<INTEREST-INVEST> 4,639
<INTEREST-OTHER> 682
<INTEREST-TOTAL> 31,911
<INTEREST-DEPOSIT> 13,937
<INTEREST-EXPENSE> 15,525
<INTEREST-INCOME-NET> 16,386
<LOAN-LOSSES> 620
<SECURITIES-GAINS> 27
<EXPENSE-OTHER> 12,557
<INCOME-PRETAX> 7,377
<INCOME-PRE-EXTRAORDINARY> 7,377
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,808
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 4.36
<LOANS-NON> 127
<LOANS-PAST> 505
<LOANS-TROUBLED> 350
<LOANS-PROBLEM> 2,675
<ALLOWANCE-OPEN> 3,198
<CHARGE-OFFS> 550
<RECOVERIES> 196
<ALLOWANCE-CLOSE> 3,464
<ALLOWANCE-DOMESTIC> 2,100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,364
</TABLE>
