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, 1998
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>ii
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 $40.27 reported on the OTC Bulletin Board as of March
16, 1999, was approximately $94,006,690.
As of March 16, 1999, there were outstanding 2,385,219 common shares, no par
value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders of Lafayette
Bancorporation for 1998, 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 12, 1999, 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. [ ]
<PAGE>1
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.
On March 12, 1999, the Bank completed the acquisition of three branches
from Bank One Indiana, National Association. The three branches are located in
DeMotte, Remington and Rensselaer, in Jasper County, Indiana. This branch
purchase added approximately $117 million in deposits and represented
approximately 30% of the deposits in Jasper County. The branch acquisition
expands the Bank's market area into an additional county in northwestern
Indiana.
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, 1998, the Bank was the largest bank headquartered in Tippecanoe County with
total assets of $483,969,000 and total deposits of $395,546,000.
Competition
The banking business is highly competitive. The Corporation's market
area consists principally of Tippecanoe, White and Jasper 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.
<PAGE>2
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.
Employees
The Corporation has no compensated employees. At December 31, 1998, the
Bank employed 203 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.
<PAGE>3
Under the BHC Act, a company generally must obtain the prior approval
of the FRB before it exercises a controlling influence over, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Corporation is
required to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank, or bank holding company. Any company seeking to
acquire, merge or consolidate with the Corporation also would be required to
obtain the FRB's approval.
The Corporation is generally prohibited under the BHC Act from
acquiring ownership or control of more than 5% of the voting shares of any
company that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than banking, managing banks, or providing
services to affiliates of the holding company. A bank holding company, with the
approval of the FRB, may engage or acquire the voting shares of companies
engaged, in activities that the FRB has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
bank holding company must demonstrate that the benefits to the public of the
proposed activity will outweigh the possible adverse effects associated with
such activity.
The FRB generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition.
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.
<PAGE>4
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. On
March 2, 1999, the four federal banking agencies published in the Federal
Register uniform final rules that amended the leverage capital standards to make
them more uniform and streamlined and amended the risk-based standards
applicable to three types of assets. The new standards will become effective on
April 1, 1999, and are not anticipated to have a significant effect on the
Corporation.
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%; all other institutions are required to have a minimum ration of 4%. 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, 1998, 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.
<PAGE>5
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the federal financial institution agencies to prescribe
standards for assessing interest rate risk, which is the exposure of a bank's
earnings and capital arising from adverse movements in interest rates. The
banking agencies issued a joint policy statement on interest rate risk in May
1996 that describes prudent methods for monitoring such risk that rely primarily
on the maintenance of adequate internal risk measurement systems and active
oversight of risk management activities by the Board of Directors and senior
management.
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%.
<PAGE>6
"Significantly Undercapitalized":
Total risk-based capital less than 6%; Tier 1 risk-based
capital less than 3%; or Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a prima facie showing by the agency that such relief is
appropriate. Additionally, a holding company's 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.
<PAGE>7
As of December 31, 1998, the Bank was classified as "well-capitalized"
under the above guidelines. As discussed in the "Capital Adequacy" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report to Shareholders and Note 18 to the Corporation's
Financial Statements, which are incorporated herein by reference, the
acquisition of the three branches from Bank One Indiana, National Association,
which was completed on March 12, 1999, will reduce consolidated and bank-only
capital levels. In March 1999, the Corporation borrowed funds to contribute to
the Bank to maintain the Bank's well-capitalized status. While management
expects the Bank to remain well-capitalized following the consummation of this
transaction, the Corporation's capital levels may temporarily drop below the
minimum required level for capital adequacy purposes. Management will monitor
the Corporation's consolidated capital level and anticipates the minimum
required level for capital adequacy purposes to be met by the Corporation prior
to December 31, 1999. See Items 7 and 8 below.
Safety and Soundness Standards.
FDICIA also implemented certain specific restrictions on transactions
and required the regulators to adopt overall safety and soundness standards for
depository institutions related to internal control, loan underwriting and
documentation, and asset growth. Among other things, FDICIA limits the interest
rates paid on deposits by undercapitalized institutions, the use of brokered
deposits and the aggregate extension of credit by a depository institution to an
executive officer, director, principal stockholder or related interest, and
reduces deposit insurance coverage for deposits offered by undercapitalized
institutions for deposits by certain employee benefits accounts.
The FDICIA also required the agencies to establish safety and soundness
standards for insured financial institutions covering (1) internal controls,
information systems and internal audit systems; (2) loan documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; (7) asset quality, earnings and stock
valuation; and (8) excessive compensation for executive officers, directors or
principal shareholders which could lead to material financial loss.
The agencies have adopted guidelines covering most of these items.
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.
<PAGE>8
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.
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.
<PAGE>9
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.
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.
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, 1998, 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 apply to the interstate branches.
<PAGE>10
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>11
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-Corporate 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>12
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.
Pending Legislation.
The United States Congress considered proposals for comprehensive
financial reform legislation during 1998, but none of the proposals was adopted.
The Senate and House Banking Committees each approved financial reform bills in
March 1999. The Corporation and Bank can not predict whether, or in what form,
any proposed legislation will be adopted or, if adopted, the extent to which
such adoption would affect the business of the Corporation or Bank.
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.
<PAGE>13
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.
ITEM 2. Properties.
The Corporation, through the Bank, currently operates from its main
office in downtown Lafayette and from 16 additional locations in Tippecanoe,
White and Jasper Counties in Indiana (effective March 29, 1999 the Bank closed
its branch location in Chalmers, Indiana). Information about those locations is
set forth in the table below:
<TABLE>
<CAPTION>
======================================== ---------------------------------------- ==================================
ADDITIONAL
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NO. 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 Automatic
Lafayette, Indiana Teller Machine
(765) 423-7165
======================================== ---------------------------------------- ==================================
Elston Branch 2862 U.S. 231 South o24-Hour MAC Automatic
Lafayette, Indiana Teller Machine
(765) 423-7166
======================================== ---------------------------------------- ==================================
Lafayette Square 2504 Teal Road o24-Hour MAC Automatic
Branch Lafayette, Indiana Teller Machine
(765) 423-7164
======================================== ---------------------------------------- ==================================
Market Square Branch 2200 Elmwood Avenue oInstallment Loan Department
Lafayette, Indiana o24-Hour MAC Automatic
(765) 423-7163 Teller Machine
======================================== ---------------------------------------- ==================================
Tippecanoe Court Pay Less Super Market o24-Hour MAC Automatic
Branch 2513 Maple Point Drive Teller Machine
Lafayette, Indiana
(765) 423-3821
======================================== ---------------------------------------- ==================================
West Lafayette Branch 2329 N. Salisbury Street o24-Hour MAC Automatic
West Lafayette, Indiana Teller Machine
(765) 423-7162
======================================== ---------------------------------------- ==================================
<PAGE>14
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 Automatic
Branch 1904 Elmwood Avenue Teller Machine
Lafayette, Indiana
(765) 423-3931
======================================== ---------------------------------------- ==================================
Valley Lakes Branch 1803 E. 350 S. o24-Hour MAC Automatic
Lafayette, Indiana Teller Machine
(765) 423-3841
======================================== ---------------------------------------- ==================================
Brookston Branch S.R. 18 West and HWY 43 o24-Hour MAC Automatic
Brookston, Indiana Teller Machine
(765) 563-6400
======================================== ---------------------------------------- ==================================
Monticello Branch 116 East Washington St. o24-Hour MAC Automatic
Monticello, Indiana Teller Machine
(219) 583-5137
======================================== ---------------------------------------- ==================================
Reynolds Branch U.S. 24 West o24-Hour MAC Automatic
Reynolds, Indiana Teller Machine
(219) 984-5471
======================================== ---------------------------------------- ==================================
DeMotte Branch 437 N. Halleck o24-Hour MAC Automatic
DeMotte, Indiana 46310 Teller Machine
(219) 987-5812
======================================== ---------------------------------------- ==================================
Remington Branch 101 E. Division Street o24-Hour MAC Automatic
Remington, Indiana 47977 Teller Machine
(219) 866-2161
======================================== ---------------------------------------- ==================================
Rensselaer Branch 200 W. Washington Street o24-Hour MAC Automatic
Rensselaer, Indiana 47978 Teller Machine
(219) 866-7121
======================================== ======================================== ==================================
Rensselaer Motor Bank 200 N. Van Rensselaer
Rensselaer, Indiana 47978
(219) 866-1455
======================================== ======================================== ==================================
</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 11,425 square feet down to approximately 450 square feet. The Bank's Data
Center is located at 320 North Street in Lafayette, Indiana, and houses the
Bank's data processing operations in addition to the proof and checking
departments.
<PAGE>15
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 1998 to a vote of
security holders, by solicitation of proxies or otherwise.
Special Item. Executive Officers of the Registrant.
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------- ------------------------------------------------------
Name Age Offices Held
- ------------------------------------------------- ----------- ------------------------------------------------------
<S> <C> <C>
Joseph A. Bonner 67 Chairman of the Board of the Corporation and the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Robert J. Weeder 61 Chief Executive Officer and President of the
Corporation and the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Robert J. Ralston 57 Executive Vice President/Senior Operations Officer
and Secretary/Treasurer of the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Lawrence A. Anthrop 54 Senior Vice President and Senior Trust Officer of
the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
E. James Brisco 46 Senior Vice President and Manager, Mortgage Loan
Department of the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Michelle D. Turnpaugh 33 Secretary/Treasurer of the Corporation and Assistant
Secretary of the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Marvin S. Veatch 34 Controller of the Bank
- ------------------------------------------------- ----------- ------------------------------------------------------
Charles E. Wise 52 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. 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.
Ms. Turnpaugh was appointed Secretary/Treasurer of the Corporation in
September, 1996.
Mr. Wise became Senior Vice President of the Bank in December, 1996.
<PAGE>16
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, 1998. [Page numbers in EDGAR version are enclosed
in brackets.]
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Annual Report to
Shareholders
Page
(a) Market 39 [13.62]
(b) Holders 39 [13.62]
(c) Dividends 39 [13.62]
<PAGE>17
ITEM 6. Selected Financial Data.
Annual Report to
Shareholders
Page
Selected Financial Data 13 [13.3]
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Annual Report to
Shareholders
Pages
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12-25
[13.2-13.28]
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 [13.23]
ITEM 8. Financial Statements and Supplementary Data.
Annual Report to
Shareholders
Pages
Financial Statements and
Supplementary Data 26-38
[13.29-13.61]
<PAGE>18
ITEM 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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 12, 1999,
which was filed with the Commission pursuant to Regulation 14A on March 9, 1999.
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 12, 1999, 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 12, 1999, 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 12, 1999, 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 12, 1999, which has been filed with the Commission and is incorporated by
reference in this Form 10-K.
<PAGE>19
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.
(a)1. Financial Statements.
Annual Report to
Shareholders
Page
Report of Independent Auditors 26 [13.31]
Consolidated Balance Sheets as of
December 31, 1998 and 1997 27 [13.32]
Consolidated Statements of Income for
the years ended December 31, 1998,
1997 and 1996 28 [13.33]
Consolidated Statements of Changes
in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 29 [13.34]
Consolidated Statements of Cash Flows
for the years ended December 31,
1998, 1997 and 1996 30 [13.35]
Notes to Consolidated Financial
Statements 31-38 [13.38-13.61]
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>20
(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.
During the quarter ended December 31, 1998, the Corporation filed one
Current Report on Form 8-K. The report, dated October 21, 1998, was filed under
Item 5 and announced the Bank's agreement to acquire three branches in Jasper
County, Indiana from Bank One Indiana, National Association.
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 26, 1999 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 26, 1999 /s/ Robert J. Weeder
Robert J. Weeder, President (Principal
Executive Officer) and Director
Dated: March 26, 1999 Marvin S. Veatch
Marvin S. Veatch, Controller (Principal
Accounting Officer and Principal
Financial Officer)
Dated: March ____ , 1999 ______________________________________
Richard A. Boehning, Director
Dated: March 26, 1999 /s/ Joseph A. Bonner
Joseph A. Bonner, Director
Dated: March ____ , 1999 ______________________________________
Wilbur L. Hancock, Director
Dated: March 26, 1999 /s/ Roy D. Meeks
Roy D. Meeks, Director
<PAGE>21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
<S> <C> <C>
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
10.5* Lafayette Bancorporation 1998 Nonqualified Stock Option Plan
10.6* Lafayette Bancorporation Director Emeritus Supplemental
Retirement Benefits Plan
13 Registrant's 1998 Annual Report to Shareholders (includes
only portions incorporated by reference)
21 Subsidiaries of Registrant
27 Financial Data Schedule
<FN>
* Indicates Exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as Exhibits to this
Form 10-K.
</FN>
</TABLE>
LAFAYETTE BANCORPORATION
1998 NONQUALIFIED STOCK OPTION PLAN
ARTICLE I
Definitions
Section 1.1 Definitions: As used herein, the following terms shall have the
meaning set forth below, unless the context clearly requires otherwise:
(a) "Applicable Event" shall mean (i) the expiration of a tender offer or
exchange offer (other than an offer by the Company) pursuant to which more
than 50% of the Company's issued and outstanding stock has been purchased,
or (ii) the approval by the shareholders of the Company of an agreement to
merge or consolidate the Company with or into another entity where the
Company is not the surviving entity, or an agreement to sell or otherwise
dispose of all or substantially all of the Company's assets (including a
plan of liquidation), or the approval by the shareholders of the Company of
an agreement to merge or consolidate the Company with or into another
entity where the Company is the surviving entity, pursuant to which more
than 50% of the Company's issued and outstanding Stock has been
transferred.
(b) "Bank" shall mean any Subsidiary of Lafayette Bancorporation as defined in
Section 1.1(n).
(c) "Committee" shall mean a Committee consisting of the members of the
Board of Directors of the Company, who are not employees of the Bank or
the Company.
(d) "Company" shall mean Lafayette Bancorporation
(e) "Director" shall mean a member of the Board of Directors of the Company
and/or the Bank.
(f) "Effective Date" with respect to the Plan shall mean the date
specified in Section 2.3 as the Effective Date.
(g) "Fair Market Value" with respect to a share of Stock shall mean the Fair
Market Value of the Stock, as determined by application of such
reasonable valuation methods as the Committee shall adopt or apply. The
Committee's determination of Fair Market Value shall be conclusive and
binding on the Company and the Optionee. In no event may an Option be
granted under the Plan if the Option Price per Share is less than the
par value of a Share.
(h) "Option" shall mean an option to purchase Stock granted pursuant to the
provisions of the Plan. Options granted under the Plan shall be
Nonqualified Stock Options.
(i) "Optionee" shall mean a Director, executive or key management employee
of the Bank or the Company to whom an Option has been granted.
<PAGE>
(j) "Plan" shall mean the Lafayette Bancorporation 1998 Nonqualified Stock
Option Plan, the terms of which are set forth herein.
(k) "Plan Year" shall mean the twelve-month period beginning on the
Effective Date, and each twelve-month period thereafter beginning on the
anniversary date of the Effective Date.
(l) "Stock" shall mean the Common Stock of the Company or, in the event that
the outstanding shares of Stock are changed into or exchanged for shares
of a different stock or securities of the Company or some other entity,
such other stock or securities.
(m) "Stock Option Agreement" shall mean the agreement between the Company
and the Optionee under which the Optionee may purchase Stock pursuant to
the terms of the Plan.
(n) "Subsidiary" shall mean "subsidiary corporation" as defined in Section
424 (f) of the Internal Revenue Code of 1986, as amended.
ARTICLE II
The Plan
Section 2.1 Name. This plan shall be known as the "Lafayette Bancorporation 1998
Nonqualified Stock Option Plan."
Section 2.2 Purpose. The purpose of the Plan is to advance the interests of the
Company and its stockholders by affording to key management employees of the
Company and the Bank an opportunity to acquire or increase their proprietary
interest in the Company by the grant to such persons of Options under the terms
set forth herein. By encouraging such persons to become owners of the Company,
the Company seeks to attract, motivate, reward and retain those highly competent
individuals upon whose judgment, initiative, leadership and efforts the success
of the Company depends.
Section 2.3 Effective Date and Term. The Plan was approved by the Board of
Directors of the Company on March 9, 1998 and shall be effective on May 1, 1998,
as approved by a majority of the shareholders of the Company present in person
or by proxy at the meeting of the shareholders of the Company held on April 13,
1998. The Plan shall terminate upon the fifth anniversary of the date on which
it is adopted by the Board of Directors.
<PAGE>
ARTICLE III
Administration
Section 3.1 Administration.
(a) The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have sole discretion and
authority to determine from time to time the individuals to whom Options
may be granted, the number of shares of Stock to be subject to each
Option, the period during which such Option may be exercised and the
price at which such Option may be exercised.
(b) Meetings of the Committee shall be held at such times and places as
shall be determined from time to time by the Committee. A majority of
the members of the Committee shall constitute a quorum for the
transaction of business and the vote of a majority of those members
present at any meeting shall decide any question brought before the
meeting. In addition, the Committee may take any action otherwise proper
under the Plan by the affirmative vote, taken without a meeting, of a
majority of the members.
(c) No member of the Committee shall be liable for any act or omission of
any other member of the Committee or for any act of omission on his own
part, including, but not limited to, the exercise of any power or
discretion given to him under the Plan, except those resulting from his
own gross negligence or willful misconduct.
(d) All questions of interpretations and application with respect to the
Plan or Options granted thereunder shall be subject to the
determination, which shall be final and binding, of a majority of the
whole Committee.
(e) The Committee shall be a minimum of two individuals who (i) are neither
officers nor employees of the Company, (ii) do not receive compensation
from the Company for services in any capacity other than as a Director
in excess of $60,000 per annum, and (iii) have not engaged in a
transaction with the Company nor have a business relationship relative
to the Company which requires disclosure under Item 404(a) or (b) of the
SEC Regulation S-K.
<PAGE>
Section 3.2 Company Assistance. The Company and the Bank shall supply full and
timely information to the Committee on all matters relating to eligible
employees, their employment, death, retirement, disability or other termination
of employment and such other pertinent facts as the Committee may require. The
Company and the Bank shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
ARTICLE IV
Optionees
Section 4.1 Eligibility. Directors and executives and key management employees
of the Company and the Bank shall be eligible to participate in the Plan. The
Committee may grant Options to any eligible individual subject to the provisions
of Section 5.1
ARTICLE V
Shares of Stock Subject to Plan
Section 5.1 Grant of Options and Limitations.
(a) Initial Plan Year. For the initial Plan Year, such individuals as are
designated by the Committee shall be eligible to receive Options for the
number of shares of Stock determined by the Committee.
(b) Subsequent Years. As of the first day of each subsequent Plan Year,
current Optionees and such other individuals as are designated by the
Committee shall be eligible to receive Options for the number of shares
of Stock determined by the Committee.
(c) Stock Available for Options. Subject to adjustment pursuant to the
provisions of Section 9.4 hereof, the aggregate number of shares with
respect to which Options may be granted during the term of the Plan
shall not exceed:
Optionee Group Maximum Shares
Sum of All Directors 15,000
Sum of All Employees 42,000
Total: 57,000
Shares with respect to which Options may be granted may be either
authorized and unissued shares or shares issued and thereafter acquired
by the Company.
<PAGE>
Section 5.2 Options Under the Plan. Shares of Stock with respect to which
Options granted hereunder that have been exercised shall not again be available
for grant hereunder. If Options granted hereunder shall expire, terminate or be
canceled for any reason without being wholly exercised, new Options may be
granted hereunder covering the number of shares to which such Option expiration,
termination or cancellation relates.
ARTICLE VI
Options
Section 6.1 Option Grant and Agreement. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of at least a majority
of the members of the Committee and by a written Stock Option Agreement dated as
of the date of grant and executed by the Company and the Optionee. The Stock
Option Agreement shall set forth such terms and conditions as may be determined
by the Committee consistent with the Plan.
Section 6.2 Option Price. The exercise price of the Stock subject to each Option
shall not be less than the Fair Market Value of the Stock on the date the Option
is granted.
Section 6.3 Option Grant and Exercise Periods. No Option may be granted after
the fifth anniversary of the Effective Date. The period for exercise of each
Option shall be determined by the Committee, but in no instance shall such
period extend beyond the tenth anniversary of the date of grant of the Option.
Section 6.4 Option Exercise.
(a) The Company shall not be required to sell or issue shares under any Option
if the issuance of such shares shall constitute or result in a violation of
the Optionee or the Company of any provisions of any law, statute or
regulation of any governmental authority. Specifically, in connection with
the Securities Act of 1933 (the "Act"), upon exercise of any Option, the
Company shall not be required to issue such shares unless the Committee has
received evidence satisfactory to it to the effect that registration under
the Act and applicable state securities laws is not required, unless the
offer and sale of securities under the Plan is registered or qualified
under the Act and applicable state laws. Any determination in this
connection by the Committee shall be final, binding and conclusive. If
shares are issued under any Option without registrations under the Act or
applicable state securities laws, the Optionee may be required to accept
the shares subject to such restrictions on transferability as may in the
reasonable judgment of the Committee be required to comply with exemptions
from registrations under such laws. The Company may, but shall in no event
be obligated to, register any securities covered hereby pursuant to the Act
or applicable state securities laws. The Company shall not be obligated to
take any other affirmative action in order to cause the exercise of an
Option or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority.
<PAGE>
(b) Subject to Section 6.4(c) and such terms and conditions as may be
determined by the Committee in its sole discretion upon the grant of an
Option, an Option may be exercised in whole or in part (but with respect
to whole shares only) and from time to time by delivering to the Company
at its principal office written notice of intent to exercise the Option
with respect to a specified number of shares.
(c) Options shall be exercisable according to the following vesting schedules:
Employees:
0% on and before one year from grant 20% after one year
from grant 40% after two years from grant 60% after three
years from grant 80% after four years from grant 100%
after five years from grant
Directors:
0% on and before two years from grant 100% after two years
from grant
Provided, however, that upon the earlier of (i) the Optionee-Employee's
65th birth date or the Optionee-Director's 70th birth date, (ii) the
occurrence of an Applicable Event, (iii) the death of the Optionee (iv)
or total disability, all Options granted to the Optionee shall be fully
exercisable in accordance with terms of the Plan. For purposes of this
paragraph, an Optionee is totally disabled if he is receiving disability
benefits under the Social Security Act as the result of a total and
permanent disability, or is determined to be totally disabled under any
long-term disability plan sponsored by the Bank or Company.
At the discretion of the Committee, all or a portion of Options
previously granted to an Optionee can be amended to reduce the vesting
schedule or immediately 100% vest such Options.
<PAGE>
(d) Subject to such terms and conditions as may be determined by the
Committee in its sole discretion upon grant of any Option, payment for
the shares to be acquired pursuant to exercise of the Option shall be
made as follows:
(1) by delivering to the Company at its principal office a cashier's
or certified check, payable to the order of the Company, in the
amount of the Option Price for the number of shares of Stock with
respect to which the Option is then being exercised; or
(2) by delivering to the Company at its principal office certificates
representing Stock, duly endorsed for transfer to the Company,
having an aggregate Fair Market Value as of the date of exercise
equal to the amount of the Option Price, for the number of shares
of Stock with respect to which the Option is then being
exercised; or
(3) by any combination of payments delivered pursuant to paragraphs
(d)(1) and (d)(2) above.
Section 6.5 Rights as Shareholder. An Optionee shall have no rights as a
shareholder with respect to any share subject to such Option prior to the
exercise of the Option and the purchase of such shares.
Section 6.6 Limited Rights. Upon the occurrence of an Applicable Event, an
Optionee shall have the right (without regard to the limitation on the exercise
of Options set forth in Section 6.4(c) of the Plan and similar limitations in
the Stock Option Agreement) to exercise Options then held, or to surrender
unexercised Options in exchange for a cash amount. Such cash amount shall be
equal to the product of (1) the number of shares of Stock subject to the Option,
or portion thereof which is surrendered, multiplied by (2) the amount by which
the highest price paid or to be paid per share pursuant to an Applicable Event
exceeds the exercise price.
ARTICLE VII
Termination, Amendment and Modification of Plan
Section 7.1 Termination. The Board of Directors of the Company may at any time
and from time to time and in any respect amend, modify or terminate the Plan;
provided, however, that absent the approval of holders representing a majority
of the voting shares of stock of the Company, no such action may:
(a) increase the total number of shares of Stock subject to the Plan,
except as contemplated in Section 9.4 hereof; or
(b) withdraw the administration of the Plan from the Committee; or
(c) change the terms by which an Option may be exercised, in whole or in
part, as described in Section 6.4 of this Plan; or
<PAGE>
(d) change the limitation on the price at which Options may be granted
hereunder as provided by Section 6.2; or
(e) affect any Stock Option Agreement previously executed pursuant to the
Plan without the consent of the Optionee.
ARTICLE VIII
Withholding
Section 8.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold an amount sufficient to satisfy Federal, state and local
taxes required by law to be withheld with respect to any grant, exercise, or
payment made under or as a result of the Plan. At the discretion of the
Committee, an Optionee may be permitted to pay to the Company the withholding
amount in the form of cash or previously owned shares. If payment of the
withholding amount is made by delivery of shares, the value of the shares
delivered shall equal the Fair Market Value of the shares on the day preceding
the date of exercise of the Option.
Section 8.2 Share Withholding. With respect to tax withholding required upon
exercise of Options, an Optionee may elect, subject to the approval of the
Committee, to satisfy the withholding requirement, in whole or in part, by
having the Company withhold shares having a Fair Market Value on the date the
tax is to be determined equal to an amount sufficient to satisfy Federal, state
and local taxes. If the Optionee is a "reporting person" under Section 16(a) of
the Exchange Act, then any withholding shall comply with Rule 16b-3(e)
thereunder.
<PAGE>
ARTICLE IX
Miscellaneous
Section 9.1 Nontransferability of Option. During the Optionee's lifetime, any
Option may be exercised only by the Optionee or any guardian or legal
representative of the Optionee, and the Option shall not be transferable except
in the case of the death of the Optionee, by will or the laws of descent and
distribution, and (i) as specifically permitted by and solely to the extent
permitted in the Stock Option Agreement, or (ii) to an immediate family member,
a partnership consisting solely of immediate family members, or trusts for the
benefit of immediate family members.
Section 9.2 Designation of Beneficiary. An Optionee may file a written
designation of a beneficiary who is to receive any Stock and/or cash. The
Optionee may change such designation of beneficiary at any time by written
notice to the Company. Upon the death of an Optionee and upon receipt by the
Company of proof of identity and the existence of a beneficiary at the time of
the Optionee's death validly designated by the Optionee under the Plan, the
Company shall deliver such Stock and/or cash to such beneficiary. In the event
of the death of an Optionee in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Optionee's death, the Company
shall deliver such Stock and/or cash to the executor or the administrator of the
estate of the Optionee, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its discretion, may
deliver such Stock and/or cash to the spouse or to any one or more dependents of
the Optionee as the Company may designate. No beneficiary shall, prior to the
death of the Optionee by whom he has been designated, acquire any interest in
the Stock and/or cash credited to the Optionee under the Plan.
Section 9.3 Effect of Termination of Employment, Retirement, Disability or
Death.
(a) If an Optionee's status as a Director and/or employee of the Company
and all Subsidiaries terminates for any reason other than retirement,
disability or death of the Optionee, before the date of expiration of
Options held by the Optionee, the right to exercise such Options shall
become null and void on the day three (3) months following the date of
such termination. In the case of an Optionee who terminates employment
with the Company and all Subsidiaries, but retains his status as a
Director of the Company or Bank, the Optionee shall not be considered
terminated for purposes of this Section 9.3. The date of such
termination shall be the date the Optionee ceases to be both a
Director and an employee of the Company and all Subsidiaries.
<PAGE>
(b) If an Optionee's status as a Director and/or employee of the Company and
all Subsidiaries terminates due to retirement, the three month period
specified in Section 9.3(a) shall become one year. In the case of an
Optionee who retires from the Company and all Subsidiaries, but retains
his status as a Director of the Company or Bank, the Optionee shall not
be considered terminated for purposes of this Section 9.3. The date of
such termination by retirement shall be the date the Optionee ceases to
be both a Director and an employee of the Company and all Subsidiaries.
(c) For an Optionee who terminates employment and/or board service with the
Company and all Subsidiaries due to disability, as defined in Internal
Code Section 22 (e) (3), the three month period specified in Section
9.3(a) shall become one year.
(d) In the event of the death of an Optionee while in the employ and/or
board service of the Company or Bank or within three months after
termination of such employment and/or board service, the executors,
administrators, legatees or distributes of the estate of the Optionee
shall have the right to exercise any Options which became exercisable
prior to or on account of the Optionees's death but only within a period
of one year from the date of the Optionee's death (even if the Option
period as defined in Section 6.3 would have expired earlier had the
Optionee lived) after which time any unexercised portion of all
outstanding Options shall expire.
Section 9.4 Antidilution. The provisions of subsections (a), (b) and (c) shall
apply in the event that the outstanding shares of Stock are changed into or
exchanged for a different number or kind of shares or other securities of the
Company or another entity by reason of any merger, consolidation,
reorganization, recapitalization, reclassification, combination, stock split or
stock dividend.
(a) The aggregate number and kind of shares subject to Options, which may be
granted hereunder, shall be adjusted appropriately;
(b) Rights under outstanding Options granted hereunder, both as to the
number of subject shares and the Option Price, shall be adjusted
appropriately; and
<PAGE>
(c) Where dissolution or liquidation of the Company or any merger or
combination in which the Company is not a surviving company is involved,
each outstanding Option granted hereunder shall, subject to Section 6.6,
terminate.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined solely by the Committee and any such adjustment
may provide for the elimination of fractional share interests.
Section 9.5 Application of Funds. The proceeds received by the Company from the
sale of Stock pursuant to Options shall be used for general corporate purposes.
Section 9.6 No Right to Continued Employment or Service. Nothing in the Plan or
in any Option granted hereunder or in any Stock Option Agreement, relating
thereto shall confer upon any employee or Director, the right to continue in
such position with the Company or the Bank.
Section 9.7 Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or the Bank, nor shall the Plan preclude the Company or the Bank
from establishing any other forms of incentive or other compensation for
employees or Directors of the Company or the Bank.
Section 9.8 No Obligation to Exercise Options. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
Section 9.9 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
Section 9.10 Compliance with Section 16. If the Company has a class of equity
securities registered under Section 12 of the Exchange Act and the Plan is
qualified under Rule 16b-3 or its successors under the Exchange Act,
transactions under the Plan are intended to comply with all applicable
conditions of such Rule or its successors. To the extent any provision of the
Plan or action by the Committee fails to so comply, the Committee may amend the
Plan and the terms of any outstanding Option, and any action of the Committee
which fails to comply shall be deemed void to the extent permitted by law and
deemed advisable by the Committee.
Section 9.11 Investment Representation and Restrictions. The Company may require
Optionee's receiving shares pursuant to any Option under the Plan to represent
to and agree with the Company in writing that the Optionee is acquiring the
shares for investment without a view to distribution thereof. No shares shall be
issued or transferred pursuant to an Option unless such issuance or transfer
complies with all relevant provisions of law, including but not limited to, the
(i) limitations, if any, imposed in the state of issuance or transfer, (ii)
restrictions, if any, imposed by the Securities Act of 1933, as amended, the
Exchange Act, and the rules and regulations promulgated thereunder, and (iii)
requirements of any stock exchange upon which the Company's shares may then be
listed. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
<PAGE>
Section 9.12 Singular, Plural, Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include
feminine.
Section 9.13 Headings, Etc., No Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience of reference; they constitute no part of the
Plan.
Section 9.14 Governing Law. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under the Laws
of the State of Indiana.
Signed this _________ day of _____________________, 199__.
LAFAYETTE BANCORPORATION
By: __________________________________
Chairman of the Board of Directors
LAFAYETTE BANCORPORATION
DIRECTOR EMERITUS SUPPLEMENTAL RETIREMENT BENEFITS PLAN
ARTICLE I
Recitals
The Company, in recognition of the invaluable contribution of Directors'
services to its success, and in recognition of the such Directors' considerable
and unique knowledge and experience relating to its business, affairs and
operations, desires and believes it to be in its best interest and the best
interest of its shareholders to secure the continuation of services of its
Directors. To induce Directors to continue in their service as Directors of the
Company, the Company desires to provide Directors attaining ten years of service
with the Company with supplemental retirement compensation upon retirement from
the Board of Directors.
ARTICLE II
Definitions
Section 2.01 Definitions. As used herein, the following terms shall have the
meaning set forth below, unless the context clearly requires otherwise.
(a) "Applicable Event" shall mean (i) the expiration of a tender offer
or exchange offer (other than an offer by the Company) pursuant to which more
than 50 percent of the Company's issued and outstanding stock has been
purchased, or (ii) the approval by the shareholders of the Company of an
agreement to merge or consolidate the Company with or into another entity where
the Company is not the surviving entity, or an agreement to sell or otherwise
dispose of all or substantially all of the Company's assets (including a plan of
liquidation).
(b) "Bank" shall mean Lafayette Bank and Trust Company.
(c) "Compensation" shall mean the total amount of ordinary outside
directors fees which are actually paid to the Participant by the Company during
a calendar year. The term "Compensation" shall not mean amounts paid as inside
directors fees or chairman's fees.
(d) "Company" shall mean Lafayette Bank and Trust Company and/or
Lafayette Bancorporation.
(e) "Consecutive Years of Service" shall mean consecutive twelve-month
periods of active board service for the Company.
(f) "Director" shall mean a member of the Board of Directors of the
Company.
(g) "Final Compensation" shall mean the total amount of outside directors
fees in force by the Company at the time of retirement from the active service
from the Board of Directors.
(h) "Holding Company" shall mean Lafayette Bancorporation.
(i) "Participant" shall mean an eligible Director who has elected to
receive benefits under the Plan.
(j) "Plan" shall mean the Lafayette Bancorporation Director Emeritus
Supplemental Retirement Benefits Plan.
(k) "Qualifying Termination" shall mean termination of the Director's
active service on the Board of Directors of the Company as a result of a mutual
agreement respecting such termination between the Company and Director or by
reason of the Director's discharge without cause, resignation, retirement,
disability, or as a result of an Applicable Event.
(l) "Supplemental Retirement Benefits" shall mean benefits payable by the
Company to the Participant pursuant to this Plan.
(m) "Termination Date" shall mean the date and time at which the
Director's service with the Company terminates by reason of a Qualifying
Termination. If such Qualifying Termination results from the Director's
resignation or retirement (including resignation or retirement necessitated by
the Director's disability), the Director shall specify the Termination Date
pursuant to Section 4.02 hereof. If such Qualifying Termination results from the
Company's discharge of the Director (including discharge necessitated by the
attainment of age 70 or the Director's disability), the Company shall specify
the Termination Date. If the Company and Director mutually agree to a
termination of the Director's service, whether necessitated by the Director's
disability or for any other reason, the Director shall specify the Termination
Date.
ARTICLE III
Participants
Section 3.01 Eligibility. Directors who have actively served on the Board of
Directors for a minimum ten Consecutive Years of Service shall become eligible
to participate in the Plan. Also Directors who have actively served on the Board
of Directors for a minimum of three (3) consecutive years of service immediately
prior to an Applicable Event shall become eligible to participate in the Plan.
ARTICLE IV
Qualifying Termination
Section 4.01 Death Prior to a Qualifying Termination. The Participant is
entitled to Supplemental Retirement Benefits hereunder only if his service with
the Company terminates by reason of a Qualifying Termination as defined in
Section 2.01(k) hereof. If the Director dies prior to the Termination Date
specified pursuant to Section 2.01(m) hereof in connection with a Qualifying
Termination, then the termination of the Participant's service with the Company
shall be deemed to have occurred by reason of the Director's death rather than
by reason of a Qualifying Termination and no Supplemental Retirement Benefits
shall be payable to the Director (or to his beneficiary or successors) under
this Plan.
Section 4.02 Notice of Resignation or Retirement. For purposes of this Plan the
Director's service with the Company shall be deemed to have been terminated by
resignation or retirement only if the Director submits to the Company, during
the Director's lifetime, a written notice, signed by the Director, stating his
intention to resign or retire, as applicable, and specifying therein the
Termination Date as of which such resignation or retirement shall be effective
(which date and time shall not be earlier than the date and time such notice is
received by the Company). Such resignation or retirement shall be effective as
of the Termination Date so specified.
ARTICLE V
Supplemental Retirement Benefits
Section 5.01 Amount of Supplemental Retirement Benefits Payments. The amount of
each payment payable to the Participant will equal 50% of the Participant's
Final Compensation.
Section 5.02 Benefit Period. Benefits will be provided to Participants beginning
on the first payment date following the Termination Date and continuing until
the payment immediately preceding the death of the Participant, at which time
all obligation to pay additional benefits under the Plan shall cease.
Section 5.03 Method of Payment. Payments will be made at the time and in the
manner of payments made to active Board members. If the Board no longer exists,
the payments will be made monthly.
ARTICLE VI
Miscellaneous
Section 6.01 Succession. This Plan shall inure to the benefit of and be binding
upon the Participant and the Company. The Company shall assign this Plan to any
person that succeeds to all or substantially all of its business and assets by
merger, consolidation, sale of assets or otherwise, and shall obtain the
assumption hereof by such successor. In such event, all references herein to the
Company shall be deemed and construed to be references to such successor,
provided, however that such assignment and assumption shall not reduce or affect
any of the obligations of the assignor hereunder, which obligations shall
continue in full force and effect as the obligations of a principal and not as
the obligations of a surety to the same extent as though no assignment had been
made.
Section 6.02 Legal Expenses. In the event that the Participant or his successors
institute any legal action to enforce their rights under, or to recover damages
for breach of, the provisions of this Plan, the Participant or his successors,
if the prevailing party, shall be entitled to recover from the Company actual
expenses (including attorneys' fees) incurred in connection with such legal
action.
Section 6.03 Titles. The titles of sections hereof are intended solely for
convenience, and no provision hereof is to be construed by reference to any such
title.
Section 6.04 Amendment or Termination of Plan. The Company may amend or
terminate the Plan at any time, without the consent of Participants. Provided,
however, that no amendment or termination of the Plan shall divest any Director,
Participant or Beneficiary of his contractual right to receive payment under the
Plan prior to and after the date of such amendment or termination.
Section 6.05 Severability. In the event that any provision or portion hereof is
determined to be invalid or unenforceable for any reason, the remaining
provisions and portions hereof shall be unaffected thereby and shall remain in
full force and effect to the fullest extent permitted by law; provided, however,
that if the remaining provisions and portions hereof are so essentially and
inseparably connected, and so dependent upon, the provision or portion declared
invalid that they are incomplete and incapable of being given effect without
such provision or portion, then this entire Plan shall be deemed to be invalid
and unenforceable.
Section 6.06 No Participant Interest or Trust. Neither anything contained herein
nor any action taken pursuant to the provisions hereof shall create or be
construed to create an interest of the Participant in any insurance or annuity
policy purchased and owned by the Company for the purpose of paying the
retirement benefits payable hereunder, and neither anything contained herein nor
any such action shall create or be construed to create a trust of any kind or a
fiduciary relationship between the Company and the Participant, his beneficiary
or any other person. Any funds that may be set aside or invested by the Company
for the purpose of paying the Supplemental Retirement Benefits payable hereunder
shall continue for all purposes to be a part of the general funds of the
Company, and no person other than the Company shall, by virtue of the provisions
hereof, have any interest in such funds. To the extent that any person acquires
a right to receive payments from the Company hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Company.
Section 6.07 Other Benefits. Nothing contained herein shall be deemed to exclude
a Director from any supplemental compensation, bonus, pension, insurance,
severance pay or other benefit to which he might otherwise be or become entitled
as a Director of the Company.
Section 6.08 Expenses. Costs of administration of the Plan will be paid by the
Company.
Section 6.09 Notices. Any Notice or other election required or permitted to be
given hereunder shall be in writing and shall be deemed to have filed on the
date it is personally delivered to the Secretary of the Company; or
(a) three business days after it is sent by registered or certified
mail, addressed to such Secretary at P.O. Box 1130, Lafayette, IN 47902.
Section 6.10 No Guarantee of Continued Service. No Director shall have any
rights whatsoever against the Company as a result of this Plan except those
expressly granted hereunder. Nothing herein shall be construed to grant any
Participant the right to remain a Director.
Section 6.11 Gender and Number. Pronouns and other similar words used in the
masculine gender shall be read as the feminine gender where appropriate and the
singular form of words shall be read as the plural where appropriate.
Section 6.12 Governing Law. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under the laws
of the State of Indiana.
Executed on Behalf of the company by the respective Chairman.
LAFAYETTE BANK AND TRUST COMPANY LAFAYETTE BANCORPORATION
- ------------------------------------ -------------------------------
Signature Signature
- ----------------------------------- -------------------------------
Chairman of the Board of Directors Chairman of the Board of Directors
- ----------------------------------- --------------------------------
Date Date
<PAGE>
DIRECTOR EMERITUS SUPPLEMENTAL RETIREMENT BENEFITS PLAN
Director's Termination Notification and Election to Participate
To: The Chairman of the Board of Directors
From: ________________________________, Director's Name
This is to inform you in writing of my termination of service as an active
member of the Board of Directors beginning on the determined date of
___________________, _______.
Pursuant to the terms of the Lafayette Bancorporation Director Emeritus
Supplemental Retirement Benefits Plan (the "Plan"), I hereby elect to begin
receiving payments under the Plan as of the next payment date. I understand
that, under the terms of the Plan, payments of 50% of the amount of outside
directors fees in force at the time of my retirement from the Board of
Directors, will continue until the payment immediately preceding my death, at
which time all obligation to receive additional benefits under the Plan shall
cease. I further understand that the payments will be made at the time and in
the manner of payments made to active Board members.
Please mail payments to me at the following address:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
I will notify you in writing of any changes to my mailing address.
I understand that nothing in this Plan shall require the segregation of any
account from the general assets of the Company. Further, I understand that any
funds that may be set aside or invested by the Company for the purpose of paying
the Supplemental Retirement Benefits payable hereunder shall continue for all
purposes to be a part of the general funds of the Company, and no person other
than the Company shall, by virtue of the provisions hereof, have any interest in
such funds. To the extent that any person acquires a right to receive payments
from the Company hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Company.
Signed this __________________ day of ________________________, ________.
- ---------------------------------- ---------------------------------
Participant Name (Print) Signature
LAFAYETTE BANK AND TRUST COMPANY OR LAFAYETTE BANCORPORATION
By: _______________________________
Chairman of the Board of Directors
<TABLE>
<CAPTION>
LAFAYETTE BANCORPORATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
per share data) 1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
YEAR ENDED DECEMBER 31
<S> <C> <C> <C> <C> <C>
Net interest income $17,762 $16,386 $14,203 $12,776 $12,635
Noninterest income 4,916 4,168 3,422 2,790 2,580
Noninterest expense 13,610 12,557 11,191 10,220 9,689
Net income 5,377 4,808 4,091 3,375 3,233
PER COMMON SHARE (1)
Net income $2.26 $2.02 $1.72 $1.42 $1.36
Cash dividends 0.56 0.51 0.42 0.33 0.30
Book value 17.90 16.18 14.57 13.40 11.90
AT DECEMBER 31
Assets $483,969 $439,029 $414,391 $372,265 $360,221
Investment securities 81,835 71,845 94,362 93,042 94,893
Loans held for sale 10,086 7,640 5,877 2,473 -
Loans, total 353,828 312,227 268,940 228,643 224,680
Deposits 395,546 355,195 341,550 308,652 296,763
Shareholders' equity 42,614 38,469 34,646 31,875 28,294
AVERAGE BALANCES
Assets $455,268 $416,957 $377,623 $351,782 $338,537
Investment securities 76,928 80,606 91,802 90,749 88,697
Loans held for sale 6,095 5,522 4,989 1,092 -
Loans, total 327,412 289,197 242,286 220,117 213,722
Deposits 371,067 345,739 313,621 293,916 282,746
Shareholders' equity 40,814 36,530 33,133 30,125 27,684
KEY RATIOS
Return on average assets 1.18% 1.15% 1.08% 0.96% 0.95%
Return of average equity 13.17% 13.16% 12.35% 11.20% 11.68%
Efficiency ratio 58.46% 59.63% 61.66% 64.11% 62.33%
<FN>
(1) Per share data has been retroactively adjusted to reflect stock dividends
and splits. Amounts do not consider the dilutive effect of stock options
outstanding.
</FN>
</TABLE>
<PAGE>13.2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION AND OVERVIEW
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 fourteen 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 information in this Management's Discussion and Analysis is presented as an
analysis of the major components of the Corporation's operations for the three
years ended December 31, 1998, 1997, and 1996, and financial condition as of
December 31, 1998 and 1997. This information should be read in conjunction with
the accompanying consolidated financial statements and footnotes contained
elsewhere in this report.
MERGERS AND ACQUISITIONS
In October, 1998, the Bank signed a definitive agreement to acquire three
branches of Bank One, Indiana, NA located in DeMotte, Remington, and Rensselaer,
Indiana. Under the terms of the agreement, the Bank will acquire all of the
deposits, selected loans, and all physical facilities of the branches.
Intangibles associated with this transaction are expected to be approximately
$13 million. All required regulatory approvals have been received, and the
transaction is expected to close in March, 1999. See footnote 18 for additional
information regarding this acquisition.
<PAGE>13.3
RESULTS OF OPERATIONS
The major components of the Corporation's operating results for the past five
years are summarized in Table 1 - Five Year Financial Summary.
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996 1995 1994
---------------------------- ------------- ------------- -------------
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Interest income - tax equivalent (1) $35,329 $32,415 $28,739 $26,267 $23,981
Interest expense 16,963 15,525 14,012 13,115 11,016
---------------------------- ------------- ------------- -------------
Net interest income - tax equivalent (1) 18,366 16,890 14,727 13,152 12,965
Tax equivalent adjustment (1) (604) (504) (524) (376) (330)
---------------------------- ------------- ------------- -------------
Net interest income 17,762 16,386 14,203 12,776 12,635
Provision for loan losses (980) (620) (240) (180) (600)
Noninterest income 4,916 4,168 3,422 2,790 2,580
Noninterest expense 13,610 12,557 11,191 10,220 9,689
---------------------------- ------------- ------------- -------------
Income before income taxes 8,088 7,377 6,194 5,166 4,926
Income tax expense 2,711 2,569 2,103 1,791 1,693
---------------------------- ------------- ------------- -------------
NET INCOME $5,377 $4,808 $4,091 $3,375 $3,233
============================ ============= ============= =============
PER SHARE DATA (2)
Net income $2.26 $2.02 $1.72 $1.42 $1.36
Cash dividends 0.56 0.51 0.42 0.33 0.30
Shareholders' equity, end of year 17.90 16.18 14.57 13.40 11.90
SELECTED ACTUAL YEAR-END BALANCES
Total assets $483,969 $439,029 $414,391 $372,265 $360,221
Earning assets 449,359 406,954 378,345 333,153 323,904
Investment securities available-for-sale 76,956 66,577 88,206 90,881 41,339
Investment securities held-to-maturity 4,879 5,268 6,156 2,161 53,554
Loans held for sale 10,086 7,640 5,877 2,473 -
Loans 353,828 312,227 268,940 228,643 224,680
Allowance for loan losses (4,241) (3,464) (3,198) (3,200) (3,309)
Total deposits 395,546 355,195 341,550 308,652 296,763
Noninterest-bearing demand deposits 48,657 42,752 43,579 43,950 37,875
Interest-bearing demand deposits 54,294 47,054 47,945 46,940 49,081
Savings deposits 116,014 96,974 87,938 77,287 67,607
Time deposits 176,581 168,415 162,088 140,475 142,200
Long-term borrowings 23,854 19,886 9,265 8,905 9,738
Shareholders' equity 42,614 38,469 34,646 31,875 28,294
SELECTED AVERAGE BALANCES
Total assets $455,268 $416,957 $377,623 $351,782 $338,537
Earning assets 422,772 387,277 348,218 323,495 313,684
Securities 76,928 80,606 91,802 90,749 88,697
Loans held for sale 6,095 5,522 4,989 1,092 -
Loans 327,412 289,197 242,286 220,117 213,722
Allowance for loan losses (3,766) (3,254) (3,210) (3,269) (3,461)
Total deposits 371,067 345,739 313,621 293,916 282,746
Noninterest-bearing demand deposits 39,312 35,728 35,655 35,822 33,622
Interest-bearing demand deposits 48,777 47,945 45,086 45,614 46,757
Savings deposits 108,019 94,360 82,535 71,406 69,558
Time deposits 174,959 167,706 150,345 141,074 132,809
Long-term borrowings 22,101 13,940 8,458 9,216 10,289
Shareholders' equity 40,814 36,530 33,133 30,125 27,684
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits (3) 88.24% 83.65% 77.25% 74.89% 75.59%
Return on average assets 1.18% 1.15% 1.08% 0.96% 0.95%
Return on average equity 13.17% 13.16% 12.35% 11.20% 11.68%
Dividend payout ratio 24.94% 24.98% 24.18% 23.05% 21.81%
Leverage capital ratio 8.82% 8.76% 8.59% 8.77% 8.27%
Efficiency ratio (4) 58.46% 59.63% 61.66% 64.11% 62.33%
OTHER DATA
Number of employees (FTE) 220 213 205 192 185
Average common shares outstanding (2) 2,380,342 2,377,618 2,377,750 2,377,891 2,377,931
Cash dividends declared $1,341 $1,201 $989 $778 $705
<FN>
(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.
</FN>
</TABLE>
<PAGE>13.4
The Corporation earned $5,377,000, $4,808,000, and $4,091,000, or $2.26, $2.02,
and $1.72 per share for the years ended December 31, 1998, 1997, and 1996,
respectively. Net interest income growth accounted for a significant portion of
the 11.8% and 17.5% earnings increase the Corporation recorded in 1998 and 1997,
respectively. Earnings were boosted in both years by increased net gains on
loans sold in the secondary mortgage market, in addition to increased fees
generated by the Bank's investment brokerage department. Conversely, offsetting
a portion of 1998 and 1997 profits were increases recognized in the
Corporation's provision for loan losses and salaries and employee benefits.
Return on average assets (ROA) was 1.18%, 1.15%, and 1.08% for the periods
ending December 31, 1998, 1997, and 1996, respectively, while return on average
equity (ROE) was 13.17%, 13.16%, and 12.35% for those same time periods.
<PAGE>13.5
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 1994 through 1998. 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.
<PAGE>13.6
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------------------------- --------------------------- ------------------------------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------- --------------------------- ------------------------------
Interest earning assets
Securities
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable $55,973 $3,217 5.75% $64,119 $3,857 6.02% $71,716 $4,219 5.88%
Tax-exempt (1) 20,978 1,502 7.16% 17,160 1,185 6.91% 20,805 1,424 6.84%
Unrealized loss on AFS securities (23) - (673) - (719) -
-------- ------- ------ -------- ------- ------- -------- ------- -------
Total securities 76,928 4,719 6.13% 80,606 5,042 6.26% 91,802 5,643 6.15%
Loans (1)(2)
Commercial 153,030 13,916 9.09% 121,295 11,206 9.24% 89,545 8,493 9.48%
Real estate 129,380 11,012 8.51% 118,156 10,173 8.61% 102,257 8,772 8.58%
Installment and other consumer 51,097 4,975 9.74% 55,254 5,311 9.61% 54,870 5,281 9.62%
Other - - 14 1 7.14% 603 32 5.31%
-------- ------- ------- ------- ------- ------- -------- ------- -------
Total loans 333,507 29,903 8.97% 294,719 26,691 9.06% 247,275 22,578 9.13%
Interest-bearing balances with
other financial institutions 153 8 5.23% - - - -
Federal Home Loan Bank stock 1,464 117 7.99% 1,210 96 7.93% 1,106 87 7.87%
Federal funds sold and overnight
balances 10,720 582 5.43% 10,742 586 5.46% 8,035 431 5.36%
-------- ------- ------- ------- ------- ------- ------- ------- -------
Total earning assets 422,772 $35,329 8.36% 387,277 $32,415 8.37% 348,218 $28,739 8.25%
======= ======= ======= ======= ======= ======= ======= ======== =======
Noninterest earning assets
Allowance for loan losses (3,766) (3,254) (3,210)
Premises and equipment 6,417 6,177 5,752
Cash and due from banks 16,309 15,520 14,785
Accrued interest and other assets 13,536 11,237 12,078
------- -------- -------
Total assets $455,268 $416,957 $377,623
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand deposits $48,777 $610 1.25% $47,945 $657 1.37% $45,086 $831 1.84%
Savings deposits 108,019 4,339 4.02% 94,360 3,702 3.92% 82,535 3,134 3.80%
Time deposits 174,959 9,957 5.69% 167,706 9,578 5.71% 150,345 8,743 5.82%
--------- --------- ------- -------- ------- ------- --------- -------- -------
Total interest-bearing deposits 331,755 14,906 4.49% 310,011 13,937 4.50% 277,966 12,708 4.57%
Borrowed funds
Short-term borrowings 15,581 712 4.57% 15,129 711 4.70% 16,661 781 4.69%
Long-term debt 22,101 1,345 6.09% 13,940 877 6.29% 8,458 523 6.18%
-------- --------- ------- -------- -------- ------ -------- ------- -----
Total borrowed funds 37,682 2,057 5.46% 29,069 1,588 5.46% 25,119 1,304 5.19%
-------- --------- ------- -------- -------- ------ -------- ------- -----
Total interest-bearing liabilities 369,437 $16,963 4.59% 339,080 $15,525 4.58% 303,085 $14,012 4.62%
======== ========= ======= ======== ======== ====== ======== ======= =====
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 39,312 35,728 35,655
Accrued interest and other liabilities 5,705 5,619 5,750
Shareholders' equity 40,814 36,530 33,133
------ ------- -------
Total liabilities and
shareholders' equity $455,268 $416,957 $377,623
======== ======== =========
Interest margin recap
Net interest income and
interest rate spread $18,366 3.76% $16,890 3.79% $14,727 3.63%
======== ====== ======== ====== ======== ======
Net interest income margin 4.34% 4.36% 4.23%
====== ====== ======
<FN>
(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 $1,090 for 1998, $912 for 1997, and $928 for 1996.
</FN>
</TABLE>
<PAGE>13.7
Table 3 - Net Interest Earning Assets illustrates net interest-earning assets
and liabilities for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Average interest-earning assets....... $422,772 $387,277 $348,218
Average interest-bearing liabilities.. 369,437 339,080 303,085
--------------------- --------------------- --------------------
Net interest-earning assets $53,335 $48,197 $45,133
===================== ===================== ====================
</TABLE>
Table 4 - Volume and Rate Analysis depicts the dollar effect of volume and rate
changes from 1996 through 1998. Variances which were not specifically
attributable to volume or rate were allocated proportionately between rate and
volume using the absolute values of each as a basis for the allocation.
Nonaccrual loans were included in the average loan balances used in determining
the yields.
<TABLE>
<CAPTION>
1998-1997 1997-1996
------------------------------------------ ----------------------------------------
Change Change Change Change
Total Due To Due To Total Due To Due To
INTEREST INCOME Change Volume Rate Change Volume Rate
------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 3,212 3,480 (268) 4,113 4,298 (185)
Securities
Taxable (640) (439) (201) (362) (457) 95
Tax-exempt 317 272 45 (239) (252) 13
Interest-bearing balances with
other financial institutions 8 8 - - - -
FHLB stock 21 20 1 9 8 1
Federal funds sold and
overnight balances (4) (1) (3) 155 148 7
------------------------------------------ ----------------------------------------
Total interest income 2,914 3,340 (426) 3,676 3,745 (69)
========================================== ========================================
INTEREST EXPENSE
Interest-bearing DDA (47) 11 (58) (174) 50 (224)
Savings deposits 637 547 90 568 461 107
Time deposits 379 413 (34) 835 994 (159)
Short-term borrowings 1 21 (20) (70) (72) 2
Long-term borrowings 468 498 (30) 354 345 9
------------------------------------------ ----------------------------------------
Total interest expense 1,438 1,490 (52) 1,513 1,778 (265)
========================================== ========================================
Net Interest income 1,476 1,850 (374) 2,163 1,967 196
========================================== ========================================
</TABLE>
Net interest income on a tax equivalent basis for 1998 was 8.7% higher than that
for 1997, while the net interest margin for 1998 was 4.34%, or 2 basis points
lower than the prior year. Tax equivalent net interest income was 14.7% higher
in 1997 compared to 1996, as the net interest margin increased 13 basis points
to 4.36% from that of 1996.
There were a number of similarities between the events of 1998 and 1997 in terms
of growth the Corporation experienced, as well as the interest rate environment
in which the Corporation operated. The most noticeable difference between the
two years was that the interest rate environment declined at a more rapid pace
in 1998 than in 1997. This downward trend in the interest rate environment
resulted in earning assets repricing at a quicker pace and at a lower interest
rate than the repricing and maturity of certain interest-bearing liabilities.
Overall, the increase in net interest-earning asset volume during the year more
than adequately compensated for the general decline in yields, which resulted in
higher net interest income, but a lower net interest margin.
<PAGE>13.8
The increase in 1997 net interest income was due to the combination of increased
earning asset volume, along with lower cost of funds due to the general decline
in interest rates during the last half of 1997. The Corporation continued the
shift from investment securities to loans, and although average investment
securities yields increased from the prior year, management enhanced earnings
through the higher yields associated with loans. Much like 1998, the 1997 loan
growth was supported with deposit growth, the shift from investment securities,
and additional long-term debt. Also adding to 1997 net interest income was the
effect of lower interest rates paid on interest-bearing liability accounts,
which reduced the Corporation's cost of funds 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.
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.
<PAGE>13.9
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $3,464 $3,198 $3,200 $3,309 $3,459
Loans charged-off
Commercial and agricultural (37) (126) (202) (294) (796)
Real estate 0 0 0 0 0
Installment (374) (424) (343) (262) (172)
---------------- --------------- --------------- -------------- ---------------
Total charge-offs (411) (550) (545) (556) (968)
---------------- --------------- --------------- -------------- ---------------
Charge-offs recovered
Commercial and agricultural 124 126 250 190 179
Real estate 0 0 0 0 0
Installment 84 70 53 77 39
---------------- --------------- --------------- -------------- ---------------
Total recoveries 208 196 303 267 218
---------------- --------------- --------------- -------------- ---------------
Net loans charged-off (203) (354) (242) (289) (750)
Current year provision 980 620 240 180 600
---------------- --------------- --------------- -------------- ---------------
Balance at end of year $4,241 $3,464 $3,198 $3,200 $3,309
================ =============== =============== ============== ===============
Loans at year end, excluding
loans held for sale $353,828 $312,227 $268,940 $228,643 $224,680
Ratio of allowance to loans
at year end 1.20% 1.11% 1.19% 1.40% 1.47%
Average loans $327,412 $289,197 $242,286 $220,117 $213,722
Ratio of net loans charged-off
to average loans 0.06% 0.12% 0.10% 0.13% 0.35%
Allocation of allowance for loan losses at December 31,
1998 1997 1996 1995 1994
---------------- --------------- --------------- -------------- ---------------
Commercial and agricultural $2,499 $1,200 $1,245 $942 $1,106
Real estate 486 340 50 50 50
Installment 570 560 550 550 550
Unallocated 686 1,364 1,353 1,658 1,603
---------------- --------------- --------------- -------------- ---------------
Total $4,241 $3,464 $3,198 $3,200 $3,309
================ =============== =============== ============== ===============
</TABLE>
<PAGE>13.10
Nonperforming assets and their 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 evaluated for
nonaccrual when payments are past due over 90 days. Another element associated
with asset quality is other real estate owned (OREO), which represents
properties acquired by the Corporation through loan defaults by customers.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Principal balance
Nonaccrual $1,468 $127 $178 $381 $474
Restructured 197 350 482 661 761
90 days or more past due 775 505 735 796 228
-------------- ------------------ ---------------- ------------- -------------
Total nonperforming loans $2,440 $982 $1,395 $1,838 $1,463
============== ================== ================ ============= =============
Nonperforming loans as a percent
of loans 0.69% 0.31% 0.52% 0.80% 0.65%
Other real estate owned $22 $230 $116 $436 $1,092
OREO as a percent of loans 0.01% 0.07% 0.04% 0.19% 0.49%
Allowance as a percent of
nonperforming loans 173.81% 352.75% 229.25% 174.10% 226.18%
For nonaccrual and restructured loans for the years ended December 31:
Interest income under
original terms $146 $55 $74 $113 $95
Interest income which
was recorded 17 27 56 50 51
</TABLE>
<PAGE>13.11
The consolidated provision for loan losses was $980,000, $620,000, and $240,000
for 1998, 1997, and 1996, respectively. Although nonperforming loan totals and
delinquency trends have been moving upward during the latter part of 1998,
management believes the level of nonperforming loans remains at a very
manageable level as a percent of loans.
The allowance as a percent of loans had been declining in the two years prior to
the current year. Management's identification of a specific area of risk, along
with the Corporation's continued loan growth and increased nonperforming loan
totals resulted in management's decision to increase the provision for loan
losses to $980,000 for 1998. With hog prices dropping significantly during the
latter part of the fourth quarter of 1998, management conducted an analysis of
the pork producer sector. This review indicated the Corporation had extended in
excess of $8 million dollars to these hog-producing borrowers, and, as a result,
management allocated a specific reserve to these credits.
During 1998 there was a shift in the allocation of allowance for loan losses.
This movement, primarily from the unallocated to the commercial and agricultural
category, occurred primarily due to the combination of higher nonaccrual loan
balances and the identification of the potential risks associated with pork
producer credits.
The $380,000 increase in the 1997 provision for loan losses was primarily
attributed to the 13.2% average growth experienced in the overall loan
portfolio. The amount of future year provisions for loan losses will be subject
to adjustment based on future evaluations of the loan loss reserve adequacy.
While the restructured loan category of nonperforming loan totals declined
during 1998, increases were realized in nonaccrual and 90 days or more past due
balances. A total of seven commercial borrowers with loans totaling
approximately $829,000 and three mortgage loan borrowers with loans totaling
approximately $525,000 were added to the nonaccrual list in 1998. One commercial
loan totaling $556,000 accounted for 67.1% of the $829,000 added to nonaccrual
status. A specific reserve allowance has been placed on each of these credits,
and management expects losses, if any, will approximate amounts reserved. As of
December 31, 1998, loans 90 days or more past due had increased $270,000, or
53.5%, from the prior year. While commercial loan balances in this category
declined $65,000, mortgage and indirect installment loan balances increased
$183,000 and $104,000, respectively. Management will continue to monitor the
activity and performance of these loans.
Management believes five credits totaling approximately $748,000 as of December
31, 1998 met the criteria for an impaired loan. The $556,000 commercial loan
mentioned in the above paragraph accounted for 89.5% of the increase from the
prior year. 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 in accordance with Statements of Financial Accounting Standard No. 114 and
118. Application of these accounting statements has not had a material effect on
Corporation's financial statements.
The $208,000 decrease in other real estate owned ("OREO") in 1998 related to the
sale of one parcel of property in February, whereby the Corporation recorded a
$43,000 gain. As of December 31, 1998, there were two parcels of other real
estate held by the Corporation with a remaining book value of $22,000.
<PAGE>13.12
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 agreements; however, management may have a
significant degree of concern about the borrowers' ability to continue to
perform according to the terms of the loans. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing the loans. Also, watch category loans may include credits
which, although adequately secured and performing, reflect past delinquency
problems or unfavorable financial trends exhibited by the borrowers.
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.
As of December 31, 1998, the Corporation had loans totaling $803,000 on its
watch list which were not included in impaired or nonperforming loans.
<PAGE>13.13
NONINTEREST INCOME AND EXPENSE
A listing of noninterest income and expense from 1996 through 1998 and
percentage changes between years is included in Table 7 Noninterest Income and
Expense.
<TABLE>
<CAPTION>
% change % change
1998 from '97 1997 from '96 1996
---------------- ----------------- ------------------ ---------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Income from fiduciary activities $ 964 8.93% $ 885 8.99% $ 812
Service charges on deposit accounts 1,309 4.39% 1,254 12.37% 1,116
Other operating income 1,382 9.16% 1,266 24.98% 1,013
---------------- ----------------- ------------------ ------------- -------------------
3,655 7.34% 3,405 15.78% 2,941
Net gain on loan sales 1,255 70.52% 736 84.92% 398
Net realized gain on securities 6 -77.78% 27 -67.47% 83
---------------- ----------------- ------------------ ------------- -------------------
Total noninterest income $ 4,916 17.95% $ 4,168 21.80% $ 3,422
================ ================= ================== ============= ===================
% change % change
1998 from '97 1997 from '96 1996
---------------- ----------------- ------------------ ---------------------------------
Noninterest Expense
Salaries and employee benefits $ 8,206 9.65% $ 7,484 18.21% $ 6,331
Occupancy expenses, net 891 1.02% 882 5.76% 834
Equipment expenses 1,054 8.66% 970 -3.87% 1,009
Other operating expenses 3,459 7.39% 3,221 6.76% 3,017
---------------- ----------------- ------------------ ------------- -------------------
Total noninterest expense $ 13,610 8.39% $ 12,557 12.21% $ 11,191
================ ================= ================== ============= ===================
</TABLE>
<PAGE>13.14
Noninterest income increased 18.0% to $4,916,000 in 1998 compared to $4,168,000
in 1997. Primary sources of noninterest income were income from fiduciary
activities, service charges on deposit accounts, and net gain on secondary
market mortgage loan sales.
Income from fiduciary activities increased 8.9% during 1998. The majority of the
increase was attributed to the following: the general increase in overall market
values of trust assets, an increase in the departmental fee structure, and an
increase in the number of high market value accounts obtained throughout the
year. Service charges on deposit accounts increased 4.4% due to the deposit base
growth and more accounts being assessed fees, predominately early withdrawal
fees on certificates of deposit. Other operating income rose 9.2% over the prior
year primarily due to two areas. An increase in gross fees recorded by the
Bank's Investment Center, a full service brokerage operation offered through
Raymond James Financial Services, Inc., member NASD/SIPC, in addition to the
increase posted in the ATM fee income, primarily due to the first full year
effect of surcharge fees assessed on all non-bank customers, accounted for
nearly all of the 9.2% increase in other operating income.
Net gain on secondary market mortgage loan sales recorded a 70.5% increase
compared to the prior year. The lower interest rate environment coupled with the
ongoing strength of the local economy gave rise to a 67.1% increase in the
dollar amount of loan originations and a 66.2% 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, given 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 1997 increased 21.8% compared to 1996. The same areas
of growth in 1998 occurred in 1997 as well. New accounts, an increase in the fee
structure, and the exceptional year in the stock market led to a 9.0% increase
in income from fiduciary activities. In a similar fashion, service charges on
deposit accounts increased 12.4% due to an increase in the deposit fee structure
along with deposit growth and a higher number of accounts being assessed fees.
Other operating income rose 25.0% during 1997. Again, a 64.3% increase in gross
investment center fees, in addition to a 75.8% increase in ATM income, mainly
surcharge fees, was responsible for the majority of the overall increase.
Total noninterest expense rose 8.4% to $13,610,000 in 1998 compared to the 12.2%
increase recorded in 1997. As a percentage of total average assets, total
noninterest expense was 2.9% and 3.0% for 1998 and 1997, respectively. Salaries
and employee benefits increased 9.7% during the current year. The full year
effect of the additional personnel added in 1997 due to the Monticello branch
acquisition, along with the increases in commissions paid to secondary market
and Investment Center personnel as a result of increased production contributed
to a portion of the overall increase in 1998. In addition, general wage
increases and a 38.5% rise in health insurance costs in 1998 were offset
somewhat by a reduction in the amount of expense recorded for executive
management's stock appreciation rights.
Equipment expense increased 8.7% due to higher equipment maintenance costs, in
addition to expenses associated with bringing certain pieces of equipment in
compliance with Y2K requirements.
Other operating expenses increased 7.4% mainly as a result of the Corporation's
increased marketing and advertising campaign.
Total noninterest expense increased 12.2% in 1997 compared to 1996 predominately
due to higher salary and employee benefit costs. The full year effect of
personnel gained in the Monticello branch acquisition, in addition to added
personnel in the secondary market department, along with higher commissions paid
to secondary market loan originators and Investment Center personnel were the
leading factors in this category.
<PAGE>13.15
Occupancy expense increased 5.8% 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 decreased 3.9% in 1997 from the prior year as a result of
items that were fully depreciated in 1996 and were not replaced in 1997, thus
causing lower depreciation expense.
Other operating expense increased 6.8% in 1997. In general, overhead expenses,
including goodwill, were higher primarily as a result of the first full year of
operation of the Monticello branch that was acquired.
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 had regular tax and alternative minimum tax net operating loss
carryforwards which were fully utilized during 1998.
The Corporation's effective tax rate was 33.5%, 34.8%, and 34.0% in 1998, 1997,
and 1996, 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, 1998 and 1997. For a
fair and consistent presentation, these results contain all necessary
restatements in connection with stock dividends that occurred in the periods
presented.
<PAGE>13.16
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
December September June March
1998 31 30 30 31
-----
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income $ 9,189 $ 8,794 $ 8,490 $ 8,252
Interest expense 4,370 4,387 4,177 4,029
---------------- ----------------- ----------------- -----------------
Net interest income 4,819 4,407 4,313 4,223
Provision for loan losses 440 180 180 180
Noninterest income 1,129 1,354 1,212 1,221
Noninterest expense 3,682 3,357 3,321 3,250
---------------- ----------------- ----------------- -----------------
Income before income taxes 1,826 2,224 2,024 2,014
Income taxes 581 758 683 689
---------------- ----------------- ----------------- -----------------
Net income $ 1,245 $ 1,466 $ 1,341 $ 1,325
================ ================= ================= =================
Net income per share
Basic earnings per share $0.52 $0.62 $0.56 $0.56
Diluted earnings per share $0.51 $0.60 $0.55 $0.55
Weighted average shares (1)
Weighted average shares 2,380,427 2,380,448 2,380,448 2,380,082
Diluted average shares 2,433,662 2,434,496 2,429,507 2,422,370
Stock price (2) $38.25 $37.27 $36.36 $31.36
1997
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 $0.50 $0.55 $0.50 $0.47
Diluted earnings per share $0.49 $0.54 $0.50 $0.47
Weighted average shares (1)
Weighted average shares 2,377,618 2,377,618 2,377,618 2,377,618
Diluted average shares 2,400,849 2,400,069 2,391,077 2,385,577
Stock price (2) $28.86 $24.55 $21.90 $19.84
<FN>
(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.
</FN>
</TABLE>
<PAGE>13.17
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 1996 through 1998 and the maturity distribution at
December 31, 1998, by classification. Interest on tax-exempt securities has been
adjusted to a tax equivalent basis using a marginal federal tax rate of 34% for
all years.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1998 1997 1996
----------------- --------------- ------------------
<S> <C> <C> <C>
Securities available-for-sale
U.S. Government & agencies $14,110 $21,906 $35,938
States and political subdivisions 23,637 9,981 17,480
Corporate obligations 2,513 250 1,301
Mortgage-backed and asset-backed 36,696 34,440 33,487
----------------- --------------- ------------------
Total securities available-for-sale $76,956 $66,577 $88,206
Securities held-to-maturity
States and political subdivisions $4,879 $5,268 $6,156
----------------- --------------- ------------------
Total securities held-to-maturity $4,879 $5,268 $6,156
================= =============== ==================
Total securities $81,835 $71,845 $94,362
================= =============== ==================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES MATURITY SCHEDULE
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
-------------------- -------------------- ------------------ ---------------
Available-for-sale Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------ -------------------- -------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $3,028 6.00% $3,071 5.96% - - - -
Federal agencies 2,008 5.73% 4,003 6.06% 2,000 5.79% - -
State and municipal (1) - - 2,352 6.81% 7,003 6.83% 14,282 7.14%
Corporate obligations 1,007 6.68% 1,506 6.00% - - - -
Mortgage-backed and
asset-backed - - 6,545 7.17% 3,503 5.09% 26,648 6.27%
======= ======= ======== =======
Total available-for-sale $6,043 $17,477 $12,506 $40,930
======= ======= ======== =======
Held-to-maturity
State and municipal (1) $140 6.06% $616 6.97% $2,657 8.03% $1,466 8.77%
======= ======= ======== =======
Total held-to-maturity $140 $616 $2,657 $1,466
======= ======= ======== =======
<FN>
(1) - Average rates were calculated on a tax equivalent basis using a marginal
federal income tax rate of 34%.
</FN>
</TABLE>
<PAGE>13.18
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. The
Corporation's investment policy requires that obligations of states and
political subdivisions and corporate bonds must have a rating of A or better
when purchased. The vast majority of these investments were rated A or better at
December 31, 1998. 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, 1998. The Corporation does not use off-balance sheet derivative
financial instruments as defined in SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments."
Total securities were $81,835,000 and $71,845,000 as of December 31, 1998 and
1997, respectively. Although in 1998 the total securities balance increased
approximately $9,990,000, or 13.9% from the prior year, the average balance of
securities actually decreased approximately $3,678,000, or 4.6% during the year
primarily because of funding the ongoing growth of the loan portfolio. During
1998, the markets witnessed a significant flight to quality which reduced U.S.
Government and agency yields anywhere from 85 to 115 basis points. These
conditions led to the change in securities mix, predominately from U.S.
Governments and agencies to states and political subdivisions. As U.S.
Government and agency securities matured or were called during the year, their
proceeds were reinvested into other sectors, mainly states and political
subdivisions, which were not subject to the run-up in prices and corresponding
reduction in yield.
As of December 31, 1998 and 1997, the security portfolio held structured notes
totaling $1,995,000 and $1,892,000, 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 primarily to fund
the continuing growth of the loan portfolio. Tax-free and intermediate taxable
bonds are used to further enhance earnings. As of December 31, 1998,
approximately 94% of the total investment security portfolio was classified in
the available-for-sale category, which allows flexibility in the asset/liability
management function. Sell strategies are executed, on occasion, when the
interest rate environment provides the opportunity to boost the overall
portfolio performance.
The change which occurred in the unrealized gain/loss on securities between 1998
and 1997 was a result of the swing in the interest rate environment during that
time period, in conjunction with the change in the portfolio mix. It is not
likely the Corporation will realize any losses in the security portfolio to
satisfy loan growth or liquidity needs, and the change in equity due to market
value fluctuations in the available-for-sale portfolio are not used in the
regulatory capital calculation. 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.
<PAGE>13.19
LOANS
The loan portfolio constitutes the major earning asset of the Corporation, and
offers the best alternative for maximizing interest spread above the cost of
funds. The Corporation's loan personnel have the authority to extend credit
under guidelines established and approved by the Board of Directors. Any 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 Tippecanoe, White, and
contiguous counties in Northwest Indiana. 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.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $115,198 $112,586 $96,276 $75,317 $74,303
Real estate - construction 28,043 17,117 12,194 10,472 6,384
Real estate - mortgage 160,655 127,574 104,547 87,637 77,662
Installment 49,932 54,950 54,924 55,217 57,337
Other 0 0 999 0 8,994
----------------- ----------------- ---------------- ------------------ -------------------
Total loans $353,828 $312,227 $268,940 $228,643 $224,680
================= ================= ================ ================== ===================
</TABLE>
<TABLE>
<CAPTION>
Composition of loan portfolio by type at December 31,
1998 1997 1996 1995 1994
----------------- ----------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural 32.56% 36.06% 35.80% 32.94% 33.07%
Real estate - construction 7.93% 5.48% 4.54% 4.58% 2.84%
Real estate - mortgage 45.40% 40.86% 38.87% 38.33% 34.57%
Installment 14.11% 17.60% 20.42% 24.15% 25.52%
Other 0.00% 0.00% 0.37% 0.00% 4.00%
================= ================= ================ ================== ===================
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
================= ================= ================ ================== ===================
</TABLE>
As mentioned throughout, the Corporation's loan portfolio continued its growth
during 1998. Total loans increased $41,601,000, or 13.3% in 1998, while 1997 saw
an increase of $43,287,000, or 16.1%. The real estate-mortgage category posted a
$33,081,000, or 25.9% increase and the real estate-construction portion of the
portfolio increased $10,926,000, or 63.8% over the prior year. The growth in
these two loan areas can be attributed mainly to the ongoing economic expansion
and prosperity the Greater Lafayette area continues to experience. Tippecanoe
County also continues to enjoy one of the lowest unemployment rates in the
state.
<PAGE>13.20
In an effort to control the level of net charge-offs recorded in the installment
loan area, management did not aggressively pursue the indirect automobile line
of business during 1998. As a result, total installment loan balances decreased
$5,018,000, or 9.1% from one year ago, and indirect loan net charge-offs also
declined to $127,000 in 1998, compared to $257,000 in 1997. As loan balances
have continued to escalate during the last few years, the loan portfolio has
remained diversified by loan type, borrower, and industry. As of December 31,
1998, there were no concentrations of credits in excess of 10.0%.
The real estate-mortgage category remained the largest segment of the loan
portfolio as of December 31, 1998. These loans carry a lower degree of risk
because of the nature of the loan, as evidenced by the fact there have been zero
net charge-offs for this loan type over the last five years. Management believes
the degree of risk assumed on any loan is commensurate with the interest rate
assessed, and is thereby able to receive a higher rate of return on commercial
and real estate-construction loans as compared to residential real estate loans.
Although these loan types usually possess increased elements of risk, the
Corporation's lending practices, policies, and procedures that are in place are
intended to mitigate certain risks associated with such loans. As previously
mentioned, the indirect lending function continues to be the most significant
portion of the consumer loan portfolio. A specific policy pertaining to these
loan types, including separate reporting requirements, are in place for
monitoring purposes. Total indirect loan balances declined approximately
$6,200,000 to $31,800,000 as of December 31, 1998.
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.
<TABLE>
<CAPTION>
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 $50,459 $58,430 $6,309 $115,198
Real estate - construction 25,917 1,696 430 28,043
=============== ================== ================= =================
Total selected loans $76,376 $60,126 $6,739 $143,241
=============== ================== ================= =================
Sensitivity to Changes in Interest Rates
Fixed rates $12,984 $6,374
Variable rates 47,142 365
------------------ -----------------
Total selected loans $60,126 $6,739
================== =================
</TABLE>
<PAGE>13.21
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. The
Corporation posted a record year in deposit growth. Total deposits increased
$40,351,000, or 11.4% in 1998, compared to $13,645,000, or 4.0% in 1997. Aiding
the growth in deposit totals were the number of new accounts opened during the
year. On a net basis, the Corporation gained more than 2,200 deposit accounts
during 1998. Given the deposit growth over the years, overall deposit mix has
not changed significantly. Time deposits remain the largest single source of the
Corporation's funds.
A three year schedule of average deposits by type and maturities of time
deposits greater than $100,000 is presented in Table 12 Deposit Information.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing $39,312 $35,728 $35,655
Interest-bearing demand 48,777 1.25% 47,945 1.37% 45,086 1.84%
Savings deposits 108,019 4.02% 94,360 3.92% 82,535 3.80%
Time deposits 174,959 5.69% 167,706 5.71% 150,345 5.82%
--------------- --------------- --------------- -------------- -------------- --------------
Total deposits $371,067 4.02% $345,739 4.03% $313,621 4.05%
=============== =============== =============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Maturity Ranges of Time Deposits
with Balances of $100,000 or More at December 31,
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
3 months or less $9,273 $7,015 $15,390
3 through 6 months 4,287 2,423 3,223
6 through 12 months 4,230 3,676 3,777
Over 12 months 10,438 11,648 4,850
=============== =============== ==============
Total $28,228 $24,762 $27,240
=============== =============== ==============
</TABLE>
<PAGE>13.22
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. The
Corporation had such funds totaling $500,000, $2,000,000, and $8,300,000 as of
December 31, 1998, 1997, and 1996, respectively. The increase in the
Corporation's deposit base over the past few years led to the reduction in these
fund types.
BORROWINGS
Aside from the core deposit base and large denomination certificates of deposit
mentioned above, the remaining funding sources include short-term and long-term
borrowings. Short-term borrowings consist of federal funds purchased from other
financial institutions on an overnight basis, retail repurchase agreements which
generally mature within thirty days, and U.S. Treasury demand notes.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Repurchase agreements outstanding $15,788 $17,340 $23,497
Treasury tax and loan open-end note 614 3,032 1,024
------------- -------------- -------------
Total short-term borrowings $16,402 $20,372 $24,521
============= ============== =============
Average balance of repurchase agreements
during year $14,671 $13,926 $15,143
Maximum month-end balance of repurchase
agreements during year 17,223 17,621 23,497
Weighted-average interest rate of
repurchase agreements during year 4.47% 4.67% 4.61%
Weighted-average interest rate of
repurchase agreements at end of year 4.20% 4.98% 4.47%
</TABLE>
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, 1998, 1997, and
1996. For the years presented, the retail repurchase agreements accounted for
substantially the entire outstanding balance.
The Bank became a member of the Federal Home Loan Bank of Indianapolis ("FHLBI")
in 1992 and has the authority of the Board of Directors to borrow up to $40
million. All current and any future 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,
consisting of FHLBI borrowings, as of December 31, 1998 and 1997 was $23,854,000
and $19,886,000, respectively. Along with the annual mortgage advance principal
repayments, the Corporation increased its borrowings from the FHLBI by
$4,800,000 during 1998 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>13.23
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
("ALCO") 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 statements in this paragraph relating to the parent company
receiving dividends from the subsidiary bank are forward-looking statements
which may or may not be accurate due to the impossibility of predicting future
economic and business events.
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, 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 deposit from brokers. Table 14 - Funding Uses and
Sources details the main components of cash flows for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
-------------- ------------- ------------------------- -----------------------
FUNDING USES
<S> <C> <C> <C> <C> <C> <C>
Loans, total $333,507 $38,788 13.16% $294,719 $47,444 19.19%
Taxable securities 55,973 (8,146) -12.70% 64,119 (7,597) -10.59%
Tax-exempt securities 20,978 3,818 22.25% 17,160 (3,645) -17.52%
Interest-bearing balances with
other financial institutions 153 153 - - - -
Federal Home Loan Bank stock 1,464 254 20.99% 1,210 104 9.40%
Federal funds sold 10,720 (22) -0.20% 10,742 2,707 33.69%
-------------- ------------- --------- -------------- ------------ -------
Total uses $422,795 $34,845 8.98% $387,950 $39,013 11.18%
============== ============= ========= ============== ============ =======
FUNDING SOURCES
Noninterest-bearing deposits $39,312 $3,584 10.03% $35,728 $73 0.20%
Interest-bearing demand 48,777 832 1.74% 47,945 2,859 6.34%
Savings deposits 108,019 13,659 14.48% 94,360 11,825 14.33%
Time deposits 174,959 7,253 4.32% 167,706 17,361 11.55%
Short-term borrowings 15,581 452 2.99% 15,129 (1,532) -9.20%
Long-term borrowings 22,101 8,161 58.54% 13,940 5,482 64.81%
-------------- ------------ -------- -------------- ------------- --------
Total sources $408,749 $33,941 9.06% $374,808 $36,068 10.65%
============== ============= ========= ============== ============= ========
</TABLE>
<PAGE>13.24
The Corporation's interest rate risk is measured by computing estimated changes
in net interest income and the net portfolio value ("NPV") 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, 1998.
----------------------- Net Portfolio Value --------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change
+ 200 $ 26,144 $ (21,086) (44.65) %
+ 100 36,423 (10,807) (22.88)
Base 47,230 - -
- 100 56,302 9,072 19.21
- 200 65,016 17,786 37.66
The above table indicates that as of December 31, 1998, 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, 1998, the Corporation's
estimated changes in NPV were within the approved guidelines established by the
Board of Directors.
<PAGE>13.25
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-bearing 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-bearing 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
sensitive 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).
<PAGE>13.26
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required federal regulatory agencies to define capital tiers. These tiers are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of
at least 6.00%, and a total risk-based capital ratio of at least 10.00%, and a
leverage ratio of at least 5.00% and not be under a capital directive order.
Failure to meet capital requirements can initiate regulatory action. If an
institution is only adequately capitalized, regulatory approval is required to
accept brokered deposits. If undercapitalized, capital distributions, asset
growth, and expansion is limited, in addition to the institution being required
to submit a capital restoration plan.
Management believes the Corporation and Bank met all the capital requirements as
of December 31, 1998, and the Bank was well-capitalized under the guidelines
established by the banking regulators. To be well-capitalized, the Bank must
maintain the prompt corrective action capital guidelines described above.
Consolidated capital amounts and ratios are presented in Table 15 Capital
Ratios. Bank capital levels are materially consistent with the consolidated
ratios.
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 $4,097,000, or 10.6% in 1998 compared to the
$3,602,000, or 10.3% increase posted in 1997. The amount of dividends paid by
the Corporation increased to $1,341,000, or 11.7% above the prior year amount.
The increased dollar dividend payout, in addition to the continued stock
dividends declared in the past few years, reflect management's effort to
increase the value and return of each shareholder's investment in the
Corporation.
At December 31, 1998, 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.
<PAGE>13.27
<TABLE>
<CAPTION>
At December 31,
1998 1997
------------ ------------
Tier 1 capital
<S> <C> <C>
Shareholders' equity $42,614 $38,469
Less: Intangibles (806) (908)
Add: Unrealized loss on securities 42 90
------------ ------------
Total Tier 1 capital $41,850 $37,651
============ ============
Total risk-based capital
Tier 1 capital $41,850 $37,651
Allowance for loan losses 4,241 3,464
------------ -------------
Total risk-based capital $46,091 $41,115
============ =============
Risk weighted assets $353,215 $310,170
============ =============
Average assets, fourth quarter $475,438 $430,555
============ =============
Risk-based ratios
Tier 1 11.85% 12.14%
============ =============
Total risk-based capital 13.05% 13.26%
============ =============
Leverage Ratios 8.82% 8.76%
============ =============
</TABLE>
As discussed earlier and in Note 18, the Bank expects to acquire three branches
in March, 1999. Because this acquisition will reduce consolidated and bank-only
capital levels, the Corporation plans to borrow approximately $12 - $14 million
to contribute to the Bank to maintain the Bank's well-capitalized status. While
management expects the Bank to remain well-capitalized following the
consummation of this transaction, the Corporation's capital levels may
temporarily drop below the minimum required level for capital adequacy purposes.
Management will monitor the Corporation's consolidated capital level and
anticipates the minimum required level for capital adequacy purposes to be met
by the Corporation prior to December 31, 1999. The Federal Reserve Bank
considers holding company capital adequacy in connection with any application
activity which requires their approval. Further, to the extent the Corporation's
capital levels fall below the well-capitalized category as anticipated, the use
of expedited Federal Reserve Bank procedures in any application activity which
requires their approval will not be available to the Corporation until it once
again becomes well-capitalized. The statements in this paragraph relating to
capital levels of the Corporation and Bank are forward-looking statements which
may or may not be accurate due to the impossibility of predicting future
economic and business events, including the ability of the Corporation to raise
additional capital, if needed, as well as other factors that are beyond the
control of the Corporation.
<PAGE>13.28
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's Board of Directors and management is aware of the possible
consequences the Y2K may pose with regard to the computer systems utilized to
conduct business on a daily basis. A "Year 2000 Committee", which reports
monthly to the Board of Directors, has prepared a detailed plan to address this
issue. In addition to developing contingency plans, the Corporation has
conducted internal employee training, as well as customer awareness seminars in
an effort to not only communicate the Y2K issue, but also to inform these
individuals of the Corporation's approach to address this issue. Testing of the
Corporation's core processing systems began early in the third quarter of 1998
and is scheduled to be completed no later than the end of the first quarter of
1999.
Because the Y2K issue could affect the ability of the Corporation's customers to
conduct their business and operations in a timely and effective manner, the
result could adversely impact the Corporation. The Corporation's ability to
process loan and deposit transactions could be affected, which could limit
sources of revenues and funding from customers, as well as impact the quality of
the loan portfolio. In order to assess the potential credit risk in the
Corporation's loan portfolio, a comprehensive review of all commercial loan
customers whose aggregate borrowings were $200,000 or greater was performed. No
borrowers were classified as having a high credit risk.
While management does not believe the necessary steps involved to resolve this
issue will significantly impair the organization's ability to operate and
conduct business in a normal fashion, the Corporation does estimate the total
cost to address this issue to be approximately $1.6 million. Approximately
one-half of the estimated $1.6 million has been incurred through 1998. The
expenditures related to this issue are comprised primarily of system upgrades,
consisting both of hardware and software, in addition to dedicated personnel
costs.
The above discussion of Y2K issues includes numerous forward-looking statements
reflecting management's current assessment and estimates with respect to the
Corporation's Y2K compliance efforts and the impact of Y2K issues on the
Corporation's business and operations. Various factors could cause actual
results to differ materially from those contemplated by such assessment,
estimates and forward-looking statements, including many factors that are beyond
the control of the Corporation. These factors included, but are not limited to,
representations by vendors and customers, technological advancements, economic
conditions, and competitive considerations.
<PAGE>13.29
LAFAYETTE BANCORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
<PAGE>13.30
LAFAYETTE BANCORPORATION
Lafayette, Indiana
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS...............................................1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.............................................2
CONSOLIDATED STATEMENTS OF INCOME.......................................3
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY..................................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................7
<PAGE>13.31
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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 27, 1999
<PAGE>13.32
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,368 $ 16,901
Federal funds sold 1,400 14,000
------------ ------------
Total cash and cash equivalents 18,768 30,901
Interest-bearing balances with other financial institutions 671 -
Securities available-for-sale 76,956 66,577
Securities held-to-maturity (fair value
$5,063 and $5,378) 4,879 5,268
Loans held for sale 10,086 7,640
Loans 353,828 312,227
Less: Allowance for loan losses (4,241) (3,464)
------------ ------------
Net loans 349,587 308,763
Federal Home Loan Bank stock, at cost 1,539 1,242
Premises, furniture and equipment, net 7,953 6,183
Accrued interest receivable and other assets 13,530 12,455
------------ ------------
$ 483,969 $ 439,029
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 48,657 $ 42,752
Interest-bearing demand and savings deposits 170,308 144,028
Interest-bearing time deposits 176,581 168,415
------------ ------------
Total deposits 395,546 355,195
Short-term borrowings 16,402 20,372
Long-term debt 23,854 19,886
Accrued interest payable and other liabilities 5,553 5,107
------------ ------------
Total liabilities 441,355 400,560
Shareholders' equity
Common stock, no par value: 5,000,000 shares
authorized; 2,394,035 and 2,173,570 shares issued;
and 2,380,427 and 2,161,370 shares outstanding 2,394 2,174
Additional paid-in capital 32,620 24,555
Retained earnings 7,747 11,927
Accumulated other comprehensive income (42) (90)
Less: Treasury stock, at cost (13,608 and 12,200 shares) (105) (97)
------------ ------------
Total shareholders' equity 42,614 38,469
------------ ------------
$ 483,969 $ 439,029
============ ============
</TABLE>
See accompanying notes.
<PAGE>13.33
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including related fees $ 29,810 $ 26,590 $ 22,538
Taxable securities 3,217 3,857 4,219
Tax exempt securities 991 782 940
Other 707 682 518
------------ ------------ ------------
34,725 31,911 28,215
Interest expense
Deposits 14,906 13,937 12,708
Short-term borrowings 712 711 781
Long-term debt 1,345 877 523
------------ ------------ ------------
16,963 15,525 14,012
------------ ------------ ------------
Net interest income 17,762 16,386 14,203
Provision for loan losses 980 620 240
------------ ------------ ------------
Net interest income after provision for loan losses 16,782 15,766 13,963
Non-interest income
Fiduciary activities 964 885 812
Service charges on deposit accounts 1,309 1,254 1,116
Net realized gain on securities 6 27 83
Net gain on loan sales 1,255 736 398
Other service charges and fees 727 645 454
Other 655 621 559
------------ ------------ ------------
4,916 4,168 3,422
Non-interest expense
Salaries and employee benefits 8,206 7,484 6,331
Occupancy, net 891 882 834
Equipment 1,054 970 1,009
Other 3,459 3,221 3,017
------------ ------------ ------------
Total noninterest expenses 13,610 12,557 11,191
------------ ------------ ------------
Income before income taxes 8,088 7,377 6,194
Income taxes 2,711 2,569 2,103
------------ --------- ----------
Net income $ 5,377 $ 4,808 $ 4,091
============ ========== ===========
Basic earnings per share $ 2.26 $ 2.02 $ 1.72
=========== ============ ===========
Diluted earnings per share $ 2.21 $ 2.00 $ 1.72
=========== ============ ===========
</TABLE>
<PAGE>13.34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,646 $ 12,288 $ 18,013 $ 17 $ (89) $ 31,875
Comprehensive income
Net income 4,091 4,091
Change in net unrealized
gain/(loss) on securities
available-for-sale (328) (328)
-----------
Total comprehensive
income 3,763
20% stock dividend
329,329 shares 330 7,080 (7,410) -
Cash dividend
($.42 per share) (989) (989)
Purchase 141 treasury
Shares (3) (3)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 1,976 19,368 13,705 (311) (92) 34,646
Comprehensive income
Net income 4,808 4,808
Change in net unrealized
gain/(loss) on securities
available-for-sale 221 221
-----------
Total comprehensive
income 5,029
10% Stock dividend
197,597 shares 198 5,187 (5,385) -
Cash dividends
($.51 per share) (1,201) (1,201)
Purchase 185 treasury
shares (5) (5)
---- --- --- --- ------ ----------
Balance, December 31, 1997 2,174 24,555 11,927 (90) (97) 38,469
Comprehensive income
Net income 5,377 5,377
Change in net unrealized
gain/ (loss) on securities
available-for-sale 48 48
-----------
Total comprehensive
income 5,425
Issue 2,825 shares under
stock option plan 2 67 69
10% Stock dividend
217,640 shares 218 7,998 (8,216) -
Cash dividends
($.56 per share) (1,341) (1,341)
Purchase 188 treasury
shares (8) (8)
---- --- --- --- ------ ----------
Balance, December 31, 1998 $ 2,394 $ 32,620 $ 7,747 $ (42) $ (105) $ 42,614
=========== =========== =========== ============ ============ ===========
</TABLE>
<PAGE>13.35
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,377 $ 4,808 $ 4,091
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 646 631 693
Unrealized loss on other real estate - - 64
Net amortization of securities 311 271 302
Provision for loan losses 980 620 240
Net realized gain on securities (6) (27) (83)
Net realized (gain) loss on sale of
Fixed assets - - (96)
Other real estate (43) 21 -
Change in assets and liabilities
Loans originated for sale (86,291) (52,206) (30,502)
Loans sold 83,845 50,443 27,098
Accrued interest receivable
and other assets (1,402) (1,241) (1,173)
Accrued interest payable
and other liabilities 446 698 668
------------ ------------ ------------
Net cash from operating activities 3,863 4,018 1,302
Cash flows from investing activities
Change in interest-bearing balances with
other financial institutions (671) - -
Purchase of securities available-for-sale (54,270) (19,798) (41,957)
Proceeds from sales of securities available-for-sale 3,592 17,453 25,532
Proceeds from maturities of securities
available-for-sale 40,176 24,155 18,349
Purchase of securities held-to-maturity (2,532) (2,370) (4,013)
Proceeds from maturities of securities
held-to-maturity 2,906 3,242 5
Loans made to customers, net of payments collected (41,804) (43,641) (40,539)
Purchase of Federal Home Loan Bank stock (297) (126) (36)
Property and equipment expenditures (2,416) (459) (1,612)
Proceeds from sale of fixed assets - - 125
Proceeds from sales of other real estate 251 136 300
------------ ------------ ------------
Net cash from investing activities (55,065) (21,408) (43,846)
</TABLE>
See accompanying notes.
<PAGE>13.36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposit accounts $ 40,351 $ 13,645 $ 16,600
Cash received in branch acquisition for
liabilities assumed, net of assets acquired - - 16,298
Net change in short-term borrowings (3,970) (4,149) 5,429
Proceeds from long-term debt 4,800 16,500 1,500
Payments on long-term debt (832) (5,879) (1,140)
Common stock issued 69 - -
Dividends paid (1,341) (1,201) (989)
Purchase of treasury stock (8) (5) (3)
------------ ------------ ------------
Net cash from financing activities 39,069 18,911 37,695
------------ ------------ ------------
Net change in cash and cash equivalents (12,133) 1,521 (4,849)
Cash and cash equivalents at beginning of year 30,901 29,380 34,229
------------ ------------ ------------
Cash and cash equivalents at end of year $ 18,768 $ 30,901 $ 29,380
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 16,824 $ 15,477 $ 13,877
Income taxes 2,939 2,757 1,992
Non-cash investing activity
Loans transferred to other real estate $ - $ - $ 99
</TABLE>
See accompanying notes.
<PAGE>13.37
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: 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 provides financial services to its customers, primarily
commercial and retail banking and trust services, with operations conducted
through its main office and 12 branches located in Tippecanoe and White Counties
in Indiana. The majority of the Corporation's revenue 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: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are reported at fair value,
with unrealized gains or losses included in other comprehensive income.
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.
<PAGE>13.38
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. Loans are evaluated
for non-accrual 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.
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.
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.
<PAGE>13.39
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amounts may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance. The Bank
retains possession of and control over pledged securities.
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.
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements.
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>13.40
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.
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.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are now such matters that will have
a material effect on the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect, but the effect will depend on derivative holdings when
this standard applies.
Industry Segments: Internal financial information is primarily reported and
aggregated in three lines of business, banking, mortgage banking and trust
services.
<PAGE>13.41
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows at December 31,
1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available-for-Sale
<S> <C> <C> <C> <C>
U.S. Government and its agencies $ 14,039 $ 76 $ (5) $ 14,110
Obligations of states and political
subdivisions 23,526 309 (198) 23,637
Corporate obligations 2,520 1 (8) 2,513
Mortgage-backed and other
asset-backed securities 36,940 84 (328) 36,696
------------ ------------ ------------ ------------
$ 77,025 $ 470 $ (539) $ 76,956
============ ============ ============ ============
Securities Held-to-Maturity
Obligations of states and political
subdivisions $ 4,879 $ 186 $ (2) $ 5,063
============ ============ ============ ============
</TABLE>
The amortized cost and estimated market values of securities are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Securities Available-for-Sale
<S> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------
$ 66,725 $ 188 $ (336) $ 66,577
============ ============ ============ ============
Securities Held-to-Maturity
Obligations of states and political
subdivisions $ 5,268 $ 118 $ (8) $ 5,378
============ ============ ============ ============
</TABLE>
Gross gains of $6, $95 and $175 and gross losses of $0, $68 and $92 were
realized on sales of securities available-for-sale.
<PAGE>13.42
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated market value of securities at December 31,
1998, by contractual maturity, are shown below. Securities not due at a single
maturity date are shown separately.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C> <C>
Due in 1 year or less $ 6,036 $ 6,043 $ 140 $ 140
Due after 1 year through
5 years 10,837 10,932 616 624
Due after five years through
10 years 8,894 9,003 2,657 2,809
Due after 10 years 14,318 14,282 1,466 1,490
------------ ------------ ------------ ------------
Subtotal 40,085 40,260 4,879 5,063
Mortgage-backed and other asset-
backed securities 36,940 36,696 - -
------------ ------------ ------------ ------------
Total $ 77,025 $ 76,956 $ 4,879 $ 5,063
============ ============ ============ ============
</TABLE>
Securities with a carrying value of $19,747 and $21,807 at December 31, 1998 and
1997 were pledged to secure public deposits and repurchase agreements. See Note
8 regarding additional securities pledges.
At December 31, 1998 and 1997, mortgage-backed securities include collateralized
mortgage obligations (CMO's) and real estate mortgage investment conduits
(REMIC's) with an amortized cost of $18,000 and $15,829 and fair value of
$17,721 and $15,658, all of which are issued by U.S. Government agencies. At
December 31, 1998 and 1997, approximately $10,782 and $11,646 are variable rate,
with the remainder fixed rate.
<PAGE>13.43
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and agricultural loans $ 115,198 $ 112,586
Real estate construction 28,043 17,117
Residential real estate loans 160,655 127,574
Installment loans to individuals 49,932 54,950
------------ ------------
Total $ 353,828 $ 312,227
============ ============
</TABLE>
Non-performing loans consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans past due 90 days or more $ 775 $ 505
Non accrual loans 1,468 127
Restructured loans 197 350
------------ ------------
Total $ 2,440 $ 982
============ ============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Year end impaired loans
With no allowance for loan losses allocated $ - $ 19
With allowance for loan losses allocated 748 108
Amount of the allowance allocated 145 30
Average balance of impaired loans during the year 160 153
Interest income recognized during impairment - -
Cash-basis interest income recognized - -
</TABLE>
The Bank had $720 and $0 loans on non-accrual at December 31, 1998 or 1997 that
management did not deem to be impaired.
<PAGE>13.44
NOTE 3 - LOANS (Continued)
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, 1998 $ 4,280
Change in persons included (14)
New loans 700
Loan payments (3,404)
------------
Balance as of December 31, 1998 $ 1,562
============
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $ 3,464 $ 3,198 $ 3,200
Provision charged to operations 980 620 240
Loans charged-off (411) (550) (545)
Recoveries on loans previously charged-off 208 196 303
------------ ------------ ------------
Balance, December 31 $ 4,241 $ 3,464 $ 3,198
============ ============ ============
</TABLE>
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 789 $ 789
Buildings and improvements 7,833 6,484
Leasehold improvements 1,296 1,081
Furniture and equipment 7,218 6,885
------------ ------------
Total 17,136 15,239
Accumulated depreciation (9,183) (9,056)
------------ ------------
Premises, furniture and equipment, net $ 7,953 $ 6,183
============ ============
</TABLE>
<PAGE>13.45
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Time deposits of $100 or greater totaled $28,228 and $24,762 at December 31,
1998 and 1997.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 104,254
2000 34,618
2001 13,205
2002 10,804
2003 13,475
Thereafter 225
------------
Total $ 176,581
============
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of the following at year end:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance of repurchase agreements outstanding $ 15,788 $ 17,340
Balance of treasury tax and loan open-end note 614 3,032
------------ ------------
Total short-term borrowings $ 16,402 $ 20,372
============ ============
</TABLE>
At December 31, 1998 and 1997, the Corporation had $446 and $715 in related
party repurchase agreements.
<PAGE>13.46
NOTE 8 - LONG-TERM DEBT
Long-term debt outstanding at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal Home Loan Bank advances; annual principal payments; various
maturities with final maturity May 15, 2008; 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. $ 10,354 $ 8,386
Federal Home Loan Bank advances; principal payments due at maturity;
various maturities during the year 2000, with final maturity June 17, 2008;
interest payable monthly at various fixed interest rates from 4.96%-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. 13,500 11,500
Total $ 23,854 $ 19,886
============ =========
</TABLE>
Annual principal payments required on long-term debt are as follows:
1999 $ 827
2000 12,290
2001 755
2002 999
2003 3,026
2004 and thereafter 5,957
------------
Total long-term debt $ 23,854
============
<PAGE>13.47
NOTE 9 - EMPLOYEE BENEFIT PLANS
The following sets forth the defined benefit pension plan's funded status and
amount recognized in the balance sheet at December 31 (amounts computed as of
September 30, 1998 and 1997):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation $ 11,252 $ 10,091
Service cost 612 511
Interest cost 803 744
Actuarial gain - 316
Benefits paid (427) (410)
--------------- --------------
Ending benefit obligation 12,240 11,252
Change in plan assets, at fair value:
Beginning plan assets 14,675 12,352
Actual return 951 2,733
Employer contribution - -
Benefits paid (427) (410)
--------------- --------------
Ending plan assets 15,199 14,675
---------------- ----------------
Funded status 2,959 3,423
Unrecognized net actuarial (gain)/loss (43) (433)
Unrecognized prior service cost 22 23
Unrecognized transition asset (933) (1,083)
--------------- --------------
Prepaid/ (accrued) benefit cost $ 2,005 $ 1,930
================ ===============
</TABLE>
The components of pension expense and related actuarial assumptions were as
follows.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 612 $ 511 $ 505
Interest cost 803 743 691
Expected return on plan assets (1,341) (1,126) (1,070)
Amortization of prior service cost 2 2 2
Amortization of transition asset (151) (151) (151)
Recognized net actuarial (gain)/ loss - - 7
-------------- --------------- ---------------
$ (75) $ (21) $ (16)
============== =============== ==============
Discount rate on benefit obligation 6.75% 7.25% 7.50%
Long-term expected rate of return
on plan assets 9.25 9.25 9.25
Rate of compensation increase 4.00 4.00 4.00
</TABLE>
At December 31, 1998 and 1997, the plan's assets include Lafayette
Bancorporation common stock of $1,038 and $783. At December 31, 1998 and 1997
the plan's assets also included Lafayette Bank and Trust Company certificates of
deposit of $409 and $100.
<PAGE>13.48
NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)
The Bank maintains a retirement savings plan covering substantially all
employees. The plan requires employees to complete 1 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 $116, $106 and $73 for 1998,
1997 and 1996.
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 amount of the compensation deferred plus
accrued interest at a variable rate. Accrued benefits payable totaled $858 and
$683 at December 31, 1998 and 1997. Deferred compensation expense was $90, $90
and $84 for 1998, 1997 and 1996. 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 $3,522 and $3,367 at December 31, 1998 and 1997.
NOTE 10 - POSTRETIREMENT BENEFITS
The Bank sponsors a postretirement benefit plan which provides defined medical
benefits. 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. The plan
is not funded and has no assets.
<PAGE>13.49
NOTE 10 - POSTRETIREMENT BENEFITS (Continued)
The following sets forth the plan's benefit obligation and amounts recognized in
the balance sheet at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in postretirement benefit obligation:
Beginning benefit obligation $ 443 $ 396
Service cost 28 24
Interest cost 31 28
Unrecognized (gain)/loss - 7
Benefits paid (8) (12)
------------ ------------
Ending benefit obligation 494 443
Unrecognized net gain 165 179
------------ ------------
Accrued benefit obligation $ 659 $ 622
============ ============
</TABLE>
Components of net periodic postretirement benefit cost as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 28 $ 24 $ 22
Interest cost 31 28 25
Amortization of unrecognized (gain)/loss (14) (15) (16)
------------ ------------ ------------
Benefit cost $ 45 $ 37 $ 31
============ ============ =============
</TABLE>
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits assumed was 11.5% for 1998, 1997 and 1996, with the
rate assumed to gradually decrease to 5.5% effective January 1, 2002. The health
care cost trend is a significant assumption. However, either an increase or
decrease in the assumed health care cost trend rates by 1% in each year would
affect the accumulated postretirement benefit obligation as of December 31, 1998
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 1998, 1997 and
1996.
<PAGE>13.50
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 10 years of grant. The plan expires May, 2002.
Granted rights outstanding were fully-vested and consisted of 44,094 at $6.05
per share for 1998, and 45,085 at $6.65 per share for 1997, 69,166 at $7.32 per
share for 1996. In 1998, prior to the stock dividend, 5,000 rights were
exercised at $39 per share. Compensation expense charged to operations in 1998,
1997 and 1996 was $450, $657 and $112 and is based on an increase in market
value. The liability at December 31, 1998 and 1997 was $1,420 and $1,132.
The Corporation has established two nonqualified stock option plans to provide
stock options to directors and key members of management. One plan was adopted
in 1995 ("1995 Plan") and the other in 1998 ("1998 Plan"). The total number of
shares of common stock available for grant to directors and management are shown
below:
<TABLE>
<CAPTION>
1998 1995
Plan Plan Total
<S> <C> <C> <C>
Directors 16,500 52,708 69,208
Management 46,200 75,068 121,268
------------ ------------ ------------
Totals 62,700 127,776 190,476
============ ============ =============
</TABLE>
All shares for both plans were available for grant at a price equal to the
market price of the stock at the date of grant.
Under the 1995 Plan, 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. Under the 1998
Plan, options granted to directors at the effective date and directors elected
after the effective date are exercisable after two years. Options granted to
management under both plans become 20% exercisable after one year and 20% each
subsequent year. Both plans are effective for five years and options must be
exercised within ten years from the date of grant.
A summary of the Corporation's stock option activity, and related information
for the years ended December 31, follows (adjusted for stock dividends):
<TABLE>
<CAPTION>
----------1 9 9 8--------- -----------1 9 9 7------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding beginning of year 117,432 $ 18.75 87,142 $ 17.58
Granted 23,492 33.44 30,976 22.00
Exercised (3,102) 18.18 - -
Forfeited - - (686) 17.90
----------- ----------- ----------- --------------
Outstanding end of year 137,822 $ 21.27 117,432 $ 18.75
=========== ============ =========== ==============
Exercisable at end of year 68,163 $ 17.79 54,667 $ 17.27
=========== ============ =========== ==============
Weighted average fair value per
option granted during the year $ 5.28 $ 4.83
</TABLE>
<PAGE>13.51
Options outstanding at December 31, 1998 have a weighted average remaining life
of 8.2 years, with exercise prices ranging from $17.15 to $34.55.
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. 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 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.6%, 6.6% and 6.5%; dividend yields of 2%; volatility factors
of the expected market price of the Corporation's common stock of .16, .16 and
.05, and a weighted average expected life of the options of five years for
management options and two years for directors' options.
NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Corporation's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $ 5,242 $ 4,706 $ 4,034
Pro forma earnings per share
Basic $ 2.20 $ 1.98 $ 1.70
Diluted $ 2.15 $ 1.96 $ 1.69
</TABLE>
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
NOTE 12 - INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable $ 3,096 $ 2,626 $ 2,165
Deferred income taxes (benefit) (385) (57) (62)
------------ ------------ ------------
Total $ 2,711 $ 2,569 $ 2,103
============ ============ ============
</TABLE>
<PAGE>13.52
The following is a reconciliation of statutory federal income taxes and the
amount computed by applying the statutory rate of 34% to income before income
taxes:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before
income taxes $ 2,750 $ 2,508 $ 2,106
Add/(deduct)
Tax exempt interest income (337) (303) (301)
State tax expense (net of federal benefit) 358 405 346
Other (60) (41) (48)
------------ ------------ ------------
Total $ 2,711 $ 2,569 $ 2,103
============ ============ ============
</TABLE>
NOTE 12 - INCOME TAXES (Continued)
The net deferred tax asset reflected in the consolidated balance sheet is
comprised of the following components as of December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 817 $ 510
Accrued stock appreciation rights 562 448
Accrued post-retirement benefit obligation 319 271
Deferred compensation 307 237
Deferred loan fees 79 132
Net operating loss carry-forward - 26
Net unrealized loss on securities available-for-sale 27 59
------------ ------------
Total tax assets 2,111 1,683
Deferred tax liabilities
Depreciation (219) (220)
Net pension benefit (794) (765)
Other (216) (169)
------------ ------------
Total deferred tax liabilities (1,229) (1,154)
Valuation allowance - -
------------ ------------
Net deferred tax asset $ 882 $ 529
============ ============
</TABLE>
<PAGE>13.53
NOTE 13 - PER SHARE DATA
In November 1998, the Corporation issued 217,640 shares of common stock in
connection with a 10% stock dividend. 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. The following table illustrates the
computation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share
Net income $ 5,377 $ 4,808 $ 4,091
Weighted average shares outstanding 2,380,342 2,377,618 2,377,750
-------------- --------------- --------------
Basic earnings per share $ 2.26 $ 2.02 $ 1.72
============== =============== ==============
Diluted earnings per share
Net income $ 5,377 $ 4,808 $ 4,091
Weighted average shares outstanding 2,380,342 2,377,618 2,377,750
Diluted effect of assumed exercise
of Stock Options 53,235 23,231 4,187
-------------- --------------- --------------
Diluted average shares outstanding $ 2,433,577 $ 2,400,849 $ 2,381,937
============== =============== ==============
Diluted earnings per share $ 2.21 $ 2.00 $ 1.72
============== =============== ==============
</TABLE>
NOTE 14 - CAPITAL REQUIREMENTS
The Corporation and Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgements by regulators. Failure to meet capital
requirements can initiate regulatory action.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the following table) 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, 1998.
Prompt corrective action regulations applicable to the Bank provide five
classifications: well- capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
As of December 31, 1998, the Bank was categorized as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
<PAGE>13.54
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>
<CAPTION>
Minimum Required
To Be Well-
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
1998
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $ 46.1 13.1% $ 28.2 8.0% $ 35.3 10.0%
Tier 1 capital to risk weighted assets 41.9 11.9 14.1 4.0 21.2 6.0
Tier 1 capital to average assets 41.9 8.8 19.0 4.0 23.8 5.0
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
</TABLE>
The Bank is also subject to state regulations restricting the amount of
dividends payable to the Corporation. At December 31, 1998, the Bank had $7,331
of retained earnings available for dividends under these regulations.
As discussed in Note 18, the Bank expects to acquire three branches in March
1999. The acquisition will reduce consolidated capital levels. Management will
monitor consolidated capital levels and anticipates sufficient capital will be
maintained by December 31, 1999. The Corporation expects to borrow and
contribute capital to the Bank, and the Bank is expected to remain
well-capitalized.
<PAGE>13.55
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 $219, $188, and $181 for
1998, 1997 and 1996.
Future minimum lease payments are as follows:
1999 $ 230
2000 213
2001 149
2002 142
2003 117
2004 through 2007 232
------------
Total $ 1,083
============
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:
1998 1997
---- ----
Unused lines of credit $ 43,239 $ 33,686
Commitments to make loans 14,976 4,964
Standby letters of credit 2,759 2,189
Commercial letters of credit 59 78
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 $5,955 and $4,931 at December 31, 1998 and 1997. These
reserves do not earn interest.
<PAGE>13.56
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of the Corporation's financial
instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
-----------1 9 9 8--------- -----------1 9 9 7---------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 18,768 $ 18,768 $ 30,901 $ 30,901
Interest-bearing balances with
other financial institutions 671 671 - -
Securities available-for-sale 76,956 76,956 66,577 66,577
Securities held-to-maturity 4,879 5,063 5,268 5,378
Loans held for sale 10,086 10,264 7,640 7,768
Loans, net 349,587 351,685 308,763 310,115
Federal Home Loan Bank stock 1,539 1,539 1,242 1,242
Accrued interest receivable 4,592 4,592 4,359 4,359
Financial liabilities
Deposits $ (395,546) $ (398,747) $ (355,195) $ (356,623)
Short-term borrowings (16,402) (16,402) (20,372) (20,372)
Long-term debt (23,854) (24,527) (19,886) (20,076)
Accrued interest payable (1,471) (1,471) (1,332) (1,332)
</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, fair
value is estimated using rates 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>13.57
NOTE 17 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and cash
flows for the parent company:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 1,488 $ 758
Investment in bank 42,463 38,576
Other assets 559 720
------------ ------------
$ 44,510 $ 40,054
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 1,896 1,585
Shareholders' equity 42,614 38,469
------------ ------------
$ 44,510 $ 40,054
============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating income
Dividends received from subsidiary bank $ 1,850 $ 1,714 $ 1,570
Interest income 26 10 3
------------ ------------ ------------
1,876 1,724 1,573
Operating expenses 543 742 192
------------ ------------ ------------
Income before income taxes and equity in
undistributed earnings of bank 1,333 982 1,381
Income tax benefit 205 290 75
------------ ------------ ------------
Income before equity in undistributed earnings of bank 1,538 1,272 1,456
Equity in undistributed earnings of bank 3,839 3,536 2,635
------------ ------------ ------------
Net income 5,377 4,808 4,091
Other comprehensive income, net of tax 48 221 (328)
------------ ------------ ------------
Comprehensive income $ 5,425 $ 5,029 $ 3,763
============ ============ ============
</TABLE>
<PAGE>13.58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,377 $ 4,808 $ 4,091
Adjustments to reconcile net income to net cash
from operating activities
Amortization of deferred costs 6 6 6
Equity in undistributed earnings of bank (3,839) (3,536) (2,635)
Other assets and other liabilities 466 (36) 215
------------ ------------ ------------
Net cash from operating activities 2,010 1,242 1,677
Cash flows from financing activities
Principal payments on long-term debt - - (224)
Common stock issued 69 - -
Dividends paid (1,341) (1,201) (989)
Purchase of treasury shares (8) (5) (3)
------------ ------------ ------------
Net cash from financing activities (1,280) (1,206) (1,216)
------------ ------------ ------------
Net change in cash and cash equivalents 730 36 461
Cash and cash equivalents at beginning of year 758 722 261
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,488 $ 758 $ 722
============ ============ ============
</TABLE>
NOTE 18 - BRANCH ACQUISITION
In October 1998, the Bank signed a definitive agreement to acquire three
branches located in DeMotte, Remington, and Rensselaer, Indiana. Under the terms
of the agreement, the Bank will acquire all of the deposits totaling
approximately $118 million, selected loans totaling approximately $60 million,
in addition to all physical facilities and certain other assets. Intangibles
associated with this purchase will be approximately $13 million. The transaction
has received all required regulatory approvals and is expected to close in
March, 1999.
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>13.59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------
NOTE 19 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities $ 85 $ 394 $ (460)
Less: reclassification adjustments for gains
and losses later recognized in income (6) (27) (83)
-------------- --------------- --------------
Net unrealized gains and losses 79 367 (543)
Tax effect (31) (146) (215)
-------------- --------------- --------------
Other comprehensive income $ 48 $ 221 $ (328)
=============== =============== ==============
</TABLE>
NOTE 20 - SEGMENT INFORMATION
The Corporation's operations include three primary segments: banking, mortgage
banking, and trust. Through its banking subsidiary's thirteen locations in
Tippecanoe and White Counties, the Corporation provides traditional community
banking services, such as accepting deposits and making commercial, residential
and consumer loans. Mortgage banking activities include the origination of
residential mortgage loans for sale on a servicing released basis to various
investors. The Corporation's trust department provides both personal and
corporate trust services.
The Corporation's three reportable segments are determined by the products and
services offered. Loans, investments and deposits comprise the primary revenues
and expenses of the banking operation, net gains on loans sold account for the
revenues in the mortgage banking segment, and trust administration fees provide
the primary revenues in the trust department.
The following segment financial information has been derived from the internal
profitability reporting system utilized by management to monitor and manage the
financial performance of the Corporation. The accounting policies of the three
segments are the same as those described in the summary of significant
accounting policies. The Corporation evaluates segment performance based on
profit or loss before income taxes. The evaluation process for the mortgage
banking and trust segments include only direct expenses, while certain indirect
expenses, including goodwill, are absorbed by the banking operation.
<PAGE>13.60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------
NOTE 20 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
1998 Mortgage Total
Banking Banking Trust Segments
<S> <C> <C> <C> <C>
Net interest income $ 17,239 $ 497 $ - $ 17,736
Net gain on loan sales - 1,255 - 1,255
Other revenue 2,685 12 964 3,661
Noncash items:
Depreciation 594 27 25 646
Provision for loan loss 980 - - 980
Segment profit 7,636 760 209 8,605
Segment assets 473,019 10,224 167 483,410
1997 Mortgage Total
Banking Banking Trust Segments
Net interest income $ 15,974 $ 402 $ - $ 16,376
Net gain on loan sales - 736 - 736
Other revenue 2,531 16 885 3,432
Noncash items:
Depreciation 588 21 22 631
Provision for loan loss 620 - - 620
Segment profit 7,451 469 189 8,109
Segment assets 430,357 7,796 157 438,310
1996 Mortgage Total
Banking Banking Trust Segments
Net interest income $ 13,863 $ 346 $ - $ 14,209
Net gain on loan sales - 398 - 398
Other revenue 2,209 3 812 3,024
Noncash items:
Depreciation 657 13 23 693
Provision for loan loss 240 - - 240
Segment profit 5,858 357 168 6,383
Segment assets 407,807 5,993 130 413,930
</TABLE>
<PAGE>13.61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------
NOTE 20 - SEGMENT INFORMATION (Continued)
Significant segment totals are reconciled to the financial statements as
follows:
<TABLE>
<CAPTION>
Reportable Consolidated
1998 Segments Other Totals
- ---- -------- ----- ------
<S> <C> <C> <C>
Net interest income $ 17,736 $ 26 $ 17,762
Provision for loan loss 980 - 980
Net gain on loan sales 1,255 - 1,255
Other revenue 3,661 - 3,661
Profit 8,605 (3,228) 5,377
Assets 483,410 559 483,969
Reportable Consolidated
1997 Segments Other Totals
- ---- -------- ----- ------
Net interest income $ 16,376 $ 10 $ 16,386
Provision for loan loss 620 - 620
Net gain on loan sales 736 - 736
Other revenue 3,432 - 3,432
Profit 8,109 (3,301) 4,808
Assets 438,310 719 439,029
Reportable Consolidated
1996 Segments Other Totals
- ---- -------- ----- ------
Net interest income $ 14,209 $ (6) $ 14,203
Provision for loan loss 240 - 240
Net gain on loan sales 398 - 398
Other revenue 3,024 - 3,024
Profit 6,383 (2,292) 4,091
Assets 413,930 461 414,391
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- -------------------------------------------------------------------------------
NOTE 20 - SEGMENT INFORMATION (Continued)
Amounts included in the "other" column are as follows.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Holding company net interest
income (expense) $ 26 $ 10 $ (6)
Profit:
Holding company net interest
income (expense) 26 10 (6)
Holding company expenses (543) (742) (183)
Income tax expense (2,711) (2,569) (2,103)
Assets:
Holding company assets 559 719 461
<PAGE>
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, 1998, there were 2,380,427 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.
Price Per Share Dividend
High Low Declared
------------------- --------
1998
First Quarter $34 9/16 $28 7/8 $ .12
Second Quarter 36 3/8 31 3/4 .12
Third Quarter 37 1/4 33 7/16 .12
Fourth Quarter 40 3/4 36 .20
1997
First Quarter 19 7/8 19 1/4 $ .10
Second Quarter 21 7/8 19 7/8 .11
Third Quarter 24 1/2 21 7/8 .11
Fourth Quarter 28 7/8 24 1/2 .19
Data adjusted for all stock dividends, including a 10% stock dividend to
shareholders of record on September 30, 1998, paid on November 2, 1998.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
NAME STATE OF INCORPORATION
Lafayette Bank and Trust Company Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001035373
<NAME> Lafayette Bancorporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,368
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,956
<INVESTMENTS-CARRYING> 4,879
<INVESTMENTS-MARKET> 5,063
<LOANS> 353,828
<ALLOWANCE> 4,241
<TOTAL-ASSETS> 483,969
<DEPOSITS> 395,546
<SHORT-TERM> 16,402
<LIABILITIES-OTHER> 5,553
<LONG-TERM> 23,854
0
0
<COMMON> 2,394
<OTHER-SE> 40,220
<TOTAL-LIABILITIES-AND-EQUITY> 483,969
<INTEREST-LOAN> 29,810
<INTEREST-INVEST> 4,208
<INTEREST-OTHER> 707
<INTEREST-TOTAL> 34,725
<INTEREST-DEPOSIT> 14,906
<INTEREST-EXPENSE> 16,963
<INTEREST-INCOME-NET> 17,762
<LOAN-LOSSES> 980
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 13,610
<INCOME-PRETAX> 8,088
<INCOME-PRE-EXTRAORDINARY> 8,088
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,377
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 4.34
<LOANS-NON> 1,468
<LOANS-PAST> 775
<LOANS-TROUBLED> 197
<LOANS-PROBLEM> 816
<ALLOWANCE-OPEN> 3,464
<CHARGE-OFFS> 411
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 4,241
<ALLOWANCE-DOMESTIC> 3,555
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 686
</TABLE>
