SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1996
Commission File Number 2-87246
THE FARMERS BANCORP, FRANKFORT, INDIANA
(Exact name of registrant as specified in its charter)
INDIANA 35-1565713
(State of Incorporation) (I.R.S. Employer
Identification No.)
P.O. Box 129 46041-0129
Frankfort, Indiana (Zip Code)
(Address of Principal Executive Offices)
317-654-8731
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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....
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ..X..
The issuer had $19.6 million in gross income for the year ended June 30,
1996.
As of September 9, 1996 the aggregate estimated market value of the
voting stock held by non-affiliates of the registrant was $25,967,610.
As of September 9, 1996 there were outstanding 577,058 common shares,
without par value, of the registrant.
Exhibit Index page 77
Page 1 of 80
FORM 10-K TABLE OF CONTENTS
Part I. PAGE
Item 1. Business 3-7
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
Part II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 8-9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-39
Item 8. Financial Statements and Supplementary Data 40-67
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 68
Part III.
Item 10. Directors and Executive Officers of the
Registrant 68-71
Item 11. Executive Compensation 71-72
Item 12. Security Ownership of Certain Beneficial
Owners and Management 73-75
Item 13. Certain Relationships and Related
Transactions 76
Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 77
Signatures 78-79
Exhibit 21 80
Page 2 of 80
Part I
Item 1 BUSINESS
DESCRIPTION OF THE FARMERS BANCORP, FRANKFORT, INDIANA
The Farmers Bancorp, Frankfort, Indiana ("Bancorp"), an Indiana
Corporation, was incorporated on May 26, 1983 for the purpose of
acquiring all the outstanding common stock of The Farmers Bank,
Frankfort, Indiana ("Bank"). All of the directors and executive
officers of the Bancorp are also directors or executive officers of the
Bank. On October 20, 1983, the Bancorp was approved by the FEDERAL
RESERVE BOARD to become a bank holding company. The Bancorp is not
aware of any persons or group which qualify as a parent, that is, have
control over its operations.
There have been no material changes or developments in the business done
or intended to be done by the Bancorp or by the Bank during this year.
BUSINESS
The Bancorp and the Bank are engaged in the business of banking. The
principal source of income for the Bancorp is earnings generated by the
Bank. The principal business activity of the Bancorp is to support the
Bank. The Bancorp supports regulatory compliance, legal issues, and
strategic planning for future expansion. See the Business Section of
the Bank on page 5 for a detailed description of the Bank's activities.
REGULATION AND SUPERVISION
As a bank holding company, the Bancorp is regulated and supervised by
the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). It is required to file reports with the Federal Reserve and
such additional information as the Federal Reserve may require pursuant
to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). The Federal Reserve may also make examinations of the
Bancorp and its subsidiary and subsidiaries which may be acquired in the
future. The Federal Reserve has the authority to issue cease-and-desist
orders against bank holding companies and their non-bank subsidiaries if
the Federal Reserve determines that their actions represent an unsafe
and unsound practice or a violation of law.
The acquisition of banking subsidiaries by bank holding companies is
subject to the jurisdiction, and requires the prior approval, of the
Federal Reserve and, for institutions chartered in Indiana, the Indiana
Department of Financial Institutions (the "Department"). Effective July
1, 1992 Indiana law permitted a bank holding company resident in the
State of Indiana to acquire banking subsidiaries in any state or to be
acquired by bank holding companies in any state, subject to certain
limitations.
The non-bank activities of bank holding companies are also subject to
the supervision of the Federal Reserve. Under the Holding Company Act,
a bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of any voting shares
of a corporation which is not a bank or engaging in any activity other
than managing or controlling banks.
Page 3 of 80
Part I
Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
A bank holding company, however, may engage in, or own shares of a
corporation that engages solely in, activities which the Federal Reserve
has determined to be so closely related to banking, or managing or
controlling banks, as to be a proper incident thereto. If a bank
holding company is of the opinion that other activities in the
circumstances surrounding a particular case are closely related to
banking, or managing or controlling banks, the bank holding company may
apply to the Federal Reserve for approval to engage in the activity or
acquire an interest in a corporation that engages in the activity.
A bank holding company and its subsidiaries are also prohibited from
engaging in certain tie-in arrangements in connection with the extension
of credit or the provision of any property or service. With certain
exceptions, neither a bank holding company nor a bank, nor a subsidiary
or affiliate of either, may extend credit, lease or sell property or
furnish any services or fix or vary the consideration for the foregoing
on the condition that (i) the customer must obtain or provide some
additional credit, property or services from, or to, any of them, or
(ii) the customer may not obtain some credit, property or services from
a competitor, except to the extent reasonable conditions are imposed to
assure the soundness of credit extended.
DESCRIPTION OF BANK
The Farmers Bank, Frankfort, Indiana ("Bank") was chartered June 17,
1876 under the laws of the State of Indiana. The main office of the
Bank is in Frankfort, Indiana. The Bank has two branch offices in
Frankfort, Indiana, one in Kirklin, Indiana, one in Michigantown,
Indiana, one in Mulberry, Indiana, and one in Sheridan, Indiana. The
branch building in Sheridan was demolished in early 1996 to make room
for a new and larger facility on the same site. The Bank has one remote
ATM unmanned branch in Frankfort, Indiana. A free standing ATM is
located in the Wal-Mart store located east of Frankfort.
The Bank previously owned two subsidiary corporations. As discussed
below, both of these corporations were dissolved during the year ended
June 30, 1995.
FBF Corp. was a wholly owned subsidiary of the Bank and owned the land
and buildings of various branches. The assets were liquidated into the
Farmers Bank effective June 12, 1995.
FBF Financial Services, LTD was a wholly owned subsidiary of the Bank
and was a registered broker/dealer offering investment products and
services to its customers. This subsidiary was not meeting management's
expectations, and was liquidated effective February 13, 1995. Another
unrelated company continues to lease space within the Bank. This
company sells life insurance related products, annuity products, and
long-term health care. In addition, this company now sells securities
including stocks, bonds and mutual funds and employs a certified
financial planner.
Page 4 of 80
Part I
Item 1 BUSINESS (cont.)
BUSINESS
The Bank conducts a general banking business embracing all the usual
functions of a commercial bank. The Bank also operates a Trust
Department serving in a fiduciary capacity with trusts, estates and
guardianships.
The Bank makes and services both secured and unsecured loans to
individuals, firms and corporations. The Bank's installment loan
department makes both direct and indirect loans. The Bank makes a
variety of residential, industrial, commercial and agricultural loans
secured by real estate.
The Bank is the largest and oldest locally owned and headquartered
commercial bank in Clinton County. The Bank operates under a
conservative management philosophy and is dedicated to providing
personal service coupled with competitive products and pricing.
Management believes that local ownership allows the Bank to distinguish
itself from competitors based on its established reputation, and local
decision making authority. The Bank is seeking to capitalize on this
advantage by continuing an aggressive growth strategy throughout Clinton
County and contiguous counties. The Bank focuses on developing strong,
primary banking relationships with businesses and individuals in its
market area. The Bank's mission includes being a corporate leader in
community service and supporting projects and organizations that enhance
the quality of life through the utilization of the Bank's financial and
human resources. The Bank's loan portfolio is diversified, locally
oriented and does not include any foreign loans.
REGULATION AND SUPERVISION
The Bank, a subsidiary of the Bancorp, is a state bank and is
supervised, regulated and examined by the Indiana Department of
Financial Institutions ("IDFI"). The Bank, which is not a member of the
Federal Reserve System, is also supervised and regulated by the Federal
Deposit Insurance Corporation ("FDIC"). The deposits of the Bank are
insured by the FDIC. Each regulator has the authority to issue cease-
and-desist orders if it determines that activities of a bank regularly
represent an unsafe and unsound banking practice or violation of law.
Branching by banks in Indiana, either through establishment de novo or
acquisition, is subject to the jurisdiction, and requires the prior
approval, of the bank's primary federal regulatory authority, as well as
the IDFI if the branching bank is a state bank. Under current Indiana
law, as amended in 1991 by the Indiana General Assembly, banks may
establish branches anywhere within the State of Indiana.
Subsidiaries of bank holding companies are also subject to certain
restrictions imposed by the Federal Reserve on the extension of credit
to the bank holding company or any of its subsidiaries, on investment in
the stock or other securities of the bank holding company or any of its
subsidiaries, and in taking such stock or securities as collateral for
loans.
Page 5 of 80
Part I
Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
The Bancorp and the Bank are subject to regulations that require the
maintenance of a leverage ratio (tier one capital to adjusted total
assets), a tier one risk-based capital (tier one capital to risk
adjusted assets), and a total risk-based capital ratio (total capital to
risk adjusted assets). During 1991, Congress passed the Federal Deposit
Insurance Corporation Improvement Act (FDICIA). In addition to
addressing the insurance fund's financial needs, FDICIA required the
FDIC to promulgate regulations outlining specific regulatory actions
that would occur when the capital level of a financial institution
deteriorated beyond a specified level. An "adequately capitalized"
financial institution is defined as one which has a leverage ratio of at
least 4 percent, a tier one risk-based capital ratio of at least 4
percent, and a total risk-based capital ratio of at least 8 percent.
The level of deposit insurance assessments are also tied to the
definitions prescribed by these regulations.
Compliance with these regulations limits the amount of dividends that
may be paid by the companies. Refer to Note 13 of the Consolidated
Financial Statements and management's discussion of Capital Resources
(pages 34-35 and page 61) for more information about these requirements
and compliance with them at June 30, 1996.
The results of operations of the Bank are affected by the credit
policies of monetary authorities, particularly the Federal Reserve
System. The instruments of monetary policy employed by the Federal
Reserve System include open market operations in United States
Government securities, changes in the discount rate charged for member
bank borrowing and changes in reserve requirements assessed on member
bank deposits. Federal Reserve System monetary policies have had
significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future. In view of
the changing condition in the national economy and in the money markets,
as well as the effect of actions by monetary fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
Page 6 of 80
PART I
ITEM 1 BUSINESS (cont.)
COMPETITION
The banking business is highly competitive. The Bank competes directly
with one other bank located in Clinton County, Indiana, and with banks
elsewhere. The main office and branch offices are located in a
business/agricultural area of Clinton County and northwest Hamilton
County. The Bank also competes with various savings banks, credit
unions, finance companies and other non-bank financial institutions.
The trends of deregulation, increased competition among financial
institutions, and increased competition with non-financial institutions
seem likely to continue.
Part I
Item 2 PROPERTIES
The Bancorp owns no property. Its business requires minimal office
space and uses the Bank's facilities.
The Bank's main office is located at 9 East Clinton Street, Frankfort,
Indiana. The main office is owned by the Bank. The branches at
Kirklin, Indiana, Michigantown, Indiana, and Mulberry, Indiana and one
remote ATM branch in Frankfort, Indiana are also owned by the Bank. Two
branch facilities in Frankfort, Indiana, and the branch at Sheridan,
Indiana, are owned by the Bank but are located on leased property. A
free standing ATM is located in the Wal-Mart store on the east edge of
Frankfort.
Page 7 of 80
PART I
ITEM 3 LEGAL PROCEEDINGS
The Bancorp is not a party to any pending legal proceedings before any
court, regulatory or administrative agency or other tribunal. Further,
the Bancorp is not aware of any litigation which is threatened against
it in any court, regulatory or administrative agency or other tribunal.
As part of its ordinary course of business, the Bank is a party to
several lawsuits involving a variety of claims and in the collection of
delinquent accounts. All such litigation is incidental to the Bank's
business. Bank management believes that no litigation is threatened or
pending against the Bank in which the Bank faces potential loss or
exposure which would have a material effect upon the financial condition
of the Bank. The Bancorp and the Bank are not involved in any
administrative or judicial proceedings arising under any Federal, State
or Local provisions which have been enacted or adopted to regulate the
discharge of materials into the environment or otherwise relating to the
protection of the environment.
PART I
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year 1996
to a vote of security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET
Shares of the common stock of the Bancorp are not traded on any
established public trading market, but are purchased and sold privately
by individual security holders primarily in the Clinton and surrounding
county areas. While there have been some stock sales, privately traded
at prices determined by individual buyer and seller, McDonald & Co.
Securities, Inc. has been making a market for this stock. During the
fiscal year ending June 30, 1996, there were various transfers of the
common stock representing sales or exchanges, gifts, transfers to trust
agreements, surviving joint tenants, transfers to decedents' estates and
transfers resulting from the distribution of decedents' estates and
trusts to heirs and beneficiaries. A total of 96,279 shares were
transferred under the foregoing conditions during the fiscal year ended
June 30, 1996.
Page 8 of 80
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS (cont.)
The following table reflects the price range of Bancorp's common stock
for fiscal 1996 and 1995. Management cannot verify these figures as
they were furnished by McDonald & Co. Securities, Inc. The prices do
reflect dealer markup which varies from 2 to 5 percent depending on each
transaction.
Three Months Ended
Sept 30 December 31 March 31 June 30
Fiscal 1996
Price Range
High $ 34 $ 41 $ 43 $ 46
Low 33 34 41 43
Fiscal 1995
Price Range
High 30 32 33 35 1/8
Low 29 30 32 33
DIVIDENDS
The ability of the Bancorp to continue to pay dividends will depend on
its earnings, financial condition and other factors as may be deemed
appropriate in the determination of the Bancorp's dividend policy.
Dividends paid by the Bancorp depend primarily on dividends paid by the
Bank to Bancorp.
The dividends which the Bancorp may pay to its shareholders, and which
the Bank may pay to the Bancorp are restricted by Indiana law and
regulations of the IDFI, the FDIC, and the Federal Reserve Board. See
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Capital Resources, pages 34 and 35. On June 30, 1996,
there were 400 holders of record of Bancorp's common stock.
The cash dividends per share paid by the Bancorp for fiscal years ended
1996 and 1995 are as follows:
1996
PAYMENT DATE: AMOUNT
August 15, 1995 .40
November 15, 1995 .40
February 15, 1996 .40
May 15, 1996 .42
-----
Total for 1996 $ 1.62
=====
1995
August 15, 1994 $ .38
November 15, 1994 .38
February 15, 1995 .38
May 15, 1995 .38
-----
Total for 1995 $ 1.52
======
Page 9 of 80
Part II
Item 6 SELECTED FINANCIAL DATA (Dollars in thousands, except per share
data and ratios.)
YEAR ENDED JUNE 30
1996 1995 1994 1993 1992
Income Statement Summary:
Interest Income $ 18,111 $ 16,658 $ 15,771 $ 16,125 $ 17,249
Interest Expense 8,253 7,225 6,320 6,977 8,782
--------------------------------------------
Net interest income 9,858 9,433 9,451 9,148 8,467
Provision for loan losses 480 219 500 1,455 840
Other operating income 1,486 1,468 1,586 1,718 1,254
Other operating expenses 7,172 7,069 7,196 6,666 6,322
--------------------------------------------
Income before income taxes 3,692 3,613 3,341 2,745 2,559
Income tax expense 1,276 1,188 1,080 838 760
--------------------------------------------
NET INCOME $ 2,416 $ 2,425 $ 2,261 $ 1,907 $ 1,799
Per Share Data: ============================================
Earnings (1) $ 4.19 $ 4.20 $ 3.92 $ 3.30 $ 3.11
Cash Dividends Paid 1.62 1.52 1.40 1.32 1.28
Book Value at Year End 41.81 39.55 36.72 34.20 32.22
RATIOS:
Performance
Return on Avg. Assets 1.05% 1.11% 1.05% .93% .92%
Return on Avg. Equity 10.32 11.12 11.15 10.00 10.05
Dividend Payout Ratio 38.69 36.16 35.73 40.00 41.16
Asset Quality
Net Charge-offs to Avg. Loans .05% .23% .18% .91% .59%
Allowance for Loan Losses to
Loans at Year-End 1.57 1.50 1.68 1.65 1.58
Allowance for Loan Losses to Non-
performing Loans at Y/E 115.51 94.30 90.60 65.99 36.13
Non-performing Loans to Total
Loans at Year-End 1.36 1.59 1.85 2.51 4.37
Capital Ratios
Avg. Shareholders' Equity
to Avg. Assets 10.18% 9.98% 9.43% 9.28% 9.12%
Leverage Ratio 10.21 10.06 9.79 9.53 9.31
Tot Risk-based Capital Ratio 14.21 13.83 13.30 14.26 14.57
Year End Balances:
Assets $237,044 $226,032 $216,390 $207,063 $199,811
Earning Assets (2) 217,083 208,155 201,332 191,645 186,596
Loans, Net (3) 171,307 154,292 145,099 132,317 120,815
Deposits 191,489 175,554 169,457 163,437 172,831
Short-Term Borrowings 12,752 20,691 21,190 22,922 7,236
Other Borrowings 6,259 5,175 3,075 -0- -0-
Shareholders' Equity 24,127 22,821 21,191 19,738 18,607
(1) Earnings per share computations are based on the weighted average
number of common shares outstanding during the years. The number of
shares used in the computation was 577,058 for 1996, 1995 and 1994,
577,318 for 1993 and 577,552 for 1992.
(2) Includes nonaccrual loans.
(3) Includes loans held for sale.
Page 10 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to address the
significant factors affecting the Bancorp's financial condition and
results of operations. It is designed to provide a more comprehensive
review of the operating results and financial position than could be
obtained from the analysis of the consolidated financial statements
alone. It should, however, be read in conjunction with the consolidated
financial statements and related notes and the Selected Financial Data
included elsewhere herein.
OVERVIEW
Total assets of Bancorp increased $11,012,000, or 4.87 percent, from
June 30, 1995 to June 30, 1996, and totaled $237,044,000 at June 30,
1996. Total loans, including loans held for sale, increased $17,408,000
or 11.11 percent, from June 30, 1995 to June 30, 1996, and totaled
$174,049,000 as of June 30, 1996. Investments increased $1,920,000 or
4.76 percent, from June 30, 1995 to June 30, 1996, and totaled
$42,264,000 as of June 30, 1996. This increase in loans and investments
was funded by deposits and short-term borrowings which, combined,
increased $7,996,000, or 4.07 percent over the prior year end. Funding
was also provided by a $10.5 million decrease in short term investments
(Fed Funds Sold and Money Market Investments) and a net $1.2 million
increase in FHLB advances which totaled $5,735,000 as of June 30, 1996.
These advances require periodic principal payments and are generally
drawn to fund specific commercial loans originated by The Bank.
Bancorp reported net income of $2,416,000 in 1996, down .37 percent from
$2,425,000 earned in 1995. Earnings per share was $4.19 in 1996, down
from $4.20 per share in 1995. The small decrease resulted from a
variety of offsetting changes including an increase in the provision for
loan losses, expenses related to the demolition of a branch and higher
compensation expenses which more than offset the increase in net
interest income.
1995 net income increased 7.25 percent over the $2,261,000 earned in
1994. The increase in 1995 earnings, as compared to 1994, was primarily
attributable to a lower provision for loan losses and lower levels of
other noninterest expense.
Page 11 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
In the following table, the different components of the income statement
are divided by average total assets to provide year-to-date comparisons
(on a non tax equivalent basis).
PERCENTAGE OF AVERAGE ASSETS
Year Ended June 30
1996 1995 1994
Net Interest Income 4.28% 4.31% 4.39%
Provision for Loan Losses .21 .10 .23
Other Operating Income .65 .67 .74
Other Operating Expenses (1) 3.12 3.23 3.35
Income before Income Taxes 1.60 1.65 1.55
Income Taxes .55 .54 .50
Net Income 1.05 1.11 1.05
(1) Included in other operating expenses is the FDIC assessment. It
represents a component percentage of .004%, .18%, and .19% for 1996,
1995 and 1994 respectively.
RESULTS OF OPERATIONS:
Net Interest Income
Net interest income is the principal component of net income for the
Bancorp. Net interest income is determined by the relative size and
characteristics of interest-earning assets and interest-bearing
liabilities and by the difference, or spread, between the yields earned
on interest-earning assets and rates paid on interest-bearing
liabilities. During the years ending June 30, 1994 and June 30, 1996
there was a general decline in interest rates. During the year ended
June 30, 1995 there was a gradual increase in rates.
The following tables set forth, for the periods indicated, information
regarding the average balances of interest-earning assets and interest-
bearing liabilities, the dollar amount of interest income and interest
expense and the resulting yields on average interest-earning assets and
rates paid on average interest-bearing liabilities. Average balances
are also provided for non-interest-earning assets and non-interest-
bearing liabilities and shareholders' equity. Average balances are
determined from average daily balances.
Page 12 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
1996
Average Yield/
Balance Interest Rate
(Dollars in Thousands)
Assets
Interest earning assets:
Loans(1): (net of unearned discount)
Domestic(2) $161,663 14,820 9.17%
Foreign -0- -0- -0-
Securities:
Taxable 31,299 2,076 6.63
Tax-exempt(2) 9,012 812 9.01
Interest bearing deposits:
Domestic: -0- -0- -0-
Foreign -0- -0- -0-
Short term investments 12,627 709 5.61
------- -------- ------
Total interest earning assets 214,601 18,417 8.58
Noninterest earning assets:
Cash and due from banks 6,119
Premises and equipment, net 4,409
Other assets 7,678
Less allowance for loan losses (2,642)
------
$230,165
========
Liabilities and Shareholder's Equity
Interest bearing liabilities:
Savings deposits $ 69,079 $ 2,052 2.97%
Time deposits 97,085 5,418 5.58
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 11,100 486 4.38
Other borrowings 5,204 297 5.71
------- ------ ------
Total interest bearing liabilities 182,468 8,253 4.52
Noninterest bearing liabilities: -----
Demand deposits 22,014
Other 2,259
--------
206,741
Shareholders' equity 23,424
--------
$230,165
Net interest earnings (spread) ======== $10,164
Net interest margin on earning assets ======= 4.74%
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $306 for 1996.
Page 13 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
1995
Average Yield/
Balance Interest Rate
(Dollars in Thousands)
Assets
Interest earning assets:
Loans(1): (net of unearned discount)
Domestic(2) $151,984 $13,310 8.76%
Foreign -0- -0- -0-
Securities:
Taxable 37,575 2,508 6.68
Tax-exempt(2) 8,622 838 9.72
Interest bearing deposits:
Domestic: 142 8 5.63
Foreign -0- -0- -0-
Short term investments 5,297 300 5.66
------- ------- -----
Total interest earning assets 203,620 16,964 8.33
Noninterest earning assets:
Cash and due from banks 6,087
Premises and equipment, net 4,454
Other assets 6,977
Less allowance for loan losses (2,563)
-------
$218,575
========
Liabilities and Shareholder's Equity
Interest bearing liabilities:
Savings deposits $ 71,323 $ 2,052 2.88%
Time deposits 88,501 4,571 5.16
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 9,441 346 3.66
Other borrowings 4,580 255 5.57
------- ------- -----
Total interest bearing liabilities 173,845 7,224 4.16
Noninterest bearing liabilities: -----
Demand deposits 21,656
Other 1,240
--------
196,741
Shareholders' equity 21,834
--------
$218,575
Net interest earnings (spread) ======== $ 9,740
Net interest margin on earning assets ======= 4.78%
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $306 for 1995.
Page 14 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
1994
Average Yield/
Balance Interest Rate
(Dollars in Thousands)
Assets
Interest earning assets:
Loans(1): (net of unearned discount)
Domestic(2) $138,749 $12,001 8.65%
Foreign -0- -0- -0-
Securities:
Taxable 42,556 2,851 6.70
Tax-exempt(2) 9,182 928 10.11
Interest bearing deposits:
Domestic: 502 17 3.39
Foreign -0- -0- -0-
Short term investments 8,917 289 3.24
------- ------ -----
Total interest earning assets 199,906 16,086 8.05
Noninterest earning assets:
Cash and due from banks 7,442
Premises and equipment, net 4,096
Other assets 6,136
Less allowance for loan losses (2,448)
-------
$215,132
========
Liabilities and Shareholder's Equity
Interest bearing liabilities:
Savings deposits $ 77,522 $ 2,163 2.79%
Time deposits 82,238 3,770 4.59
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 9,643 300 3.11
Other borrowings 1,667 87 5.22
------- ----- -----
Total interest bearing liabilities 171,070 6,320 3.69
Noninterest bearing liabilities: -----
Demand deposits 22,739
Other 1,037
--------
194,846
Shareholders' equity 20,286
--------
$215,132
Net interest earnings (spread) ======== $ 9,766
Net interest margin on earning assets ======= 4.89%
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $315 for 1994.
Page 15 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Net interest income on a tax equivalent basis increased to $10,194,000
for the year ended June 30, 1996 compared to $9,740,000 for 1995 and
$9,766,000 for 1994. Net interest margin (net interest income divided
by average earning assets), on a tax equivalent basis, decreased
slightly to 4.74 percent for 1996 compared to 4.78 percent for 1995 and
4.89 percent for 1994. 1996's yield on average earning assets increased
25 basis points as compared to 1995. Likewise, 1996's rate on average
interest bearing liabilities increased 36 basis points as compared to
1995. The slight decrease in net interest margin from 1995 to 1996 was
primarily a result of the competitive local deposit rate environment.
Bancorp's deposit liabilities repriced upward more quickly than its
assets, resulting in a decreasing net interest margin. This continued a
trend which was evident when comparing 1995's results to 1994. The
average yield on earning assets increased 28 basis points and the
average cost of interest bearing liabilities increased 47 basis points.
The slow tightening of Bancorp's net interest margin is being more than
offset by continued growth in average earning assets. Average earning
assets increased nearly $11 million (5.39 percent) from 1995's balance
of $203.6 million. A change in the mix of earning assets occurred as
loan demand continued to be very strong. Average total loans increased
$9,679,000, or 6.37 percent, while average securities decreased by
$5,886,000 or 12.74 percent. By June 30, 1996 total loans, excluding
loans held for sale, were $173,557,000 compared to $155,777,000 at June
30, 1995. 1996 year end loan portfolio totals reflected a $14,809,000
increase in commercial loans, a $4,536,000 decrease in real estate
loans, a $7,081,000 increase in installment loans, and a $425,000
increase in lease financings.
Total deposits and short-term borrowings increased $7,996,000 during
1996. This increase was due to increases in time deposits, NOW accounts
and savings accounts which increased by $16,261,000, or 11.22 percent
from June 30, 1995 to June 30, 1996 while money market investment
accounts and repurchase agreements, combined, declined by $8,342,000, or
28.53 percent during the same period. Demand deposits reflected a
slight increase of $78,000, or .35 percent from June 30, 1995 to June
30, 1996.
The following tables illustrate the changes in asset and liability mix
that have taken place over the last three years, (ratios at year end).
Page 16 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Ratio to Total Earning Assets
1996 1995 1994
Loans 80.18% 75.25% 73.30%
Investments/Taxable 15.14 15.50 20.82
Tax-Exempt 4.69 4.20 4.44
Federal Funds Sold -0- 3.27 .89
Money Market Investments -0- 1.78 .55
Ratio to Total Interest Bearing Liabilities
1996 1995 1994
Savings Deposits 35.94% 32.83% 37.95%
Time Deposits 53.97 52.75 47.81
Repurchase agreements and 6.77 11.54 12.43
Short-Term Borrowings
Other Borrowings 3.32 2.88 1.81
Page 17 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
An analysis of the changes in interest income and expense, segregated
between changes in volume and rate, is shown comparing 1996 to 1995 and
1995 to 1994.
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
due to (1) due to (1)
Volume Rate Net Volume Rate Net
(Dollars in Thousands) (Dollars in Thousands)
Interest earned on:
Loans:
Domestic $ 848 $ 662 $ 1,510 $1,150 $ 159 $1,309
Foreign -0- -0- -0- -0- -0- -0-
Investment Securities:
Taxable (419) (13) (432) (335) (8) (343)
Tax-exempt 38 (64) (26) (55) (35) (90)
Interest bearing deposits:
Domestic (8) -0- (8) (16) 7 (9)
Foreign -0- -0- -0- -0- -0- -0-
Short term investments 415 (6) 409 (161) 172 11
--------------------------------------------------
Total interest
income $ 874 $ 579 $ 1,453 $ 583 $ 295 $ 878
==================================================
Interest paid on:
Savings deposits $ (65) $ 65 $ -0- $ (178)$ 67 $ (111)
Time deposits 443 404 847 305 496 801
Deposits in foreign
offices -0- -0- -0- -0- -0- -0-
Repurchase agreements and
short term borrowings 61 79 140 (7) 53 46
Other borrowings 35 7 42 158 10 168
--------------------------------------------------
Total interest
expense $ 474 $ 555 $ 1,029 $ 278 $ 626 $ 904
==================================================
Net interest
income $ 400 $ 24 $ 424 $ 305 $ (331)$ (26)
==================================================
(1) The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
Page 18 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses
The provision for loan losses (a direct charge to operating expenses)
provides a reserve (the allowance for loan losses) to which loan losses
are charged as those losses become evident. The provision is determined
in conjunction with management's review and evaluation of current
economic conditions, changes in the character and size of the loan
portfolio, estimated charge-offs and other pertinent information derived
from a quarterly review of the loan portfolio.
In order to analyze the allowance for loan losses, management utilizes a
quarterly report (watch list) containing loans with a more than normal
degree of risk. This report is the by-product of an ongoing loan review
process, the purpose of which is to determine the level of credit risk
within the portfolio and to ensure proper adherence to underwriting and
documentation standards. Utilizing this report, a "specific allocation"
of the reserve is made for those loans which are considered to represent
significant exposure to risk. In addition, estimates are made for the
potential losses within each category of the loan portfolio, not
specifically reviewed, based on a weighted five year historical loan
loss experience, non-performing loan history, and other factors and
trends.
1996's provision for loan losses totaled $480,000 as compared to
$218,500 for 1995 and $500,000 for 1994. The increase in provision for
the year ended June 30, 1996 was due to the Bank's loan growth and
management's desire to maintain the reserve at an appropriate level.
Asset quality in general continues to improve compared to prior years.
The decrease in provision for the year ended June 30, 1995, compared to
1994, resulted from improved loan quality in the portfolio. In general,
1994's crop seasons produced near record yields. Although the increased
yields were somewhat offset by lower prices, most of the Bancorp's
agricultural loan customers enjoyed successful growing seasons and were
able to service their debt, as agreed. Due to a drought, the 1995 crop
season was not as positive as the prior year; yields were down but
prices up. It is predicted that 1996 yields will be down due to heavy
rain and flooding early in the planting season, but prices will be very
good. Early predictions indicated that some of the Bank's agricultural
customers may have carryover debt. Management continues to closely
monitor the financial condition of the Bank's agricultural borrowers and
to forecast expected levels of crop yields and prices. For the year
ended June 30, 1996 the Bank recorded a net recovery of $34,000 on
commercial and agricultural loans, compared to net charge-offs of
$299,000 and $163,000 for the years ended June 30, 1995 and June 30,
1994 respectively. The majority of 1995's charge-offs occurred in March
1995 following a regulatory exam. Of these charge-offs, $280,000 was
subsequently recovered in August 1995. Management constantly monitors
the loan portfolio for any downward trends or weaknesses, and will
continue to do so.
Page 19 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses (cont.)
The following table summarizes the activity in the allowance for loan
losses for the years indicated.
1996 1995 1994 1993 1992
(Dollars in Thousands)
Allowance for loan losses:
Balance at July 1 $2,349 $2,478 $2,226 $1,936 $1,807
Loan losses:
Domestic:
Commercial, financial
and agricultural 317 562 266 1,110 498
Real estate mortgages -0- -0- -0- 66 3
Installment loans 230 173 205 217 474
Lease Financing -0- -0- -0- -0- 5
Foreign -0- -0- -0- -0- -0-
-------------------------------------------
Total loan losses 547 735 471 1,393 980
-------------------------------------------
Loan recoveries:
Domestic:
Commercial, financial
and agricultural 351 263 103 88 38
Real estate mortgages -0- -0- 1 -0- -0-
Installment loans 108 124 119 140 231
Lease Financing -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0-
-------------------------------------------
Total loan recoveries 459 387 223 228 269
-------------------------------------------
Net loan losses 88 348 248 1,165 711
Provision charged to
current income 480 219 500 1,455 840
-------------------------------------------
Balance at June 30 $2,741 $2,349 $2,478 $2,226 $1,936
===========================================
Approximately 23.63 percent of the Bancorp's total loan portfolio is
oriented in agricultural or agri-business relationships. $224,000 of
the $317,000 in commercial loan charge-offs for 1996 were agricultural
related, compared to $532,000 of the $562,000 for fiscal 1995. $326,000
of the $351,000 in commercial loan recoveries for 1996 were agricultural
related. The installment loan portfolio had gross charge-offs of
$230,000 for 1996, compared to $173,000 in 1995 and $205,000 in 1994.
Net charge offs on installment loans were $122,000 in 1996, up from
$49,000 in 1995 and $86,000 in 1994.
Page 20 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements
The following is a summary of nonperforming loans, all of which are
domestic loans.
JUNE 30
1996 1995 1994 1993 1992
(Dollars in Thousands)
Nonaccrual:
Commercial $ 632 $1,173 $ 642 $ 377 $1,183
Real Estate 420 47 83 -0- 199
Installment 84 3 10 74 -0-
Lease Financing -0- -0- -0- -0- -0-
----------------------------------------------
Total 1,136 1,223 735 451 1,382
Past Due 90 Days:
Commercial 394 541 187 776 2,072
Real Estate 44 -0- 85 623 242
Installment 51 19 59 65 62
Lease Financing -0- -0- -0- -0- -0-
----------------------------------------------
Total 489 560 331 1,464 2,376
Troubled Debt Restructurings:
Commercial 748 708 1,466 1,246 1,174
Real Estate -0- -0- 203 212 427
Installment -0- -0- -0- -0- -0-
Lease Financing -0- -0- -0- -0- -0-
-----------------------------------------------
Total 748 708 1,669 1,458 1,601
==============================================
Total Nonperforming Loans
$2,373 $2,491 $2,735 $3,373 $5,359
===============================================
Income that would have been earned during 1996, had nonaccrual and
restructured loans been accruing at their contractual rates, was
$124,000. Income that was recorded totalled $13,000. Income foregone
as a result of nonaccrual loans and troubled debt restructurings
aggregated approximately $118,000 and $174,000 for 1995 and 1994,
respectively.
Nonperforming loans totaled $2,373,000 at June 30, 1996 compared to
$2,491,000 at June 30, 1995. These loans represent 1.36 percent of
total loans at June 30, 1996, down from 1.59 percent and 1.85 percent at
June 30, 1995 and 1994, respectively. The allowance for loan losses, as
a percent of nonperforming loans, was 115.51 percent at year-end 1996,
compared to 94.30 percent for 1995 and 90.60 percent for 1994.
Page 21 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Nonperforming loans are comprised of three major sub-divisions -
nonaccrual loans, loans delinquent over 90 days and still accruing, and
troubled debt restructurings. In the nonaccrual loan category are those
loans where significant doubt exists as to the collectibility of all
principal or accrued interest. The Bank follows the definition of
nonaccrual loans established by the Federal Financial Institutions
Examination Council. The following are the Bank's procedures for
nonaccrual loans. When the status of a loan fits the criteria of
nonaccrual status, including delinquency of principal and interest
payment of 90 days or more, it is submitted to the Officers Loan
Committee for final review before placement on nonaccrual status. Loans
remain on nonaccrual status until a borrower's position improves as to
ability to repay or until a determination is made for eventual charge-
off. Regular monthly reviews of the nonaccrual loans are made by the
Directors Loan Committee and reported to the Board of Directors.
Following the guidelines Bancorp adopted for nonaccrual loans, twenty-
one individual borrowers with loan balances of $1,136,000 were in
nonaccrual status at June 30, 1996. Negotiations continue with the
respective customers to resolve their immediate financial difficulties.
It is anticipated that losses from this category will not exceed
$225,000. The total of $1,136,000 was comprised of $632,000
agricultural, $420,000 mortgage and $84,000 installment and credit card
loans.
Loans past due over 90 days and still accruing have decreased $71,000,
or 12.68 percent, to $489,000 at June 30, 1996 from the 1995 total of
$560,000. This amount is comprised of the following; $280,000 in one
agricultural borrower; $114,000 in two commercial borrowers; $36,000 in
fourteen consumer loans; $15,000 in nine credit card related loans; and
$44,000 in two mortgage loans.
Management continues to work to resolve the Bank's problem loan
situations and believes that the Bank's loan review and reserve analysis
processes have successfully identified existing problem loans and
intends to continue to work with these customers to resolve, either
through work-out, foreclosure and/or charge off, those situations.
Page 22 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Troubled debt restructurings are those loans for which the contractual
interest has been reduced, or other concessions granted because of a
deterioration in the financial condition of the borrower, resulting in
the inability of the borrower to meet the original contractual terms of
the loans. Interest on such loans is included in income only to the
extent of the reduced rate. Each borrower may be having varying degrees
of financial difficulty. On a case-by-case basis negotiations are held
to determine how to achieve the best results for both Bancorp and the
customer without forcing the borrower into liquidation. Management will
reach an agreement as to principal and interest concessions, collateral
available, and term of repayment. At June 30, 1994, restructured loans
totaled $1,669,000, consisting of ten borrowers. Eight of these
borrowers were agricultural-related, and all were current as of June 30,
1994. One of the restructured loans is a commercial loan and it also
was current as of June 30, 1994. The last borrower is involved in
renting residential property, and like previous years, this restructured
loan is 30 to 89 days delinquent; however the loan is well secured by
real estate. At June 30, 1995, restructured loans totaled $708,000.
They consist of four agricultural borrowers and one commercial borrower.
All loans were current as of June 30, 1995. At June 30, 1996
restructured loans totaled $748,000, consisting of four agricultural
borrowers and two commercial borrowers. All six loans were current as
of June 30, 1996. Management does not expect this category to
constitute an automatic loss risk, but rather a category to prevent or
minimize future loan losses.
Effective July 1, 1995, Bancorp adopted FAS 114, "Accounting by
Creditors for Impairment of a Loan", as amended by FAS 118. Loans are
identified as impaired when management concludes that it is probable
that the customer will not comply with the contractual terms of the loan
agreement. Loans are evaluated for impairment during management's
quarterly analysis of the reserve for loan losses. Generally, all
commercial and agricultural loans that have been selected for evaluation
in conjunction with the reserve analysis are evaluated for impaired
status. Generally, no consumer or 1-4 family residential real estate
loans would be evaluated. If a loan is deemed to be impaired,
management will evaluate the need for an impairment reserve (simply an
allocation of a portion of the allowance for loan losses) on that
credit. Generally, the fair value of collateral is used to evaluate
impairment. At June 30, 1996, management has determined that $1,061,000
of commercial/agricultural loans, all of which are on non-accrual
status, are impaired and has allocated $125,000 of the allowance for
loan losses to those loans.
Page 23 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
In addition to these loans outlined previously, at June 30, 1996, the
Bancorp has identified other loans which management has concerns
relative to the ability of the borrowers to comply with loan repayment
terms. These loans, which total $8,424,000, down slightly from
$8,725,000 at June 30, 1995, are classified as "watch" loans and receive
ongoing management attention in excess of that provided to the remaining
portfolio. The loans placed in "watch" status are as follows: eleven
(11) borrowers with residential mortgage loans totaling $925,000; eleven
(11) agricultural real estate loan borrowers totaling $1,828,000; five
(5) commercial real estate loans totaling $1,262,000; twenty-four (24)
agricultural operating and term loan borrowers totaling $3,499,000;
eight (8) commercial operating and term loan borrowers totaling
$832,000; and six (6) personal loan borrowers totaling $78,000. It is
noted, however, that Bank policy states that in the event any single
note of a borrower is placed on the "watch list", all notes of the
borrower are placed on said list; regardless of the payment history or
collateral valuation of individual notes.
Loan Loss Charge-off Procedures
The Bank's Officers' Loan Committee meets weekly to discuss all
significantly delinquent loans (regardless of size) and any other known
loan problems that might affect customers. Specific review is assigned
to an account officer to determine the reason for delinquency and the
chances of rehabilitation and/or improvement for the particular credit.
Once the account officer has made his review, he makes recommendations
as to the collectibility of the loan. If the loan is considered a loss,
it is approved for charge-off by the Officers' Loan Committee.
The Loan Review Committee meets monthly to evaluate the quality of the
Bank's loan portfolio and administration of its lending activities. It
also shares the responsibility for recommending transfer of credits to a
loss category in its function of summarizing "watch loans" and preparing
supporting information for the quarterly review of the adequacy of the
reserve for loan losses. There are many elements of consideration that
comprise the criteria for a "watch list." Each of the elements serve as
a management tool to act as a monitor for potential problems. It does
not indicate a loss as being imminent.
All approved charge-offs are submitted to the Directors' Loan Committee
which is made up of four outside Directors and Senior Management. They
review the findings of the Officers' Loan Committee and Loan Review
Committee and tentatively approve the charge-off of the portion of the
loan that is determined to be uncollectible.
Once the Directors' Loan Committee approves a loan for charge-off, it is
then submitted to the Board of Directors on a monthly basis for their
review and approval or rejection of the recommendation. In addition to
these internal procedures, the Bank charges off loans as a result of
regulatory examinations.
Page 24 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Income
Other Operating Income Analysis % Change from prior year
1996 1995 1994 1996 1995
(Dollars in Thousands)
Trust Fees $ 273 $ 244 $ 218 11.89% 11.93 %
Service Charge Income 727 676 696 7.54 (2.87)
Mortgage Banking Revenue 110 83 177 32.53 (53.11)
Brokerage Commission/Fees 44 73 176 (39.73) (58.52)
Other Income 332 392 319 (15.31) (22.88)
--------------------- --------------------
$1,486 $1,468 $1,586
Security Gains(losses) -0- -0- -0-
--------------------- --------------------
$1,486 $1,468 $1,586 1.23 % (7.44)%
====================== ====================
Other operating income increased during the year ended June 30, 1996,
compared to 1995. Mortgage banking revenue increased 33 percent, to
$110,000. The Bank continued to sell fixed rate first mortgage loans in
the secondary market. The Bank realized gains of $36,000 during 1996,
as compared to $20,000 in 1995 and $96,000 in 1994. Servicing income
earned on sold loans increased to $74,000 for the year ended June 30,
1996, compared to $63,000 in 1995. At June 30, 1996, Bancorp was
servicing $29,460,000 of loans for other investors compared to
$22,261,000 at June 30, 1995. Brokerage commissions and fees decreased
during 1996. This income was generated primarily by Capital Select
Investments Inc. Other income decreased by 15.3 percent, or $60,000, to
$332,000 for the fiscal year ended June 30, 1996. The most significant
factor causing this decrease was a decrease of $81,000 in the amount of
cash surrender value income recognized on life insurance policies owned
by the Bank.
Other Operating Expenses
Other Operating Expenses Analysis % Change from prior year
1996 1995 1994 1996 1995
(Dollars in Thousands)
Salaries & Employee
Benefits $3,822 $3,511 $3,445 8.86 % 1.92 %
Occupancy Expense-Net 602 551 580 9.26 (5.00)
Equipment Expense 581 569 487 2.11 16.84
FDIC assessment 9 384 419 (97.66) (8.35)
Data Processing Expense 345 458 635 (24.67) (27.87)
Other Expenses 1,813 1,596 1,630 13.60 (2.09)
------------------------ -----------------
$7,172 $7,069 $7,196 1.46 % (1.76)%
======================== =================
Page 25 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Expenses (cont.)
Other operating expenses increased 1.46 percent or $103,000 to total
$7,172,000 for 1996 compared to $7,069,000 in 1995. Personnel expense,
the largest component of other operating expenses, increased $311,000,
or 8.86 percent for 1996. $117,000 of the increase in personnel expense
was attributable to an employee incentive compensation program. The
decrease in occupancy expenses in 1995, as compared to 1994, was due
primarily to a $28,000 real estate and property tax refund. Data
processing expenses are primarily those paid to outside vendors and
decreased $113,000 from fiscal 1995 to 1996 and $177,000 from fiscal
1994 to 1995, due to converting to an in-house system.
The need to control noninterest expense has become a major focus for
management because of the increased emphasis on regulatory compliance
and its related cost. Management has very limited control over FDIC
assessment expense, insurance cost, postage expense and taxes.
Management has attempted to control labor costs by restricting new
hires. Other expenses in 1996 include a nonrecurring charge of $180,000
related to the write off of the undepreciated value of a branch building
that was demolished so it could be expanded. Absent this expense,
1996's other operating expenses declined by $77,000 or 1.1 percent.
Income Tax Expense
Income tax expense for 1996 increased to $1,276,000 compared to
$1,188,000 for 1995 and $1,080,000 for 1994. Increased tax expense
results from higher levels of income before tax and the relative decline
in tax exempt income during the period.
Net deferred tax assets at June 30, 1996 total $505,000. The Bancorp's
net deferred tax asset results primarily from a deferred tax asset
related to book provisions for loan losses in excess of the amount
deductible for tax purposes offset by a deferred tax liability related
to tax depreciation in excess of the amount deducted for financial
reporting purposes. Based on the Bancorp's historical levels of taxable
income and the relatively small size of the net deferred tax asset,
management does not believe a valuation allowance for deferred tax
assets is needed at June 30, 1996.
Page 26 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
ANALYSIS OF BALANCE SHEET
Earning Assets
Bancorp's average earning assets were 93.24 percent of average total
assets for 1996, which is slightly higher than this same ratio for 1995
of 93.16 percent and 1994 of 92.92 percent. A factor that influenced
the earning asset ratio beginning in 1993 was the purchase of life
insurance, in conjunction with the formation of deferred compensation
and death benefit programs. At June 30, 1996, the cash surrender value
of this insurance totaled $4,510,000 as compared to $4,216,000 at June
30, 1995. Although this asset does not "earn" interest, it increases in
value over time and that increase in value is reflected as a component
of other income. If this asset was considered "earning" for the purpose
of the above computation, the earning asset ratio for 1996 and 1995
would be approximately 95.11 and 94.59 percent, respectively.
Securities
The carrying value of available-for-sale and held-to-maturity
securities, by issue category, is as follows:
JUNE 30
1996 1995 1994
(Dollars in Thousands)
U.S. Govt. Agencies and Corporations $16,940 $17,660 $23,237
States and Political Subdivisions 10,178 8,742 8,940
Corporate Obligations 3,960 4,026 6,526
Mortgage-backed Securities issued
by U.S. Government Agencies 10,369 8,969 10,326
Other Asset-backed Securities 817 1,617 1,826
------------------------------
$42,264 $41,014 $50,855
==============================
Page 27 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Securities (cont.)
The Bancorp's investment portfolio acts as a source of liquidity and
additional earnings. In order to accomplish the objective of liquidity,
the weighted average maturity of the portfolio is kept relatively short.
Effective July 1, 1994 the Bancorp adopted Financial Accounting Standard
No. 115 and accordingly classified its securities as available-for-sale
securities or held-to-maturity securities. At June 30, 1994 all
securities were reported at amortized cost. At June 30, 1996, the fair
value of available-for-sale securities was less than their amortized
cost by $156,000. Held-to-maturity securities are those which the
Bancorp has the intent and ability to hold until maturity. These are
reported at amortized cost. Available-for-sale securities are those
which management may decide to sell, if needed, for liquidity, asset-
liability management, or other reasons. Available-for-sale securities
are reported at fair value with unrealized gains or losses included as a
separate component of shareholders' equity, net of tax. No securities
were sold during 1994, 1995 or 1996. The Bancorp's goal of increasing
loan volume resulted in the contraction of the securities portfolio in
1995. As securities matured or were called, the Bancorp utilized these
funds to fund the loan portfolio. Please refer to Note 2, pages 49-51
of the financial statements for additional information about the
composition of the available-for-sale and held-to-maturity securities
portfolios. At June 30, 1996 the Bancorp did not have a concentration
of securities greater than 10 percent of its total equity in any one
entity, exclusive of U.S. Government Agency obligations. Mortgage-
backed securities do represent 24.60 percent of the total portfolio and
4.37 percent of total assets. The level yield method of accounting is
used to amortize premiums and accrete discounts on mortgage-backed
securities.
Page 28 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio
The composition of the loan portfolio, including loans held for sale,
follows:
June 30
1996 1995 1994 1993 1992
(Dollars in Thousands)
Commercial, financial
and agricultural $ 90,824 $ 76,015 $ 75,041 $ 54,832 $ 50,035
Real estate/Non-Farm 31,621 35,911 32,000 39,539 36,362
Real estate/Farmland 18,556 18,310 17,438 20,508 14,823
Consumer 32,140 25,922 23,016 19,636 21,268
Lease Financing 908 483 82 28 267
Foreign -0- -0- -0- -0- -0-
-------- ------- ------- ------- -------
174,049 156,641 147,577 134,543 122,755
Unearned discount -0- -0- -0- -0- ( 4)
------- ------- ------- ------- -------
174,049 156,641 147,577 134,543 122,751
Allowance for loan
losses (2,741) (2,349) (2,478) (2,226) (1,936)
-------- -------- -------- -------- --------
Total loans, net $171,308 $154,292 $145,099 $132,317 $120,815
========= ======== ======== ======== =========
Commercial loans have maintained a growth pattern since 1992.
Outstandings averaged $77,329,000 in 1996, $75,698,000 in 1995 and
$70,449,000 in 1994. While the Bank's commitment to agricultural-
related financing remains, outstanding agricultural-operating lines have
been on a gradual decline with balances at $22,570,000 for 1996,
$25,831,000 for 1995, $27,756,000 for 1994 and $28,408,000 for 1993.
New non-farm commercial credits have continued to increase, which will
help diversify the entire commercial loan portfolio.
Consumer loans, which include installment, credit card and student
loans, reversed the downward trend of the previous years and have
increased the past three years. Average outstandings increased by
approximately 12.27 percent or $3,025,000 for 1996 as compared to 12.63
percent or $2,906,000 for the year ended 1995. Credit card activity
showed gradual growth throughout 1994 and 1995, after the bank became an
"issuing bank" for both Mastercard and Visa in 1990. Following a credit
card promotion in 1996, balances increased $982,000 from the previous
year and totaled $2,307,000 at June 30, 1996. Management believes that
the outstanding consumer loan totals will show continued growth in 1997.
Page 29 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
Real estate loans decreased to $50,177,000 at June 30, 1996, as compared
to $54,221,000 at June 30, 1995. This decrease of $4,044,000
or 7.46 percent is primarily due to scheduled payments and refinancing
of 1-4 family residential mortgages. The majority of new originations
are being sold into the secondary market. Construction loans, which
are one year or less in length, are carried in the Bank's commercial
loan portfolio and totaled $5,439,000 at June 30, 1996 as compared to
$934,000 at June 30, 1995. Upon completion of construction, commitments
for permanent financing are activated either within the Bank's real
estate loan portfolio or with other financial institutions.
The Bank's portfolio doesn't include foreign loans, nor does there exist
a concentration of borrowers engaged in the same industry that would
exceed 10 percent of total loans except for the agricultural sector.
Approximately 24 percent or $41,126,000 of the total loan portfolio of
$174,049,000 represents agricultural-lending, both operations and long
term debt. This compares to 28 percent, $44,140,000 at June 30, 1995,
and 31 percent, $45,194,000 at June 30, 1994.
The size of the Bank's agricultural loan portfolio warrants a close
working relationship with these customers. At least annually each
customer presents projections, which include operating costs,
anticipated crop yields and market prices, and capital expenditures
required for their season's production. The Bank's farm lending
officers meet with customers to review these projections to assure that
they are reasonable and incorporate the repayment of principal and
interest to the Bank, over a reasonable time period. The revised
projections then provide a means for the Bank to monitor customer
performance during the current period and from year to year.
Once the extension of credit decision is made, the Bank follows a
program of monitoring the activities of their agricultural customers by
making farm visits regularly. The condition of growing crops, review of
market trends for both crops and livestock, and comparison of actual
performance to projected goals are among issues considered at the time
of visits, as well as throughout the year. The cooperation between the
Bank and its agricultural customers has provided a satisfactory
relationship over the years.
The results of the 1996 growing season in our trade area are mixed thus
far. Yields are lower due to heavy rainfall and flooding conditions in
the spring and early summer, but prices are higher than previous years.
Commercial nonaccrual loans at June 30, 1996 were $632,000, 100 percent
of which were agricultural-related. Management is acutely aware of the
inherent risks associated with agricultural lending via weather and
market. Our experience dictates that the risks are manageable and the
Bancorp is prepared to assume them.
Page 30 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
In 1996, the Bank's consumer loan emphasis was primarily in direct
lending. In the latter part of 1996 and into 1997 more emphasis has
been placed on the indirect market. Contacts with auto dealerships and
a new promotion has caused an increase in the indirect market.
Management continues to promote direct lending while increasing the
indirect market also. Currently, approximately 50 percent of new
originations are indirect. Management expects consumer loan volume to
show strong growth for 1997 and is anticipating that overall portfolio
quality will continue as in the previous years. Sound underwriting
standards and administration of the consumer loan function should
continue to maintain this segment of the loan portfolio. Our credit
card activity, both Mastercard and Visa, should continue to provide a
favorable yield. A successful promotion to increase credit card volume
was carried out in 1996.
Bancorp expects loan demand to remain strong during 1997, driven by very
competitive interest rates for both real estate mortgages and consumer
loans; and by the acquisition of quality commercial and agricultural
loans in the immediate surrounding areas.
Page 31 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Allowance for Loan Losses
Loan Composition and Allowance Allocation as of June 30, 1996 - Loan
composition and allowance allocation are presented in the table below.
June 30
1996 1995 1994 1993
Amt. Pct. Amt. Pct. Amt. Pct. Amt. Pct.
(Dollars in Thousands)
Loan Composition:
Commercial,
financial and
agricultural $ 90,824 52% $ 76,015 48% $ 75,041 51% $ 54,832 41%
Real estate/Farm 18,556 10 18,310 12 17,438 12 20,508 15
Non-Farm 31,621 19 35,911 23 32,000 22 39,539 29
Consumer 32,140 18 25,922 17 23,016 15 19,636 15
Lease Financing 908 1 483 -0- 82 -0- 28 -0-
Foreign -0- -0- -0- -0- -0- -0- -0- -0-
------------------------------------------------------
Total $174,049 $156,641 $147,577 $134,543
======================================================
Allowance Allocation:
Commercial,
financial and
agricultural $ 759 28% $ 1,358 58% $ 1,343 54% $ 1,345 60%
Real estate/Farm 48 2 47 2 20 1 60 3
Non-Farm 85 3 93 4 139 6 186 8
Consumer 289 11 274 12 346 14 435 20
Lease Financing -0- -0- -0- -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0- -0- -0- -0-
Unallocated 1,560 56 577 24 630 25 200 9
-----------------------------------------------------
Totals $2,741 100% $ 2,349 100% $ 2,478 100% 2,226 100%
=====================================================
In the course of extending credit, management recognizes that a
percentage of the loans will be uncollectible. Accordingly, an
allowance for possible loan losses is established as an estimate of the
loans which may ultimately have to be written off. During each month, a
provision for loan losses is recorded to maintain the adequacy of the
amount in the allowance for possible loan losses. When warranted, loans
are charged off against this reserve.
At June 30, 1996 the Bancorp's allowance for loan losses was $2,741,000,
compared to $2,349,000 in 1995 and $2,478,000 in 1994. The tables above
reflect the loan composition and allowance allocations for the past four
years. While the majority of Bancorp's allowance for loan losses is
allocated to specific loan categories, improved credit quality has
resulted in a significant unallocated portion which provides a cushion
against unanticipated future loan losses.
Page 32 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Deposits
The following table shows the average daily deposits and rates paid for
the years indicated.
By type of 1996 1995 1994
deposit: Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
Demand $ 22,014 -0-% $ 21,656 -0-% $ 22,739 -0-%
Saving 69,079 2.97 71,323 2.88 77,522 2.79
Time 97,085 5.58 88,501 5.16 82,238 4.59
--------------------------------------------------------
$ 188,178 $ 181,480 $ 182,499
The deposit base provides the major funding source for earning assets.
The average daily deposit balance of $188,178,000 funded 87.69 percent
of the 1996 average earning assets of $214,601,000. Average total
deposits in 1996 increased $6,698,000 or 3.69 percent from 1995 deposit
totals of $181,480,000. A shift from long term deposits to shorter term
accounts continued in all retail deposit categories. Interest bearing
deposits in denominations of $100,000 or greater totaled $20,250,000 at
June 30, 1996 compared to $14,593,000 at June 30, 1995.
Short-term Borrowings
Short-term borrowings consist primarily of repurchase agreements, both
term and open end. Essentially, these are borrowings from customers
that are collateralized by a pledge of U.S. Government or Agency
investments. Such borrowings provide alternatives for those customers
who prefer this form of investment. The following table provides
information about the Bank's Repurchase Agreements.
1996 1995 1994
(Dollars in Thousands)
Balance Outstanding as of June 30 $12,752 $20,691 $21,190
Weighted Average Rate as of June 30 3.36% 5.26% 3.10%
Average Balance for year ended June 30 $11,100 $ 9,420 $ 9,643
Weighted Avg Rate for year ended June 30 4.38 3.56% 3.11%
Highest Month End Balance for Fiscal Year $14,407 $20,691 $21,534
At June 30, 1996 Bancorp had drawn none of its $3,000,000 agricultural
seasonal line of credit with the Federal Reserve Bank of Chicago. The
Bancorp annually arranges for the availability of this credit to
temporarily fund seasonal agricultural loan demand. This seasonal line
of credit is due to mature on December 31, 1996. In addition, at June
30, 1996 the Bancorp had drawn $5,735,000 in various borrowings from the
Federal Home Loan Bank of Indianapolis to match particular loan pools.
These borrowings were matched to specific loan pools for comparable
terms and at a favorable interest rate spread to the Bank. Details of
these draws are found in Note #8, pages 55-56 of the accompanying
financials.
Page 33 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources
The strength of a company's capital position influences management's
willingness to take advantage of growth opportunities and provides the
capacity to absorb unforeseen financial difficulties. Bancorp's capital
position remains strong. Shareholders' equity was $24,127,000 on June
30, 1996 compared to $22,821,000 on June 30, 1995 and $21,191,000 on
June 30, 1994.
The Bancorp and the Bank are subject to regulations that require the
maintenance of a leverage ratio (tier one capital to adjusted total
assets), a tier one risk-based capital ratio (tier one capital to risk
adjusted assets), and a total risk-based capital ratio (total capital to
risk adjusted assets). These regulations require the maintenance of a
leverage ratio of at least 3 percent (for the best performing
institutions), a tier one risk-based capital ratio of at least 4
percent, and a total risk-based capital ratio of a least 8 percent.
During 1991, Congress passed the Federal Deposit Insurance Corporation
Improvement Act (FDICIA). In addition to addressing the insurance
fund's financial needs, FDICIA required the FDIC to promulgate
regulations (which were issued in early 1993) outlining specific
regulatory actions that would occur when the capital level of a
financial institution deteriorated beyond a specified level. A "well
capitalized" financial institution is defined as one which has a
leverage ratio of at least 5 percent, a tier one risk-based capital
ratio of at least 6 percent and a total risk-based capital ratio of at
least 10 percent. The FDIC established five capital ranges (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized). Institutions that
are not deemed to be "well" or "adequately" capitalized are subject to
operational restrictions and higher deposit insurance assessments.
These new regulations, effectively, establish minimum capital guidelines
in excess of the 3 percent (leverage), 4 percent (tier one risk-based),
and 8 percent (total risk-based) described above.
The Bancorp's ability to pay dividends to its shareholders depends
substantially upon the Bank's ability to pay dividends to the Bancorp.
Compliance with these regulations limits the amount of dividends that
may be paid by the companies. At June 30, 1996, both the Bancorp and
the Bank have capital levels substantially in excess of those required.
Bancorp's capital and capital ratios, which do not differ significantly
from bank-only ratios, were as follows at the dates indicated (dollars
in thousands):
Page 34 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources (cont.)
At June 30, 1996 1995 1994
Tier I Capital $ 24,221 $ 22,739 $ 21,191
Total Capital 26,562 24,998 23,390
Risk Weighted Assets 186,905 180,687 175,882
Leverage Ratio 10.21% 10.06% 9.79%
Tier One Risk-based Capital Ratio 12.96 12.58 12.05
Total Risk-based Capital Ratio 14.21 13.83 13.30
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The objective of liquidity management is to provide for the cash needs
of the Bancorp at a reasonable cost. Liquidity resources include liquid
assets and the Bancorp's ability to access additional sources of funds.
Additional asset liquidity is provided by our ability to sell loans.
Sales of real estate loans in the secondary market during 1996 generated
proceeds of $10,978,000 compared to $3,365,000 during 1995 and
$13,571,000 during 1994. In addition, the Bancorp sold $879,000 of
student loans during the year ended June 30, 1996, compared to $298,000
during 1995 and $224,000 during the year ended June 30, 1994. The
Bancorp also sold $1,640,000 in agricultural mortgage loans to an
insurance company during fiscal 1994. These loans were classified as
held for sale at June 30, 1993. At June 30, 1996, $492,000 of loans,
all first mortgages, were held for sale to secondary market entities,
compared to $863,000, $128,000 of first mortgages loans and $735,000 in
guaranteed student loans, at June 30, 1995.
The liquidity position is analyzed by comparing expected needs against
planned resources. Quantitative analysis of historical trends, seasonal
factors and cyclical influences are used to prepare forecasts of
liquidity needs.
Asset liquidity is provided primarily by the maturity of loans.
Additionally, Bancorp considers all securities that mature within one
year or have a call feature within the next year, all time deposits in
banks, bankers acceptances, and all federal funds sold to be sources of
asset liquidity. The total of these resources at June 30, 1996 is
$13,008,000, compared to $22,128,000 at June 30, 1995. The total of
these resources is down 41.21 percent from June 30, 1995 to June 30,
1996. The level at June 30, 1996 is deemed by management to be adequate
for funding purposes. In addition, the Bancorp has wholesale funding
sources with Federal Home Loan Bank and the Federal Reserve. At June
30, 1996, the Bancorp has $492,000 of first mortgages being held for
sale in the secondary market.
Page 35 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (cont.)
Unfunded loan commitments and unused lines of credit at June 30, 1996
were $34,524,000 and letters of credit were $381,000. Many existing
commitments will expire without being used. Consequently the
outstandings do not necessarily represent future cash commitments. The
reality of unknown credit demands challenges the Asset/Liability
Committee to maintain funding sources sufficient to meet our
requirements. If excess funds are available, the committee will strive
to invest them to effectively match our funding sources. 1997 has been
projected to be a year for an increased demand on funding levels as has
been the experience of the past year.
The principal objectives of asset/liability management are to manage
interest rate risk, ensure adequate liquidity, and coordinate sources
and uses of funds. The Bancorp engages in a formal process of
asset/liability management through an Asset/Liability ("A/L") Committee
of the Bank. Through this committee, senior management actively
participates in the process, ensuring that actions are communicated and
implemented throughout the bank.
In the analysis of interest rate risk, the objective is to manage,
within acceptable limits, the impact on the income statement caused by
fluctuating interest rates and changing rate relationships. Our policy
is to maintain a relatively neutral interest sensitive position and, if
necessary, the A/L committee may deviate from the neutral position
within our prescribed guidelines, which are reviewed by the Bancorp's
Board of Directors. The A/L committee can then manage interest rate
risk, while responding to change in the balance sheet and financial
markets as they strive to improve net interest income.
Provided on the next page is various repricing and maturity information
relative to securities, loans, and deposits at June 30, 1996, followed
by a condensed summary of Bancorp's interest sensitivity analysis
report.
Page 36 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The maturity distribution, reflecting scheduled maturities, or calls,
and projected paydowns of asset-backed securities, and average tax
equivalent yields for the securities at June 30, 1996 is shown in the
following table.
Within one One to Five Five to Ten
Year Years Years
Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
U.S. Govt. Agencies $ 6,998 6.83 $ 9,981 6.87% $ -0- -0-%
State and Municipal 3,261 8.80 5,632 7.38 1,285 6.93
Corporate Obligations 500 6.85 3,512 6.02 -0- -0-
Mortgage-backed
securities issued by
U.S. Govt. Agencies 1,431 6.76 8,142 6.41 298 9.16
Other Asset-backed
securities 818 7.06 -0- -0- -0- -0-
------------------------------------------------
$13,008 $27,267 $ 1,583
======= ======= =======
Over Ten
Years
Amount Yield
(Dollars in Thousands)
U.S. Govt. Agencies $ -0- -0-%
State and Municipal -0- -0-
Corporate Obligations -0- -0-
Mortgage-backed
securities issued by
U.S. Govt. Agencies 562 7.50
Other Asset-backed
securities -0- -0-
--------------
$ 562
======
Yields are reflected on a federal tax equivalent basis, assuming a 34
percent tax rate.
As of June 30, 1996, certificates of deposit over $100,000 mature as
follows: Amount Percent
(Dollars in Thousands)
Three months or less $ 13,320 65.78%
Over three through six months 2,144 10.59
Over six through twelve months 2,910 14.37
Over twelve months 1,876 9.26
----------------------------
Total $ 20,250 100.00%
============================
Page 37 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont.)
The following table reflects interest rate sensitivity as of June 30,
1996 with dollar references in thousands.
ASSET AND LIABILITY MATURITY/REPRICING SCHEDULE
Within Four to One to Over
Three Twelve Three Three
Months Months Years Years Total
ASSETS
Short Term Investments $ -0- $ -0- $ -0- $ -0- $ -0-
Securities 3,690 7,846 17,218 13,510 42,264
Loans 63,012 52,451 24,540 34,046 174,049
-----------------------------------------------
TOTAL EARNING ASSETS 66,702 60,297 41,758 47,556 216,313
------------------------------------------------
LIABILITIES
Savings, NOW & Money
Market Deposits 67,711 -0- -0- -0- 67,711
CDs Less Than $100,000 34,502 26,534 15,701 4,675 81,412
CDs Over $100,000 12,431 6,048 1,251 520 20,250
Short-term Borrowings 12,752 -0- -0- -0- 12,752
Other Borrowings 106 2,264 3,295 594 6,259
------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 127,502 34,846 20,247 5,789 188,384
------------------------------------------------
PERIOD GAP (RSA-RSL) $(60,800)$ 25,451 $ 21,511 $ 41,767 $ 27,929
Percent of Total Assets( 25.66)% 10.74% 9.08% 17.62% 11.79%
================================================
CUMULATIVE GAP $(60,800)$(35,349) $(13,838) $ 27,929
Percent of Total Assets( 25.66)% (14.92)% (5.84)% 11.79%
=====================================
Page 38 of 80
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The condensed GAP report (on the previous page) summarizes the Bank's
interest rate sensitivity. Management projects that rates will
gradually increase during the first quarter of the next fiscal year and
then level out the remainder of the 1997 fiscal year. Should these
projections be realized, a significant effect on earnings is not
anticipated. Interest rates decreased during the first six months of
fiscal 1996. With the decrease of rates, being negatively gapped has
been an advantage to the Bank. Interest bearing liabilities have
repriced more quickly, at lower rates, than have interest earning
assets; resulting in an increase in the net interest margin. Management
does believe that many of the deposit accounts and dollars are true core
deposits, and as such will not react significantly to changes in
interest rates. This will lessen the effect of interest rate changes.
The Bank continues to position itself to be as flexible as possible in
both earning assets and interest bearing liabilities by offering
variable rate loan and deposit instruments. Although rate sensitivity
gaps constantly change as funds are acquired and invested, the Bancorp's
cumulative gaps at all intervals are viewed by management to be a
relatively low percentage of total assets.
IMPACT OF ACCOUNTING ISSUES
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issues Financial
Accounting Standards which affect the Bancorp.
FAS 121 - Accounting For the Impairment of Long-Lived Assets
This Standard is applicable for 1997. The Bancorp does not currently
have any assets which management believes will be affected by FAS 121
and, accordingly, does not expect that this Standard will materially
effect the Bancorp's consolidated financial statements.
FAS 122 - Accounting For Mortgage Servicing Rights
This Standard is effective for 1997. FAS No. 122 requires the Bancorp
to recognize the servicing value associated with mortgage loans which
are originated by the Bancorp and sold to a third party, if the Bancorp
retains the right to service the mortgage. The Bancorp adopted this new
standard on July 1, 1996, and anticipates that FAS No. 122 will not have
a significant impact on the Bancorp's financial position and operations
for 1997.
FAS 123 - Accounting for Stock-based Compensation
This standard is effective for 1997 and requires entities to use fair
value accounting for stock-based compensation or, alternatively, to
disclose the effect of fair value accounting. Currently, the Bancorp
does not have any outstanding stock options or other instruments that
would be affected by this Standard and, as a result, management does not
expect FAS 123 to have a material effect on the Bancorp's consolidated
financial statements.
Page 39 of 80
Part II
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Farmers Bancorp
Frankfort, Indiana
We have audited the consolidated balance sheets of The Farmers Bancorp
as of June 30, 1996 and 1995 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Farmers Bancorp as of June 30, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 of the financial statements, the Company changed
its method of accounting for certain loans on July 1, 1995 and for
securities on July 1, 1994.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
July 18, 1996
Page 40 of 80
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
1996 1995
ASSETS
Cash and due from banks (Note 12) $ 9,888,804 $ 8,584,650
Federal funds sold - 6,800,000
Money market investments - 3,700,000
------------ ------------
Total cash and cash equivalents (Note 1) 9,888,804 19,084,650
Available-for-sale securities (Note 2) 18,610,219 11,510,352
Held-to-maturity securities (Note 2)
(Market values of $23,535,351 and $29,044,023) 23,653,882 28,833,477
Loans held for sale (Note 1) 491,943 863,122
Total loans (Note 3) 173,556,670 155,777,236
Less allowance for loan losses (Note 4) (2,741,200) (2,348,552)
------------ -----------
Loans, net 170,815,470 153,428,684
Premises and equipment - net (Note 5) 4,641,371 4,325,690
Restricted stock, at cost 770,500 670,600
Accrued income and other assets (Note 9) 8,171,998 7,315,395
------------ ------------
$237,044,187 $226,031,970
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Non-interest-bearing deposits $22,115,456 $22,037,943
Interest-bearing deposits (Note 6) 169,373,155 153,515,920
------------ -----------
Total deposits 191,488,611 175,553,863
Short-term borrowings (Note 7) 12,751,777 20,690,660
Other borrowings (Note 8) 6,259,397 5,174,512
Accrued expenses and other liabilities 2,417,631 1,791,981
------------ ------------
212,917,416 203,211,016
Commitments (Note 12)
Shareholders' equity
Common stock, (no par value - 600,000 shares
authorized, 577,058 shares issued
and outstanding) 2,885,290 2,885,290
Additional paid-in capital 5,101,125 5,101,125
Retained earnings 16,234,631 14,753,001
Net unrealized appreciation/(depreciation) on
available-for-sale securities
(net of tax of $61,835 and ($53,480)) (94,275) 81,538
------------ ------------
24,126,771 22,820,954
------------ ------------
$237,044,187 $226,031,970
============ ============
Page 41 of 80
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1996, 1995 and 1994
1996 1995 1994
INTEREST INCOME:
Loans, including related fees $14,791,655 $13,288,674 $12,001,391
Deposits in other banks - 8,333 17,044
Federal funds sold and short-
term money market investments 708,674 299,807 289,097
Securities
Taxable 2,075,872 2,508,259 2,851,019
Tax exempt 534,314 552,983 612,583
---------- ---------- ----------
18,110,515 16,658,056 15,771,134
INTEREST EXPENSE:
Deposits 7,469,131 6,623,127 5,933,499
Repurchase agreements and
other short-term borrowings 486,512 345,716 299,502
Long-term debt (Note 8) 297,125 255,674 86,723
---------- --------- ----------
8,252,768 7,224,517 6,319,724
---------- ---------- ----------
NET INTEREST INCOME 9,857,747 9,433,539 9,451,410
Provision for loan losses Note(4) 480,000 218,500 500,000
--------- --------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,377,747 9,215,039 8,951,410
OTHER OPERATING INCOME:
Trust fees 272,787 243,786 217,611
Service charge income 726,514 676,081 695,695
Mortgage banking revenue 110,106 82,965 176,998
Other income 377,019 464,831 495,895
--------- --------- ---------
1,486,426 1,467,663 1,586,199
OTHER OPERATING EXPENSES:
Salaries and employee benefits
(Note 9) 3,821,831 3,510,885 3,445,295
Occupancy expense - net 602,305 550,500 580,232
Equipment expense 580,780 568,720 486,686
Data processing expense 345,335 458,311 635,338
FDIC assessment 8,706 384,233 419,211
Other expenses 1,813,054 1,596,153 1,629,640
--------- --------- ---------
7,172,011 7,068,802 7,196,402
--------- --------- ---------
Income before income taxes 3,692,162 3,613,900 3,341,207
Less income taxes (Note 10) 1,275,699 1,188,469 1,080,103
---------- ---------- ----------
NET INCOME $ 2,416,463 $ 2,425,431 $ 2,261,104
========== ========== ==========
Per share data (Note 11):
Net income per share $ 4.19 $ 4.20 $ 3.92
========== ========== ==========
Page 42 of 80
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
Net
Unrealized
Appreciation/
(Depreciation)
Additional on Available-
Common Paid-in Retained for-Sale Treasury
Stock Capital Earnings Securities Stock Total
Balance, July 1, 1993
$2,887,760 $5,112,240 $11,751,477 $ - $(13,585) $19,737,892
Retirement of common
stock held in Treasury
(2,470) (11,115) - - 13,585 -
Net income - - 2,261,104 - - 2,261,104
Cash dividends
($1.40 per share) - - (807,883) - - (807,883)
--------- --------- --------- ------- ------- ---------
Balance, June 30, 1994
2,885,290 5,101,125 13,204,698 - - 21,191,113
Implementation of
Financial Accounting
Standard No. 115
(Note 1) - - - 33,393 - 33,393
Net income - - 2,425,431 - - 2,425,431
Cash dividends
($1.52 per share) - - (877,128) - - (877,128)
Change in net
unrealized appreciation/
(depreciation) - - - 48,145 - 48,145
--------- --------- ---------- ------- ------- ----------
Balance, June 30, 1995
2,885,290 5,101,125 14,753,001 81,538 - 22,820,954
Net income - - 2,416,463 - - 2,416,463
Cash dividends ($1.62
per share) - - (934,833) - - (934,833)
Change in net
unrealized appreciation/
(depreciation) - - - (175,813) - (175,813)
--------- --------- ---------- ------- ------- ----------
Balance, June 30, 1996
$2,885,290 $5,101,125 $16,234,631 $(94,275)$ - $24,126,771
========== ========== =========== ========= ====== ===========
Page 43 of 80
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities
Net income $2,416,463 $2,425,431 $2,261,104
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 514,517 476,714 417,812
Provision for loan losses 480,000 218,500 500,000
Net premium amortization on
securities 71,574 108,647 213,641
Proceeds from sales of loans 11,892,982 3,683,287 15,531,295
Gain on sale of loans (36,140) (20,287) (96,295)
Loans originated for sale (11,485,663) (3,548,466)(14,077,295)
Write-off of building 181,480 - -
Deferred taxes (94,685) 63,520 (172,084)
Change in assets and liabilities
Income taxes payable (40,618) 48,749 (64,224)
Interest receivable (216,224) 83,042 338,620
Interest payable 127,079 282,574 (36,299)
Other assets (146,451) (185,623) 33,236
Other liabilities 498,571 31,741 503,522
Net cash from operating ---------- ---------- ----------
activities 4,162,885 3,667,829 5,353,033
Cash flows from investing activities
Proceeds from maturities and principal
repayments on available-for-sale
securities 5,063,092 8,220,886 -
Purchase of available-for-sale
securities (7,461,299) (3,620,000) -
Proceeds from maturities and
principal repayments on held-to-
maturity securities 11,460,784 8,388,613 23,453,088
Purchase of held-to-maturity
securities (11,345,551) (3,108,185)(17,400,118)
Loans made to customers, net of
principal collections thereon (17,866,786) (9,526,199)(14,639,543)
Net change in interest-bearing balances
with financial institutions - 1,100,000 (1,100,000)
Purchase of life insurance policies (243,310) (142,453) (1,641,153)
Property and equipment expenditures(1,011,678) (44,833) (146,745)
Purchase of restricted stock (99,900) (14,500) (19,700)
----------- ---------- ----------
Net cash from investing activities(21,504,648) 1,253,329 (11,494,171)
Page 44 of 80
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30, 1996, 1995 and 1994
1996 1995 1994
Cash flows from financing activities
Net increase/(decrease)in deposits $15,934,748 $6,096,871 $6,020,024
Net increase/(decrease) in
short-term borrowings (7,938,883) (499,159) (1,732,512)
Proceeds from other borrowings 2,875,000 1,528,000 3,075,000
Repayment of other borrowings (1,790,115) (242,745) -
Dividends paid (934,833) (877,128) (807,883)
Net cash from financing ---------- --------- ---------
activities 8,145,917 6,005,839 6,554,629
Net change in cash and cash ---------- ---------- ---------
equivalents (9,195,846)10,926,997 413,491
Cash and cash equivalents at beginning
of year 19,084,650 8,157,653 7,744,162
Cash and cash equivalents at end of
year $9,888,804 $19,084,650 $8,157,653
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $8,125,689 $6,941,943 $6,356,023
Income taxes 1,411,002 1,076,200 1,316,411
Noncash investing activities
Transfer from held-to-maturity securities
to available-for-sale securities 5,010,512 16,738,531 -
Capital lease obligation - 814,257 -
Page 45 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: The consolidated financial statements include the
accounts of The Farmers Bancorp ("Bancorp") and its wholly owned
subsidiary, The Farmers Bank ("Bank"). Upon consolidation, all
significant intercompany accounts and transactions have been eliminated.
During the year ended June 30, 1995, the Bank dissolved its two wholly
owned subsidiaries, FBF Corp. and FBF Financial Services, LTD. FBF
Corp. owned all of the Bank s premises and FBF Financial Services, LTD
was a registered broker/dealer. All assets and liabilities of these two
companies were assumed by the Bank upon dissolution.
Use of Estimates in Preparation of Financial Statements: Management
must make estimates and assumptions in preparing financial statements
that affect the amounts reported therein and the disclosures provided.
These estimates and assumptions may change in the future, and future
results could differ.
Significant areas involving the use of management s estimates and
assumptions that are more susceptible to change in the near term include
the allowance for loan losses, the fair values of certain securities,
the determination and carrying value of impaired loans and the carrying
value of loans held for sale.
Description of Business: Bancorp operates primarily in the banking
industry which accounts for more than 90% of its revenues, operating
income and assets. The Bank generates commercial, installment and
mortgage loans and receives deposits from customers located primarily in
the Clinton County, Indiana area. Although the overall loan portfolio
is diversified, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the agricultural industry. The
majority of the Bank's loans are secured by specific items of collateral
including business assets, consumer assets and real property.
Securities: Effective July 1, 1994, the Bancorp adopted Financial
Accounting Standard No. 115 and accordingly classified its securities to
the categories discussed below. Prior to this date, securities were
reported at amortized cost. The Bancorp classifies its securities into
held-to-maturity and available-for-sale categories. Held-to-maturity
securities are those which the Bancorp has the intent and ability to
hold until maturity. These are reported at amortized cost. Available-
for-sale securities are those which management may decide to sell, if
needed, for liquidity, asset-liability management, or other reasons.
Available-for-sale securities are reported at fair value with unrealized
appreciation or depreciation included as a separate component of
shareholders equity, net of tax.
Realized gains or losses are determined based on the amortized cost of
the specific security sold. Interest and dividend income, adjusted for
the amortization of purchase premiums or discounts, is included in
earnings.
Page 46 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: The Bank originates certain fixed rate residential
real estate loans for sale in the secondary market. Loans held for sale
are carried at the lower of cost or aggregate market value. At June 30,
1996 and 1995, the market value of these loans exceeded their cost.
Gain and losses on the sale of real estate loans are included in
mortgage banking revenue.
Interest Income on Loans: Interest on loans is accrued over the term of
the loans based on the principal outstanding. Loans are placed on non-
accrual status when the collection of interest becomes doubtful. Loan
fees, net of certain direct loan origination costs, are deferred and
recognized into interest income over the term of the loan using the
level yield method.
Allowance for Loan Losses: An allowance for loan losses is established
and maintained because some loans may not be repaid in full. The
balance in the allowance and the amount of the annual provision charged
to expense are judgmentally determined based upon a number of factors.
Estimating the risk of loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover possible losses that
are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations,
including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for
specific problem loan situations, the whole allowance is available for
any loan charge-offs that occur. Increases to the allowance are
recorded by a provision for possible loan losses charged to expense. A
loan is charged-off by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
Effective July 1, 1995, the Bancorp adopted Financial Accounting
Standard No. 114 (FAS 114), "Accounting by Creditors for Impairment of a
Loan", as amended by FAS 118. Under this standard, loans considered to
be impaired are reduced to the present value of expected future cash
flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. The effect of adopting this
standard is considered to be a component of the provision for loan
losses and was not significant.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the passage
of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value,
while increases or decreases due to changes in estimates of future
payments and due to the passage of time are reported as reductions or
increases to the provision for loan losses. Management evaluates all
loans selected for specific review during their analysis of the
allowance for loan losses for impairment. Generally, that analysis will
not address smaller balance consumer credits.
Page 47 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated on the
straight-line and declining-balance methods over the estimated useful
lives of the assets. Maintenance and repairs are expensed and major
improvements are capitalized.
Other Real Estate: Real estate acquired through foreclosure is carried
at the lower of cost (fair value at date of foreclosure) or fair value
less estimated cost to sell. If it is later determined that the total
capitalized cost of the property cannot be recovered through its sale or
use, the loss is immediately recognized by a charge to income and the
creation of a reserve. Expenses incurred in carrying other real estate
are charged to operations as incurred.
Income Taxes: Deferred tax liabilities and assets are determined at
each balance sheet date. They are measured by applying enacted tax laws
to future amounts that will result from differences in the financial
statement and tax bases of assets and liabilities. Recognition of
deferred tax assets is limited by the establishment of a valuation
reserve unless management concludes that the assets will more likely
than not result in future tax benefits to the Bancorp. Income tax
expense equals the amount currently payable on the income tax return
plus or minus the change in deferred tax assets and liabilities.
Statement of Cash Flows: For purposes of the statement of cash flows,
cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold and short-term money market investments. Bancorp
reports net cash flows for customer loan and deposit transactions, for
interest-bearing balances with financial institutions and for short-term
borrowings.
Financial Statement Presentation: Certain items in the 1995 and 1994
financial statements have been reclassified to correspond with the 1996
presentation. These reclassifications had no effect on shareholders'
equity or the results of operations.
Page 48 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 2 - SECURITIES
The amortized cost and fair value of available-for-sale securities were
as follows at June 30, 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $ 8,992,361 $50,341 $ (90,671) $ 8,952,031
States and political
subdivisions 630,000 - - 630,000
Corporate obligations 4,011,770 3,750 (55,398) 3,960,122
Mortgage-backed securities
issued by U.S. Government
agencies 4,314,287 4,995 (68,591) 4,250,691
Other asset-backed
securities 817,911 31 (567) 817,375
------------ -------- ---------- -----------
$18,766,329 $59,117 $(215,227)$18,610,219
=========== ======= ========== ===========
This table presents the amortized cost and fair value of available-for-
sale securities at June 30, 1996, by contractual maturity. Actual
maturities may differ from contractual maturities because issuers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year $ 4,500,750 $ 4,522,185
Due after one year through five years 8,003,381 7,895,281
Due after five years through ten years 385,000 385,000
Due after ten years 745,000 739,687
Mortgage-backed securities issued by
U.S. Government agencies 4,314,287 4,250,691
Other asset-backed securities 817,911 817,375
---------- --------
$18,766,329 $18,610,219
=========== ===========
Page 49 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities were
as follows at June 30, 1995:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $ 4,340,069 $122,922 $ - $ 4,462,991
States and political
subdivisions 670,000 - - 670,000
Corporate obligations 1,000,000 9,687 (3,125) 1,006,562
Mortgage-backed securities
issued by U.S. Government
agencies 3,759,696 17,562 (23,527) 3,753,731
Other asset-backed
securities 1,605,569 11,499 - 1,617,068
----------- -------- -------- -----------
$11,375,334 $161,670 $(26,652) $11,510,352
=========== ======== ========= ===========
The amortized cost and fair value of held-to-maturity securities were as
follows at June 30, 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $7,987,400 $ 16,733 $(156,481) $ 7,847,652
States and political
subdivisions 9,548,045 128,958 (48,209) 9,628,794
Mortgage-backed securities
issued by U.S. Government
agencies 6,118,437 42,717 (102,249) 6,058,905
---------- --------- ---------- -----------
$23,653,882 $ 188,408 $ (306,939) $23,535,351
========== ========= ========== ===========
This table presents the amortized cost and fair value of held-to-
maturity securities at June 30, 1996, by contractual maturity. Actual
maturities may differ from contractual maturities because issuers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year $ 2,631,342 $ 2,658,977
Due after one year through five years 8,664,646 8,678,123
Due after five years through ten years 6,239,457 6,139,346
Mortgage-backed securities issued by U.S.
Government agencies 6,118,437 6,058,905
----------- -------------
$23,653,882 $23,535,351
Page 50 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of held-to-maturity securities at June
30, 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $12,526,237 $ 99,648 $ (72,486) $12,553,399
States and political
subdivisions 8,071,915 256,854 (1,673) 8,327,096
Corporate obligations 3,019,098 7,812 (56,600) 2,970,310
Mortgage-backed securities
issued by U.S. Government
agencies 5,216,227 53,730 (76,739) 5,193,218
---------- ------- -------- ---------
$28,833,477 $418,044 $(207,498) $29,044,023
=========== ======== ========= ===========
No securities were sold during 1996, 1995 or 1994.
Securities with a book value of $14,183,000 and $21,119,000 at June 30,
1996 and 1995, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes required or permitted by
law.
On December 31, 1995, pursuant to new accounting guidance, the Bancorp
transferred held-to-maturity securities with an amortized cost of
$5,011,000 and a fair value of $4,996,000 to the available-for-sale
category.
NOTE 3 - LOANS
Loans as presented on the balance sheet are comprised of the following:
1996 1995
Commercial loans $ 90,824,202 $ 76,014,707
Real estate loans 49,683,949 54,220,307
Installment loans 32,140,145 25,059,218
Lease financing 908,374 483,004
------------ ------------
$173,556,670 $155,777,236
============ ============
Page 51 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 3 - LOANS (Continued)
The Bank services mortgage loans sold to the Federal Home Loan Mortgage
Corporation. These loans are not included in the above balances and
totaled approximately $29,309,000 and $22,085,000 at June 30, 1996 and
1995, respectively.
Total loans at June 30, 1996 and 1995 include approximately $41,126,000
and $44,140,000, respectively, of loans to farmers or businesses related
to the agricultural industry.
At June 30, 1996, 1995 and 1994, non-performing loans included the
following:
1996 1995 1994
Non accrual loans $1,136,000 $1,223,000 $ 735,000
Troubled debt restructuring 748,000 708,000 $1,669,000
Loans contractually past due greater
than 90 days and still accruing 489,000 560,000 331,000
---------- ---------- ---------
$2,373,000 $2,491,000 $2,735,000
========== ========== ==========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
1996 1995 1994
Beginning balance $2,348,552 $2,478,124 $2,226,294
Provision charged to operations 480,000 218,500 500,000
Loans charged off (546,895) (735,123) (471,361)
Recoveries 459,543 387,051 223,191
---------- ---------- ----------
Ending balance $2,741,200 $2,348,552 $2,478,124
========== ========== ==========
Page 52 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows at or for the year
ended June 30, 1996:
1996
Average investment in impaired loans $1,233,000
==========
Interest income recognized on impaired loans including
interest income recognized on cash basis of $1,000 $ 1,000
==========
Information regarding impaired loans at year-end is as follows:
Balance of impaired loans at June 30, 1996 $1,061,000
Less portion for which no allowance for loan losses
is allocated 612,000
---------
Portion of impaired loan balance for which an allowance
for credit losses is allocated $ 449,000
==========
Portion of allowance for loan losses allocated to the
impaired loan balance $ 125,000
==========
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment by major category follows:
1996 1995
Land $1,010,862 $1,000,862
Buildings and improvements 4,973,436 4,504,416
Furniture and equipment 3,336,284 3,151,892
--------- ---------
9,320,582 8,657,170
Accumulated depreciation (4,679,211) (4,331,480)
--------- ---------
$4,641,371 $4,325,690
NOTE 6 - DEPOSITS
Time deposits issued in denominations of $100,000 or greater totaled
$20,250,000 and $14,593,000 at June 30, 1996 and 1995, respectively.
Interest expense on such deposits for 1996, 1995 and 1994 was $941,000,
$673,000 and $376,000, respectively.
Page 53 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 6 - DEPOSITS (Continued)
At June 30, 1996, the scheduled maturities of time deposits are as
follows:
1997 $67,145,000
1998 9,964,000
1999 6,988,000
2000 2,840,000
2001 and thereafter 2,355,000
-----------
$89,292,000
===========
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings consist solely of retail repurchase agreements at
June 30, 1996 and 1995. Essentially, these are borrowings from
customers that are collateralized by a pledge of U.S. Government or
Agency Securities. Bancorp retains possession of and control over such
securities. Information regarding repurchase agreements at and for the
years ended June 30, 1996 and 1995 is presented below:
1996 1995
Average balance during the year $11,100,000 $ 9,420,000
Average rate paid during the year 4.38% 3.56%
Maximum month end balance during the year $14,407,000 $20,891,000
Carrying value of securities pledged at June 30 $13,155,000 $21,310,000
Fair value of securities pledged at June 30 $13,095,000 $21,035,000
Page 54 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 8 - OTHER BORROWINGS
Other borrowings consist of the following at June 30:
1996 1995
Federal Home Loan Bank (FHLB) advances $5,735,017 $4,499,801
Capital lease obligation 524,380 674,711
--------- -----------
Total $6,259,397 $5,174,512
========== ==========
The FHLB advances are secured by a blanket pledge covering the Bank s
mortgage loans and other assets and require monthly interest payments.
The following advances are outstanding at June 30, 1996:
Maturity Date Interest Rate Balance
------------- ------------- -------
October 4, 1996 5.78% $ 560,000
October 7, 1996 4.57 950,000
January 13, 1997 5.18 450,000
February 1, 1999 5.28 1,200,000
February 16, 1999 5.38 1,623,113
September 15, 2000 5.12 286,904
June 15, 2006 7.09 665,000
---------
$5,735,017
==========
Required annual principal payments for those advances outstanding at
June 30, 1996 are as follows:
Year ending
June 30,
1997 $2,093,165
1998 144,409
1999 2,744,640
2000 77,386
2001 83,657
After 2001 591,760
---------
$5,735,017
==========
Page 55 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 8 - OTHER BORROWINGS (Continued)
The $950,000 advance maturing October 7, 1996 may be prepaid at
specified times without penalty. Penalties, based on market rates at
the time of prepayment, will be assessed if the other advances are
prepaid.
The capital lease obligation relates to EDP equipment. The term of the
lease is sixty months and it expires in 1999. The gross amount of this
asset is $814,257 and accumulated depreciation was $247,656 at June 30,
1996. Annual payments are $195,647 with aggregate remaining payments of
$586,940 at June 30, 1996. The obligation reflected on the balance
sheet at June 30, 1996 represents the aggregate amount payable less
$62,560 of imputed interest.
NOTE 9 - BENEFIT PLANS
The Bank has a non-contributory defined benefit pension plan which
covers a majority of its employees. The Bank's funding policy is to
contribute the amount allowable as a deduction under the Internal
Revenue Code. The following sets forth the Plan's funded status and
amounts recognized in the Bancorp's balance sheet and income statement:
As of June 30: 1996 1995
Accumulated benefit obligation $ 3,746,265 $ 3,646,427
=========== ===========
Vested benefit obligation $ 3,403,128 $ 3,255,221
=========== ===========
Plan assets at fair value $ 4,582,399 $ 4,420,733
Projected benefit obligation for service
rendered to date (4,421,099) (4,279,908)
Unrecognized prior service gain (85,338) (95,965)
Unrecognized loss 460,394 395,715
Unrecognized transition asset (134,573) (159,975)
---------- ----------
Prepaid pension cost $ 401,783 $ 280,600
=========== ===========
Page 56 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 9 - BENEFIT PLANS (Continued)
For the year ended June 30: 1996 1995 1994
Net pension expense included
the following:
Service cost for the year $197,187 $194,773 $205,869
Interest cost on projected benefit
obligation 300,479 276,980 260,227
Actual return on plan assets (333,781) (259,868) (126,917)
Net amortization and deferral (32,495) (86,953) (206,909)
--------- --------- ---------
Net pension expense $131,390 $124,932 $132,270
======== ======== ========
Significant actuarial assumptions which affect the Plan's obligations
and funding requirements are as follows:
1996 1995 1994
Weighted average discount rate 7.00% 7.00% 7.00%
Increase in annual compensation 5.00 5.00 5.00
Long-term rate of return on Plan assets 7.50 7.50 7.50
The unrecognized prior service gain relates to the effect of changes in
the Plan's benefit formula. These gains are being amortized, using the
straight line method, over the remaining average service lives of Plan
participants.
Plan assets consist primarily of investments in interest-bearing
balances with financial institutions, U.S. Treasury notes, U.S.
Government agencies and corporate bonds and notes.
The Bank also maintains a 401(k) plan for the benefit of eligible
employees. Employer contributions include discretionary contributions
and the matching of a portion of employee contributions. Expense
recognized for this plan was $26,836, $26,213 and $24,147 for 1996, 1995
and 1994, respectively.
The Bank maintains a deferred compensation plan for the benefit of
certain directors, executive officers and independent contractors. In
return for relinquishing the right to a portion of their current
compensation, the Bank agrees to pay participants a retirement benefit,
in the form of a monthly payment for up to 180 months. During 1996,
1995 and 1994, the Bank accrued approximately $310,000, $211,000 and
$178,000, respectively, towards its obligation under the plan.
Page 57 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 9 - BENEFIT PLANS (Continued)
During 1994, the Bank established a death benefit plan for the benefit
of its officers. Under the plan, if the participant dies prior to
retirement, the Bank agrees to pay a specified death benefit to
designated beneficiaries.
In conjunction with the deferred compensation and death benefit plans,
the Bank purchased life insurance on the participants. The cash
surrender value of such insurance at June 30, 1996 and 1995 was
$4,510,000 and $4,216,000, respectively, and is included in "accrued
income and other assets" on the Bancorp's consolidated balance sheets.
NOTE 10 - INCOME TAXES
Income taxes consist of the following components:
1996 1995 1994
Income tax expense/(benefit)
Current $1,370,384 $1,124,949 $1,252,187
Deferred (94,685) 63,520 (172,084)
----------- ---------- ----------
$1,275,699 $1,188,469 $1,080,103
========== ========== ==========
Principal components of the deferred income tax expense/(benefit) are
the tax effects of temporary differences related to the provision for
loan losses, depreciation expense and pension expense.
The following is a reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to
income before income taxes:
1996 1995 1994
Statutory rate applied to
income before income taxes $1,255,335 $1,228,726 $1,136,010
Add (deduct) tax effect of
Tax exempt interest income (175,449) (191,563) (202,077)
State income tax (net of
federal tax benefit) 212,063 199,500 190,091
Other, net (16,250) (48,194) (43,921)
----------- ---------- ----------
$1,275,699 $1,188,469 $1,080,103
Page 58 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 10 - INCOME TAXES (Continued)
The net deferred tax asset reflected in the June 30, 1996 and 1995
consolidated balance sheets is comprised of the following components:
1996 1995
Deferred tax assets from:
Provision for loan losses $ 784,000 $ 599,000
Deferred loan fees/costs - 135,000
Deferred compensation plans 325,000 202,000
Available-for-sale securities 61,835 -
Other 103,165 12,000
--------- --------
1,274,000 948,000
Deferred tax liabilities for:
Depreciation (509,000) (455,000)
Pension plan (158,000) (110,000)
Available-for-sale securities - (53,480)
Deferred loan fees/costs (64,000) -
Other (38,000) (34,520)
---------- ----------
(769,000) (653,000)
Valuation allowance for deferred tax assets - -
---------- ----------
$ 505,000 $ 295,000
========== ==========
NOTE 11 - EARNINGS PER SHARE
Earnings per common share have been computed based on the weighted
average number of shares outstanding during the years presented. The
number of shares used in the computation was 577,058 for 1996, 1995 and
1994.
NOTE 12 - COMMITMENTS AND OFF BALANCE SHEET ITEMS
The Bank has operating leases covering certain of its properties.
Expense for leased premises was $64,079 for 1996, $56,295 for 1995 and
$52,172 for 1994. Minimum lease payments at June 30, 1996 for all non-
cancelable leases are as follows:
1997 $ 65,699
1998 63,664
1999 22,546
2000 16,248
2001 16,896
Thereafter 74,580
--------
$259,633
========
Page 59 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 12 - COMMITMENTS AND OFF BALANCE SHEET ITEMS (Continued)
The Bank, in the ordinary course of business, has commitments and
contingent liabilities, such as guarantees and commitments to extend
credit which are not reflected in the accompanying consolidated balance
sheets. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to make loans, standby letters of credit, and financial
guarantees is represented by the contractual amount of those
instruments. The Bank uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
At June 30, 1996 and 1995, these financial instruments are summarized as
follows:
1996 1995
Financial instruments which contract amount
represents credit risk:
Unused commercial lines of credit $15,732,000 $13,642,000
Unused revolving lines of credit 11,503,000 8,744,000
Commitments to make loans 7,289,000 2,776,000
Standby letters of credit 381,000 738,000
The unused revolving and commercial lines of credit are predominantly
variable rate agreements. The commitments are agreements to lend to a
customer, provided they accept the terms and conditions offered by the
Bank. These commitments are generally extended for terms of up to 60
days and, in many cases, allow the customer to select from one of
several financing options offered. At June 30, 1996, these commitments
included $1,185,000 of fixed-rate loan commitments at rates ranging from
7.00% to 10.00%. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is
determined using management s credit evaluation of the borrower, and may
include accounts receivable, inventory, property, land and other items.
At June 30, 1996, the Bank was required to have $2,299,000 on deposit
with the Federal Reserve or as cash on hand as reserve. These reserves
do not earn interest.
The Bancorp is also subject to claims and lawsuits which arise primarily
in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits
will not have a material adverse effect on the consolidated financial
position of the Bancorp.
Page 60 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 13 - CAPITAL REQUIREMENTS
The Bancorp and the Bank are subject to regulations which require the
maintenance of both a leverage ratio (tier one capital to adjusted total
assets) and a risk based capital ratio (total capital to risk adjusted
assets). Compliance with these regulations limits the amount of
dividends that may be paid by the companies. These regulations define
an "adequately capitalized" financial institution as one which has a
tier one leverage ratio of at least 4% and a total risk-based capital
ratio of at least 8%. Financial institutions which fail to achieve at
least those levels of capital compliance are subject to regulatory
action. At June 30, 1996, the Bank's tier one and total capital were
$24,200,000 and $26,500,000, respectively, and its leverage and total
risk-based capital ratios were 10.40% and 14.19%, respectively, which
exceed the levels required to be deemed adequately capitalized by 6.40%
($14,900,000) and 6.19% ($11,600,000), respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain of the Bancorp's directors and executive officers were loan
customers of the Bank. A schedule of the aggregate activity in such
loans, when total customer borrowings exceed $60,000, follows:
Balance July 1, 1995 $1,984,799
New loans and draws 137,314
Loan reductions and principal payments (590,300)
Other changes (39,244)
----------
Balance June 30, 1996 $1,492,569
==========
Other changes include adjustments for loans applicable to one period
that are excludable from the other reporting period.
Page 61 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value of financial
instruments and their related carrying value at June 30, 1996 and 1995.
Items which are not financial instruments are not included.
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(in thousands) (in thousands)
Financial assets
Cash and short-term
investments $ 9,889 $ 9,889 $ 19,085 $ 19,085
Securities 42,264 42,146 40,343 40,554
Net loans 171,307 168,008 154,292 152,608
Financial liabilities
Deposits (191,489) (191,275) (175,554) (176,074)
Short-term borrowings (12,752) (12,752) (20,691) (20,691)
Other borrowings (6,259) (6,171) (5,175) (5,096)
Off balance sheet financial
instruments
Loan commitments and
letters of credit 0 0 0 0
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments at June 30, 1996 and 1995:
Cash and Short-term Investments: The carrying amount is a reasonable
estimate of the fair value of cash and short-term investments.
Securities: For securities, fair value equals quoted market value for
the individual securities. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
instruments.
Page 62 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Loans: The fair value of loans is estimated by discounting projected
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings for similar remaining
maturities.
Deposits: The fair value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed maturity certificates of deposit is
estimated by discounting projected future cash flows using rates
currently offered for deposits with similar remaining maturities.
Short-term Borrowings: These obligations are generally variable rate or
are for very short terms. Accordingly, their carrying amount is a
reasonable estimate of fair value.
Other Borrowings: The estimated fair value of other borrowings is based
upon the current rate that the Bancorp would pay for similar borrowings,
applied to the time period until maturity.
Loan Commitments and Letters of Credit: The carrying value of these
commitments is a reasonable estimate of fair value. These investments
are generally variable rate and/or short-term in nature with minimal
fees charged.
While these estimates of fair value are based on management's judgment
of the most appropriate factors, there is no assurance that were the
Bancorp to have disposed of such items, the estimated fair values would
necessarily have been achieved at that date, since actual sales prices
may differ depending on various circumstances. The estimated fair
values presented should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Bancorp that are not
defined as financial instruments such as property and equipment are not
included in the above disclosures. Also, non-financial instruments
typically not recognized in financial statements nevertheless may have
value but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit
accounts, the earnings potential of loan servicing rights, the earnings
potential of the Bancorp's trust department, the trained work force,
customer goodwill, and similar items.
Page 63 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 16 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and
statements of cash flows for the parent company:
CONDENSED BALANCE SHEETS
June 30,
1996 1995
ASSETS
Cash on deposit with subsidiary $ 21,312 $ 17,731
Investment in Bank subsidiary 24,094,858 22,796,050
Other assets 23,237 11,435
----------- ------------
$24,139,407 $22,825,216
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 12,636 $ 4,262
Total shareholders' equity 24,126,771 22,820,954
----------- -----------
$24,139,407 $22,825,216
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years ended June 30: 1996 1995 1994
Operating income
Dividends from Bank subsidiary $ 959,835 $ 877,128 $ 807,883
Interest income 15,090 588 310
---------- ---------- ----------
974,925 877,716 808,193
Operating expense 44,885 33,685 27,846
---------- ---------- ----------
Income before income tax and
equity in undistributed
income of subsidiary 930,040 844,031 780,347
Income tax benefit (11,802) (13,109) (10,908)
---------- ---------- ----------
Income before equity in
undistributed income of
subsidiary 941,842 857,140 791,255
Equity in undistributed income
of subsidiary 1,474,621 1,568,291 1,469,849
--------- --------- ---------
Net income $2,416,463 $2,425,431 $2,261,104
========== ========== ==========
Page 64 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 16 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended June 30: 1996 1995 1994
Cash flows from operating activities
Net income $2,416,463 $2,425,431 $2,261,104
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed income of
subsidiary (1,474,621) (1,568,291) (1,469,849)
Change in other assets (11,802) (491) 26,593
Change in other liabilities 8,374 (289) (7,249)
--------- --------- ---------
Net cash from operating activities 938,414 856,360 810,599
Cash flows from financing activities
Dividends paid (934,833) (877,128) (807,883)
--------- --------- ---------
Net change in cash 3,581 (20,768) 2,716
Cash at beginning of year 17,731 38,499 35,783
--------- --------- ---------
Cash at end of year $ 21,312 $ 17,731 $ 38,499
========== ========== ==========
NOTE 17 - PENDING CHANGES IN ACCOUNTING POLICIES
FASB Statement 122 (FAS 122) "Accounting for Mortgage Servicing Rights"
was issued in May, 1995. Bancorp adopted this statement on July 1,
1996, as required. FAS 122 eliminates the accounting distinction
between originated and purchased mortgage servicing rights. Beginning
July 1, 1996, when a loan is originated with the intent to sell, a
separate asset will be recognized for the mortgage servicing right,
which is consistent with the current treatment of purchased mortgage
servicing rights. FAS 122 also changes the manner in which impairment
of capitalized mortgage servicing rights is recognized. Impairment will
be recognized using the fair value of individual stratum of servicing
rights based on the underlying risk characteristics of the serviced loan
portfolio, compared to an aggregate portfolio approach under previous
accounting guidance.
Page 65 of 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 17 - PENDING CHANGES IN ACCOUNTING POLICIES (Continued)
Based on its current volume of mortgage banking activity, Bancorp
expects FAS 122 to have a positive impact on its financial condition and
operations for the fiscal year ending June 30, 1997. The impact in
subsequent years is difficult to predict. FAS 122 will initially result
in the recognition of larger gains on sales of mortgage loans, because
of the initial capitalization of the originated mortgage servicing right
asset. However, the larger gains on sales of loans will be offset by
the future amortization of the mortgage servicing right asset. In
addition, the valuation allowance on impaired mortgage servicing rights
may fluctuate significantly in the future, because the impairment
evaluation is based on assumed loan prepayment and default rates,
interest rates, and other factors.
Page 66 of 80
Part II
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cont.)
DEPOSIT INTEREST EXPENSE BY TYPE
JUNE 30
1996 1995 1994
(Dollars in Thousands)
Deposit Interest Expense:
NOW Accounts $ 694 $ 676 $ 649
Money Market Checking 162 173 187
Regular Savings 530 513 509
Advantage Savings 380 388 495
Christmas Club Savings 11 11 10
Money Market Investment 275 291 322
Total Certificates 5,417 4,571 3,761
------------------------------------
Total Deposit Interest Expense $7,469 $6,623 $5,933
=====================================
Page 67 of 80
Part II
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements to report under this item.
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Fred K Agnew retired as President of the bank effective September 1995
after serving in that capacity since March 1986. Mr. Agnew remains on
the Board of Directors, and serves as Chairman to the Board. Tom
Rohrabaugh was named President of the Bank effective September 1995 and
became the thirteenth President of the Farmers Bank. Armean Wright
announced his retirement from the Board of Directors effective September
1996. He served faithfully with dedication and distinction for the past
twenty-eight years. The executive officers and present directors of the
Bancorp include the following persons.
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
Fred K Agnew 64 Chairman of the 1 1983 Retired
905 S O'Neil St. Board and Director (1996) Banker (1)
Frankfort, IN
Ralph M. Butler 80 Director N/A 1983 Retired
3052 N Co Rd 1000 E (1997) (2)
Forest, IN
John L. Conway 64 Vice President 13 N/A Banker
701 S Williams Rd. and Secretary
Frankfort, IN
Judson J. Costlow 53 Vice President 2 N/A Banker
906 S O'Neil St. and Trust Officer
Frankfort, IN
Joe C. Doan 52 Director N/A 1990 Business-
801 Eastwood Drive (1996) man (3)
Frankfort, IN
Daryl C. Fry 56 Vice President 2 N/A Banker
759 Maple Drive
Frankfort, IN
Joseph V. Lahrman 65 Director N/A 1989 Farming (4)
5253 N Co Rd 850 W (1998)
Mulberry, IN
C. Robert Lord 57 Senior Vice 2 N/A Banker
1550 S. Williams Rd. President
Frankfort, IN
Page 68 of 80
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
R. Ronald McClughen 53 Senior Vice 2 N/A Banker
1351 Forest Drive President
Frankfort, IN
Karen I. Miller 40 Chief Financial 2 N/A Banker
1208 N. Jackson St. Officer
Frankfort, IN
Jennifer L. Neal 42 Investment Officer 2 N/A Banker
4515 E. St. Rd. 38
Kirklin, IN
Edward R. Pluhar 49 Vice President 2 N/A Banker
309 Harvard Terrace
Frankfort, IN
Jack W. Ransom 49 Director N/A 1994 Business-
958 Forest Drive S. (1996) man (5)
Frankfort, IN
Rawl V. Ransom 76 Director N/A 1983 Retired
1555 N Main St. (1997) Business-
Frankfort, IN man (6)
Steven C. Reynolds 44 Vice President 2 N/A Banker
4 S. Crescent Drive
Frankfort, IN
Tom Rohrabaugh 62 President and 11 1992 Banker
901 Williams Road Director (1998)
Frankfort, In
Stephen G. 50 Director N/A 1994 Farming
Rothenberger (1997) (7)
1784 S. County Rd. 180E
Frankfort, IN
R. Kent Ryan Jr. 53 Secretary to the 2 1995 Attorney
3490 State Road 75 N Board and Director (1997) (8)
Frankfort, IN
Page 69 of 80
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
Stanley K. Smith 47 Director N/A 1989 General
859 Forest Drive S. (1998) Contractor
Frankfort, IN (9)
Robert F. Thorley 48 Vice President 2 N/A Banker
7628 E. Co. Rd. 500 S.
Kirklin, IN
Armean L. Wright 83 Director N/A 1983 Retired
800 Glendale Dr. (1996) (10)
Frankfort, IN
* "N/A" means not applicable and represents that the named individual
is either not a director or not an executive officer.
1. Fred K Agnew retired as President of the Farmers Bank in September
1995.
2. Ralph M. Butler has been retired for the past 13 years. From 1960-
1981, he was part owner - operator of Fairground Implement Inc.,
Frankfort, Indiana, a farm implement dealer.
3. Joe C. Doan is President of Coapstick Insurance Agency, Frankfort,
Indiana.
4. Joseph V. Lahrman is President of Joseph Lahrman Farms, Inc.,
Mulberry, Indiana.
5. Jack W. Ransom is President of Kramer Brothers Lumber Co., Inc.,
Frankfort, Indiana.
6. Rawl V. Ransom retired in 1985 as President of Kramer Brothers
Lumber Co., Inc., Frankfort, Indiana.
7. Stephen G. Rothenberger is owner and manager of Rothenberger Farms.
8. R. Kent Ryan Jr. is the managing partner of the law firm Ryan,
Hartzell, Moore and Cook in Frankfort, Indiana. Mr. Ryan's firm is
retained by the Bank and performs services on behalf of the Bank.
9. Stanley K. Smith is President of Arthur A. Gill & Son Co. Inc.,
Frankfort, Indiana, a general contractor.
10. Armean L. Wright is retired as President of Mallory Controls Co., a
division of P.R. Mallory Co., Inc. in Frankfort, Indiana, a
manufacturer of mechanical devices.
Page 70 of 80
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
All of Bancorp's directors are divided into 3 classes, whose term is
three years or until their respective successors are duly elected and
qualified. One class of Directors are elected annually. All executive
officers hold office for a term of one year. There are no arrangements
or understandings between any of the directors, executive officers, or
any other persons pursuant to which any of the Bancorp's directors or
executive officers have been selected for their respective position.
Part III
Item 11 EXECUTIVE COMPENSATION
The following table contains information concerning the compensation
paid by Bank and Bancorp for the fiscal years ended June 30, 1994, 1995
and 1996 to the two executive officers whose total annual salary and
bonus exceeded $100,000. Mr. Fred Agnew decided to retire from the
office of President in September 1995. Tom Rohrabaugh replaced Mr.
Agnew as President at that time.
SUMMARY COMPENSATION TABLE
Name and All
Principal Year ended Other
Position June 30, Salary Compensation (1)
Tom Rohrabaugh 1996 $112,831 $1,410
President of Bancorp
and Bank
Fred K Agnew 1996 $142,160 $1,777
President of Bancorp 1995 117,319 1,405
and Bank 1994 107,225 1,329
(1) Bank contributions for fiscal year to Internal Revenue Code
Section 401(k) savings plan.
Tom Rohrabaugh is a participant in a deferred compensation plan
established during the year ended June 30, 1993, and will receive
$21,419 per year for 15 years following his retirement or his death.
Such benefit is to be paid in equal monthly installments and the amount
he will receive is conditioned upon Mr. Rohrabaugh deferring receipt of
5 percent of his monthly base compensation, which he would otherwise be
entitled to receive from the Bank, through the date of his retirement,
expected to be December 1998. In addition to the benefit described
above, Mr. Rohrabaugh shall be entitled to receive a one-time lump sum
death benefit in the amount of $10,000.
Fred K Agnew is a participant in a deferred compensation plan
established during the year ended June 30, 1993 and will receive $26,729
per year for 15 years following his retirement or his death. Such
benefit is to be paid in equal monthly installments. In addition to the
benefits described above, Mr. Agnew shall be entitled to receive a one-
time lump-sum death benefit in the amount of $10,000.
Page 71 of 80
Part III
Item 11 EXECUTIVE COMPENSATION (cont.)
During the fiscal year ended June 30, 1994, the Bank established a death
benefit plan covering all officers. By the purchase of a whole life
insurance product, the Bank would be owner and beneficiary of the
policies. The Bank, in turn, executes an agreement with each officer to
pay a specified death benefit to each officer's beneficiary if death
occurs before retirement.
Upon retirement, the officer will have the option to continue the
existing death benefit coverage through a split dollar agreement with
the Bank. The Bank will assign the death benefit portion to the officer
for the portion of death benefit they had at retirement, or a lesser
amount if the officer chooses. The Bank retains the ownership of the
cash surrender value of the policy plus the balance of the death
benefit, if any. The retired Bank officer does assume the economic
benefit accruing to the policy and is responsible to pay the taxes for
such benefit. It thereby will make the proceeds received by the retired
officers' beneficiary free of federal income tax under the current tax
laws.
This program replaced the existing group term policy that had been in
effect for many years. The former group plan resulted in an expense
only and the new death benefit program is expected to provide a
reasonable rate of return on the Bank's investment.
COMPENSATION OF DIRECTORS
Each outside director of the Bank and Bancorp, who did not elect to
participate in the deferred compensation program described below,
received a $6,000 director's fee for the year ended June 30, 1996;
except the Chairman of the Board received $9,600, and the Secretary
received $8,400. In addition an attendance fee of $150 per board and
committee meeting is paid to outside directors on a quarterly basis.
Those outside directors serving on the Finance Committee receive $300 as
an attendance fee.
During the fiscal year ended June 30, 1993, the Bank established a
deferred compensation program for the benefit of certain executive
officers, directors and independent contractors who elected to
participate. Directors Joe C. Doan, Joseph V. Lahrman, Jack W. Ransom,
Rawl V. Ransom, and Stanley K. Smith elected to participate in the plan.
In return for deferring a percent of the directors fees they would
otherwise be entitled to receive from the Bank and the Bancorp for a
period of five years, they will receive annual benefits of $36,426,
$9,494, $33,847, $8,650, and $45,724, respectively. Such benefits will
be paid in equal monthly installments and will continue for 10 years.
The payments will commence upon the later of their 65th birthday or
their completion of five years' further service to the Bank and Bancorp
as a director. In addition, each participant shall be entitled to
receive a one-time lump-sum death benefit in the amount of $10,000.
Page 72 of 80
Part III
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 9, 1996 the total number
of shares of common stock of Bancorp beneficially owned, and the percent
of such shares so owned, by each person known to Bancorp to be
beneficial owner of more than 5 percent of the common stock of Bancorp,
by each director and by directors and executive officers as a group.
Bancorp has only one class of equity securities with a total 577,058
shares outstanding at September 9, 1996.
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class
- -----------------------------------------------------------------------
Fred K Agnew 12,124 (2) 2.10%
905 S. O'Neil Street
Frankfort, IN 46041
Ralph M. Butler 9,100 (3) 1.58%
3052 N. Co. Rd. 1000 E.
Forest, IN 46039
Joe C. Doan 3,000 (4) .52%
801 Eastwood Drive
Frankfort, IN 46041
Joseph V. Lahrman 1,170 (5) .20%
5253 N. Co. Rd. 850 W.
Mulberry, IN 46058
Jack W. Ransom 1,860 (6) .32%
958 Forest Drive S.
Frankfort, IN 46041
Rawl V. Ransom 11,100 (7) 1.92%
1555 N. Main Street
Frankfort, IN 46041
Tom Rohrabaugh 1,300 (8) .23%
901 Williams Road
Frankfort, IN 46041
Stephen G. Rothenberger 100 .02%
1784 S. County Road 180 E.
Frankfort, IN 46041
Robert K. Ryan 32,000 (9) 5.55%
600 Harvard Terrace
Frankfort, IN 46041
R. Kent Ryan Jr. 1,648 (10) .29%
3490 State Road 75 North
Frankfort, IN 46041
Stanley K. Smith 700 (11) .12%
859 Forest Drive South
Frankfort, IN 46041
Page 73 of 80
Part III
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(cont.)
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class
- -----------------------------------------------------------------------
Armean L. Wright 8,000 (12) 1.39%
800 Glendale Drive
Frankfort, In 46041
Other Executive Officers 3,422 (13) .59%
Total Directors, Principle 85,524 14.82%
Shareholders and Executive Officers
as a Group (21 persons)
******
(1) The information contained in this column is based upon information
furnished to the Bank by the individuals named above and the
members of the designated group. Except as otherwise indicated,
sole voting power and sole investment power with respect to the
shares of common stock are held by the director, principle
shareholders, or officer alone or by the director, principle
shareholder or officer and his spouse.
(2) Includes 1,412 shares held in joint name with his wife Ann A.
Agnew, 2,588 shares held in his wife's name only and 1,624 held
in the name Carl W. Agnew, Revocable Trust.
(3) Includes 4,800 shares held in joint name with his wife, Mary E.
Butler, and 1,000 shares held in his wife's name only.
(4) Includes 2,200 shares held in trust for Joe C. Doan.
(5) Includes 700 shares held in joint name with his wife, Jeanette
Lahrman, and 370 shares held in Joseph Lahrman Farms, Inc. name.
(6) Includes 900 shares held in trust for his wife Susan J. Ransom and
800 shares held as Kramer Brothers Lumber Company Inc.
(7) Includes 6,924 shares held in trust for Rawl V. Ransom and 4,076
shares held in trust for his wife, Rosemary W. Ransom.
(8) Includes 1,200 shares held in joint name with his wife, Connie K.
Rohrabaugh.
(9) Includes 3,260 shares held in the name of his wife, Eleanor Ryan.
(10) Includes 220 shares held in joint name with his wife, Linda E.
Ryan, and 1,200 shares held in his wife's name only.
(11) Includes 500 shares held in joint name with his wife, Nancy Smith.
Page 74 of 80
Part III
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(cont.)
(12) Includes 7,900 shares held as Armean L. Wright, Revocable Trust.
(13) Includes 9 executive officers: John L. Conway, Vice President and
Secretary, 100 shares owned jointly with his wife, Regina A.
Conway, and 1,300 shares held in his wife's name only; Daryl C.
Fry, Vice President, 100 shares held under the name Community
Trust & Investment Co.; C. Robert Lord, Senior Vice President, 20
shares held in joint name with his wife, Barbara L. Lord;
R. Ronald McClughen, Senior Vice President, 150 shares held under
the name Rauscher Pierce Refsnes, custodian for Ronald McClughen,
CEDE and Company; Karen I. Miller, Vice President and Treasurer,
100 shares; Jennifer L. Neal, Investment Officer, 10 shares held
in joint name with her husband, H. Steven Neal; Edward R. Pluhar,
Vice President, 900 shares held in joint name with his wife
Suzanne S. Pluhar, 200 shares held in joint name with his mother
Lorraine D. Pluhar, and 50 shares held under the name Rauscher
Pierce Refsnes, custodian for Edward Pluhar, CEDE and Company;
Steven C. Reynolds, Vice President, 20 shares held in joint name
with his wife Brenda M. Reynolds; and Robert F. Thorley, Vice
President, 330 shares held in joint name with his wife Janet
Thorley, 71 shares held in joint name with his son Scott Thorley,
and 71 shares held in joint name with his son Greg Thorley.
Page 75 of 80
Part III
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, executive officers and principal shareholders of the Bank and
Bancorp and their respective associates were customers of, and have had
transactions with, the Bank in the ordinary course of business during
1996. Comparable transactions may be expected to take place in the
future.
During 1996, certain directors and executive officers of the Bank and
the Bancorp and their respective associates were indebted to the Bank
from time to time. The outstanding balance due from such individuals
whose aggregate indebtedness exceeded $60,000 at June 30, 1996 was
$1,492,569, or 6.19 percent of Bancorp's total shareholders' equity.
See Note #14 of the Notes to Consolidated Financial Statements, page 61
of this report. These loans were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for similar transactions
with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features.
Director R. Kent Ryan Jr. is a member of the law firm of Ryan, Hartzell,
Moore and Cook. This firm, serving as legal counsel for the Bancorp,
was paid $85,959 for services rendered during 1996. The Bancorp does
anticipate the continued use of this law firm in the future.
Page 76 of 80
Part IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Page of this Report
(A) 1. Financial Statements: Where Located
The Farmers Bancorp, Frankfort, Indiana
and Subsidiary:
Independent Auditor's Report 40
Consolidated Balance Sheets
June 30, 1996 and 1995 41
Consolidated Statements of Income, Years
Ended June 30, 1996, 1995 and 1994 42
Consolidated Statements of Changes in
Shareholders' Equity, Years Ended June 30,
1996, 1995 and 1994 43
Consolidated Statements of Cash Flows,
Years Ended June 30, 1996, 1995 and 1994 44 - 45
Notes to Consolidated Financial Statements 46 - 66
2. Financial Statement Schedules:
Deposit Interest Expense by Type 67
All other schedules are omitted because they are not
applicable or not required or because the required
information is included in the consolidated financial
statements or related notes.
3. Exhibits:
Exhibit 3:
The Articles of Incorporation and By-laws of The
Farmers Bancorp, Frankfort, Indiana are incorporated by
reference from the Registration filed on Form S-14 with the
Commission on October 14, 1983. (Sec File No. 2-87246)
Exhibit 10:
A. The Deferred Compensation Agreements with Fred K Agnew,
Joe C. Doan, Joseph V. Lahrman, Rawl V. Ransom, and Stanley K.
Smith are incorporated by reference from the Annual Report on
Form 10-K for the fiscal year ended June 30, 1993.
B. The Farmers Bank, Frankfort Indiana, Death Benefit Only
Plan of The Farmers Bancorp, Frankfort, Indiana is
incorporated by reference from the Annual Report on Form 10-K
for the fiscal year ended June 30, 1994.
Exhibit 21:
Subsidiaries of The Farmers Bancorp 80
(B) Reports on Form 8-K:
No reports on Form 8-K were filed during registrant's
last fiscal quarter.
Page 77 of 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
this 9th day of September 1996.
THE FARMERS BANCORP,
FRANKFORT, INDIANA
(Registrant)
By:/s/ Tom Rohrabaugh
Tom Rohrabaugh, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
September 9, 1996 /s/Fred K Agnew
Date Fred K Agnew, Director and
Chairman of the Board
September 9, 1996 /s/Ralph M. Butler
Date Ralph M. Butler, Director
September 9, 1996 /s/Joe C. Doan
Date Joe C. Doan, Director
September 9, 1996 /s/Joseph V. Lahrman
Date Joseph V. Lahrman, Director
September 9, 1996 /s/Jack w. Ransom
Date Jack W. Ransom, Director
September 9, 1996 /s/Rawl V. Ransom
Date Rawl V. Ransom, Director
September 9, 1996 /s/Tom Rohrabaugh
Date Tom Rohrabaugh, Director and
President (Principal Executive
Officer)
September 9, 1996 /s/Stephen G. Rothenberger
Date Stephen G. Rothenberger, Director
September 9, 1996 /s/R. Kent Ryan Jr.
Date R. Kent Ryan, Jr., Director and
Secretary to the Board
Page 78 of 80
September 9, 1996 /s/Stanley K. Smith
Date Stanley K. Smith, Director
September 9, 1996 /s/Armean L. Wright
Date Armean L. Wright, Director
September 9, 1996 /s/John L. Conway
Date John L. Conway, Vice President
and Secretary
September 9, 1996 /s/ Karen I. Miller
Date Karen I. Miller, Vice President
and Treasurer (Principal
Financial and Accounting Officer)
Page 79 of 80
EXHIBIT 21 - SUBSIDIARY OF REGISTRANT
Name State of
Incorporation
The Farmers Bank, Indiana
Frankfort, Indiana
Page 80 of 80
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000730726
<NAME> THE FARMERS BANCORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
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<ALLOWANCE> 2741
<TOTAL-ASSETS> 237044
<DEPOSITS> 191489
<SHORT-TERM> 12752
<LIABILITIES-OTHER> 8677
<LONG-TERM> 0
0
0
<COMMON> 2885
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<EXPENSE-OTHER> 7172
<INCOME-PRETAX> 3692
<INCOME-PRE-EXTRAORDINARY> 3692
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2416
<EPS-PRIMARY> 4.19
<EPS-DILUTED> 4.19
<YIELD-ACTUAL> 8.58
<LOANS-NON> 1136
<LOANS-PAST> 489
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<ALLOWANCE-OPEN> 2349
<CHARGE-OFFS> 547
<RECOVERIES> 459
<ALLOWANCE-CLOSE> 2741
<ALLOWANCE-DOMESTIC> 1181
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<ALLOWANCE-UNALLOCATED> 1560
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