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, 1997
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)
765-654-8731
(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..
As of September 12, 1997 the aggregate estimated market value of the
voting stock held by non-affiliates of the registrant was $33,163,375.
As of September 12, 1997 there were outstanding 1,154,116 common shares,
without par value, of the registrant.
Exhibit Index page 78
Page 1 of 81
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 8-10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-40
Item 7A. Quantitative and Qualitative Disclosures 41-42
About Market Risk
Item 8. Financial Statements and Supplementary Data 43-69
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 70
Part III.
Item 10. Directors and Executive Officers of the
Registrant 70-72
Item 11. Executive Compensation 73-74
Item 12. Security Ownership of Certain Beneficial
Owners and Management 75-76
Item 13. Certain Relationships and Related
Transactions 77
Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 78
Signatures 79-80
Page 2 of 81
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 81
Part I
Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
A bank holding company, however, may engage in, or own shares of a
corporation that engages solely in, activities which the Federal Reserve
has determined to be so closely related to banking, or managing or
controlling banks, as to be a proper incident thereto. If a bank
holding company is of the opinion that other activities in the
circumstances surrounding a particular case are closely related to
banking, or managing or controlling banks, the bank holding company may
apply to the Federal Reserve for approval to engage in the activity or
acquire an interest in a corporation that engages in the activity.
A bank holding company and its subsidiaries are also prohibited from
engaging in certain tie-in arrangements in connection with the extension
of credit or the provision of any property or service. With certain
exceptions, neither a bank holding company nor a bank, nor a subsidiary
or affiliate of either, may extend credit, lease or sell property or
furnish any services or fix or vary the consideration for the foregoing
on the condition that (i) the customer must obtain or provide some
additional credit, property or services from, or to, any of them, or
(ii) the customer may not obtain some credit, property or services from
a competitor, except to the extent reasonable conditions are imposed to
assure the soundness of credit extended.
DESCRIPTION OF BANK
The Bank, was chartered June 17, 1876 under the laws of the State of
Indiana. The main office of the Bank is in Frankfort, Indiana. The
Bank has two branch offices in Frankfort, Indiana, one in Kirklin,
Indiana, one in Michigantown, Indiana, one in Mulberry, Indiana, and one
in Sheridan, Indiana. The Bank has one remote ATM unmanned branch in
Frankfort, Indiana. A free standing ATM is located in the Wal-Mart
store located east of Frankfort.
Page 4 of 81
Part I
Item 1 BUSINESS (cont.)
BUSINESS
The Bank conducts a general banking business embracing all the usual
functions of a commercial bank. The Bank also operates a Trust
Department serving in a fiduciary capacity with trusts, estates and
guardianships.
The Bank makes and services both secured and unsecured loans to
individuals, firms and corporations. The Bank's installment loan
department makes both direct and indirect loans. The Bank makes a
variety of residential, industrial, commercial and agricultural loans
secured by real estate.
The Bank is the largest and oldest locally owned and headquartered
commercial bank in Clinton County. The Bank operates under a
conservative management philosophy and is dedicated to providing
personal service coupled with competitive products and pricing.
Management believes that local ownership allows the Bank to distinguish
itself from competitors based on it's established reputation, and local
decision making authority. The Bank is seeking to capitalize on this
advantage by continuing an aggressive growth strategy throughout Clinton
County and central Indiana. The Bank focuses on developing strong,
primary banking relationships with businesses and individuals in its
market area. The Bank's mission includes being a corporate leader in
community service and supporting projects and organizations that enhance
the quality of life through the utilization of the Bank's financial and
human resources. The Bank's loan portfolio is diversified, locally
oriented and does not include any foreign loans.
REGULATION AND SUPERVISION
The Bank, a subsidiary of the Bancorp, is a state bank and is
supervised, regulated and examined by the Department. The Bank, which
is not a member of the Federal Reserve System, is also supervised and
regulated by the Federal Deposit Insurance Corporation ("FDIC"). The
deposits of the Bank are insured by the FDIC. Each regulator has the
authority to issue cease-and-desist orders if it determines that
activities of a bank regularly represent an unsafe and unsound banking
practice or violation of law.
Branching by banks in Indiana, either through establishment de novo or
acquisition, is subject to the jurisdiction, and requires the prior
approval, of the bank's primary federal regulatory authority, as well as
the Department if the branching bank is a state bank. Under current
Indiana law, as amended in 1991 by the Indiana General Assembly, banks
may establish branches anywhere within the State of Indiana.
Subsidiaries of bank holding companies are also subject to certain
restrictions imposed by the Federal Reserve on the extension of credit
to the bank holding company or any of its subsidiaries, on investment in
the stock or other securities of the bank holding company or any of its
subsidiaries, and in taking such stock or securities as collateral for
loans.
Page 5 of 81
Part I
Item 1 BUSINESS (cont.)
REGULATION AND SUPERVISION (cont.)
The Bancorp and the Bank are subject to regulations that require the
maintenance of a leverage ratio (tier one capital to adjusted total
assets), a tier one risk-based capital (tier one capital to risk
adjusted assets), and a total risk-based capital ratio (total capital to
risk adjusted assets). During 1991, Congress passed the Federal Deposit
Insurance Corporation Improvement Act (FDICIA). In addition to
addressing the insurance fund's financial needs, FDICIA required the
FDIC to promulgate regulations outlining specific regulatory actions
that would occur when the capital level of a financial institution
deteriorated beyond a specified level. An "adequately capitalized"
financial institution is defined as one which has a leverage ratio of at
least 4 percent, a tier one risk-based capital ratio of at least 4
percent, and a total risk-based capital ratio of at least 8 percent.
The level of deposit insurance assessments are also tied to the
definitions prescribed by these regulations.
Compliance with these regulations limits the amount of dividends that
may be paid by the companies. Refer to Note 13 of the Consolidated
Financial Statements and management's discussion of Capital Resources
(pages 63-64 and pages 35-36) for more information about these
requirements and compliance with them at June 30, 1997.
The results of operations of the Bank are affected by the credit
policies of monetary authorities, particularly the Federal Reserve
System. The instruments of monetary policy employed by the Federal
Reserve System include open market operations in United States
Government securities, changes in the discount rate charged for member
bank borrowing and changes in reserve requirements assessed on member
bank deposits. Federal Reserve System monetary policies have had
significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future. In view of
the changing condition in the national economy and in the money markets,
as well as the effect of actions by monetary fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
Page 6 of 81
PART I
ITEM 1 BUSINESS (cont.)
COMPETITION
The banking business is highly competitive. The Bank competes directly
with one other bank located in Clinton County, Indiana, and with banks
elsewhere. The main office and branch offices are located in a
business/agricultural area of Clinton County and northwest Hamilton
County. The Bank also competes with various savings banks, credit
unions, finance companies and other non-bank financial institutions.
The trends of deregulation, increased competition among financial
institutions, and increased competition with non-financial institutions
seem likely to continue.
Part I
Item 2 PROPERTIES
The Bancorp owns no property. Its business requires minimal office
space and uses the Bank's facilities.
The Bank's main office is located at 9 East Clinton Street, Frankfort,
Indiana. The main office is owned by the Bank. The branches at
Kirklin, Indiana, Michigantown, Indiana, and Mulberry, Indiana and one
remote ATM branch in Frankfort, Indiana are also owned by the Bank. Two
branch facilities in Frankfort, Indiana, and the branch at Sheridan,
Indiana, are owned by the Bank but are located on leased property. A
free standing ATM is located on leased property in the Wal-Mart store on
the east edge of Frankfort.
Page 7 of 81
PART I
ITEM 3 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 1997
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, 1997, there were various transfers of the
common stock representing sales or exchanges, gifts, transfers to trust
agreements, surviving joint tenants, transfers to decedents' estates and
transfers resulting from the distribution of decedents' estates and
trusts to heirs and beneficiaries. A total of 173,288 shares were
transferred under the foregoing conditions during the fiscal year ended
June 30, 1997.
Page 8 of 81
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS (cont.)
The following table reflects the price range of Bancorp's common stock
for fiscal 1997 and 1996 (prices have been restated to give retroactive
effect to the 2-for-1 stock split declared October 14, 1996).
Management cannot verify these figures as they were furnished by
McDonald & Co. Securities, Inc. The prices do reflect dealer markup
which varies from 2 to 5 percent depending on each transaction.
Three Months Ended
Sept 30 December 31 March 31 June 30
Fiscal 1997
Price Range
High $ 23 $ 24 $ 26.5 $ 28
Low 20 23 24 26.5
Fiscal 1996
Price Range
High 17 20.5 21.5 23
Low 16.5 17 20.5 21.5
DIVIDENDS
The ability of the Bancorp to continue to pay dividends will depend on
its earnings, financial condition and other factors as may be deemed
appropriate in the determination of the Bancorp's dividend policy.
Dividends paid by the Bancorp depend primarily on dividends paid by the
Bank to Bancorp.
The dividends which the Bancorp may pay to its shareholders, and which
the Bank may pay to the Bancorp are restricted by Indiana law and
regulations of the Department, the FDIC, and the Federal Reserve Board.
See Management's Discussion And Analysis Of Financial Condition And
Results Of Operations - Capital Resources, pages 35 and 36. On June 30,
1997, there were 397 holders of record of Bancorp's common stock.
Page 9 of 81
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS (cont.)
The cash dividends per share declared by the Bancorp for fiscal years
ended 1997 and 1996 are as follows (the per share data has been restated
to give retroactive effect to the 2-for-1 stock split declared October
14, 1996):
1997
PAYMENT DATE: AMOUNT
August 15, 1996 $ .21
November 15, 1996 .22
February 14, 1997 .22
May 15, 1997 .25
July 15, 1997 1.00
-----
Total for 1997 $ 1.90
=====
1996
August 15, 1995 $ .20
November 15, 1995 .20
February 15, 1996 .20
May 15, 1996 .21
-----
Total for 1996 $ .81
======
Due to the increased earnings, the Board declared a special dividend
totaling $1.00 per share on May 12, 1997, payable July 15, 1997 to
shareholders of record as of May 30, 1997.
Page 10 of 81
Part II
Item 6 SELECTED FINANCIAL DATA (Dollars in thousands, except per share
data and ratios. Per share data has been restated to give retroactive
effect to the 2-for-1 stock split declared October 14, 1996.)
YEAR ENDED JUNE 30
1997 1996 1995 1994 1993
Income Statement Summary:
Interest Income $ 20,062 $ 18,111 $ 16,658 $ 15,771 $ 16,125
Interest Expense 8,671 8,253 7,225 6,320 6,977
--------------------------------------------
Net Interest Income 11,391 9,858 9,433 9,451 9,148
Provision for Loan Losses 570 480 218 500 1,455
Other Operating Income 1,839 1,486 1,468 1,586 1,718
Other Operating Expenses 7,255 7,172 7,069 7,196 6,666
--------------------------------------------
Income Before Income Taxes 5,405 3,692 3,614 3,341 2,745
Income Tax Expense 1,946 1,276 1,189 1,080 838
--------------------------------------------
NET INCOME $ 3,459 $ 2,416 $ 2,425 $ 2,261 $ 1,907
Per Share Data: ============================================
Earnings (1) $ 3.00 $ 2.09 $ 2.10 $ 1.96 $ 1.65
Dividends Declared 1.90 .81 .76 .70 .66
Book Value at Year End 22.07 20.91 19.77 18.36 17.10
RATIOS:
Performance:
Return on Avg. Assets 1.42% 1.05% 1.11% 1.05% .93%
Return on Avg. Equity 13.71 10.31 11.11 11.15 10.00
Dividend Payout Ratio 63.33 38.76 36.19 35.71 40.00
Asset Quality:
Net Charge-offs to Avg. Loans .04% .05% .23% .18% .91%
Allowance for Loan Losses to
Loans at Year-End 1.61 1.57 1.50 1.68 1.65
Allowance for Loan Losses to Non-
performing Loans at Y/E 154.05 115.51 94.26 90.60 65.99
Non-performing Loans to Total
Loans at Year-End 1.04 1.36 1.59 1.85 2.51
Capital Ratios:
Avg. Shareholders' Equity
to Avg. Assets 10.36% 10.18% 9.99% 9.43% 9.28%
Leverage Ratio 10.21 10.21 10.06 9.79 9.53
Tot Risk-based Capital Ratio 13.47 14.21 13.83 13.30 14.26
Year End Balances:
Assets $251,744 $237,044 $226,032 $216,390 $207,063
Earning Assets (2) 232,526 217,083 208,155 201,332 191,645
Loans, Net (3) 197,592 171,307 154,293 145,099 132,317
Deposits 202,607 191,488 175,554 169,457 163,437
Short-Term Borrowings 11,985 12,752 20,691 21,190 22,922
Other Borrowings 7,839 6,259 5,175 3,075 -0-
Shareholders' Equity 25,476 24,127 22,821 21,191 19,738
(1) Earnings per share computations are based on the weighted average
number of common shares outstanding during the years. The number of
shares used in the computation was 1,154,116 for all years presented.
(2) Includes nonaccrual loans.
(3) Includes loans held for sale.
Page 11 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to address the
significant factors affecting the Bancorp's financial condition and
results of operations. It is designed to provide a more comprehensive
review of the operating results and financial position than could be
obtained from the analysis of the consolidated financial statements
alone. It should, however, be read in conjunction with the consolidated
financial statements and related notes and the Selected Financial Data
included elsewhere herein. All per share amounts have been restated to
give retroactive effect to the 2-for-1 stock split declared October 14,
1996.
OVERVIEW
Total assets of Bancorp increased $14,700,000, or 6.20 percent, from
June 30, 1996 to June 30, 1997, and totaled $251,744,000 at June 30,
1997. Total loans, including loans held for sale, increased $26,776,000
or 15.38 percent, from June 30, 1996 to June 30, 1997, and totaled
$200,824,000 as of June 30, 1997. Securities decreased $10,562,000 or
25.00 percent, from June 30, 1996 to June 30, 1997, and totaled
$31,702,000 as of June 30, 1997. The increase in loans was funded by
the decrease in securities, and an increase in deposits and short-term
borrowings which, combined, increased $10,352,000, or 5.07 percent over
the prior year end. Funding was also provided by a net $1.7 million
increase in FHLB advances which totaled $7,477,000 as of June 30, 1997.
These advances require periodic principal payments and are generally
drawn to fund specific commercial loans originated by The Bank.
Bancorp reported net income of $3,459,000 in 1997, an increase of
$1,043,000, or 43.17 percent from $2,416,000 earned in 1996. Earnings
per share were $3.00 in 1997, up from $2.09 per share in 1996. The
increase resulted primarily from increased net interest and other
income. Net interest income increased by $1,533,000 or 15.55 percent
over the previous year. Other income increased $353,000 or 23.76
percent over the previous year. Offsetting these revenue increases was
the increase in income taxes from the previous year of $670,000 or 52.51
percent. This increase was due primarily to a 46.39 percent increase in
income before taxes and by the relative decrease in tax free investments
held by the Bank.
1996 net income was essentially the same as 1995 net income. Increases
in the provision for loan losses, expenses related to the demolition of
a branch and higher compensation expenses offset increased net interest
income.
Page 12 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
In the following table, the different components of the income statement
are divided by average total assets to provide year-to-date comparisons
(on a non-tax equivalent basis).
PERCENTAGE OF AVERAGE ASSETS
Year Ended June 30
1997 1996 1995
Net Interest Income 4.68% 4.28% 4.31%
Provision for Loan Losses .23 .21 .10
Other Operating Income .76 .65 .67
Other Operating Expenses 2.99 3.12 3.23
Income before Income Taxes 2.22 1.60 1.65
Income Taxes .80 .55 .54
Net Income 1.42 1.05 1.11
RESULTS OF OPERATIONS:
Net Interest Income:
Net interest income is the principal component of net income for the
Bancorp. Net interest income is determined by the relative size and
characteristics of interest-earning assets and interest-bearing
liabilities and by the difference, or spread, between the yields earned
on interest-earning assets and rates paid on interest-bearing
liabilities. During the year ended June 30, 1996 there was a general
decline in interest rates. During the years ending June 30, 1995 and
June 30, 1997 there was a gradual increase in rates.
The following tables set forth, for the periods indicated, information
regarding the average balances of interest-earning assets and interest-
bearing liabilities, the dollar amount of interest income and interest
expense and the resulting yields on average interest-earning assets and
rates paid on average interest-bearing liabilities. Average balances
are also provided for non-interest-earning assets and non-interest-
bearing liabilities and shareholders' equity. Average balances are
determined from average daily balances.
Page 13 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
1997
Average Yield/
Balance Interest Rate
(Dollars in Thousands)
Assets
Interest earning assets:
Loans(1): (net of unearned discount)
Domestic(2) $187,732 17,628 9.39%
Foreign -0- -0- -0-
Securities:
Taxable 28,510 1,892 6.64
Tax-exempt(2) 8,692 677 7.79
Interest bearing deposits:
Domestic: -0- -0- -0-
Foreign -0- -0- -0-
Short term investments 2,146 114 5.31
------- -------- ------
Total interest earning assets 227,080 20,311 8.94
Noninterest earning assets:
Cash and due from banks 6,279
Premises and equipment, net 4,882
Other assets 8,202
Less allowance for loan losses (2,968)
------
$243,475
========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings and demand deposits $ 67,910 1,925 2.83
Time deposits 105,017 5,844 5.56
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 11,651 450 3.86
Other borrowings 7,241 452 6.24
------- ------ ------
Total interest bearing liabilities 191,819 8,671 4.52
Noninterest bearing liabilities: -----
Demand deposits 23,821
Other 2,612
--------
218,252
Shareholders' equity 25,223
--------
$243,475
Net interest earnings (spread) ======== $11,640
Net interest margin on earning assets ======= 5.13
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $249 for 1997.
Page 14 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
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 Shareholders' Equity
Interest bearing liabilities:
Savings and demand deposits $ 69,079 2,052 2.97
Time deposits 97,085 5,417 5.58
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 11,100 487 4.36
Other borrowings 5,204 297 5.71
------- ------ ------
Total interest bearing liabilities 182,468 8,253 4.52
Noninterest bearing liabilities: -----
Demand deposits 22,014
Other 2,259
--------
206,741
Shareholders' equity 23,424
--------
$230,165
Net interest earnings (spread) ======== $10,164
Net interest margin on earning assets ======= 4.74
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $306 for 1996.
Page 15 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
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 6.67
Tax-exempt(2) 8,622 838 9.72
Interest bearing deposits:
Domestic: 142 8 5.63
Foreign -0- -0- -0-
Short term investments 5,297 300 5.66
------- ------- -----
Total interest earning assets 203,620 16,964 8.33
Noninterest earning assets:
Cash and due from banks 6,087
Premises and equipment, net 4,454
Other assets 6,977
Less allowance for loan losses (2,563)
-------
$218,575
========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings and demand deposits $ 71,323 2,052 2.88
Time deposits 88,501 4,571 5.16
Deposits in foreign offices -0- -0- -0-
Repurchase agreements & short term
borrowings 9,441 346 3.66
Other borrowings 4,580 256 5.59
------- ------- -----
Total interest bearing liabilities 173,845 7,225 4.16
Noninterest bearing liabilities: -----
Demand deposits 21,656
Other 1,240
--------
196,741
Shareholders' equity 21,834
--------
$218,575
Net interest earnings (spread) ======== $ 9,739
Net interest margin on earning assets ======= 4.78
=====
(1) For the purpose of these computations, nonaccruing loans are
included in the daily average loan amounts outstanding.
(2) Net interest income includes tax equivalent adjustments computed
using a 34 percent marginal federal tax rate of $307 for 1995.
Page 16 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Net interest income on a tax equivalent basis increased to $11,640,000
for the year ended June 30, 1997 compared to $10,164,000 for 1996 and
$9,739,000 for 1995. Net interest margin (net interest income divided
by average earning assets), on a tax equivalent basis, increased to 5.13
percent for 1997 compared to 4.74 percent for 1996 and 4.78 percent for
1995. 1997's yield on average earning assets increased 36 basis points
as compared to 1996. 1997's rate on average interest bearing
liabilities remained the same as 1996's rate. 1996's yield on average
earning assets increased 25 basis points as compared to 1995. Likewise,
1996's rate on average interest bearing liabilities increased 36 basis
points as compared to 1995. The increase in net interest margin from
1996 to 1997 primarily resulted from an increase of 22 basis points in
the yield on the loan portfolio. Average earning assets increased $12.5
million (5.81 percent) from 1996's balance of $214.6 million. A change
in the mix of earning assets occurred as loan demand continued to be
very strong. Average total loans increased $26,069,000, or 16.13
percent, while average securities decreased by $3,109,000 or 7.71
percent. By June 30, 1997 total loans, excluding loans held for sale,
were $200,824,000 compared to $173,556,000 at June 30, 1996.
Total deposits and short-term borrowings increased $10,352,000 during
1997. This increase was due to increases in time deposits, demand
deposits and savings accounts which increased by $17,384,000, or 11.41
percent from June 30, 1996 to June 30, 1997 while money market
investment accounts, NOW accounts and short-term borrowings, combined,
declined by $7,032,000, or 13.57 percent during the same period.
The following tables illustrate the changes in asset and liability mix
that have taken place over the last three years, (ratios at year end).
Page 17 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Net Interest Income (cont.)
Ratio to Total Earning Assets
1997 1996 1995
Loans 85.99% 80.18% 75.25%
Investments/Taxable 10.81 15.14 15.50
Tax-Exempt 3.20 4.68 4.20
Federal Funds Sold -0- -0- 3.27
Money Market Investments -0- -0- 1.78
Ratio to Total Interest Bearing Liabilities
1997 1996 1995
Savings Deposits 34.88% 35.94% 32.83%
Time Deposits 55.10 53.97 52.75
Repurchase agreements and 6.06 6.77 11.54
Short-Term Borrowings
Other Borrowings 3.96 3.32 2.88
Page 18 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
An analysis of the changes in interest income and expense, segregated
between changes in volume and rate, is shown comparing 1997 to 1996 and
1996 to 1995.
1997 Compared to 1996 1996 Compared to 1995
---------------------- ---------------------
Increase (Decrease) Increase (Decrease)
due to (1) due to (1)
---------------------- ---------------------
Volume Rate Net Volume Rate Net
---------------------- ---------------------
(Dollars in Thousands) (Dollars in Thousands)
Interest earned on:
Loans:
Domestic $2,391 $ 417 $ 2,808 $ 848 $ 662 $1,510
Foreign -0- -0- -0- -0- -0- -0-
Investment Securities:
Taxable (185) 1 (184) (419) (13) (432)
Tax-exempt (29) (106) (135) 38 (64) (26)
Interest bearing deposits:
Domestic -0- -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0- -0-
Short term investments (588) (7) (595) 407 (6) 401
--------------------------------------------------
Total interest
income 1,589 305 1,894 874 579 1,453
--------------------------------------------------
Interest paid on:
Savings and demand
deposits (35) (92) (127) (65) 65 -0-
Time deposits 443 (16) 427 443 403 846
Deposits in foreign
offices -0- -0- -0- -0- -0- -0-
Repurchase agreements and
short term borrowings 24 (61) (37) 61 80 141
Other borrowings 116 39 155 35 6 41
--------------------------------------------------
Total interest
expense 548 (130) 418 474 554 1,028
--------------------------------------------------
Net interest
income $1,041 $ 435 $ 1,476 $ 400 $ 25 $ 425
==================================================
(1) The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
Page 19 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses:
The provision for loan losses (a direct charge to operating expenses)
provides a reserve (the allowance for loan losses) to which loan losses
are charged as those losses become evident. The provision is determined
in conjunction with management's review and evaluation of current
economic conditions, changes in the character and size of the loan
portfolio, estimated charge-offs and other pertinent information derived
from a quarterly review of the loan portfolio.
In order to analyze the allowance for loan losses, management utilizes a
quarterly report (watch list) containing loans with a more than normal
degree of risk. This report is the by-product of an ongoing loan review
process, the purpose of which is to determine the level of credit risk
within the portfolio and to ensure proper adherence to underwriting and
documentation standards. Utilizing this report, a "specific allocation"
of the reserve is made for those loans which are considered to represent
significant exposure to risk. In addition, estimates are made for the
potential losses within each category of the loan portfolio, not
specifically reviewed, based on a weighted five year historical loan
loss experience, non-performing loan history, and other factors and
trends.
The provision for loan losses in 1997 totaled $570,000 as compared to
$480,000 for 1996 and $218,000 for 1995. The increase in provision for
the year ended June 30, 1997 was due to the Bank's loan growth and
management's desire to maintain the reserve at an appropriate level.
Asset quality in general continues to improve compared to prior years.
Management continues to closely monitor the financial condition of the
Bank's agricultural borrowers and to forecast expected levels of crop
yields and prices. Early predictions indicate that due to a dry summer
in Clinton County the corn crop yields will be significantly lower than
average, while the bean crop has the potential to reach average yields.
For the year ended June 30, 1997 the Bank recorded a net recovery of
$10,000 on commercial and agricultural loans, compared to a net recovery
of $35,000 and a net charge-off of $299,000 for the years ended June 30,
1996 and June 30, 1995 respectively. A large portion ($280,000) of
1995's charge-offs were subsequently recovered in August 1995.
Management constantly monitors the loan portfolio for any downward
trends or weaknesses, and will continue to do so.
Page 20 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Provision for Loan Losses (cont.)
The following table summarizes the activity in the allowance for loan
losses for the years indicated.
1997 1996 1995 1994 1993
(Dollars in Thousands)
Allowance for loan losses:
Balance at July 1 $2,741 $2,348 $2,478 $2,226 $1,936
Loan losses:
Domestic:
Commercial, financial
and agricultural 72 317 562 266 1,110
Real estate mortgages -0- -0- -0- -0- 66
Installment loans 244 230 173 205 217
Lease Financing -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0-
-------------------------------------------
Total loan losses 316 547 735 471 1,393
-------------------------------------------
Loan recoveries:
Domestic:
Commercial, financial
and agricultural 82 352 263 103 88
Real estate mortgages 43 -0- -0- 1 -0-
Installment loans 112 108 124 119 140
Lease Financing -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0-
-------------------------------------------
Total loan recoveries 237 460 387 223 228
-------------------------------------------
Net loan losses 79 87 348 248 1,165
Provision charged to
current income 570 480 218 500 1,455
-------------------------------------------
Balance at June 30 $3,232 $2,741 $2,348 $2,478 $2,226
===========================================
Approximately 22.10 percent of the Bancorp's total loan portfolio is
oriented in agricultural or agri-business relationships. $14,000 of the
$72,000 in commercial loan charge-offs for 1997 were agriculture
related, compared to $224,000 of the $317,000 for fiscal 1996. $74,000
of the $82,000 in commercial loan recoveries for 1997 were agriculture
related. The installment loan portfolio had gross charge-offs of
$244,000 for 1997, compared to $230,000 in 1996 and $173,000 in 1995.
Net charge offs on installment loans were $132,000 in 1997, up from
$122,000 in 1996 and $49,000 in 1995.
Page 21 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements:
The following is a summary of nonperforming loans, all of which are
domestic loans.
JUNE 30
1997 1996 1995 1994 1993
(Dollars in Thousands)
Nonaccrual:
Commercial $ 726 $ 632 $1,173 $ 642 $ 377
Real Estate 97 420 47 83 -0-
Installment 109 84 3 10 74
Lease Financing -0- -0- -0- -0- -0-
----------------------------------------------
Total 932 1,136 1,223 735 451
Past Due 90 Days:
Commercial 153 394 541 187 776
Real Estate 335 44 -0- 85 623
Installment 97 51 19 59 65
Lease Financing -0- -0- -0- -0- -0-
----------------------------------------------
Total 585 489 560 331 1,464
Troubled Debt Restructurings:
Commercial 581 748 708 1,466 1,246
Real Estate -0- -0- -0- 203 212
Installment -0- -0- -0- -0- -0-
Lease Financing -0- -0- -0- -0- -0-
-----------------------------------------------
Total 581 748 708 1,669 1,458
----------------------------------------------
Total Nonperforming Loans
$2,098 $2,373 $2,491 $2,735 $3,373
===============================================
Income that would have been earned during 1997, had nonaccrual and
restructured loans been accruing at their contractual rates, was
$69,000. Income that was recorded totaled $37,000. Income foregone as
a result of nonaccrual loans and troubled debt restructurings aggregated
approximately $111,000 and $118,000 for 1996 and 1995, respectively.
Nonperforming loans totaled $2,098,000 at June 30, 1997 compared to
$2,373,000 at June 30, 1996 and represent 1.04 percent of total loans at
June 30, 1997, down from 1.36 percent and 1.59 percent at June 30, 1996
and 1995, respectively. The allowance for loan losses, as a percent of
nonperforming loans, was 154.05 percent at year-end 1997, compared to
115.51 percent for 1996 and 94.26 percent for 1995.
Page 22 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Nonperforming loans are comprised of three major sub-divisions -
nonaccrual loans, loans delinquent over 90 days and still accruing, and
troubled debt restructurings. In the nonaccrual loan category are those
loans where significant doubt exists as to the collectibility of all
principal or accrued interest. The Bank follows the definition of
nonaccrual loans established by the Federal Financial Institutions
Examination Council. The following are the Bank's procedures for
nonaccrual loans. When the status of a loan fits the criteria of
nonaccrual status, including delinquency of principal and interest
payment of 90 days or more, it is submitted to the Officers Loan
Committee for final review before placement on nonaccrual status. Loans
remain on nonaccrual status until a borrower's position improves as to
ability to repay or until a determination is made for eventual charge-
off. Regular monthly reviews of the nonaccrual loans are made by the
Directors Loan Committee and reported to the Board of Directors.
Following the guidelines Bancorp adopted for nonaccrual loans, twenty-
seven individual borrowers with loan balances of $932,000 were in
nonaccrual status at June 30, 1997. Negotiations continue with the
respective customers to resolve their immediate financial difficulties.
It is anticipated that losses from this category will not exceed
$300,000.
Loans past due over 90 days and still accruing have increased $96,000,
or 19.63 percent, to $585,000 at June 30, 1997 from the 1996 total of
$489,000. This amount is comprised of the following; $153,000 in two
commercial borrowers; $85,000 in twelve consumer loans; $12,000 in eight
credit card related loans; $121,000 in two mortgage construction loans
and $214,000 in four residential mortgage loans.
Management continues to work to resolve the Bank's problem loan
situations and believes that the Bank's loan review and reserve analysis
processes have successfully identified existing problem loans and
intends to continue to work with these customers to resolve, either
through work-out, foreclosure and/or charge off, those situations.
Page 23 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
Troubled debt restructurings are those loans for which the contractual
interest has been reduced, or other concessions granted because of a
deterioration in the financial condition of the borrower, resulting in
the inability of the borrower to meet the original contractual terms of
the loans. Interest on such loans is included in income only to the
extent of the reduced rate. Each borrower may be having varying degrees
of financial difficulty. On a case-by-case basis negotiations are held
to determine how to achieve the best results for both Bancorp and the
customer without forcing the borrower into liquidation. Management will
reach an agreement as to principal and interest concessions, collateral
available, and term of repayment. At June 30, 1995, restructured loans
totaled $708,000. They consisted of four agricultural borrowers and one
commercial borrower. All loans were current as of June 30, 1995. At
June 30, 1996 restructured loans totaled $748,000, consisting of four
agricultural borrowers and two commercial borrowers. All six loans were
current as of June 30, 1996. At June 30, 1997, restructured loans
totaled $581,000, consisting of five borrowers. Three of these
borrowers were agriculture-related and two were commercial borrowers.
All were current as of June 30, 1997. Management does not expect this
category to constitute an automatic loss risk, but rather a category to
prevent or minimize future loan losses.
Effective July 1, 1995, Bancorp adopted FAS 114, "Accounting by
Creditors for Impairment of a Loan", as amended by FAS 118. Loans are
identified as impaired when management concludes that it is probable
that the customer will not comply with the contractual terms of the loan
agreement. Loans are evaluated for impairment during management's
quarterly analysis of the reserve for loan losses. Generally, all
commercial and agricultural loans that have been selected for evaluation
in conjunction with the reserve analysis are evaluated for impaired
status. Generally, no consumer or 1-4 family residential real estate
loans would be evaluated. If a loan is deemed to be impaired,
management will evaluate the need for an impairment reserve (simply an
allocation of a portion of the allowance for loan losses) on that
credit. Generally, the fair value of collateral is used to evaluate
impairment. At June 30, 1997, management has determined that four
commercial/agricultural loans totaling $747,000, all of which are on
non-accrual status, are impaired and has allocated $125,000 of the
allowance for loan losses to those loans. Two commercial loans past due
more than 90 days in the amount of $153,000 and one restructured
commercial loan in the amount of $187,000 have also been deemed to be
impaired. One mortgage loan totaling $213,000, secured by several
rental properties, is also included in the impaired loan total of
$1,300,000 at June 30, 1997. No impairment reserves were deemed needed
for the delinquent or restructured loans.
Page 24 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Risk Elements (cont.)
In addition to these loans outlined previously, at June 30, 1997, the
Bancorp has identified other loans which management has concerns
relative to the ability of the borrowers to comply with loan repayment
terms. These loans, which total $3,139,000, down from $7,075,000 at
June 30, 1996, are classified as "watch" loans and receive ongoing
management attention in excess of that provided to the remaining
portfolio. The loans placed in "watch" status are as follows: four (4)
borrowers with residential mortgage loans totaling $243,000; eleven (11)
agricultural real estate loan borrowers totaling $1,083,000; three (3)
commercial real estate loans totaling $388,000; twelve (12) agricultural
operating and term loan borrowers totaling $1,033,000; five (5)
commercial operating and term loan borrowers totaling $376,000; and one
(1) personal loan borrower totaling $16,000. It is noted, however, that
Bank policy states that in the event any single note of a borrower is
placed on the "watch list", all notes of the borrower are placed on said
list; regardless of the payment history or collateral valuation of
individual notes.
Loan Loss Charge-off Procedures:
The Bank's Officers' Loan Committee meets weekly to discuss all
significantly delinquent loans (regardless of size) and any other known
loan problems that might affect customers. Specific review is assigned
to an account officer to determine the reason for delinquency and the
chances of rehabilitation and/or improvement for the particular credit.
Once the account officer has made his review, he makes recommendations
as to the collectibility of the loan. If the loan is considered a loss,
it is approved for charge-off by the Officers' Loan Committee.
The Loan Review Committee meets monthly to evaluate the quality of the
Bank's loan portfolio and administration of its lending activities. It
also shares the responsibility for recommending transfer of credits to a
loss category in its function of summarizing "watch loans" and preparing
supporting information for the quarterly review of the adequacy of the
reserve for loan losses. There are many elements of consideration that
comprise the criteria for a "watch list." Each of the elements serve as
a management tool to act as a monitor for potential problems. It does
not indicate a loss as being imminent.
All approved charge-offs are submitted to the Directors' Loan Committee
which is made up of four outside Directors and Senior Management. They
review the findings of the Officers' Loan Committee and Loan Review
Committee and tentatively approve the charge-off of the portion of the
loan that is determined to be uncollectible.
Once the Directors' Loan Committee approves a loan for charge-off, it is
then submitted to the Board of Directors on a monthly basis for their
review and approval or rejection of the recommendation. In addition to
these internal procedures, the Bank charges off loans as a result of
regulatory examinations.
Page 25 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Income:
Other Operating Income Analysis % Change from prior year
1997 1996 1995 1997 1996
(Dollars in Thousands)
Trust Fees $ 315 $ 273 $ 244 15.38% 11.89 %
Service Charge Income 792 727 676 8.94 7.54
Mortgage Banking Revenue 139 110 83 26.36 32.53
Other Income 593 376 465 57.71 (19.14)
--------------------- --------------------
1,839 1,486 1,468
Security Gains(losses) -0- -0- -0-
--------------------- --------------------
$1,839 $1,486 $1,468 23.76% 1.23 %
====================== ====================
Other operating income increased during the year ended June 30, 1997,
compared to 1996. Mortgage banking revenue increased 26.36 percent, to
$139,000. The Bank continued to sell fixed rate first mortgage loans in
the secondary market. The Bank realized gains of $52,000 during 1997,
as compared to $36,000 in 1996 and $20,000 in 1995. Servicing income
earned on sold loans increased to $87,000 for the year ended June 30,
1997, compared to $74,000 in 1996. At June 30, 1997, Bancorp was
servicing $37,566,000 of loans for other investors compared to
$29,309,000 at June 30, 1996. Other income increased by 57.71 percent,
or $217,000, to $593,000 for the fiscal year ended June 30, 1997. The
most significant factor causing this increase was a increase of $189,000
in the amount of cash surrender value income recognized on life
insurance policies owned by the Bank.
Other Operating Expenses:
Other Operating Expenses Analysis % Change from prior year
1997 1996 1995 1997 1996
(Dollars in Thousands)
Salaries & Employee
Benefits $3,866 $3,822 $3,511 1.15 % 8.86 %
Occupancy Expense-Net 592 602 551 (1.66) 9.26
Equipment Expense 657 581 569 13.08 2.11
FDIC assessment 12 9 384 33.33 (97.66)
Data Processing Expense 402 345 458 16.52 (24.67)
Other Expenses 1,726 1,813 1,596 (4.80) 13.60
------------------------ -----------------
$7,255 $7,172 $7,069 1.16 % 1.46 %
======================== =================
Page 26 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Other Operating Expenses (cont.)
Other operating expenses increased 1.16 percent or $83,000 to total
$7,255,000 for 1997 compared to $7,172,000 in 1996. Salaries and
employee benefits, the largest component of other operating expenses,
increased only $44,000, or 1.15 percent for 1997. Data processing
expenses are primarily those paid to outside vendors and increased
$57,000 from fiscal 1996 to 1997 but decreased $113,000 from fiscal 1995
to 1996, due to converting to an in-house system. The 1997 increase was
due to a new teller platformation system, increased expenses related to
credit card processing, and increased ATM processing charges.
The need to control noninterest expense has become a major focus for
management because of the increased emphasis on regulatory compliance
and its related cost. Management has very limited control over FDIC
assessment expense, insurance cost, postage expense and taxes.
Management has attempted to control labor costs by restricting new
hires. Other expenses in 1996 include a nonrecurring charge of $180,000
related to the write off of the undepreciated value of a branch building
that was demolished so it could be expanded.
Income Tax Expense:
Income tax expense for 1997 increased to $1,946,000 compared to
$1,276,000 for 1996 and $1,189,000 for 1995. Increased tax expense
resulted primarily from higher levels of income before tax and was also
due to the decline in tax exempt income during the period.
Net deferred tax assets at June 30, 1997 total $662,000. The Bancorp's
net deferred tax asset results primarily from a deferred tax asset
related to book provisions for loan losses in excess of the amount
deductible for tax purposes and deferred compensation accruals offset by
a deferred tax liability related to tax depreciation in excess of the
amount deducted for financial reporting purposes. Based on the
Bancorp's historical levels of taxable income and the relatively small
size of the net deferred tax asset, management does not believe a
valuation allowance for deferred tax assets is needed at June 30, 1997.
Page 27 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
ANALYSIS OF BALANCE SHEET
Earning Assets:
Bancorp's average earning assets were 93.27 percent of average total
assets for 1997, which is slightly higher than this same ratio for 1996
of 93.24 percent and 1995 of 93.16 percent. A factor that influences
(lowers) the earning asset ratio is the purchase of life insurance, in
conjunction with the formation of deferred compensation and death
benefit programs. At June 30, 1997, the cash surrender value of this
insurance totaled $4,774,000 as compared to $4,510,000 at June 30, 1996.
Although this asset does not "earn" interest, it increases in value over
time and that increase in value is reflected as a component of other
income. If this asset was considered "earning" for the purpose of the
above computation, the earning asset ratio for 1997 and 1996 would be
approximately 95.16 and 95.11 percent, respectively.
Securities:
The combined carrying value of available-for-sale and held-to-maturity
securities, by category, is as follows:
JUNE 30
1997 1996 1995
(Dollars in Thousands)
U.S. Govt. Agencies and Corporations $12,491 $16,939 $17,660
States and Political Subdivisions 7,476 10,178 8,742
Corporate Obligations 3,495 3,960 4,026
Mortgage-backed Securities issued
by U.S. Government Agencies 8,089 10,370 8,969
Other Asset-backed Securities 151 817 1,617
------------------------------
$31,702 $42,264 $41,014
==============================
Page 28 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Securities (cont.)
The Bancorp's securities portfolio acts as a source of liquidity and
additional earnings. In order to accomplish the objective of liquidity,
the weighted average maturity of the portfolio is kept relatively short.
The Bancorp classifies its securities as available-for-sale securities
or held-to-maturity securities. At June 30, 1997, the fair value of
available-for-sale securities was less than their amortized cost by
$18,000. Held-to-maturity securities are those which the Bancorp has
the intent and ability to hold until maturity. These are reported at
amortized cost. Available-for-sale securities are those which
management may decide to sell, if needed, for liquidity, asset-liability
management, or other reasons. Available-for-sale securities are
reported at fair value with unrealized gains or losses included as a
separate component of shareholders' equity, net of tax. No securities
were sold during 1995, 1996 or 1997. The Bancorp's goal of increasing
loan volume resulted in the contraction of the securities portfolio in
1997. As securities matured or were called, the Bancorp utilized these
funds to fund the loan portfolio. Please refer to Note 2, pages 52-54
of the financial statements for additional information about the
composition of the available-for-sale and held-to-maturity securities
portfolios. At June 30, 1997 the Bancorp did not have a concentration
of securities greater than 10 percent of its total equity in any one
entity, exclusive of U.S. Government Agency obligations. Mortgage-
backed securities issued by U. S. Government Agencies do represent 25.52
percent of the total portfolio and 3.21 percent of total assets. The
level yield method of accounting is used to amortize premiums and
accrete discounts on mortgage-backed securities.
Page 29 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio:
The composition of the loan portfolio, including loans held for sale,
follows:
June 30
1997 1996 1995 1994 1993
(Dollars in Thousands)
Commercial, financial
and agricultural $104,702 $ 90,824 $ 76,015 $ 75,041 $ 54,832
Real estate/Non-Farm 29,936 31,620 35,911 32,000 39,539
Real estate/Farmland 21,335 18,556 18,310 17,438 20,508
Consumer 43,807 32,140 25,922 23,016 19,636
Lease Financing 1,044 908 483 82 28
Foreign -0- -0- -0- -0- -0-
-------- ------- ------- ------- -------
200,824 174,048 156,641 147,577 134,543
Unearned discount -0- -0- -0- -0- -0-
------- ------- ------- ------- -------
200,824 174,048 156,641 147,577 134,543
Allowance for loan
losses (3,232) (2,741) (2,348) (2,478) (2,226)
-------- -------- -------- -------- --------
Total loans, net $197,592 $171,307 $154,293 $145,099 $132,317
========= ======== ======== ======== =========
Commercial loans have maintained a growth pattern since 1992.
Outstandings averaged $95,750,000 in 1997, $77,329,000 in 1996 and
$75,698,000 in 1995. While the Bank's commitment to agricultural-
related financing remains, outstanding agricultural-operating lines have
been on a gradual decline with balances at $23,050,000 for 1997, up
slightly from 1996's total of $22,570,000; $25,831,000 for 1995 and
$27,756,000 for 1994. New non-farm commercial credits have continued to
increase, which will help diversify the entire commercial loan
portfolio.
Consumer loans, which include installment, credit card and student loans
increased the past four years. Average outstandings increased by
approximately 43.31 percent or $11,970,000 for 1997 as compared to 12.27
percent or $3,025,000 for the year ended 1996. Credit card activity
showed gradual growth throughout 1994 and 1995, after the Bank became an
"issuing bank" for both Mastercard and Visa in 1990. Following a credit
card promotion in 1996, balances increased $982,000 from the previous
year and totaled $2,307,000 at June 30, 1996. Credit card balances in
1997 increased $496,000, or 21.50 percent from June 30, 1996 to total
$2,803,000 at year-end. Management believes that the outstanding
consumer loan totals will show continued growth in 1998.
Page 30 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
Real estate loans increased to $51,271,000 at June 30, 1997, as compared
to $50,176,000 at June 30, 1996. This increase of $1,095,000
or 2.18 percent is due to an increase of $2,780,000 in the farmland real
estate portfolio, offset by a decrease in the residential real estate
portfolio of $1,684,000 due to scheduled payments and refinancing of 1-4
family residential mortgages. The majority of new originations are
being sold into the secondary market. Construction loans, which are
one year or less in length, are carried in the Bank's commercial loan
portfolio and totaled $10,629,000 at June 30, 1997 as compared to
$5,439,000 at June 30, 1996. Upon completion of construction,
commitments for permanent financing are activated either within the
Bank's real estate loan portfolio or with other financial institutions.
The Bank's portfolio doesn't include foreign loans, nor does there exist
a concentration of borrowers engaged in the same industry that would
exceed 10 percent of total loans except for the agricultural sector.
Approximately 22 percent or $44,385,000 of the total loan portfolio of
$200,824,000 represents agricultural-lending, both operations and long
term debt. This compares to 24 percent, $41,126,000 at June 30, 1996,
and 28 percent, $44,140,000 at June 30, 1995.
The size of the Bank's agricultural loan portfolio warrants a close
working relationship with these customers. At least annually each
customer presents projections, which include operating costs,
anticipated crop yields and market prices, and capital expenditures
required for their season's production. The Bank's farm lending
officers meet with customers to review these projections to assure that
they are reasonable and incorporate the repayment of principal and
interest to the Bank, over a reasonable time period. The revised
projections then provide a means for the Bank to monitor customer
performance during the current period and from year to year.
Once the extension of credit decision is made, the Bank follows a
program of monitoring the activities of their agricultural customers by
making farm visits regularly. The condition of growing crops, review of
market trends for both crops and livestock, and comparison of actual
performance to projected goals are among issues considered at the time
of visits, as well as throughout the year. The cooperation between the
Bank and its agricultural customers has provided a satisfactory
relationship over the years.
The results of the 1997 growing season in our trade area are mixed thus
far. It is predicted that dry weather in July and August will cause
lower than average yields in the corn crop, but beans have the potential
to equal the average of 40 bushels/acre. Corn and bean prices in 1996
were higher than anticipated which offset lower yields, but it is
predicted that 1997 prices will be significantly lower than in 1996.
Page 31 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Loan Portfolio (cont.)
Commercial nonaccrual loans at June 30, 1997 were $726,000, $443,000 or
61 percent of which were agricultural-related. Management is acutely
aware of the inherent risks associated with agricultural lending via
weather and market. Our experience dictates that the risks are
manageable and the Bancorp is prepared to assume them.
In 1996, the Bank's consumer loan emphasis was primarily in direct
lending. In the latter part of 1996 and into 1997 more emphasis was
placed on the indirect market. Contacts with auto dealerships and a new
promotion caused an increase in the indirect market. Management
continues to promote direct lending while increasing the indirect market
also. Currently, approximately 36 percent of new originations are
indirect. Indirect origination requests are received by the Bank on a
regular basis. Indirect contracts are written based on the same
underwriting standards that are used for writing direct contracts. The
decision to write the contract rests with the Bank. Management expects
consumer loan volume to show strong growth for 1998 and is anticipating
that overall portfolio quality will continue as in the previous years.
Sound underwriting standards and administration of the consumer loan
function should continue to maintain this segment of the loan portfolio.
Our credit card activity, both Mastercard and Visa, should continue to
provide a favorable yield.
Bancorp expects loan demand to remain strong during 1998, driven by very
competitive interest rates for both real estate mortgages and consumer
loans; and by the acquisition of quality commercial and agricultural
loans in the immediate surrounding areas.
Page 32 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Allowance for Loan Losses:
Loan Composition and Allowance Allocation as of June 30, 1997 - Loan
composition and allowance allocation are presented in the table below.
June 30
1997 1996 1995 1994
Amt. Pct. Amt. Pct. Amt. Pct. Amt. Pct.
(Dollars in Thousands)
Loan Composition:
Commercial,
financial and
agricultural $104,702 52% $ 90,824 52% $ 76,015 48% $ 75,041 51%
Real estate/Farm 21,335 11 18,556 10 18,310 12 17,438 12
Non-Farm 29,936 14 31,620 19 35,911 23 32,000 22
Consumer 43,807 22 32,140 18 25,922 17 23,016 15
Lease Financing 1,044 1 908 1 483 -0- 82 -0-
Foreign -0- -0- -0- -0- -0- -0- -0- -0-
------------------------------------------------------
Total $200,824 $174,048 $156,641 $147,577
======================================================
Allowance Allocation:
Commercial,
financial and
agricultural $ 352 11% $ 759 28% $ 1,358 58% $ 1,343 54%
Real estate/Farm 20 1 48 2 47 2 20 1
Non-Farm 11 -0- 85 3 93 4 139 6
Consumer 260 8 289 10 274 12 346 14
Lease Financing -0- -0- -0- -0- -0- -0- -0- -0-
Foreign -0- -0- -0- -0- -0- -0- -0- -0-
Unallocated 2,589 80 1,560 57 576 24 630 25
-----------------------------------------------------
Totals $ 3,232 100% $ 2,741 100% $ 2,348 100% $ 2,478 100%
=====================================================
In the course of extending credit, management recognizes that a
percentage of the loans will be uncollectible. Accordingly, an
allowance for possible loan losses is established as an estimate of the
loans which may ultimately have to be written off. During each month, a
provision for loan losses is recorded to maintain the adequacy of the
amount in the allowance for possible loan losses. When warranted, loans
are charged off against this reserve.
Page 33 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
At June 30, 1997 the Bancorp's allowance for loan losses was $3,232,000,
or 1.61 percent of total loans compared to $2,741,000, 1.57 percent of
total loans in 1996 and $2,348,000, 1.50 percent of total loans in 1995.
The tables above reflect the loan composition and allowance allocations
for the past four years. While a portion of Bancorp's allowance for
loan losses is allocated to specific loan categories, improved credit
quality has resulted in a significant unallocated portion which provides
a cushion against future loan losses. Management believes that the
reserve, despite the large unallocated portion is not excessive based on
norms for the industry and history of the Bank's loan portfolio prior to
1994.
Deposits:
The deposit base provides the major funding source for earning assets.
The average daily deposit balance of $196,747,000 funded 86.64 percent
of the 1997 average earning assets of $227,080,000. Average total
deposits in 1997 increased $8,570,000 or 4.55 percent from 1996 deposit
totals of $188,178,000. A shift from long term deposits to shorter term
accounts continued in all retail deposit categories. Interest bearing
deposits in denominations of $100,000 or greater totaled $23,361,000 at
June 30, 1997 compared to $20,250,000 at June 30, 1996.
Short-term Borrowings:
Short-term borrowings at June 30, 1997 consist of retail repurchase
agreements in the amount of $9,085,000 and borrowings in the amount of
$2,900,000 from the Federal Reserve Bank's Seasonal Line of Credit.
Repurchase agreements are borrowings from customers that are
collateralized by a pledge of U.S. Government or Agency investments.
Such borrowings provide alternatives for those customers who prefer this
form of investment. The following table provides information about the
Bank's Repurchase Agreements.
1997 1996 1995
(Dollars in Thousands)
Balance Outstanding as of June 30 $ 9,085 $12,752 $20,691
Weighted Average Rate as of June 30 4.31% 3.36% 5.26%
Average Balance for year ended June 30 $10,660 $11,100 $ 9,420
Weighted Avg Rate for year ended June 30 4.02% 4.38% 3.56%
Highest Month End Balance for Fiscal Year $12,752 $14,407 $20,891
At June 30, 1997 Bancorp had drawn $2,900,000 of its $5,000,000
agricultural seasonal line of credit with the Federal Reserve Bank of
Chicago. The Bancorp annually arranges for the availability of this
credit to temporarily fund seasonal agricultural loan demand. This
seasonal line of credit is due to mature on December 31, 1997.
In addition, at June 30, 1997 the Bancorp had drawn $7,477,000 in
various borrowings from the Federal Home Loan Bank of Indianapolis to
match particular loan pools. These borrowings were matched to specific
loan pools for comparable terms and at a favorable interest rate spread
to the Bank. Details of these draws are found in Note #8, pages 57-58
of the accompanying financials.
Page 34 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources:
The strength of a company's capital position influences management's
willingness to take advantage of growth opportunities and provides the
capacity to absorb unforeseen financial difficulties. Bancorp's capital
position remains strong. Shareholders' equity was $25,476,000 on June
30, 1997 compared to $24,127,000 on June 30, 1996 and $22,821,000 on
June 30, 1995.
The Bancorp and the Bank are subject to regulations that require the
maintenance of a leverage ratio (tier one capital to adjusted total
assets), a tier one risk-based capital ratio (tier one capital to risk
adjusted assets), and a total risk-based capital ratio (total capital to
risk adjusted assets). These regulations require the maintenance of a
leverage ratio of at least 3 percent (for the best performing
institutions), a tier one risk-based capital ratio of at least 4
percent, and a total risk-based capital ratio of a least 8 percent.
During 1991, Congress passed the Federal Deposit Insurance Corporation
Improvement Act (FDICIA). In addition to addressing the insurance
fund's financial needs, FDICIA required the FDIC to promulgate
regulations (which were issued in early 1993) outlining specific
regulatory actions that would occur when the capital level of a
financial institution deteriorated beyond a specified level. A "well
capitalized" financial institution is defined as one which has a
leverage ratio of at least 5 percent, a tier one risk-based capital
ratio of at least 6 percent and a total risk-based capital ratio of at
least 10 percent. The FDIC established five capital ranges (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized). Institutions that
are not deemed to be "well" or "adequately" capitalized are subject to
operational restrictions and higher deposit insurance assessments.
These new regulations, effectively, establish minimum capital guidelines
in excess of the 3 percent (leverage), 4 percent (tier one risk-based),
and 8 percent (total risk-based) described above.
The Bancorp's ability to pay dividends to its shareholders depends
substantially upon the Bank's ability to pay dividends to the Bancorp.
Compliance with these regulations limits the amount of dividends that
may be paid by the companies. At June 30, 1997, both the Bancorp and
the Bank have capital levels substantially in excess of those required.
Bancorp's capital and capital ratios, which do not differ significantly
from bank-only ratios, were as follows at the dates indicated (dollars
in thousands):
Page 35 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Capital Resources (cont.)
At June 30, 1997 1996 1995
Tier I Capital $ 25,487 $ 24,221 $ 22,739
Total Capital 28,099 26,562 24,998
Risk Weighted Assets 208,700 186,905 180,687
Leverage Ratio 10.27% 10.21% 10.06%
Tier One Risk-based Capital Ratio 12.21 12.96 12.58
Total Risk-based Capital Ratio 13.47 14.21 13.83
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The objective of liquidity management is to provide for the cash needs
of the Bancorp at a reasonable cost. Liquidity resources include liquid
assets and the Bancorp's ability to access additional sources of funds.
Additional asset liquidity is provided by our ability to sell loans.
Sales of real estate loans in the secondary market during 1997 generated
proceeds of $11,974,000 compared to $10,978,000 during 1996 and
$3,365,000 during 1995. In addition, the Bancorp sold $879,000 of
student loans during the year ended June 30, 1996, compared to $298,000
during 1995.
The liquidity position is analyzed by comparing expected needs against
planned resources. Quantitative analysis of historical trends, seasonal
factors and cyclical influences are used to prepare forecasts of
liquidity needs.
Asset liquidity is provided primarily by the maturity of loans.
Additionally, Bancorp considers all securities that mature within one
year or have a call feature within the next year, all time deposits in
banks, bankers acceptances, and all federal funds sold to be sources of
asset liquidity. The total of these resources at June 30, 1997 is
$9,457,000, compared to $13,008,000 at June 30, 1996. The total of
these resources is down 27.30 percent from June 30, 1996 to June 30,
1997. The level at June 30, 1997 is deemed by management to be adequate
for funding purposes. In addition, the Bancorp has wholesale funding
sources with Federal Home Loan Bank and the Federal Reserve.
Page 36 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (cont.)
Unfunded loan commitments and unused lines of credit at June 30, 1997
were $38,790,000 and letters of credit were $1,506,000. Many existing
commitments will expire without being used. Consequently the
outstandings do not necessarily represent future cash commitments. The
reality of unknown credit demands challenges the Asset/Liability
Committee to maintain funding sources sufficient to meet our
requirements. If excess funds are available, the committee will strive
to invest them to effectively match our funding sources. 1998 has been
projected to be a year for an increased demand on funding levels as has
been the experience of the past year.
The principal objectives of asset/liability management are to manage
interest rate risk, ensure adequate liquidity, and coordinate sources
and uses of funds. The Bancorp engages in a formal process of
asset/liability management through an Asset/Liability ("A/L") Committee
of the Bank. Through this committee, senior management actively
participates in the process, ensuring that actions are communicated and
implemented throughout the bank.
In the analysis of interest rate risk, the objective is to manage,
within acceptable limits, the impact on the income statement caused by
fluctuating interest rates and changing rate relationships. Our policy
is to maintain a relatively neutral interest sensitive position and, if
necessary, the A/L committee may deviate from the neutral position
within our prescribed guidelines, which are reviewed by the Bancorp's
Board of Directors. The A/L committee can then manage interest rate
risk, while responding to change in the balance sheet and financial
markets as they strive to improve net interest income.
Provided on the next page is various repricing and maturity information
relative to securities, loans, and deposits at June 30, 1997, followed
by a condensed summary of Bancorp's interest sensitivity analysis
report.
Page 37 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The maturity distribution, reflecting, at amortized cost, the scheduled
maturities, or calls, and projected paydowns of asset-backed securities,
and average tax equivalent yields for the securities at June 30, 1997 is
shown in the following table.
Within one One to Five Five to Ten
Year Years Years
Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
U.S. Govt. Agencies $ 2,997 7.81% $ 9,498 6.36% $ -0- -0-%
State and Municipal 965 7.30 5,541 7.08 970 7.52
Corporate Obligations 1,505 5.38 1,998 6.03 -0- -0-
Mortgage-backed
securities issued by
U.S. Govt. Agencies 2,582 5.99 4,576 6.92 500 5.50
Other Asset-backed
securities -0- -0- 151 6.20 -0- -0-
------------------------------------------------
$ 8,049 $21,764 $ 1,470
======= ======= =======
Over Ten
Years
Amount Yield
(Dollars in Thousands)
U.S. Govt. Agencies $ -0- -0-%
State and Municipal -0- -0-
Corporate Obligations -0- -0-
Mortgage-backed
securities issued by
U.S. Govt. Agencies 437 7.50
Other Asset-backed
securities -0- -0-
--------------
$ 437
======
Yields are reflected on a federal tax equivalent basis, assuming a 34
percent tax rate.
As of June 30, 1997, time of deposits over $100,000 mature as follows:
Amount Percent
(Dollars in Thousands)
Three months or less $ 10,352 44.31%
Over three through six months 1,129 4.83
Over six through twelve months 528 2.26
Over twelve months 11,352 48.60
----------------------------
Total $ 23,361 100.00%
============================
Page 38 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont.)
The following table reflects interest rate sensitivity as of June 30,
1997 with dollar references in thousands.
ASSET AND LIABILITY MATURITY/REPRICING SCHEDULE
Within Four to One to Over
Three Twelve Three Three
Months Months Years Years Total
------ ------ ----- ----- -----
ASSETS
Short Term Investments $ -0- $ -0- $ -0- $ -0- $ -0-
Securities 2,385 6,060 10,706 12,551 31,702
Loans 75,117 55,194 32,949 37,564 200,824
-----------------------------------------------
TOTAL EARNING ASSETS 77,502 61,254 43,655 50,115 232,526
------------------------------------------------
LIABILITIES
Savings, NOW & Money
Market Deposits 68,977 -0- -0- -0- 68,977
CDs Less Than $100,000 20,106 18,548 34,003 12,949 85,606
CDs Over $100,000 10,352 1,657 8,595 2,757 23,361
Short-term Borrowings 11,985 -0- -0- -0- 11,985
Other Borrowings 148 1,368 3,858 2,465 7,839
------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 111,568 21,573 46,456 18,171 197,768
------------------------------------------------
PERIOD GAP (RSA-RSL) $(34,066)$ 39,681 $ (2,801) $ 31,944 $ 34,758
Percent of Total Assets( 13.53)% 15.76% (1.11)% 12.69% 13.81%
================================================
CUMULATIVE GAP $(34,066)$ 5,615 $ 2,814 $ 34,758
Percent of Total Assets( 13.53)% 2.23% 1.12% 13.81%
=====================================
Page 39 of 81
Part II
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
The condensed GAP report (on the previous page) summarizes the Bank's
interest rate sensitivity. Management projects that rates will remain
relatively level during the first quarter of the next fiscal year and
then expect a minor upward movement the remainder of the 1998 fiscal
year. Should these projections be realized, a significant effect on
earnings is not anticipated. Interest rates decreased slightly during
fiscal 1997. With the decrease of rates, being negatively gapped has
been an advantage to the Bank. Interest bearing liabilities have
repriced more quickly, at lower rates, than have interest earning
assets; resulting in an increase in the net interest margin. Management
does believe that many of the deposit accounts and dollars are true core
deposits, and as such will not react significantly to changes in
interest rates. This will lessen the effect of interest rate changes.
The Bank continues to position itself to be as flexible as possible in
both earning assets and interest bearing liabilities by offering
variable rate loan and deposit instruments. Although rate sensitivity
gaps constantly change as funds are acquired and invested, the Bancorp's
cumulative gaps at all intervals are viewed by management to be a
relatively low percentage of total assets.
IMPACT OF ACCOUNTING ISSUES
Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", was
issued by the Financial Accounting Standards Board in 1996. It revised
the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
It is effective prospectively for some transactions occurring after
December 31, 1996 and others in 1998. The impact of partial adoption
closing 1997 was not significant. Management does not expect that full
adoption of the Standard in 1998 will significantly impact the Bancorp's
financial position or results of operations.
Page 40 of 81
Part II
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest
rate swaps, option contracts, and other financial instruments with
similar characteristics. The Bancorp currently does not enter into
futures, forwards, swaps, or options. However, the Bancorp is party to
financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from
the borrower if deemed necessary by the Bancorp. Standby letters of
credit are conditional commitments issued by the Bancorp to guarantee
the performance of a customer to a third party up to a stipulated amount
and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Bancorp until the instrument is
exercised.
The Bank's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic
losses can be reflected as a loss of future net interest income and/or a
loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. Tools used by management include the
standard GAP report and a recently instituted interest rate shock
simulation report. The Bank has no market risk sensitive instruments
held for trading purposes. It appears the Bank's market risk is
reasonable at this time. The condensed GAP report summarizing the
Banks's interest rate sensitivity is as follows:
Page 41 of 81
Part II
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(cont.)
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled
maturity of market risk sensitive instruments at June 30, 1997:
Maturing in: Year 1 Year 2 Year 3 Years Beyond Total
4-5
ASSETS
Securities $ 9,457 $ 8,534 $ 2,172 $ 5,451 $ 6,088 $ 31,702
Loans 131,507 19,321 13,628 13,314 23,054 200,824
-------- -------- -------- -------- -------- --------
Total 140,964 27,855 15,800 18,765 29,142 232,526
======== ======== ======== ======== ======== ========
LIABILITIES
Savings, NOW
and Money
Market Dep. 68,977
CD's 50,663 37,728 4,870 15,676 30 108,967
Short-term
Borrowings 11,985 -0- -0- -0- -0- 11,985
Long-term
Borrowings 1,181 2,932 835 2,238 653 7,839
-------- -------- -------- -------- -------- --------
Total 132,806 40,660 5,705 17,914 683 197,768
======== ======== ======== ======== ======== ========
Total Average Interest Rate Estimated Fair Value
ASSETS
Securities $ 31,702 6.67% $ 31,847
Loans 200,824 9.48 196,220
LIABILITIES
Savings, now
and Money
Market Dep. 68,977 2.86 68,977
CD's 108,967 5.68 108,881
Short-term
Borrowings 11,985 4.95 11,985
Long-term
Borrowings 7,839 5.54 7,755
Page 42 of 81
Part II
Item 8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - REPORT
OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Farmers Bancorp
Frankfort, Indiana
We have audited the consolidated balance sheets of The Farmers Bancorp
as of June 30, 1997 and 1996 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Farmers Bancorp as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
July 11, 1997
Page 43 of 81
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
(Dollar amounts in thousands)
1997 1996
ASSETS
Cash and due from banks (Note 12) $ 7,591 $ 9,889
Available-for-sale securities (Note 2) 11,374 18,610
Held-to-maturity securities (Note 2)
(Market values of $ 20,473 and $ 23,535) 20,328 23,654
Loans held for sale - 492
Total loans (Note 3) 200,824 173,556
Less allowance for loan losses (Note 4) (3,232) (2,741)
-------- --------
Loans, net 197,592 170,815
Premises and equipment - net (Note 5) 5,325 4,641
Restricted stock, at cost 1,013 771
Accrued income and other assets (Note 9) 8,521 8,172
-------- --------
$ 251,744 $ 237,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Non-interest-bearing deposits $ 24,663 $ 22,115
Interest-bearing deposits (Note 6) 177,944 169,373
-------- --------
Total deposits 202,607 191,488
Short-term borrowings (Note 7) 11,985 12,752
Other borrowings (Note 8) 7,839 6,259
Accrued expenses and other liabilities 3,837 2,418
-------- --------
226,268 212,917
Commitments (Note 12)
Shareholders' equity
Common stock, (no par value - 2,400,000 shares
authorized, 1,154,116 shares issued
and outstanding) 2,885 2,885
Additional paid-in capital 5,101 5,101
Retained earnings 17,501 16,235
Unrealized depreciation on
available-for-sale securities, net of tax
benefit of $7 and $62 (11) (94)
--------- --------
25,476 24,127
$ 251,744 $ 237,044
========= =========
Page 44 of 81
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share data)
1997 1996 1995
Interest income
Loans, including related fees $ 17,605 $ 14,792 $ 13,289
Federal funds sold and short-term
money market investments 114 709 308
Securities
Taxable 1,892 2,076 2,508
Tax exempt 451 534 553
-------- -------- --------
20,062 18,111 16,658
Interest expense
Deposits 7,769 7,469 6,623
Short-term borrowings 450 487 346
Other borrowings 452 297 256
-------- -------- --------
8,671 8,253 7,225
-------- -------- --------
Net interest income 11,391 9,858 9,433
Provision for loan losses (Note 4) 570 480 218
-------- -------- --------
Net interest income after provision for
loan losses 10,821 9,378 9,215
Other operating income
Trust fees 315 273 244
Service charge income 792 726 676
Mortgage banking revenue 139 110 83
Other 593 377 465
------- ------- -------
1,839 1,486 1,468
Other operating expenses
Salaries and employee benefits (Note 9) 3,866 3,822 3,511
Occupancy - net 592 602 551
Equipment 657 581 569
Data processing 402 345 458
FDIC assessment 12 9 384
Other 1,726 1,813 1,596
------- ------- -------
7,255 7,172 7,069
------- ------- -------
Income before income taxes 5,405 3,692 3,614
Less income taxes (Note 10) 1,946 1,276 1,189
------- ------- -------
Net income $ 3,459 $ 2,416 $ 2,425
======= ======= =======
Per share data (Note 11):
Net income per share $ 3.00 $ 2.09 $ 2.10
======= ======= =======
Page 45 of 81
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended June 30, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share data)
Net
Unrealized
Appreciation/
(Depreciation)
Additional on Available-
Common Paid-in Retained for-Sale
Stock Capital Earnings Securities Total
Balance, July 1, 1994 $ 2,885 $ 5,101 $ 13,205 $ - $ 21,191
Implementation of
Financial Accounting
Standard No. 115 - - - 34 34
Net income - - 2,425 - 2,425
Cash dividends ($.76 per
share) - - (877) - (877)
Change in net unrealized
appreciation/(depreciation) - - - 48 48
------- ------ -------- ----- -------
Balance, June 30, 1995 2,885 5,101 14,753 82 22,821
Net income - - 2,416 - 2,416
Cash dividends ($.81 per
share) - - (934) - (934)
Change in net unrealized
appreciation/(depreciation) - - - (176) (176)
------ ------ ------- ----- ------
Balance, June 30, 1996 2,885 5,101 16,235 (94) 24,127
Net income - - 3,459 - 3,459
Cash dividends ($ 1.90 per
share) - - (2,193) - (2,193)
Change in net unrealized
appreciation/(depreciation) - - - 83 83
------ ------ ------ ---- ------
Balance, June 30, 1997 $ 2,885 $ 5,101 $ 17,501 $ (11) $ 25,476
======= ======= ======== ====== ========
Page 46 of 81
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
(Dollar amounts in thousands)
1997 1996 1995
Cash flows from operating activities
Net income $ 3,459 $ 2,416 $ 2,425
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 580 515 477
Provision for loan losses 570 480 218
Net premium amortization on
securities 55 72 109
Proceeds from sales of loans 11,974 11,893 3,683
Gain on sale of loans (52) (36) (20)
Loans originated for sale (11,430) (11,486) (3,548)
Write-off of building - 181 -
Deferred taxes (212) (94) 64
Change in assets and liabilities
Income taxes payable (20) (41) 49
Interest receivable (25) (216) 83
Interest payable 57 127 282
Other assets (123) (146) (186)
Other liabilities 1,362 498 32
------- ------- -------
Net cash from operating activities 6,195 4,163 3,668
Cash flows from investing activities
Proceeds from maturities and principal
repayments on available-for-sale
securities 7,357 5,063 8,221
Purchase of available-for-sale securities - (7,461) (3,620)
Proceeds from maturities and principal
repayments on held-to-maturity securities 3,458 11,461 8,389
Purchase of held-to-maturity securities (170) (11,346) (3,108)
Loans made to customers, net of
principal collections thereon (27,347) (17,867) (9,526)
Net change in interest-bearing balances
with financial institutions - - 1,100
Purchase of life insurance policies (24) (243) (142)
Property and equipment expenditures (1,264) (1,012) (45)
Purchase of restricted stock (242) (100) (16)
------- ------- -------
Net cash from investing activities (18,232) (21,505) 1,253
Page 47 of 81
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
(Dollar amounts in thousands)
1997 1996 1995
Cash flows from financing activities
Net increase/(decrease) in deposits $ 11,119 $ 15,935 $ 6,097
Net increase/(decrease) in
short-term borrowings (767) (7,940) (499)
Proceeds from other borrowings 3,835 2,875 1,528
Repayment of other borrowings (2,255) (1,790) (243)
Dividends paid (2,193) (934) (877)
------- ------- -------
Net cash from financing
activities 9,739 8,146 6,006
------- ------- -------
Net change in cash and due from banks (2,298) (9,196) 10,927
Cash and due from banks at beginning
of year 9,889 19,085 8,158
------- ------- -------
Cash and due from banks at end of
year $ 7,591 $ 9,889 $ 19,085
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 8,614 $ 8,126 $ 6,943
Income taxes 2,178 1,411 1,076
Noncash investing activities
Transfer from held-to-maturity securities
to available-for-sale securities - 5,011 16,739
Capital lease obligation - - 814
Page 48 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: The consolidated financial statements include the
accounts of The Farmers Bancorp ("Bancorp") and its wholly owned
subsidiary, The Farmers Bank ("Bank"). Upon consolidation, all
significant intercompany accounts and transactions have been eliminated.
Description of Business: Bancorp operates primarily in the banking
industry which accounts for more than 90% of its revenues, operating
income and assets. The Bank generates commercial, installment and
mortgage loans and receives deposits from customers located primarily in
the Clinton County, Indiana area. Although the overall loan portfolio
is diversified, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the agricultural industry. The
majority of the Bank's loans are secured by specific items of collateral
including business assets, consumer assets and real property.
Use of Estimates: Management must make estimates and assumptions in
preparing financial statements that affect the amounts reported therein
and the disclosures provided. These estimates and assumptions may
change in the future, and future results could differ. Significant
areas involving the use of management s estimates and assumptions that
are more susceptible to change in the near term include the allowance
for loan losses, the fair values of certain securities and other
financial instruments, the determination and carrying value of impaired
loans and the carrying value of loans held for sale.
Securities: The Bancorp classifies its securities as held-to-maturity or
available-for-sale. Held-to-maturity securities are those which the
Bancorp has the intent and ability to hold until maturity. These are
reported at amortized cost. Available-for-sale securities are those
which management may decide to sell, if needed, for liquidity, asset-
liability management, or other reasons. Available-for-sale securities
are reported at fair value with unrealized appreciation or depreciation
included as a separate component of shareholders equity, net of tax.
Realized gains or losses are determined based on the amortized cost of
the specific security sold. Interest and dividend income, adjusted for
the amortization of purchase premiums or discounts, is included in
earnings.
Loans Held for Sale: The Bank originates certain fixed rate residential
real estate loans for sale in the secondary market. Loans held for sale
are carried at the lower of cost or aggregate market value. At June 30,
1996, the market value of these loans exceeded their cost. There were
no loans held for sale at June 30, 1997.
Mortgage banking revenue on the statement of income consists of gains
and losses realized when loans are sold, unrealized gains and losses
related to loans held for sale and service fee revenue earned after
loans are sold.
Page 49 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Income on Loans: Interest on loans is accrued over the term of
the loans based on the principal outstanding. Loans are placed on non-
accrual status when the collection of interest becomes doubtful. Loan
fees, net of certain direct loan origination costs, are deferred and
recognized into interest income over the term of the loan using the
level yield method.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management s
judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated collectively for smaller-balance
loans of similar nature such as residential mortgage, consumer, and
credit card loans, and on an individual loan basis for other loans. If
a loan is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future cash
flows using the loan s existing rate.
In general, loans classified as doubtful or loss are considered impaired
while loans classified as substandard are individually evaluated for
impairment. Depending on the relative size of the credit relationship,
late or insufficient payments of 30 to 90 days will cause management to
re-evaluate the credit under its normal evaluation procedures.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the passage
of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value,
while increases or decreases due to changes in estimates of future
payments and due to the passage of time are reported as reductions or
increases to the provision for loan losses.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated on the
straight-line and declining-balance methods over the estimated useful
lives of the assets.
Other Real Estate: Real estate acquired through foreclosure is carried
at the lower of cost (fair value at date of foreclosure) or fair value
less estimated cost to sell. If it is later determined that the total
capitalized cost of the property cannot be recovered through its sale or
use, the loss is immediately recognized by a charge to income and the
creation of a reserve. Expenses incurred in carrying other real estate
are charged to operations as incurred.
Page 50 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred tax liabilities and assets are determined at
each balance sheet date. They are measured by applying enacted tax laws
to future amounts that will result from differences in the financial
statement and tax bases of assets and liabilities. Recognition of
deferred tax assets is limited by the establishment of a valuation
reserve unless management concludes that the assets will more likely
than not result in future tax benefits to the Bancorp. Income tax
expense equals the amount currently payable on the income tax return
plus or minus the change in deferred tax assets and liabilities.
Statement of Cash Flows: For purposes of the statement of cash flows,
cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold and short-term money market investments. Bancorp
reports net cash flows for customer loan and deposit transactions, for
interest-bearing balances with financial institutions and for short-term
borrowings.
Fair Values of Financial Instruments: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed separately. Fair value estimates
involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially
in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance
sheet financial instruments does not include the value of anticipated
future business or the values of assets and liabilities not considered
financial instruments.
Financial Statement Presentation: Certain items in the 1996 and 1995
financial statements have been reclassified to correspond with the 1997
presentation. These reclassifications had no effect on shareholders'
equity or the results of operations.
Page 51 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES
The amortized cost and fair value of available-for-sale securities were
as follows at June 30, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $ 4,495 $ 16 $ (20) $ 4,491
States and political
subdivisions 575 - - 575
Corporate obligations 3,503 3 (11) 3,495
Mortgage-backed securities
issued by U.S. Government
agencies 2,668 13 (19) 2,662
Other asset-backed
securities 151 - - 151
-------- -------- -------- -------
$ 11,392 $ 32 $ (50) $ 11,374
======== ======== ======== =======
The following table presents the amortized cost and fair value of
available-for-sale securities at June 30, 1997, by contractual maturity.
Actual maturities may differ from contractual maturities because issuers
may have the right to call or repay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year $ 3,004 $ 3,014
Due after one year through five years 4,494 4,469
Due after five years through ten years 360 360
Due after ten years 715 718
Mortgage-backed securities issued by
U.S. Government agencies 2,668 2,662
Other asset-backed securities 151 151
-------- --------
$ 11,392 $ 11,374
======== ========
Page 52 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of available-for-sale securities were
as follows at June 30, 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies
and corporations $ 8,993 $ 50 $ (91) $ 8,952
States and political
subdivisions 630 - - 630
Corporate obligations 4,011 4 (55) 3,960
Mortgage-backed securities
issued by U.S. Government
agencies 4,314 5 (68) 4,251
Other asset-backed
securities 818 - (1) 817
-------- -------- -------- --------
$ 18,766 $ 59 $ (215) $ 18,610
======== ======== ======== ========
The amortized cost and fair value of held-to-maturity securities were as
follows at June 30, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies and
corporations $ 8,000 $ 35 $ (35) $ 8,000
States and political subdivisions 6,901 127 (7) 7,021
Mortgage-backed securities
issued by U.S. Government
agencies 5,427 46 (21) 5,452
-------- -------- ------- --------
$ 20,328 $ 208 $ (63) $ 20,473
======== ======== ======= ========
Page 53 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 2 - SECURITIES (Continued)
The following table presents the amortized cost and fair value of held-
to-maturity securities at June 30, 1997, by contractual maturity.
Actual maturities may differ from contractual maturities because issuers
may have the right to call or repay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year $ 390 $ 393
Due after one year through five years 10,048 10,133
Due after five years through ten years 4,293 4,325
Due after ten years 170 170
Mortgage-backed securities issued by
U.S. Government agencies 5,427 5,452
------- -------
$20,328 $20,473
======= =======
The amortized cost and fair value of held-to-maturity securities were as
follows at June 30, 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government agencies and
corporations $ 7,987 $ 17 $ (157) $ 7,847
States and political subdivisions 9,548 129 (48) 9,629
Mortgage-backed securities
issued by U.S. Government
agencies 6,119 42 (102) 6,059
-------- -------- ------- --------
$ 23,654 $ 188 $ (307) $ 23,535
======== ======== ======= ========
No securities were sold during 1997, 1996 or 1995.
Securities with an amortized cost of $ 16,658 and $14,183 at June 30,
1997 and 1996, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes required or permitted by
law.
Page 54 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 3 - LOANS
Loans as presented on the balance sheet are comprised of the following:
1997 1996
Commercial loans $ 104,702 $ 90,824
Real estate loans 51,271 49,684
Installment loans 43,807 32,140
Lease financing 1,044 908
---------- ----------
$ 200,824 $ 173,556
========== ==========
Total loans at June 30, 1997 and 1996 include approximately $ 44,385 and
$41,126, respectively, of loans to farmers or businesses related to the
agricultural industry.
The Bank services mortgage loans sold to the Federal Home Loan Mortgage
Corporation. These loans are not included in the above balances and
totaled approximately $ 37,566 and $29,309 at June 30, 1997 and 1996,
respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
1997 1996 1995
Beginning balance $ 2,741 $ 2,348 $ 2,478
Provision charged to operations 570 480 218
Loans charged off (316) (547) (735)
Recoveries 237 460 387
-------- -------- --------
Ending balance $ 3,232 $ 2,741 $ 2,348
======== ======== ========
Page 55 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows:
1997 1996
Average investment in impaired loans during the year $ 1,160 $ 1,233
======= =======
Interest income recognized on impaired loans including
interest income recognized on cash basis of $3 and $1 $ 15 $ 1
======= =======
Balance of impaired loans at June 30: $ 1,300 $ 1,061
Less portion for which no allowance for loan losses
is allocated 780 612
------- -------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 520 $ 449
======= =======
Portion of allowance for loan losses allocated to
the impaired loan balance $ 125 $ 125
======= =======
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment by major category follows:
1997 1996
Land $ 1,011 $ 1,011
Buildings and improvements 5,375 4,973
Furniture and equipment 4,012 3,336
-------- --------
10,398 9,320
Accumulated depreciation (5,073) (4,679)
-------- --------
$ 5,325 $ 4,641
======== ========
NOTE 6 - DEPOSITS
Time deposits issued in denominations of $100 or greater totaled
$ 23,361 and $20,250 at June 30, 1997 and 1996, respectively. Interest
expense on such deposits for 1997, 1996 and 1995 was $1,252, $941 and
$673, respectively.
Page 56 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 6 - DEPOSITS (Continued)
At June 30, 1997, the scheduled maturities of time deposits are as
follows:
Years Ended June 30,
1998 $ 37,816
1999 37,728
2000 5,204
2001 4,847
2002 10,859
Thereafter -
---------
$ 96,454
=========
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings at June 30, 1997 consist of $2,900 from the
Federal Reserve Bank, through its seasonal line of credit program, and
$9,085 of retail repurchase agreements. At June 30, 1996, short-term
borrowings consisted solely of retail repurchase agreements.
Essentially, repurchase agreements are borrowings from customers that
are collateralized by a pledge of U.S. Government or agency securities.
Bancorp retains possession of and control over such securities.
Information regarding repurchase agreements for the years ended June 30,
1997 and 1996 is presented below:
1997 1996
Average balance during the year $ 10,660 $ 11,100
Average rate paid during the year 4.02% 4.38%
Maximum month end balance during the year $ 12,752 14,407
NOTE 8 - OTHER BORROWINGS
Other borrowings consist of the following at June 30:
1997 1996
Federal Home Loan Bank (FHLB) advances $ 7,477 $ 5,735
Capital lease obligation 362 524
--------- ---------
Total $ 7,839 $ 6,259
========= =========
Page 57 of 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
NOTE 8 - OTHER BORROWINGS (Continued)
FHLB advances are secured by a blanket pledge of the Bank s mortgage
loans and other assets and require monthly interest payments and
periodic principal reductions. The following advances are outstanding
at June 30, 1997:
Maturity Date Interest Rate Balance
October 6, 1997 5.38% $ 550
January 13, 1998 5.90 450
February 1, 1999 5.28 1,200
February 16, 1999 5.38 1,551
August 23, 1999 6.13 835
September 15, 2000 5.12 238
November 20, 2001 5.92 2,000
June 15, 2006 7.09 653
--------
$ 7,477
========
Required annual principal payments for those advances outstanding at
June 30, 1997 are as follows:
Year ending June 30,
1998 $ 1,144
1999 2,745
2000 912
2001 84
2002 2,019
After 2002 573
--------
$ 7,477
========
Generally, penalties, based on market rates at the time of prepayment,
will be assessed if advances are prepaid. However, certain advances may
be prepaid at specified times without penalty.
The capital lease obligation relates to EDP equipment. The term of the
lease is sixty months and it expires in 1999. The gross amount of this
asset is $814 and accumulated depreciation was $409 at June 30, 1997.
Annual payments are $196 with aggregate remaining payments of $391 at
June 30, 1997. The obligation reflected on the balance sheet at
June 30, 1997 represents the aggregate amount payable less $29 of
imputed interest.
Page 58 of 81
NOTE 9 - BENEFIT PLANS
The Bank has a non-contributory defined benefit pension plan which
covers a majority of its employees. The Bank's funding policy is to
contribute the amount allowable as a deduction under the Internal
Revenue Code. The following sets forth the Plan's funded status and
amounts recognized in the Bancorp's balance sheet and income statement:
As of June 30: 1997 1996
Accumulated benefit obligation $ 4,025 $ 3,746
========== ==========
Vested benefit obligation $ 3,727 $ 3,403
========== ==========
Plan assets at fair value $ 4,937 $ 4,582
Projected benefit obligation for service
rendered to date (4,762) (4,421)
Unrecognized prior service gain (75) (85)
Unrecognized loss 273 460
Unrecognized transition asset (109) (134)
---------- ----------
Prepaid pension cost $ 264 $ 402
========== ==========
For the year ended June 30: 1997 1996 1995
Net pension expense included
the following:
Service cost for the year $ 203 $ 197 $ 195
Interest cost on projected benefit
obligation 310 300 277
Actual return on plan assets (625) (334) (260)
Net amortization and deferral 250 (32) (87)
------ ------ ------
Net pension expense $ 138 $ 131 $ 125
====== ====== ======
Page 59 of 81
NOTE 9 - BENEFIT PLANS (Continued)
Significant actuarial assumptions which affect the Plan's obligations
and funding requirements are as follows:
1997 1996 1995
Weighted average discount rate 7.00% 7.00% 7.00%
Increase in annual compensation 5.00 5.00 5.00
Long-term rate of return on Plan assets 7.50 7.50 7.50
The unrecognized prior service gain relates to the effect of changes in
the Plan's benefit formula. These gains are being amortized, using the
straight line method, over the remaining average service lives of Plan
participants.
Plan assets consist primarily of investments in interest-bearing
balances with financial institutions, U.S. Treasury notes, U.S.
Government agencies and corporate bonds and notes.
The Bank also maintains a 401(k) plan for the benefit of eligible
employees. Employer contributions include discretionary contributions
and the matching of a portion of employee contributions. Expense
recognized for this plan was $36, $27 and $26 for 1997, 1996 and 1995,
respectively.
The Bank maintains a deferred compensation plan for the benefit of
certain directors, executive officers and independent contractors. In
return for relinquishing the right to a portion of their current
compensation, the Bank agrees to pay participants a retirement benefit,
in the form of a monthly payment for up to 180 months. The liability
accrued at June 30, 1997 and 1996 was $1,008 and $821, respectively and
the expense recognized during 1997, 1996 and 1995 was $228, $310 and
$211, respectively.
The Bank also maintains a death benefit plan for the benefit of
officers. Under the plan, if the participant dies prior to retirement,
the Bank agrees to pay a specified death benefit to designated
beneficiaries.
In conjunction with the deferred compensation and death benefit plans,
the Bank purchased life insurance on the participants. The cash
surrender value of such insurance at June 30, 1997 and 1996 was $4,774
and $4,510, respectively, and is included in "accrued income and other
assets" on the Bancorp's consolidated balance sheets.
Page 60 of 81
NOTE 10 - INCOME TAXES
Income taxes consist of the following components:
1997 1996 1995
Income tax expense/(benefit)
Current $ 2,158 $ 1,370 $ 1,125
Deferred (212) (94) 64
-------- -------- --------
$ 1,946 $ 1,276 $ 1,189
======== ======== ========
The following is a reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to
income before income taxes:
1997 1996 1995
Statutory rate applied to income
before income taxes $ 1,838 $ 1,255 $ 1,229
Add (deduct) tax effect of
Tax exempt interest income (141) (175) (192)
State income tax (net of
federal tax benefit) 305 212 200
Other, net (56) (16) (48)
-------- -------- --------
$ 1,946 $ 1,276 $ 1,189
======== ======== ========
The net deferred tax asset reflected in the June 30, 1997 and 1996
consolidated balance sheets is comprised of the following components:
1997 1996
Deferred tax assets from:
Provision for loan losses $ 1,004 $ 784
Deferred compensation plans 399 325
Available-for-sale securities 7 62
Other 38 103
-------- --------
1,448 1,274
Deferred tax liabilities for:
Depreciation (524) (509)
Pension plan (105) (158)
Deferred loan fees/costs (101) (64)
Other (56) (38)
-------- --------
(786) (769)
Valuation allowance for deferred tax assets - -
$ 662 $ 505
======== ========
Page 61 of 81
NOTE 11 - PER SHARE DATA
On October 14, 1996, the Board approved a 2-for-1 stock split effective
October 28, 1996. All per share data has been restated to give
retroactive effect to that stock split.
Earnings per common share have been computed based on the weighted
average number of shares outstanding during the years presented. The
number of shares used in the computation was 1,154,116 for all years
presented.
NOTE 12 - COMMITMENTS AND OFF-BALANCE-SHEET ITEMS
The Bank has operating leases covering certain of its properties.
Expense for leased premises was $66 for 1997, $64 for 1996 and $56 for
1995. Minimum lease payments at June 30, 1997 for all non-cancelable
leases are as follows:
1998 $ 64
1999 22
2000 16
2001 17
2002 18
Thereafter 57
--------
$ 194
========
The Bank, in the ordinary course of business, has commitments and
contingent liabilities, such as guarantees and commitments to extend
credit which are not reflected in the accompanying consolidated balance
sheets. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to make loans, standby letters of credit, and financial
guarantees is represented by the contractual amount of those
instruments. The Bank uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
Page 62 of 81
NOTE 12 - COMMITMENTS AND OFF-BALANCE-SHEET ITEMS (Continued)
At June 30, 1997 and 1996, these financial instruments are summarized as
follows:
1997 1996
Financial instruments which contract amount
represents credit risk:
Unused commercial lines of credit $ 20,907 $ 15,732
Unused revolving lines of credit 13,924 11,503
Commitments to make loans 3,959 7,289
Stand by letters of credit 1,506 381
The unused revolving and commercial lines of credit are predominantly
variable rate agreements. The commitments are agreements to lend to a
customer, provided they accept the terms and conditions offered by the
Bank. These commitments are generally extended for terms of up to 60
days and, in many cases, allow the customer to select from one of
several financing options offered. At June 30, 1997, these commitments
included $467 of fixed-rate loan commitments at rates ranging from 7.50%
to 10.00%. Since many commitments to make loans expire without being
used, the amount does not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using
management s credit evaluation of the borrower, and may include accounts
receivable, inventory, property, land and other items.
At June 30, 1997 and 1996, the Bank was required to have $2,033 and
$2,299 on deposit with the Federal Reserve or as cash on hand as
reserve. These reserves do not earn interest.
The Bancorp is also subject to claims and lawsuits which arise primarily
in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits
will not have a material adverse effect on the consolidated financial
position of the Bancorp.
NOTE 13 - CAPITAL REQUIREMENTS
The Bancorp and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can result in certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. These guidelines and the regulatory framework for prompt
corrective action involve quantitative measures of capital, assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices as well as qualitative judgments by the
regulators about components, risk weightings, and other factors.
Page 63 of 81
NOTE 13 - CAPITAL REQUIREMENTS (Continued)
Compliance with these regulations can limit dividends paid by either
entity. Both entities must comply with regulations that establish
minimum levels of capital adequacy. The Bank must also comply with
capital requirements promulgated by the FDIC under its "prompt
corrective action" rules. The Bank s deposit insurance assessment rate
is based, in part, on these measurements. At June 30, 1997, the Bank s
capital levels result in it being designated "well capitalized" under
these guidelines.
The Bancorp consolidated and the Bank s (Bank only) capital amounts and
ratios at June 30, 1997 are presented below:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk
Weighted Assets)
Consolidated $ 28,099 13.4% $ 16,722 8.0% $ 20,903 10.0%
Bank $ 28,046 13.4% $ 16,717 8.0% $ 20,896 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 25,487 12.2% $ 8,361 4.0% $ 12,542 6.0%
Bank $ 25,434 12.2% $ 8,358 4.0% $ 12,537 6.0%
Tier I Capital (to
Average Assets)
Consolidated $ 25,487 10.3% $ 9,935 4.0% $ 12,419 5.0%
Bank $ 25,434 10.2% $ 9,932 4.0% $ 12,415 5.0%
Page 64 of 81
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain of the Bancorp's directors and executive officers were loan
customers of the Bank. A schedule of the aggregate activity in such
loans, when total customer borrowings exceed $60, follows:
Balance July 1, 1996 $ 1,493
New loans and draws 673
Loan reductions and principal payments (595)
---------
Balance June 30, 1997 $ 1,571
=========
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value of financial
instruments and their related carrying value at June 30, 1997 and 1996.
Items which are not financial instruments are not included.
1997 1996
Carrying Carrying
Amount Fair Value Amount Fair Value
Financial assets
Cash and due from banks $ 7,591 $ 7,591 $ 9,889 $ 9,889
Securities 31,702 31,847 42,264 42,145
Net loans 197,592 196,220 171,307 168,008
Financial liabilities
Deposits (202,607) (202,521) (191,488) (191,275)
Short-term borrowings (11,985) (11,985) (12,752) (12,752)
Other borrowings (7,839) (7,755) (6,259) (6,171)
Off-balance-sheet financial
instruments
Loan commitments and
letters of credit -0- -0- -0- -0-
Page 65 of 81
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments at June 30, 1997 and 1996:
Cash and Due from Banks: The carrying amount is a reasonable estimate
of the fair value of cash and short-term investments.
Securities: For securities, fair value equals quoted market value for
the individual securities. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
instruments.
Net Loans: The fair value of loans is estimated by discounting
projected future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings for similar
remaining maturities.
Deposits: The fair value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed maturity certificates of deposit is
estimated by discounting projected future cash flows using rates
currently offered for deposits with similar remaining maturities.
Short-term Borrowings: These obligations are generally variable rate or
are for very short terms. Accordingly, their carrying amount is a
reasonable estimate of fair value.
Other Borrowings: The estimated fair value of other borrowings is based
upon the current rate that the Bancorp would pay for similar borrowings,
applied to the time period until maturity.
Loan Commitments and Letters of Credit: The carrying value of these
commitments is a reasonable estimate of fair value. These investments
are generally variable rate and/or short-term in nature with minimal
fees charged.
Page 66 of 81
NOTE 16 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and
statements of cash flows for the parent company:
CONDENSED BALANCE SHEETS
June 30,
1997 1996
ASSETS
Cash on deposit with subsidiary $ 44 $ 21
Investment in Bank subsidiary 25,423 24,095
Other assets 1,179 23
--------- ---------
$ 26,646 $ 24,139
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 1,170 $ 12
Total shareholders' equity 25,476 24,127
--------- ---------
$ 26,646 $ 24,139
========= =========
CONDENSED STATEMENTS OF INCOME
Years ended June 30: 1997 1996 1995
Operating income
Dividends from Bank subsidiary $ 2,218 $ 960 $ 877
Interest income 18 15 1
-------- --------- ---------
2,236 975 878
Operating expense 24 45 34
-------- --------- ---------
Income before income tax and equity
in undistributed income of subsidiary 2,212 930 844
Income tax benefit (2) (11) (13)
-------- --------- ---------
Income before equity in undistributed
income of subsidiary 2,214 941 857
Equity in undistributed income
of subsidiary 1,245 1,475 1,568
-------- --------- ---------
Net income $ 3,459 $ 2,416 $ 2,425
========= ========= =========
Page 67 of 81
NOTE 16 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended June 30: 1997 1996 1995
Cash flows from operating activities
Net income $ 3,459 $ 2,416 $ 2,425
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
income of subsidiary (1,245) (1,475) (1,568)
Change in other assets (1,156) (12) (1)
Change in other liabilities 1,158 8 -
-------- --------- --------
Net cash from
operating activities 2,216 937 856
Cash flows from financing activities
Dividends paid (2,193) (934) (877)
-------- -------- --------
Net change in cash 23 3 (21)
Cash at beginning of year 21 18 39
-------- -------- --------
Cash at end of year $ 44 $ 21 $ 18
======== ======== ========
NOTE 17 - IMPACT OF NEW ACCOUNTING POLICIES
Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", was
issued by the Financial Accounting Standards Board in 1996. It revised
the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
It is effective prospectively for some transactions occurring after
December 31, 1996 and others in 1998. The impact of partial adoption in
1997 was not significant. Management does not expect that full adoption
of the Standard in 1998 will significantly impact the Company s
financial position or results of operations.
Page 68 of 81
Part II
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cont.)
DEPOSIT INTEREST EXPENSE BY TYPE
JUNE 30
----------------------------------
1997 1996 1995
----------------------------------
(Dollars in Thousands)
Deposit Interest Expense:
NOW Accounts $ 619 $ 694 $ 676
Money Market Checking 96 162 173
Regular Savings 607 530 513
Advantage Savings 345 380 388
Christmas Club Savings 11 11 11
Money Market Investment 247 275 291
Total Certificates 5,844 5,417 4,571
------------------------------------
Total Deposit Interest Expense $7,769 $7,469 $6,623
=====================================
Page 69 of 81
Part II
Item 9 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
John Conway, Vice President and Secretary of Bancorp and Executive Vice
President of Bank, announced his retirement from the Bank effective
June 30, 1997. He served faithfully with dedication and distinction for
the past fourteen years. The present executive officers and directors
of the Bancorp include the following persons.
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
Fred K Agnew 65 Chairman of the 2 1983 Retired
905 S O'Neil St. Board and Director (1999) Banker (1)
Frankfort, IN
Ralph M. Butler 81 Director N/A 1983 Retired
3052 N Co Rd 1000 E (1997) (2)
Forest, IN
Judson J. Costlow 54 Vice President 3 N/A Banker
906 S O'Neil St. and Trust Officer
Frankfort, IN
Joe C. Doan 53 Director N/A 1990 Business-
801 Eastwood Drive (1999) man (3)
Frankfort, IN
Daryl C. Fry 57 Vice President 3 N/A Banker
759 Maple Drive
Frankfort, IN
Joseph V. Lahrman 66 Director N/A 1989 Farming (4)
5253 N Co Rd 850 W (1998)
Mulberry, IN
C. Robert Lord 58 Senior Vice 3 N/A Banker
1550 S. Williams Rd. President
Frankfort, IN
Page 70 of 81
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
R. Ronald McClughen 54 Senior Vice 3 N/A Banker
1351 Forest Drive President
Frankfort, IN
Karen I. Miller 41 Chief Financial 3 N/A Banker
1208 N. Jackson St. Officer
Frankfort, IN
Jennifer L. Neal 43 Investment Officer 3 N/A Banker
4515 E. St. Rd. 38
Kirklin, IN
Edward R. Pluhar 50 Vice President 3 N/A Banker
309 Harvard Terrace
Frankfort, IN
Jack W. Ransom 50 Director N/A 1994 Business-
958 Forest Drive S. (1999) man (5)
Frankfort, IN
Rawl V. Ransom 77 Director N/A 1983 Retired
1555 N Main St. (1997) Business-
Frankfort, IN man (6)
Steven C. Reynolds 45 Vice President 3 N/A Banker
4 S. Crescent Drive
Frankfort, IN
Tom Rohrabaugh 63 President and 12 1992 Banker
1335 Coin Drive Director (1998)
Frankfort, In
Stephen G. 51 Director N/A 1994 Farming
Rothenberger (1997) (7)
1784 S. County Rd. 180E
Frankfort, IN
R. Kent Ryan Jr. 54 Secretary to the 3 1995 Attorney
3490 State Road 75 N Board and Director (1997) (8)
Frankfort, IN
Page 71 of 81
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
Years in Year First
Name and Title or Officer Elected as Principal
Address Age Position Position a Director Occupation
(Year Term
Expires)
- ------------------------------------------------------------------------
Stanley K. Smith 48 Director N/A 1989 General
859 Forest Drive S. (1998) Contractor
Frankfort, IN (9)
Robert F. Thorley 49 Vice President 3 N/A Banker
7628 E. Co. Rd. 500 S.
Kirklin, IN
* "N/A" means not applicable and represents that the named individual
is either not a director or not an executive officer.
1. Fred K Agnew retired as President of the Bank in September 1995.
2. Ralph M. Butler has been retired for the past 14 years. From 1960-
1981, he was part owner - operator of Fairground Implement Inc.,
Frankfort, Indiana, a farm implement dealer.
3. Joe C. Doan is President of Coapstick Insurance Agency, Frankfort,
Indiana.
4. Joseph V. Lahrman is President of Joseph Lahrman Farms, Inc.,
Mulberry, Indiana.
5. Jack W. Ransom is President of Kramer Brothers Lumber Co., Inc.,
Frankfort, Indiana and is the son of director Rawl V. Ransom.
6. Rawl V. Ransom retired in 1985 as President of Kramer Brothers
Lumber Co., Inc., Frankfort, Indiana and is the father of director
Jack W. Ransom.
7. Stephen G. Rothenberger is owner and manager of Rothenberger Farms.
8. R. Kent Ryan Jr. is the managing partner of the law firm Ryan,
Moore, Cook and Hunter in Frankfort, Indiana. Mr. Ryan's firm is
retained by the Bank and performs services on behalf of the Bank.
9. Stanley K. Smith is President of Arthur A. Gill & Son Co. Inc.,
Frankfort, Indiana, a general contractor.
Page 72 of 81
Part III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
All of Bancorp's directors are divided into 3 classes, whose term is
three years or until their respective successors are duly elected and
qualified. One class of Directors are elected annually. All executive
officers hold office for a term of one year. There are no arrangements
or understandings between any of the directors, executive officers, or
any other persons pursuant to which any of the Bancorp's directors or
executive officers have been selected for their respective position.
Part III
Item 11 EXECUTIVE COMPENSATION:
The following table contains information concerning the compensation
paid by Bank and Bancorp for the fiscal years ended June 30, 1996 and
1997 to the two executive officers whose total annual salary and bonus
exceeded $100,000.
SUMMARY COMPENSATION TABLE:
Name and All
Principal Year ended Other
Position June 30, Salary Compensation (1)
Tom Rohrabaugh 1997 $129,182 $1,500
President of Bancorp 1996 $112,831 $1,410
and Bank 1995 $115,000 $1,181
John L. Conway 1997 $120,531 $1,413
Vice President and 1996 $ 94,500 $1,242
Secretary of Bancorp 1995 $ 90,000 $1,104
and Executive Vice
President of Bank
(1) Bank contributions for fiscal year to Internal Revenue Code
Section 401(k) savings plan.
Tom Rohrabaugh is a participant in a deferred compensation plan
established during the year ended June 30, 1993, and will receive
$21,419 per year for 15 years following his retirement or his death.
Such benefit is to be paid in equal monthly installments and the amount
he will receive is conditioned upon Mr. Rohrabaugh deferring receipt of
5 percent of his monthly base compensation, which he would otherwise be
entitled to receive from the Bank, through the date of his retirement,
expected to be December 1998. In addition to the benefit described
above, Mr. Rohrabaugh shall be entitled to receive a one-time lump sum
death benefit in the amount of $10,000.
John L. Conway is a participant in a deferred compensation plan
established during the year ended June 30, 1993 and will receive $28,044
per year for 15 years following his retirement or his death. Such
benefit is to be paid in equal monthly installments. In addition to the
benefits described above, Mr. Conway shall be entitled to receive a one-
time lump-sum death benefit in the amount of $10,000.
Page 73 of 81
Part III
Item 11 EXECUTIVE COMPENSATION (cont.)
The Bank maintains a death benefit plan covering all officers. By the
purchase of a whole life insurance product, the Bank would be owner and
beneficiary of the policies. The Bank, in turn, executes an agreement
with each officer to pay a specified death benefit to each officer's
beneficiary if death occurs before retirement.
Upon retirement, the officer will have the option to continue the
existing death benefit coverage through a split dollar agreement with
the Bank. The Bank will assign the death benefit portion to the officer
for the portion of death benefit they had at retirement, or a lesser
amount if the officer chooses. The Bank retains the ownership of the
cash surrender value of the policy plus the balance of the death
benefit, if any. The retired Bank officer does assume the economic
benefit accruing to the policy and is responsible to pay the taxes for
such benefit. It thereby will make the proceeds received by the retired
officers' beneficiary free of federal income tax under the current tax
laws.
This program replaced the existing group term policy that had been in
effect for many years. The former group plan resulted in an expense
only and the new death benefit program is expected to provide a
reasonable rate of return on the Bank's investment.
COMPENSATION OF DIRECTORS:
Each outside director of the Bank and Bancorp, who did not elect to
participate in the deferred compensation program described below,
received a $6,000 director's fee for the year ended June 30, 1997;
except the Chairman of the Board received $9,600, and the Secretary
received $8,400. In addition an attendance fee of $150 per board and
committee meeting is paid to outside directors on a quarterly basis.
Those outside directors serving on the Finance Committee receive $300 as
an attendance fee.
The Bank maintains a deferred compensation program for the benefit of
certain executive officers, directors and independent contractors who
elect to participate. Directors Joe C. Doan, Joseph V. Lahrman, Jack W.
Ransom, Rawl V. Ransom and Stanley K. Smith elected to participate in
the plan. In return for deferring a percent of the directors fees they
would otherwise be entitled to receive from the Bank and the Bancorp for
a period of five years, they will receive annual benefits of $36,426,
$9,494, $33,847, $8,650 and $45,724, respectively. Such benefits will
be paid in equal monthly installments and will continue for 10 years.
The payments will commence upon the later of their 65th birthday or
their completion of five years' further service to the Bank and Bancorp
as a director. In addition, each participant shall be entitled to
receive a one-time lump-sum death benefit in the amount of $10,000.
Page 74 of 81
Part III
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 8, 1997 the total number
of shares of common stock of Bancorp beneficially owned, and the percent
of such shares so owned, by each person known to Bancorp to be
beneficial owner of more than 5 percent of the common stock of Bancorp,
by each director, by each executive officer named on page 73 and by
directors and executive officers as a group. Bancorp has only one class
of equity securities with a total 1,154,116 shares outstanding at
September 8, 1997.
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class
- -----------------------------------------------------------------------
Fred K Agnew 24,248 (2) 2.10%
905 S. O'Neil Street
Frankfort, IN 46041
Ralph M. Butler 18,800 (3) 1.63%
3052 N. Co. Rd. 1000 E.
Forest, IN 46039
John L. Conway 2,800 (4) .24%
701 S. Williams Road
Frankfort, IN 46041
Joe C. Doan 6,150 (5) .53%
801 Eastwood Drive
Frankfort, IN 46041
Joseph V. Lahrman 2,340 (6) .20%
5253 N. Co. Rd. 850 W.
Mulberry, IN 46058
Jack W. Ransom 3,720 (7) .32%
958 Forest Drive S.
Frankfort, IN 46041
Rawl V. Ransom 22,200 (8) 1.92%
1555 N. Main Street
Frankfort, IN 46041
Tom Rohrabaugh 2,600 (9) .23%
901 Williams Road
Frankfort, IN 46041
Stephen G. Rothenberger 200 .02%
1784 S. County Road 180 E.
Frankfort, IN 46041
Robert K. Ryan 64,000 (10) 5.55%
600 Harvard Terrace
Frankfort, IN 46041
R. Kent Ryan Jr. 4,296 (11) .37%
3490 State Road 75 North
Frankfort, IN 46041
Page 75 of 81
Part III
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(cont.)
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class
- -----------------------------------------------------------------------
Stanley K. Smith 1,400 (12) .12%
859 Forest Drive South
Frankfort, IN 46041
Total Directors and 92,888 8.05%
Executive Officers
as a Group (21 persons)
******
(1) The information contained in this column is based upon information
furnished to the Bank by the individuals named above and the
members of the designated group. Except as otherwise indicated,
sole voting power and sole investment power with respect to the
shares of common stock are held by the director, principal
shareholders, or officer alone or by the director, principal
shareholder or officer and his spouse.
(2) Includes 2,824 shares held in joint name with his wife Ann A.
Agnew, 5,176 shares held in his wife's name only and 3,248 held
in the name Carl W. Agnew, Revocable Trust.
(3) Includes 9,600 shares held in joint name with his wife, Mary E.
Butler, and 2,000 shares held in his wife's name only.
(4) Includes 2,600 shares held in the name of his wife, Regina A.
Conway.
(5) Includes 4,400 shares held in trust for Joe C. Doan.
(6) Includes 1,400 shares held in joint name with his wife, Jeanette
Lahrman, and 740 shares held in his wife's name only.
(7) Includes 1,800 shares held in trust for his wife Susan J. Ransom
and 1,600 shares held as Kramer Brothers Lumber Company Inc.
(8) Includes 13,848 shares held in trust for Rawl V. Ransom and 8,152
shares held in trust for his wife, Rosemary W. Ransom.
(9) Includes 2,400 shares held in joint name with his wife, Connie K.
Rohrabaugh.
(10) Includes 6,520 shares held in the name of his wife, Eleanor Ryan.
(11) Includes 1,440 shares held in joint name with his wife, Linda E.
Ryan, and 2,400 shares held in his wife's name only.
(12) Includes 1,000 shares held in joint name with his wife, Nancy
Smith.
Page 76 of 81
Part III
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, executive officers and principal shareholders of the Bank and
Bancorp and their respective associates were customers of, and have had
transactions with, the Bank in the ordinary course of business during
1997. Comparable transactions may be expected to take place in the
future.
During 1997, certain directors and executive officers of the Bank and
the Bancorp and their respective associates were indebted to the Bank
from time to time. The outstanding balance due from such individuals
whose aggregate indebtedness exceeded $60,000 at June 30, 1997 was
$1,571,000, or 6.17 percent of Bancorp's total shareholders' equity.
See Note #14 of the Notes to Consolidated Financial Statements, page 65
of this report. These loans were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for similar transactions
with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features.
Director R. Kent Ryan Jr. is a member of the law firm of Ryan, Moore
Cook and Hunter. This firm, serving as legal counsel for the Bancorp,
was paid $83,100 for services rendered during 1997. The Bancorp does
anticipate the continued use of this law firm in the future.
Page 77 of 81
Part IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Page of this Report
(A) 1. Financial Statements: Where Located
The Farmers Bancorp, Frankfort, Indiana
and Subsidiary:
Report of Independent Auditor 43
Consolidated Balance Sheets
June 30, 1997 and 1996 44
Consolidated Statements of Income, Years
Ended June 30, 1997, 1996 and 1995 45
Consolidated Statements of Changes in
Shareholders' Equity, Years Ended June 30,
1997, 1996 and 1995 46
Consolidated Statements of Cash Flows,
Years Ended June 30, 1997, 1996 and 1995 47 - 48
Notes to Consolidated Financial Statements 49 - 68
2. Financial Statement Schedules:
Deposit Interest Expense by Type 69
All other schedules are omitted because they are not
applicable or not required or because the required
information is included in the consolidated financial
statements or related notes.
3. Exhibits:
Exhibit 3:
The Articles of Incorporation and By-laws of The
Farmers Bancorp, Frankfort, Indiana are incorporated by
reference from the Registration filed on Form S-14 with the
Commission on October 14, 1983. (Sec File No. 2-87246)
Exhibit 10:
A. The Deferred Compensation Agreements with Fred K Agnew,
Joe C. Doan, Joseph V. Lahrman, Rawl V. Ransom, and Stanley K.
Smith are incorporated by reference from the Annual Report on
Form 10-K for the fiscal year ended June 30, 1993.
B. The Farmers Bank, Frankfort Indiana, Death Benefit Only
Plan of The Farmers Bancorp, Frankfort, Indiana is
incorporated by reference from the Annual Report on Form 10-K
for the fiscal year ended June 30, 1994.
Exhibit 21:
Subsidiaries of The Farmers Bancorp 81
(B) Reports on Form 8-K:
No reports on Form 8-K were filed during registrant's
last fiscal quarter.
Page 78 of 81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
this 9th day of September 1996.
THE FARMERS BANCORP,
FRANKFORT, INDIANA
(Registrant)
By:/s/ Tom Rohrabaugh
Tom Rohrabaugh, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
September 8, 1997 /s/Fred K Agnew
Date Fred K Agnew, Director and
Chairman of the Board
September 8, 1997 /s/Ralph M. Butler
Date Ralph M. Butler, Director
September 8, 1997 /s/Joe C. Doan
Date Joe C. Doan, Director
September 8, 1997 /s/Joseph V. Lahrman
Date Joseph V. Lahrman, Director
September 8, 1997 /s/Jack w. Ransom
Date Jack W. Ransom, Director
September 8, 1997 /s/Rawl V. Ransom
Date Rawl V. Ransom, Director
September 8, 1997 /s/Tom Rohrabaugh
Date Tom Rohrabaugh, Director and
President (Principal Executive
Officer)
September 8, 1997 /s/Stephen G. Rothenberger
Date Stephen G. Rothenberger, Director
September 8, 1997 /s/R. Kent Ryan Jr.
Date R. Kent Ryan, Jr., Director and
Secretary to the Board
Page 79 of 81
September 8, 1997 /s/Stanley K. Smith
Date Stanley K. Smith, Director
September 8, 1997 /s/ Karen I. Miller
Date Karen I. Miller, Vice President
and Treasurer (Principal
Financial and Accounting Officer)
Page 80 of 81
EXHIBIT 21 - SUBSIDIARY OF REGISTRANT
Name State of Incorporation
The Farmers Bank, Indiana
Frankfort, Indiana
Page 81 of 81
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000730726
<NAME> THE FARMERS BANCORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7591
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11374
<INVESTMENTS-CARRYING> 20328
<INVESTMENTS-MARKET> 20473
<LOANS> 200824
<ALLOWANCE> 3232
<TOTAL-ASSETS> 251744
<DEPOSITS> 202607
<SHORT-TERM> 11985
<LIABILITIES-OTHER> 11676
<LONG-TERM> 0
0
0
<COMMON> 2885
<OTHER-SE> 22591
<TOTAL-LIABILITIES-AND-EQUITY> 251744
<INTEREST-LOAN> 17605
<INTEREST-INVEST> 2343
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 20062
<INTEREST-DEPOSIT> 7769
<INTEREST-EXPENSE> 8671
<INTEREST-INCOME-NET> 11391
<LOAN-LOSSES> 570
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7255
<INCOME-PRETAX> 5405
<INCOME-PRE-EXTRAORDINARY> 5405
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3459
<EPS-PRIMARY> 3.00
<EPS-DILUTED> 3.00
<YIELD-ACTUAL> 8.88
<LOANS-NON> 932
<LOANS-PAST> 585
<LOANS-TROUBLED> 581
<LOANS-PROBLEM> 213
<ALLOWANCE-OPEN> 2741
<CHARGE-OFFS> 316
<RECOVERIES> 237
<ALLOWANCE-CLOSE> 3232
<ALLOWANCE-DOMESTIC> 643
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2589
</TABLE>
