NorthWest Indiana - ----------------- BANCORP 1996 ANNUAL REPORT -------------------- BUILDING VALUE photo montage of employees, new Merrillville Branch building and housing rehab project Inside Front Cover is blank BUILDING VALUE Dear Shareholder: Banking is one of America's most regulated industries and 1996 stands out as a year when the pervasive authority of the federal government truly impacted operating results. During the year congress passed the Federal Deposit Insurance Funds Act of 1996 which mandated all SAIF insured financial institutions to make a one-time payment to recapitalize the federal deposit insurance fund. This industry wide solution to a public policy question, while laudable, had a direct negative effect upon the Bancorp's earnings. The $1.6 million special assessment of the FDIC depressed income to $2.2 million. Going forward, our deposit insurance premiums will be decidedly less, making the Bancorp more competitive in our market place. Shareholders should be pleased to know that without the FDIC special assessment, income would have exceeded $3.1 million for an adjusted return on assets of 1.07%. Earnings also were impacted by the action of the Federal Reserve to raise interest rates, which increased our interest costs paid to depositors. These government actions did not deter your board of directors and management from accomplishing our mission of building investment value for our shareholders and economic value for our customers and community. photo montage of employees and buildings 1 - -------------------------------------------------------------------------------- OPERATING RESULTS - - Core earning, the difference between the Bancorp's interest income and interest expense, rose to $11.1 million in 1996 from $10.6 million in a year earlier. - - Our efficiency ratio, a key measure of the Bancorp's expense management, stood at 55.2% excluding the SAIF special assessment. - - Peoples Bank earned an "Exceptional Performance Award" from Bauer financial reports. Only 9% of the nation's banking institutions achieved this distinction for strength, performance, and safety over the last eight years. - ------------------------------------------------------------------------------- GROWTH - - Assets grew 6.6% to $299 million. - - Loans grew 10.1% to $244.7 with construction, commercial and consumer loans comprising 38.2% of loans outstanding. - - NOW account balances increased 12.5% and commercial checking accounts balances increased 12%. - - Trust assets grew 10.6% to $66 million. - - Peoples Bank expanded our market share through a new branch on the Broadway corridor in Merrillville. photo montage of employees and buildings 2 - -------------------------------------------------------------------------------- ASSET QUALITY - - The ratio of non-performing loans to total loans was 0.48% (forty eight hundredths of one percent). - - Foreclosed real estate was 0.06% (six-hundredths of one percent) of total assets. - - At year end, the allowance for loan losses (ALL) totaled $2.9 million or 1.18% of total loans. - -------------------------------------------------------------------------------- SHAREHOLDERS - - Implemented a two-for-one stock split. - - Increased dividends per share during the fourth quarter by 16.4%. - - Price of stock appreciated 15.3% during 1996 over 1995. - - Total return to shareholders out performed the CRSP Index for the Nasdaq Stock Market and the CRSP Index for the Nasdaq Bank Stocks for the five year period ended December 31, 1996. Your directors and management continue to be committed to building a locally owned, independent community bank. Resources have been allocated to develop the people, products, and technology essential to meet the challenges of our banking and non-banking competitors. Despite this year's adversity, our employees continued to provide quality service which in the final analysis creates customer trust, shareholder value, and a superior banking performance. /s/ David A. Bochnowski Sincerely, DAVID A. BOCHNOWSKI Chairman and Chief Executive Officer photo montage of employees and buildings 3 SELECTED CONSOLIDATED FINANCIAL DATA (In Thousands of Dollars, except Per Share Data)
Fiscal Year Ended December 31, December 31, December 31, December 31, June 30, June 30, 1996 1995 1994 1993 (1) 1993 1992 ------------ ------------ ------------ ------------ ----------- ----------- Statement of Income: Total interest income....... $ 22,337 $ 21,123 $ 19,122 $ 9,360 $ 19,035 $ 19,744 Total interest expense...... 11,287 10,484 8,079 4,015 8,485 10,698 ------------ ------------ ------------ ------------ ----------- ----------- Net interest income......... 11,050 10,639 11,043 5,345 10,550 9,046 Provision for loan losses... 85 80 145 319 711 665 ------------ ------------ ------------ ------------ ----------- ----------- Net interest income after provision for loan losses. 10,965 10,559 10,898 5,026 9,839 8,381 ------------ ------------ ------------ ------------ ----------- ----------- Noninterest income.......... 682 685 493 253 749 726 Noninterest expense......... 8,039 6,117 6,031 3,011 5,378 4,795 ------------ ------------ ------------ ------------ ----------- ----------- Net noninterest expense..... 7,357 5,432 5,538 2,758 4,629 4,069 ------------ ------------ ------------ ------------ ----------- ----------- Income tax expenses......... 1,419 2,026 2,132 902 2,158 1,849 Cumulative effect of changes in accounting............. - - - 450 - - ------------ ------------ ------------ ------------ ----------- ----------- Net income.................. $ 2,189 $ 3,101 $ 3,228 $ 1,816 $ 3,052 $ 2,463 ============ ============ ============ ============ =========== =========== Earnings per common and common equivalent share... $1.59 $2.25 $2.35 $1.33 $2.25 $1.85 Cash dividends declared per common share.............. $1.15 $1.10 $1.10 $0.50 $0.80 $0.68 - ---------------------------------------------------------------------------------------------------------------------------------- December 31, December 31, December 31, December 31, June 30, June 30, 1996 1995 1994 1993 1993 1992 ------------ ------------ ------------ ------------ ----------- ----------- Balance Sheet: Total assets................ $ 299,419 $ 280,911 $ 266,343 $ 251,481 $ 246,180 $ 227,183 Loans receivable............ 244,696 222,293 221,930 204,205 202,083 183,366 Investment securities....... 40,024 38,001 33,678 33,639 28,910 28,910 Deposits.................... 256,420 247,945 234,639 222,945 219,133 202,823 Borrowed funds.............. 12,261 3,139 3,151 2,087 993 609 Total stockholders' equity.. 27,815 27,204 25,606 23,874 22,691 20,667 - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, December 31, December 31, December 31, June 30, June 30, 1996 1995 1994 1993 (1) (2) 1993 1992 ------------ ------------ ------------ ------------ ----------- ----------- Interest Rate Spread During Period: Average effective yield on loans and investment securities.............. 7.98% 8.06% 7.66% 7.75% 8.24% 9.20% Average effective cost of deposits and borrowings... 4.32% 4.33% 3.48% 3.63% 4.04% 5.39% ------------ ------------- ------------- ------------- ------------ ----------- Interest rate spread........ 3.66% 3.73% 4.18% 4.12% 4.20% 3.81% ============ ============ ============ ============ =========== =========== Net interest margin......... 3.79% 3.91% 4.25% 4.27% 4.44% 4.04% Return on assets............ 0.75% 1.14% 1.24% 1.45% 1.28% 1.10% Return on equity............ 7.90% 11.74% 13.04% 15.51% 14.00% 12.38% - ---------------------------------------------------------------------------------------------------------------------------------- December 31, December 31, December 31, December 31, June 30, June 30, 1996 1995 1994 1993 1993 1992 ------------ ------------ ------------ ------------ ----------- ----------- Tier 1 capital to risk-weighted assets...... 14.7% 15.8% 15.9% 15.5% 14.9% 14.7% Total risk-based capital to risk-weighted assets...... 16.0% 17.1% 17.2% 16.8% 16.1% 15.9% Tier 1 capital leverage ratio 9.3% 9.7% 9.6% 9.5% 9.2% 9.1% Allowance for loan losses to total loans............... 1.18% 1.27% 1.24% 1.26% 1.15% 0.88% Allowance for loan losses to non-performing loans...... 247.40% 268.25% 176.46% 454.75% 382.34% 231.51% Non-performance loans to total loans............... 0.48% 0.47% 0.70% 0.27% 0.30% 0.38% Total loan accounts......... 4,404 4,606 4,671 4,654 4,661 4,755 Total deposit accounts...... 24,666 23,730 22,738 21,204 21,330 20,834 Total branches (all full service)........ 7 6 6 6 6 6 (1) Six month period due to change in fiscal year end. (2) Data for six months ended December 31, 1993 has been annualized.
4
June 30, June 30, June 30, June 30, 1991 1990 1989 1988 ------------ ------------ ------------ ------------ $ 20,709 $ 20,042 $ 18,313 $ 16,985 12,896 13,145 11,872 10,604 ------------ ------------ ------------ ------------ 7,813 6,897 6,441 6,381 238 130 188 210 ------------ ------------ ------------ ------------ 7,575 6,767 6,253 6,171 ------------ ------------ ------------ ------------ 757 622 854 811 4,625 4,357 4,057 4,001 ------------ ------------ ------------ ------------ 3,868 3,735 3,203 3,190 ------------ ------------ ------------ ------------ 1,505 992 1,024 971 - - - - ------------ ------------ ------------ ------------ $ 2,202 $ 2,040 $ 2,026 $ 2,010 ============ ============ ============ ============ $1.65 $1.54 $1.55 $1.55 $0.22 $0.15 $0.23 $0.07 - ----------------------------------------------------------- June 30, June 30, June 30, June 30, 1991 1990 1989 1988 ------------ ------------ ------------ ------------ $ 220,053 $ 208,796 $ 192,269 $ 188,173 177,421 173,244 156,925 147,809 25,160 24,983 24,885 20,977 196,880 188,621 174,729 172,579 799 604 - 174 18,972 16,955 14,986 13,076 - ---------------------------------------------------------- June 30, June 30, June 30, June 30, 1991 1990 1989 1988 ------------ ------------- ------------ ------------ 10.08% 10.28% 9.85% 9.55% 6.75% 7.25% 6.86% 6.32% ------------ ------------ ------------ ------------ 3.33% 3.03% 2.99% 3.23% ============ ============ ============ ============ 3.80% 3.42% 3.36% 3.46% 1.03% 1.01% 1.06% 1.09% 12.31% 12.82% 14.51% 16.73% - ----------------------------------------------------------- June 30, June 30, June 30, June 30, 1991 1990 1989 1988 ------------ ------------- ------------ ------------ 14.1% 13.1% N/A N/A 14.8% 13.7% N/A N/A 8.6% 8.1% 7.8% 7.0% 0.53% 0.42% 0.43% 0.36% 117.96% 155.93% 129.81% 38.58% 0.45% 0.27% 0.33% 0.94% 4,793 4,428 4,907 5,107 21,200 21,492 20,932 20,996 6 6 5 5
BUSINESS NorthWest Indiana Bancorp (the Company) is the holding company for Peoples Bank SB (the Bank), an Indiana stock savings bank. Peoples Bank SB is a wholly owned subsidiary of the Company. The Company has no other business activity other than being the holding company for Peoples Bank SB. The Bank conducts business from its main office at Munster and its six full-service offices located in East Chicago, Hammond, Merrillville, Dyer and Schererville, Indiana. The Bank is primarily engaged in the business of attracting deposits from the general public and the origination of loans secured by single family residences and commercial real estate, as well as, and construction loans and various types of consumer loans and commercial business loans. In addition, the Bank's trust department provides estate administration, estate planning, guardianships, land trusts, retirement planning, self-directed IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts. The Company's capital stock is traded in the over-the-counter market and quoted in the National Quotation Bureau's "Pink Sheets". On December 2, 1996, the Company effected a two-for-one common stock split. All references herein to the number of shares and per share data reflect the stock split. On February 28, 1997, the Company had 1,380,846 shares of common stock outstanding, excluding fractional shares, and 593 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or "street" name through brokerage firms. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's earnings are dependent upon the earnings of the Bank. The Bank's earnings are primarily dependent upon net interest margin. The net interest margin is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings stated as a percentage of average total assets. The net interest margin is perhaps the clearest indicator of a financial institution's ability to generate core earnings. The Bank's profitability is also affected by service charges, trust department income, gains and losses from the sale of loans, provisions for loan losses, income taxes and operating expenses. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. On September 30, 1996, the President signed the Deposit Insurance Funds Act of 1996 which required a one-time special assessment on SAIF-assessable deposits to recapitalize SAIF. The special assessment resulted in a 1996 pre-tax expense of $1.6 million and an after-tax effect on earnings of $941 thousand. As a result the Company reported a net income for 1996 of $2.2 million, or $1.59 per share. The return on average assets (ROA) was 0.75%, while the return on average stockholders' equity (ROE) was 7.90% for 1996. Excluding the SAIF assessment, adjusted net income for 1996 was $3.1 million, or $2.27 per share compared to $3.1 million, or $2.25 per share for 1995. The adjusted ROA was 1.07%, while the adjusted ROE was 11.27% for 1996 compared to a ROA of 1.14% and a ROE of 11.74% for 1995. For 1997, the Bank's annual insurance premium will be reduced from $0.23 per $100 of insured deposits to $0.0648 per $100. Based on December 31, 1996 total deposits, the Bank projects a federal insurance premium expense reduction from $580 thousand at $0.23 per $100 of insured deposits to $163 thousand at $0.0648 per $100 for 1997. At December 31, 1996, the Company had total assets of $299.4 million and total deposits of $256.4 million. Stockholders' equity totaled $27.8 million or 9.3% of total assets, with book value per share at $20.16.
TOTAL ASSETS (DOLLARS IN MILLIONS) June 30, Six Months Dec. 31, Dec. 31, Dec. 31, 1993 Dec. 31, 1993 1994 1995 1996 $246.2 $251.5 $266.3 $280.9 $299.4 Total assets have increased from $246.2 million at June 30, 1993 to $299.4 million at December 31, 1996. Growth during 1996 totaled $18.5 million or 6.6%. ===============================================================================
ASSET/LIABILITY MANAGEMENT Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. These strategies determine the characteristics and mix of the balance sheet. They affect the interest margins, maturity patterns, interest rate sensitivity and risk, as well as resource allocation. For the Bank, the key components of asset/liability management are loans, investments and deposits. Over the years, the Bank has directed its lending efforts toward construction loans, adjustable rate residential loans, equity lines of credit, adjustable rate commercial real estate loans and commercial business loans tied to the prime rate of interest. Consumer loans are generally made for terms of five years or less. Fixed rate residential real estate loans are generally made for terms of fifteen years or less. The actual cash flow from these loans generally results in a duration which is less than the contractual maturity, providing protection against the possibility of rising interest rates. The primary objective of the Bank's investment portfolio is to provide for the liquidity needs of the Bank and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest-bearing balances in financial institutions, U.S. government securities and federal agency obligations. Interest-bearing balances in financial institutions include overnight deposits at the Federal Home Loan Bank of Indianapolis (FHLBI). Investments are generally for terms ranging from one day to five years. The Bank's cost of funds reacts rapidly to changes in market interest rates due to the relatively short-term nature of its deposit liabilities. Consequently, the Bank's results of operations have been influenced by the levels of short-term interest rates. In order to reduce exposure to interest-rate risk, certificate accounts with maturities in excess of one year have been aggressively marketed. In addition, product offerings are competitively priced and maturities are carefully monitored in order to guard against the outflow of funds. Relatively low interest rates during 1996 and uncertainty with the direction of future rates resulted in a strong customer preference for liquidity. Borrowed money is used on a short term basis to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as, through a line of credit and short-term advances from the FHLBI. The Bank does not obtain funds through brokers. A primary objective of Asset/Liability Management is controlling interest rate risk. The Bank's exposure to interest rate risk is due to the differences in the maturities of interest-bearing liabilities and interest-earning assets, and to the volatility of interest rates. To moderate unfavorable operating results in periods of rising or high interest rates, the Bank restructures its asset-liability mix on an ongoing basis. While steps have been taken which have significantly reduced the overall vulnerability to interest rate risk, the Bank will still 6 be adversely affected by a rising or high interest rate environment, and is beneficially affected by a falling or low interest rate environment because rate sensitive liabilities exceed rate sensitive assets within a one year time period. Increasing the amount of interest-earning assets that are rate sensitive, extending the maturities of customer deposits and increasing the balances of NOW/checking accounts are all part of management's commitment toward reducing the Bank's overall vulnerability to interest rate risk. At December 31, 1996, the Bank's one year unadjusted GAP; i.e., the difference between interest-earning assets maturing or repricing during the next twelve months and interest-bearing liabilities maturing in the same period as a percentage of total assets, was -37.42%. The GAP position incorporates the Bank's internal data as related to the maturity/repricing and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. The Bank has not experienced the kind of earnings volatility indicated from the unadjusted GAP, because a significant portion of the Bank's deposits do not reprice on a contractual basis. As is common in the banking industry, management makes adjustments to the timing and magnitude of non-contractual deposit repricing to more accurately reflect anticipated pricing behavior and exposure to interest rate risk. These adjustments include assumptions on rate/volume elasticity for checking and non-interest bearing deposits, NOW accounts, money market accounts and savings accounts. The table which follows is first presented without adjustment for expected repricing behavior. Then, as presented in the management adjustment line, these balances have been distributed over a number of periods to reflect those portions of such accounts that are expected to reprice over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of allocations. A core amount of transaction and savings account balances has been calculated by reviewing historical data on short-term interest rates and account balance activity. The core balance is considered non-rate sensitive and is classified as due/repricing between one and five years. Management expects to continue the same methodology in response to future market rate changes; however, management adjustments may change as customer preferences and competitive market conditions change. All management adjustments are reflected in the cumulative management adjusted GAP line. The cumulative GAP reflects sensitivity to interest rate changes over time. The Bank's management believes that the Bank's adjusted one year GAP of -6.30% has been maintained within an acceptable range in view of the prevailing interest rate environment. There can be no assurance that the assets and liabilities will have the projected maturities used in developing this table. The GAP position is a static indicator and is not a predictor of net interest income for a dynamic business in a rapidly changing environment.
GAP POSITION AT DECEMBER 31, 1996 0-3 4-12 1-5 over 5 months months years years total --------- --------- --------- --------- --------- (dollars in thousands) Real estate loans ............ $ 39,055 $ 64,813 $ 78,436 $ 39,545 $ 221,849 Consumer loans ............... 1,172 1,394 2,310 14 4,890 Commercial business loans and other ............. 13,621 1,830 2,433 73 17,957 Securities held-to-maturity .. 2,328 4,914 26,264 6,518 40,024 Interest-bearing balances and federal funds ........... 1,000 -- -- -- 1,000 --------- --------- --------- --------- --------- Total ...................... 57,176 72,951 109,443 46,150 285,720 --------- --------- --------- --------- --------- Certificates of deposit ...... 57,976 69,137 26,509 -- 153,622 Checking and non-interest bearing deposits ............ 12,879 -- -- -- 12,879 NOW accounts ................. 23,907 -- -- -- 23,907 Money market accounts ........ 22,359 -- -- -- 22,359 Savings accounts ............. 43,653 -- -- -- 43,653 Borrowed funds ............... 9,360 2,901 -- -- 12,261 --------- --------- --------- --------- --------- Total ...................... 170,134 72,038 26,509 -- 268,681 --------- --------- --------- --------- --------- AT DECEMBER 31, 1996: GAP .......................... (112,958) 913 82,934 46,150 --------- --------- --------- --------- Cumulative GAP................ $(112,958) $(112,045) $ (29,111) $ 17,039 ========= ========= ========= ========= Cumulative GAP as a percent of total assets .... -37.73% -37.42% -9.72% 5.69% ========= ========= ========= ========= Management adjustments ....... $ 98,639 $ 93,186 $ -- $ -- Cumulative management adjusted GAP ................ $ (14,319) $ (18,859) $ (29,111) $ 17,039 ========= ========= ========= ========= Cumulative management adjusted GAP/total assets ...................... -4.78% -6.30% -9.72% 5.69% ========= ========= ========= =========
FINANCIAL CONDITION During the year ended December 31, 1996, total assets increased by $18.5 million (6.6%), with interest-earning assets increasing by $17.4 million (6.5%). At December 31, 1996, interest-earning assets totaled $285.7 million and represented 95.4% of total assets. Loans totaled $244.7 million and represented 85.6% of interest-earning assets, 81.7% of total assets and 95.4% of total deposits. The loan portfolio includes $13.2 million (5.4%) in construction and land development loans, $151.3 (61.8%) in residential real estate loans, $57.3 million (23.4%) in commercial and multifamily real estate loans, $4.9 million ( 2.0%) in consumer loans, and $18.0 million (7.4%) commercial business and other loans. During 1996, loans increased by $22.4 million (10.1%). Loan demand was strong in all areas as evidenced by the growth in the real estate loans (8.9%), consumer loans (38.6%) and commercial business and other loans (19.1%). Loan growth was due to a strong local economy, a formalized Bank customer calling program and an aggressive marketing program. Adjustable rate loans comprised 63% of total loans at year end. 7 LOAN COMPOSITION (DOLLARS IN MILLIONS) Commercial Real Estate and Multifamily - $57.3 (23.4%) Commercial Business and Other - $18.0 (7.4%) Consumer - $4.9 (2.0%) Construction and Land Development - $13.2 (5.4%) Residential Real Estate - $151.3 (61.8%) At December 31, 1996, the loan portfolio totaled $244.7 million and represented 85.6% of interest-earning assets. ================================================================================
TOTAL LOANS (DOLLARS IN MILLIONS) June 30, Six Months Dec. 31, Dec. 31, Dec. 31, 1993 Dec. 31, 1993 1994 1995 1996 $202.1 $204.2 $221.9 $222.3 $244.7 During 1996, loans increased by $22.4 million or 10.1%. Loan growth was due to strong local economy, a formalized Bank customer calling program and an aggressive marketing program.
================================================================================ The Bank is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities of thirty years. These loans are sold in the secondary market because of the additional exposure to interest rate risk associated with this product. The Bank retains the servicing on all loans sold in the secondary market. During 1996, the Bank sold $699 thousand in fixed rate mortgages compared to $1.3 million in 1995 and $937 thousand in 1994. The amounts include 10 loans for 1996, and 15 loans for 1995 and 1994. All loans sold had contractual maturities of thirty years. Net gains realized from the sales totaled $1 thousand, $19 thousand and $8 thousand for 1996, 1995 and 1994. Mortgage loan servicing income totaled $21 thousand, $23 thousand and $22 thousand for 1996, 1995 and 1994. At December 31, 1996, the Bank had no loans classified as held for sale. At December 31, 1996, the Bank's investment portfolio totaled $40.0 million and was invested as follows: 62.3% in U.S. government agency debt securities, 28.9% in U.S. government debt securities, 4.8% in U.S. government agency mortgage-backed securities and 4.0% in FHLBI common stock. In addition, the Bank had $1.0 million in interest-bearing balances at the FHLBI. During 1996, investment securities increased by $2.0 million (5.3%), while interest-bearing balances in financial institutions and federal funds decreased by $7.0 million (87.5%). Overnight investments provided funding for securities and loan portfolio growth. Management believes that the credit risk profile of the earning asset portfolio is relatively low. At December 31, 1996 the Bank had $1.2 million in non-performing loans. The December 31, 1996 balance includes $788 thousand in loans accounted for on a non-accrual basis and $379 thousand in accruing loans which were contractually past due 90 days or more. The total of these non-performing loans represents 0.48% of the total loan portfolio and 0.39% of total assets. The amount for non-accruing loans includes 14 residential real estate loans, one commercial real estate loan, two commercial business loans and two consumer loans. The amount for accruing loans which are contractually past due 90 days or more includes five residential real estate loans, one commercial business loan and one consumer loan. At December 31, 1996, $877 thousand of the Bank's loans were classified as substandard. The total represents 14 residential real estate loans, one commercial real estate loan, five commercial business loans and four consumer loans. There were no loans classified as doubtful or loss. Management does not anticipate that any of the non-performing loans or classified loans will materially impact future operations, liquidity or capital resources. At December 31, 1996, there were no material credits which would cause management to have serious doubts as to the ability of such borrowers to comply with loan repayment terms.
NON-PERFORMING LOANS TO TOTAL LOANS June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 0.30% 0.27% 0.70% 0.47% 0.48% Management believes that the credit risk profile of the loan portfolio is relatively low. At December 31, 1996, the Bank's ratio of non-performing loans to total loans was 0.48% (forty-eight hundredths of one percent) which was below the industry norm.
================================================================================ At December 31, 1996, the Bank had $189 thousand in foreclosed real estate. The total includes three residential properties and represents 0.06% of total assets. Because some loans may not be repaid in accordance with contractual agreements, an allowance for loan losses (ALL) has been maintained. While management may periodically allocate portions of the allowance for specific problem 8 loans, the entire allowance is available to absorb all credit losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. During 1996, amounts provided to the ALL account totaled $85 thousand compared to $80 thousand for 1995 and $145 thousand for 1994. The amount provided during 1996 was based on loan activity, current economic conditions and management's assessment of portfolio risk. Charge-offs net of recoveries totaled $28 thousand during 1996. At December 31, 1996, the balance in the ALL account totaled $2.9 million which is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions. The allocation of the ALL reflects consideration of the facts and circumstances that affect the repayment of individual loans, as well as, loans which have been pooled as of the evaluation date.
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 1.15% 1.26% 1.24% 1.27% 1.18% At December 31, 1996, the Bank had $2.9 million in the Allowance for Loan Losses account. The amount represents 1.18% of loans outstanding and 247.4% of non-performing loans.
================================================================================ Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114), as amended by SFAS No. 118, was adopted on January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, the increase is reported in the provision for loan losses. A loan is impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The effect of adopting these standards did not result in the recording of additional provisions for loan losses. At December 31, 1996, no portion of the allowance for loan losses was allocated to impaired loan balances as the Bank had no loans considered to be impaired loans as of, or for the year ended December 31, 1996. Deposits are the major source of funds for lending and other investment purposes. At December 31, 1996, deposits totaled $256.4 million. During 1996, deposit growth totaled $8.5 million (3.4%). Savings accounts increased $1.8 million (4.2%), NOW accounts increased $2.6 million (12.5%), checking accounts increased $1.4 million (12.0%), money market deposit accounts increased $1.1 million (5.0%) and certificates of deposit increased by $1.6 million (1.1%). At December 31, 1996, the deposit base was comprised of 17.0% savings accounts, 8.7% MMDA's, 9.3% NOW accounts, 5.0% checking accounts and 60.0% certificates of deposit. At December 31, 1996, repurchase agreements totaled $4.0 million. Other short-term borrowings totaled $8.3 million, of which $7.0 million represents a variable rate advance from the FHLBI. The Company had no long-term borrowings.
TOTAL DEPOSITS (DOLLARS IN MILLIONS) June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 $219.1 $222.9 $234.6 $247.9 $256.4 Deposits are the major source of funds for lending and other investment purposes. During 1996 deposits increased by $8.5 million or 3.4%.
================================================================================ LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals and pay operating expenses. Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in financial institutions, and the purchase and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bank utilizes short-term borrowings, i.e., repurchase agreements and advances from the FHLBI as a source of funds. During 1996, cash and cash equivalents decreased by $8.4 million compared to a $9.2 million increase for 1995 and a $1.9 million decrease for 1994. The decrease for 1996 was due to the reduction in interest-bearing balances in financial institutions and federal funds, as cash flows were used for loan originations. During 1996, cash provided by operating activities totaled $2.5 million, compared to $3.1 million for 1995 and $4.1 million for 1994. The decrease during 1996 was due to the required payment of $1.6 million to capitalize SAIF. Cash flows from investing activities reflect strong loan demand throughout 1996, causing a reduction in cash and cash equivalents which had accumulated during 1995 when loan growth was slow relative to deposit growth. Loans made net of payments received totaled $22.6 million during 1996, compared to $712 thousand for 9 1995 and $18.2 million for 1994. During 1996, cash flows were also used to purchase securities and open a new full-service branch facility located in Merrillville, Indiana. The facility represents the Company's commitment to quality service and community development, and provides opportunities to expand market share by attracting additional deposits and loans from the surrounding areas. The new facility is not expected to have a material impact on noninterest expense. Cash flows from financing activities totaled $16.0 million during 1996, compared to $11.8 million for 1995 and $11.3 million for 1994. During 1996, the Company paid common stock dividends of $1.6 million. In addition, the Bank used both deposits and borrowed money to fund loan growth. Deposit growth during 1996 totaled $8.5 million, compared to $13.3 million for 1995 and $11.7 million for 1994. The increase in borrowed funds totaled $9.1 million during 1996, compared to a decrease of $12 thousand for 1995 and an increase of $1.1 million for 1994. The increase in borrowed funds represents short-term borrowings which, on average, provided a cost effective alternative to certificates of deposit as price competition within the local market area became very competitive during 1996. At December 31, 1996, outstanding commitments to fund loans totaled $34.1 million. Approximately 81% of the commitments were at variable rates. The Bank has sufficient cash flow and borrowing capacity to fund all outstanding commitments and to maintain proper levels of liquidity. Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. During 1996, stockholders' equity increased by $611 thousand (2.2%). The increase resulted primarily from earnings of $2.2 million for 1996. In addition, two thousand dollars represents proceeds from the exercise of 159 stock options. The reduction of $1.6 million represents cash dividends for 1996. At December 31, 1996, book value per share was $20.16 compared to $19.72 reported at December 31, 1995.
CAPITAL TO TOTAL ASSETS June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 9.2% 9.5% 9.6% 9.7% 9.3% Management firmly believes that the safety and soundness of the Company is enhanced by maintaining a high level of capital. At December 31, 1996, the Company's capital exceeded all regulatory capital requirements. The Company is categorized as "well capitalized". The ratio of Tier I capital to total assets reflects the increase in capital over the periods presented as a result of profitability and success in managing growth. In addition, Tier I capital to risk-weighted assets was 14.7% and total risk-based capital to risk-weighted assets was 16.0%.
================================================================================ The Company is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the FRB), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Company and the Bank, the FRB and FDIC capital requirements are substantially identical. These regulations divide capital into two tiers. The first tier (Tier I) includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Supplementary (Tier II) capital includes, among other things, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. The Company and the Bank are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I capital. In addition, the FRB and FDIC regulations provide for a minimum Tier I leverage ratio (Tier I capital to adjusted total assets) of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other financial institutions are required to maintain a Tier I leverage ratio of 3% plus an additional cushion of at least one to two percent. The following table shows that, at December 31, 1996, the Company's capital exceeded all regulatory capital requirements. At December 31, 1996, the Company's and the Bank's regulatory capital ratios were identical. The dollar amounts are in millions.
Required for To be well Actual adequate capital capitalized -------------- ---------------- ----------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital to risk-weighted assets ........ $30.2 16.0% $15.1 8.0% $18.9 10.0% Tier 1 capital to risk-weighted assets ........ $27.8 14.7% $ 7.6 4.0% $11.3 6.0% Tier 1 capital to total assets $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
On December 2, 1996, the Company effected a two-for-one split of its common stock. All earnings per share and book value per share data herein have been restated for all periods presented to reflect the split. CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY The laws and regulations affecting banks and bank holding companies are in a state of flux. The laws, rules and the regulatory agencies in this area have changed significantly over recent years, and there is reason to expect that similar changes will continue in the future. It is difficult to predict the outcome of these changes. Recent legislation has, for example, reduced the regulatory burden on bank holding companies and may lead to consolidated regulation of the banking industry. Other recent initiatives have removed barriers to interstate mergers and acquisitions; encouraged lending for the development of poor, rural, inner city and other communities; and provided additional proposals to restructure regulation of the banking industry and its participants' powers, particularly with respect to insurance and securities 10 activities. Based on what is presently known about these initiatives, management does not believe that the Company's operations will be materially adversely affected by those initiatives that have been enacted or those pending initiatives that may be enacted in the future. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with Generally Accepted Accounting Principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. CURRENT 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 revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements has not yet been determined. RESULTS OF OPERATIONS - COMPARISON OF 1996 TO 1995. Net income for 1996 was $2.2 million compared to $3.1 million for 1995, a decrease of $913 thousand (29.4%). The earnings represent a return on average assets of 0.75% for 1996 compared to 1.14% for 1995. The return on average equity was 7.90% for 1996 compared to 11.74% for 1995. The decrease in the current year operating results was due to the one-time special assessment required by the Deposit Insurance Funds Act of 1996 on SAIF-assessable deposits to capitalize SAIF. The SAIF assessment resulted in a pre-tax expense of $1.6 million for 1996. Excluding the SAIF assessment, adjusted net income for 1996 was $3.1 million, representing an adjusted ROA of 1.07% and an adjusted ROE of 11.27%. Net interest income for 1996 was $11.1 million, up $412 thousand (3.9%) from $10.6 million for 1995. The growth in net interest income was due to the growth in average interest-earning assets and a stable cost of funds. Interest-earning assets averaged $279.9 million for 1996, up $17.8 million (6.8%) from $262.1 million for 1995. The net interest margin was 3.79% for 1996 compared to 3.91% for 1995. The decrease was due to lower yields on interest-earning assets as the Bank's cost of funds remained stable. During 1996, total interest income increased by $1.2 million (5.7%) while total interest expense increased by $802 thousand (7.7%).
RETURN ON ASSETS June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 1.28% 1.45% 1.24% 1.14% 0.75% Return on assets (ROA) indicates the overall operating efficiency of a company. The ratio is determined by stating net income as a percentage of average total assets. The decrease in the ROA for 1996 reflects the one-time special assessment on SAIF-assessable deposits to recapitalize SAIF.
================================================================================ During 1996, interest income from loans increased by $685 thousand (3.7%) compared to 1995. The weighted average yield on loans outstanding was 8.35% for 1996 compared to 8.46% for 1995. Higher average loan balances have contributed to the increase in interest income as loans averaged $232.5 million for 1996, up $11.1 million (5.0%) from $221.4 for 1995. During 1996, interest income on investments and other deposits increased by $530 thousand (22.1%) compared to 1995. The increase was due to higher yields and portfolio growth during 1996. The weighted average yield on investments and other deposits was 6.17% for 1996 compared to 5.88% for 1995. The increase in yield was due to a reduction in the average balances for federal funds sold and interest bearing balances in financial institutions, and the investment of funds in securities with contractual maturities ranging from three to seven years. In addition, securities averaged $40.9 million for 1996, up $5.8 million (16.4%) from $35.1 million for 1995. The combined weighted average yield on total interest-earning assets was 7.98% for 1996 compared to 8.06% for 1995. Interest expense for deposits increased by $699 thousand (6.7%) during 1996. The increase was due to higher average balances as deposits averaged $255.6 million for 1996, up $15.8 million (6.6%) from $239.8 million for 1995. The weighted average rate paid on deposits for 1996 was 4.33% compared to 4.32% for 1995. Interest expense on short-term borrowings increased by $104 thousand during 1996 due to higher average balances as borrowed funds averaged $4.8 million, up $2.3 million (92.8%) from $2.5 million for 1995. The weighted average cost of short-term borrowings was 4.62% for 1996 compared to 4.72% for 1995. The combined weighted average rate paid on deposits and borrowings for 1996 and 1995 was 4.33%. The impact of the 7.98% return on interest-earning assets and the 4.33% cost of funds resulted in an interest rate spread of 3.65% for 1996 compared to 3.73% for 1995. Noninterest income for 1996 was $682 thousand, down four thousand dollars (0.5%) from $685 thousand for 1995. The decrease was due to reduced gains from the sale of fixed rate loans and foreclosed real estate. During 1996, income from fees and service charges increased $59 thousand 11 (13.9%), while income from Trust operations increased by $11 thousand (6.2%). Noninterest expense for 1996 was $8.0 million, up $1.9 million (31.4%) from $6.1 million for 1995. The increase was due primarily to the SAIF assessment of $1.6 million. Excluding the SAIF assessment results in an increase of noninterest expense of $364 thousand (6.0%) for 1996 compared to 1995. In general, increases in noninterest expense have resulted from the expansion of the Bank's operations and the investment in new technologies. The increase in compensation and benefits was due to additional staffing and annual salary increases. The increase in occupancy and equipment expense was due to the operation of the new East Chicago, Indiana, branch facility which opened during September 1995, the operation of the new Merrillville, Indiana, branch facility which opened during September 1996, and depreciation related to investments in technology. Other expense changes were due to standard increases in bank operations. The Company's efficiency ratio, excluding the SAIF assessment, for 1996, was 55.2% compared to 54.0% for 1995. The ratio is determined by dividing total noninterest expense minus the SAIF assessment by the sum of net interest income and total noninterest income for the period. Income tax expenses for 1996 totaled $1.4 million compared to $2.0 million for 1995, a decrease of $607 thousand (30.0%). The decrease was due to a decrease in pretax earnings during 1996.
RETURN ON EQUITY Six Months June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 14.00% 15.51% 13.04% 11.74% 7.90% Return on equity (ROE) is determined by stating net income as a percentage of average stockholders' equity. The ratio is important to the Company's stockholders because it measures the return on their invested capital. The decrease in ROE for 1996 reflects the one-time special assessment on SAIF-assessable deposits to recapitalize SAIF.
================================================================================ RESULTS OF OPERATIONS - COMPARISON OF 1995 TO 1994. Net income for 1995 was $3.1 million compared to $3.2 million for 1994, a decrease of $127 thousand (3.9%). The earnings represent a return on average assets of 1.14% for 1995 compared to 1.24% for 1994. The return on average equity was 11.74% for 1995 compared to 13.04% for 1994. The decrease in the operating results for 1995 was due to a decrease in net interest margin caused by a rising cost of funds. Net interest income for 1995 decreased by $404 thousand (3.7%) compared to 1994. The net interest margin for 1995 was 3.91% compared to 4.25% during 1994. While total interest income increased by 10.5% during 1995, total interest expense increased by 29.8%, causing the increase in the cost of funds for interest-bearing liabilities to exceed the increase in the yield on interest-earning assets. During 1995, interest income from loans increased by $1.6 million (9.3%) compared to 1994. The weighted average yield on loans outstanding was 8.46% for 1995 compared to 8.03% for 1994. Higher yields and higher average loan balances contributed to the increase in interest income. During 1995, interest income on investments and other deposits increased by $412 thousand (20.7%) compared to 1994. The increase was due to higher yields and portfolio growth during 1995. The weighted average yield on investments and other deposits was 5.88% for 1995 compared to 5.47% for 1994. The increase was caused by the upswing in interest rates which began during 1994. Yields on investments react rapidly to changes in market interest rates due to the highly liquid nature of the portfolio. The combined weighted average yield on total interest-earning assets was 8.06% for 1995 compared to 7.66% for 1994. Interest expense for deposits increased by $2.4 million (29.4%) during 1995. The increase was due to the repricing of existing deposits at higher interest rates and certificate of deposit growth. The weighted average rate paid on deposits for 1995 was 4.32% compared to 3.49% for 1994. Interest expense on short-term borrowings increased by $49 thousand during 1995 due to higher average balances and interest rates for repurchase agreements. The weighted average cost of short-term borrowings was 4.72% for 1995 compared to 4.07% for 1994. Interest expense on short-term borrowings totaled only $117 thousand during 1995, due to the low level of borrowing during the period. The combined weighted average rate paid on deposits and borrowings for 1995 was 4.33% compared to 3.49% for 1994. The impact of the 8.06% return on interest-earning assets and the 4.33% cost of funds resulted in an interest rate spread of 3.73% for 1995 compared to 4.17% for 1994. Noninterest income for 1995 was $193 thousand (39.1%) greater than that reported during 1994. The improvement was due to increased income from Trust operations of $34 thousand (23.2%) and increased fees and service charges of $91 thousand (27.1%). Also contributing to noninterest income during 1995 were gains on the sale of foreclosed real estate of $51 thousand, and gains on the sale of fixed rate loans of $19 thousand. Noninterest expense for 1995 was $86 thousand (1.4%) greater than that reported during 1994. The increase in compensation and benefits was due to the additional staffing and annual salary increases. With the exception of the federal insurance premium, other expenses remained relatively stable compared to 1994. During 1994 the Company incurred costs related to the conversion to a new service bureau for the purpose of providing data processing services. Income tax expenses for 1995 totaled $2.0 million compared to $2.1 million for 1994, a decrease of $106 thousand (5.0%). The decrease was due to a decrease in pretax earnings during 1995. 12 [LOGO CROWE CHIZEK] Independent Auditor's Report Board of Directors NorthWest Indiana Bancorp Munster, Indiana We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp (the Company) as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. 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 NorthWest Indiana Bancorp as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP South Bend, Indiana January 9, 1997 13
CONSOLIDATED BALANCE SHEETS DECEMBER 31, --------------------------------- 1996 1995 ------------- ------------- ASSETS Cash and non-interest bearing balances in financial institutions............... $ 5,508,822 $ 6,952,377 Interest bearing balances in financial institutions............................ 1,000,000 6,151,327 Federal funds sold............................................................. - 1,840,000 ------------- ------------- Total cash and cash equivalents.............................................. 6,508,822 14,943,704 Securities held-to-maturity (market value: December 31, 1996 - $39,909,000; December 31, 1995 - $38,279,000)............................................. 40,023,992 38,001,081 Loans receivable............................................................... 244,695,883 222,292,700 Less: allowance for loan losses................................................ (2,887,005) (2,829,681) ------------- ------------- Net loans receivable......................................................... 241,808,878 219,463,019 Accrued interest receivable.................................................... 2,152,672 2,091,874 Premises and equipment......................................................... 7,085,982 5,256,785 Foreclosed real estate......................................................... 188,886 86,366 Deferred income taxes.......................................................... 706,008 644,915 Other assets................................................................... 943,260 423,195 ------------- ------------- Total assets................................................................. $299,418,500 $280,910,939 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing deposits................................................ $ 12,878,557 $ 11,497,478 Interest bearing deposits.................................................... 243,541,120 236,447,211 ------------- ------------- Total deposits............................................................. 256,419,677 247,944,689 Borrowed funds................................................................. 12,260,507 3,138,829 Accrued expenses and other liabilities......................................... 2,923,079 2,623,293 ------------- ------------- Total liabilities............................................................ 271,603,263 253,706,811 Commitments and contingencies Stockholders' Equity Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding ............................ - - Common stock, no par or stated value; 20,000,000 shares authorized; issued and outstanding: December 31, 1996 - 1,379,595 shares; December 31, 1995 - 1,379,436 shares......................................... 344,899 344,859 Additional paid in capital..................................................... 2,929,587 2,927,595 Retained earnings - substantially restricted................................... 24,540,751 23,931,674 ------------- ------------- Total stockholders' equity................................................... 27,815,237 27,204,128 ------------- ------------- Total liabilities and stockholders' equity................................... $299,418,500 $280,910,939 ============ ============
See accompanying notes to consolidated financial statements. 14 i
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ---------------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Interest income: Loans receivable Real estate loans.................................. $17,522,544 $17,015,267 $14,986,332 Commercial loans................................... 1,522,360 1,411,744 1,847,743 Consumer loans..................................... 363,505 296,752 300,938 ------------ ----------- ----------- Total loan interest.............................. 19,408,409 18,723,763 17,135,013 Securities held-to-maturity.......................... 2,604,759 2,054,976 1,806,621 Other interest earning assets........................ 323,741 343,919 180,340 ------------ ----------- ----------- Total interest income.............................. 22,336,909 21,122,658 19,121,974 ------------ ----------- ----------- Interest expense: Deposits............................................. 11,065,874 10,367,179 8,011,495 Borrowed funds....................................... 220,773 117,030 68,311 ------------ ----------- ----------- Total interest expense............................. 11,286,647 10,484,209 8,079,806 ------------ ----------- ----------- Net interest income....................................... 11,050,262 10,638,449 11,042,168 Provision for loan losses................................. 85,000 80,000 144,500 ------------ ----------- ----------- Net interest income after provision for loan losses....... 10,965,262 10,558,449 10,897,668 ------------ ----------- ----------- Noninterest income: Gain on sale of loans, net........................... 639 18,916 7,711 Gain on sale of foreclosed real estate............... 3,668 51,061 3,070 Fees and service charges............................. 487,351 427,855 336,748 Trust operations..................................... 190,183 179,087 145,349 Other................................................ - 8,520 - ------------ ----------- ----------- Total noninterest income........................... 681,841 685,439 492,878 ------------ ----------- ----------- Noninterest expense: Compensation and benefits............................ 3,213,151 3,049,295 2,937,347 Occupancy and equipment.............................. 1,049,626 842,108 848,951 Federal insurance premium............................ 1,979,211 536,224 513,390 Advertising.......................................... 158,579 156,511 131,036 Data processing...................................... 299,037 272,078 334,273 Other................................................ 1,339,837 1,260,069 1,265,629 ------------ ----------- ----------- Total noninterest expense.......................... 8,039,441 6,116,285 6,030,626 ------------ ----------- ----------- Income before income taxes................................ 3,607,662 5,127,603 5,359,920 Income tax expenses....................................... 1,419,000 2,026,400 2,132,000 ------------ ----------- ----------- Net income................................................ $ 2,188,662 $ 3,101,203 $ 3,227,920 ============ =========== =========== Earnings per common and common equivalent share: Net income............................................... $ 1.59 $ 2.25 $ 2.35 =========== =========== =========== Dividend declared per common share........................ $ 1.15 $ 1.10 $ 1.10
See accompanying notes to consolidated financial statements. 15
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Additional Common Paid-in Retained Total Stock Capital Earnings Equity ------------ ------------ ------------ ------------- Balance at January 1, 1994.................................... $ 343,573 $ 2,896,210 $ 20,634,648 $ 23,874,431 Issuance of 3,792 shares of common stock at $2.50 - $11.50 per share, under stock option plan...... 948 17,794 - 18,742 Cash dividends, $1.10 per share.......................... - - (1,515,084) (1,515,084) Net income for the year ended December 31, 1994.......... - - 3,227,920 3,227,920 ------------ ------------ ------------ ------------- Balance at December 31, 1994.................................. 344,521 2,914,004 22,347,484 25,606,009 Issuance of 1,352 shares of common stock at $8.57 - $21.25 per share, under stock option plan...... 338 13,591 - 13,929 Cash dividends, $1.10 per share.......................... - - (1,517,013) (1,517,013) Net income for the year ended December 31, 1995.......... - - 3,101,203 3,101,203 ------------ ------------ ------------ ------------- Balance at December 31, 1995.................................. 344,859 2,927,595 23,931,674 27,204,128 Issuance of 159 shares of common stock at $8.57 - $21.25 per share, under stock option plan...... 40 1,992 - 2,032 Cash dividends, $1.15 per share.......................... - - (1,579,585) (1,579,585) Net income for the year ended December 31, 1996.......... - - 2,188,662 2,188,662 ------------ ------------ ------------ ------------- Balance at December 31, 1996.................................. $ 344,899 $ 2,929,587 $ 24,540,751 $ 27,815,237 =========== ============ ============ ============
See accompanying notes to consolidated financial statements. 16
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ----------------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 2,188,662 $ 3,101,203 $ 3,227,920 ------------ ------------ ----------- Adjustments to reconcile net income to net cash provided by operating activities: Origination of loans for sale...................... (699,900) (1,247,100) (881,700) Sale of loans originated for sale.................. 699,264 1,312,416 937,253 Depreciation and amortization, net of accretion.... 553,416 393,493 352,807 Net gains on sale of loans......................... (639) (18,916) (7,711) Net gains on sale of foreclosed real estate........ (3,668) (51,061) (3,070) Provision for loan losses.......................... 85,000 80,000 144,500 Change in unrealized premiums on loans............. - - 32,757 Net change in unearned discount on loans........... (795) (11,889) (25,791) Change in deferred taxes........................... (61,093) 244,072 34,362 Change in deferred loan fees....................... (1,335) (74,806) 69,916 Change in interest receivable...................... (60,798) (271,987) (262,875) Change in other assets............................. (520,065) (44,510) 142,986 Change in accrued expenses and other liabilities... 237,667 (323,830) 372,968 ------------ ----------- ----------- Total adjustments.................................. 227,054 (14,118) 906,402 ------------ ----------- ----------- Net cash from operating activities................. 2,415,716 3,087,085 4,134,322 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Change in interest bearing time deposits in other financial institutions....................... - 493,472 1,000,000 Proceeds from maturities of securities held-to-maturity................................... 12,671,429 8,000,000 8,500,000 Purchase of securities held-to-maturity.............. (15,164,019) (12,771,852) (9,431,047) Principal collected on mortgage-backed securities.... 459,954 445,819 839,944 Proceeds from education loans sold................... - - 485,944 Loan participations purchased........................ - (33,440) (94,017) Loans made net of payments received.................. (22,587,037) (711,802) (18,189,438) Purchase of property plant and equipment............. (2,372,888) (1,646,683) (500,733) Proceeds from sale of foreclosed real estate......... 60,731 547,231 49,456 ------------ ----------- ----------- Net cash from investing activities................. (26,931,830) (5,677,255) (17,339,891) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits................................... 8,474,988 13,305,721 11,693,550 Proceeds from FHLB advances.......................... 7,000,000 - - Change in other borrowed funds....................... 2,121,678 (11,823) 1,063,751 Proceeds from issuance of capital stock.............. 2,032 13,929 18,742 Cash dividends paid.................................. (1,517,466) (1,517,013) (1,515,084) ------------ ----------- ----------- Net cash from financing activities................. 16,081,232 11,790,814 11,260,959 ------------ ----------- ----------- Net change in cash and cash equivalents............ (8,434,882) 9,200,644 (1,944,610) Cash and cash equivalents at beginning of period..... 14,943,704 5,743,060 7,687,670 ------------ ----------- ----------- Cash and cash equivalents at end of period........... $ 6,508,822 $ 14,943,704 $ 5,743,060 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................... $ 11,343,472 $ 10,456,707 $ 8,148,286 Income taxes....................................... $ 2,045,000 $ 1,815,000 $ 2,060,000
See accompanying notes to consolidated financial statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 1996, 1995 and 1994. NOTE 1 - Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the Company), its wholly-owned subsidiary, Peoples Bank SB (the Bank), and the Bank's wholly-owned subsidiaries, Peoples Service Corporation and PSA Insurance Corporation. Effective July 31, 1994, the Company became a one-bank holding company for Peoples Bank SB, an Indiana savings bank resulting from the conversion of Peoples Bank from a federal stock savings bank to an Indiana stock savings bank. References herein to the Company prior to July 31, 1994, are references to the Bank and its subsidiaries. The formation of the Company and the acquisition of Peoples Bank SB by the Company was an internal reorganization accounted for at historical cost. The Company has no other business activity other than being a holding company for the Bank. The Company's earnings are dependent upon the earnings of the Bank. Both Peoples Service Corporation and PSA Insurance Corporation are inactive. At December 31, 1996, the Company had investment balances of $10,000 and $44,950 in Peoples Service Corporation and PSA Insurance Corporation, respectively. All significant inter-company accounts and transactions have been eliminated in consolidation. The parent only financial statements for NorthWest Indiana Bancorp are presented in Note 17. Use of Estimates - Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Areas involving the use of estimates and assumptions include the allowance for loan losses, fair values of securities and other financial instruments, determination and carrying value of impaired loans, the carrying value of loans held for sale, the accrued liability for deferred compensation, the realization of deferred tax assets, and the determination of depreciation of premises and equipment. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses and the fair values of securities and other financial instruments are particularly susceptible to material change in the near term. Concentrations of Credit Risk - The Company grants residential, commercial real estate, commercial business and installment loans to customers primarily of Lake County, in northwest Indiana. Substantially all loans are secured by specific items of collateral including residences, business assets and consumer assets. Statements of Cash Flow - For purposes of the statement of cash flows, the Company considers cash on hand, all interest-bearing deposits in other financial institutions with original maturities of ninety days or less and federal funds sold to be cash and cash equivalents. The Company reports net cash flows for customer loan and deposit transactions and deposits made with other financial institutions. Securities - The Company classifies securities into held-to-maturity, available-for-sale, or trading categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those the Company 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 and losses included as a separate component of equity, net of tax. Trading securities are bought principally for sale in the near term and are reported at fair value with unrealized gains and losses included in earnings. Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of premium or discount, is included in earnings. Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Loans and Loan Income - Loans are stated net of loans in process, deferred loan fees, and unearned income. Discounts on consumer loans are recognized over the lives of the loans using the interest method. Interest income on other loans is accrued over the term of the loans based upon the principal outstanding except where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status.. Foreclosed Real Estate - Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs. Allowance for Loan Losses - Because some loans may not be repaid in full, an allowance for loan losses is maintained. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge-offs that occur. A loan is charged-off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. 18 SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, was adopted on January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require increase, such increase is reported in the provision for loan losses. The effect of adopting this standard did not result in the recording of additional provision for loan losses. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and non-performing asset disclosures. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 26 to 40 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to expense and improvements are capitalized. The cost and accumulated depreciation applicable to assets retired or otherwise disposed of are eliminated from the accounts and the gain or loss on disposition is credited or charged to operations. Recognition of Gains or Losses on the Sale of Loans - Loans are sold on a net yield basis, with servicing rights and obligations retained by the Company, resulting in the recognition of gains or losses at the time of sale. The Company uses the purchaser's normal servicing fee in computing these gains and losses. The resulting premiums or discounts, if any, are amortized or accreted in income over the estimated lives of these loans sold using the level yield method. Loan Origination Fees - Loan fees are netted with certain direct loan origination costs, and are deferred and amortized into interest income as yield adjustments using the interest method over the term of the related loans. When a loan is paid off or sold, any unamortized origination fee is credited to interest income. Income Taxes - The Company records income tax expense based on the amount of taxes due on its tax return, plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Earnings per Share - On February 28, 1995 and December 2, 1996, the Company effected a two-for-one common stock split. All references in the accompanying financial statements to the number of shares and per share data have been restated to reflect the two stock splits. The weighted average number of shares used in the calculation of earnings per share are summarized below as of the dates indicated:
1996 1995 1994 ---------- --------- ---------- Weighted average shares outstanding.. 1,379,519 1,378,808 1,376,456 ========= ========= =========
The effect of common stock equivalents is not material in the periods reported. Postretirement Benefits Other Than Pensions - The Company sponsors a defined benefit postretirement plan that provides comprehensive major medical benefits to all eligible retirees. Postretirement benefits are accrued based on the expected cost of providing postretirement benefits to employees during the years that the employees have rendered service to the Company. Reclassification - Certain amounts appearing in the consolidated financial statements and notes thereto for the year ended December 31, 1995 and 1994, have been reclassified to conform to the December 31, 1996 presentation. NOTE 2 - Securities The amortized cost and fair value of securities held-to-maturity are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- AT DECEMBER 31, 1996: Debt securities: U.S. government and federal agencies ..... $36,482,782 $ 91,980 $ (216,762) $36,358,000 Mortgage-backed securities ........... 1,944,510 16,135 (6,645) 1,954,000 ----------- ----------- ----------- ----------- Total debt securities . 38,427,292 108,115 (223,407) 38,312,000 Other securities ...... 1,596,700 300 -- 1,597,000 ----------- ----------- ----------- ----------- Total ............... $40,023,992 $ 108,415 $ (223,407) $39,909,000 =========== =========== =========== =========== AT DECEMBER 31, 1995: Debt securities: U.S. government and federal agencies ..... $33,999,917 $ 306,015 $ (99,932) $34,206,000 Mortgage-backed securities ........... 2,404,464 71,618 (82) 2,476,000 ----------- ----------- ----------- ----------- Total debt securities . 36,404,381 377,633 (100,014) 36,682,000 Other securities ...... 1,596,700 300 -- 1,597,000 ----------- ----------- ----------- ----------- Total ............... $38,001,081 $ 377,933 $ (100,014) $38,279,000 =========== =========== =========== ===========
The amortized cost and fair value of debt securities held-to-maturity at December 31, 1996, by contractual maturity, are shown on the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 19
Amortized Fair Cost Value ----------- ----------- Due in one year or less ........................ $ 7,242,235 $ 7,253,000 Due after one year through five years .......... 26,240,547 26,112,000 Due after five years through ten years ......... 3,000,000 2,993,000 Mortgage-backed securities ..................... 1,944,510 1,954,000 ----------- ----------- Total ......................................... $38,427,292 $38,312,000 =========== ===========
There were no sales of securities during the year ended December 31, 1996, 1995 and 1994. NOTE 3 - Loans Receivable Loans are summarized below as of the dates indicated:
1996 1995 ------------ ------------ Loans secured by real estate: Construction and land development ............ $ 13,247,600 $ 8,913,022 Residential .................................. 151,342,808 143,571,514 Commercial real estate and other dwelling .... 57,258,765 51,207,564 ------------ ------------ Total loans secured by real estate ........ 221,849,173 203,692,100 Commercial business loans ..................... 17,820,797 14,948,660 Consumer loans ................................ 4,889,512 3,526,619 Government and other .......................... 136,401 125,321 ------------ ------------ Loans receivable .......................... $244,695,883 $222,292,700 ============ ============
Activity in the allowance for loan losses is summarized below for the periods indicated:
1996 1995 1994 ----------- ----------- ----------- Balance at beginning of period .... $ 2,829,681 $ 2,751,146 $ 2,582,536 Provision charged to income ....... 85,000 80,000 144,500 Loans charged off ................. (28,203) (2,330) (9,858) Recoveries ........................ 527 865 33,968 ----------- ----------- ----------- Balance at end of period .......... $ 2,887,005 $ 2,829,681 $ 2,751,146 =========== =========== ===========
At December 31, 1996 and 1995, no portion of the allowance for loan losses was allocated to impaired loan balances as the Company had no loans it considered to be impaired loans as of or for the year ended December 31, 1996 and 1995. NOTE 4 - Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans are summarized below as of the dates indicated:
1996 1995 ---------- --------- Mortgage loan portfolios serviced for: FHLMC ............................ $7,152,436 $7,591,703 ========== ==========
Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $128,000 and $160,000 at December 31, 1996 and 1995, respectively. NOTE 5 - Premises and Equipment, Net Premises and equipment are summarized below as of the dates indicated:
1996 1995 --------- --------- Cost: Land............................ $ 1,721,313 $ 1,271,652 Buildings and improvements...... 5,228,753 4,112,790 Furniture and equipment......... 3,104,300 2,412,838 ------------ ----------- Total cost...................... 10,054,366 7,797,280 Less accumulated depreciation and amortization ............... (2,968,384) (2,540,495) ------------ ----------- Premises and equipment, net.... $ 7,085,982 $ 5,256,785 =========== ===========
NOTE 6 - Income Taxes Components of the provision for income taxes consists of the following for the years indicated:
1996 1995 1994 ----------- ----------- ----------- Federal: Current .................. $ 1,071,291 $ 1,376,742 $ 1,604,830 Deferred ................. 56,709 221,058 59,170 State: Current .................. 286,616 405,586 492,808 Deferred ................. 4,384 23,014 (24,808) ----------- ----------- ----------- Income tax expense ......... $ 1,419,000 $ 2,026,400 $ 2,132,000 =========== =========== ===========
The differences between the provision for income taxes shown on the statement of income and amounts computed by applying the statutory federal income tax rate to income before tax expense consists of the following for the years indicated:
1996 1995 1994 ----------- ----------- ----------- Federal statutory rate ........... 34% 34% 34% Tax expense at statutory rate .... $ 1,226,605 $ 1,743,385 $ 1,822,373 State tax, net of federal effect . 195,360 282,876 308,880 Other ............................ (2,965) 139 747 ----------- ----------- ----------- Total income tax expense ......... $ 1,419,000 $ 2,026,400 $ 2,132,000 =========== =========== ===========
The components of the net deferred tax asset recorded in the consolidated balance sheet are as follows:
1996 1995 ---------- --------- Deferred tax assets: Bad debt........................ $ 298,239 $ 266,123 Deferred loan fees.............. 174,419 174,903 Deferred compensation........... 430,168 392,851 Other........................... 75,448 72,186 ---------- --------- Total deferred tax assets...... 978,274 906,063 Deferred tax liabilities: Depreciation ................... (215,862) (221,716) Other........................... (56,404) (39,432) ---------- --------- Total deferred tax liabilities. 272,266 (261,148) Valuation allowance.............. - - ---------- --------- Net deferred tax assets........ $ 706,008 $ 644,915 ========== ==========
The Company has qualified under provisions of the Internal Revenue Code which permit it to deduct from taxable income a provision for bad debts in excess of the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at December 31, 1996 and 1995 includes approximately $6,000,000 for which no provision for federal income taxes has been made. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad 20 debt losses, federal income taxes would be imposed at the then applicable rates. The unrecorded deferred income tax liability on the above amounts was approximately $2,040,000 at December 31, 1996. Tax legislation passed in August 1996 now requires the Company to deduct a provision for bad debts for tax purposes based on actual loss experience and recapture the excess bad debt reserve accumulated in tax years after 1986. The related amount of deferred tax liability which must be recaptured is $855,000 and is payable over a six year period beginning no later than 1998. NOTE 7 - Deposits The aggregate amount of certificates of deposit with a balance of $100,000 or more was $26,099,900 at December 31, 1996 and $23,107,687 at December 31, 1995. At December 31, 1996, scheduled maturities of certificates of deposit were as follows for the years ended December 31: 1997 $127,112,424 1998 21,515,026 1999 3,795,951 2000 1,198,423 2001 and thereafter - ------------ $153,621,824 ============ NOTE 8 - Borrowed Funds Borrowed funds is summarized below as of the dates indicated:
1996 1995 ----------- ---------- Repurchase agreements ........................ $ 3,993,467 $ 2,403,347 5.75% FHLB advance, due June 30, 1997 ........ 7,000,000 -- Other ........................................ 1,267,040 735,482 ----------- ----------- Total ...................................... $12,260,507 $ 3,138,829 =========== ===========
Repurchase agreements generally mature within one year and are secured by FHLMC participation certificates or U.S. government securities, under the Company's control. Information concerning these retail repurchase agreements are summarized as of the dates indicated:
1996 1995 ---------- ---------- Ending balance ..................................... $3,993,467 $2,403,347 Average balance during the year .................... 3,599,183 1,592,978 Average interest rate during the year .............. 5.27% 5.65% Maximum month-end balance during the year .......... 5,419,296 2,403,347 Securities underlying the agreements at year end: Carrying value .................................... $5,572,107 $3,363,545 Fair value ........................................ 5,558,621 3,538,432
NOTE 9 - Employees' Benefit Plans The Company maintains a Profit Sharing Plan and Trust for all employees who meet the plan qualifications. Employees are eligible to participate in the Employees' Profit Sharing Plan and Trust if they are 21 years of age or older and have completed one year of employment with more than 1,000 hours of service to the Company. The plan is noncontributory on the part of the employee. Contributions to the Employees' Profit Sharing Plan and Trust are made at the discretion of the Company's Board of Directors. Contributions during the year ended December 31, 1996 were based on 9.0% of the participants' total compensation excluding incentives. Participants in the plan become 100% vested upon completion of five years of service. The benefit plan expense amounted to $185,417 for the year ended December 31, 1996, $203,246 for the year ended December 31, 1995 and $172,140 for the year ended December 31, 1994. In addition, the Company maintains an Unqualified Deferred Compensation Plan. The purpose of the Plan is to provide a means for the payment of deferred compensation to a select group of key senior management employees of the Company. The Plan expense amounted to $2,868 for the year ended December 31, 1996 and $3,838 for the year ended December 31, 1995. No expense was incurred for the year ended December 31, 1994. The Company also maintains an Employee Stock Ownership Plan (ESOP). Eligibility and vesting requirements for the ESOP are the same as those for the Profit Sharing Plan and Trust. Contributions to the ESOP are made at the discretion of the Company's Board of Directors. No contributions to the ESOP were made during the year ended December 31, 1996 and 1995. Contributions during the year ended December 31, 1994 were based on 1.0% of the participants total compensation excluding incentives. The ESOP held 572 shares of the Company's common stock as of December 31, 1996, all of which have been allocated to participants. The ESOP expense amounted to $0, $0 and $19,377 for the year ended December 31, 1996, 1995 and 1994, respectively. NOTE 10 - Defined Benefit Postretirement Plan The Company sponsors a defined benefit postretirement plan that provides comprehensive major medical benefits to all eligible retirees. Eligible retirees are those who have attained age 65, have completed at least 18 years of service and are eligible for coverage under the employee group medical plan as of the date of their retirement. Spouses of eligible retirees are covered if they were covered as of the employee's date of retirement. Surviving spouses are covered if they were covered at the time of the retiree's death. Dependent children of eligible retirees are generally covered to the later of age 19 or until the child ceases being a full-time student. Surviving dependent children are subject to the same eligibility restrictions if they were covered at the time of the retiree's death. The Company pays 50% of any future premium increases for retiree medical coverage. Retirees pay 100% of the premiums for all dependent medical coverage. The following table sets forth a reconciliation of the funded status of the plan with the amount reported in the Company's consolidated balance sheet as of the dates indicated:
1996 1995 -------- -------- Accumulated postretirement benefit obligation: Retirees ............................................ $ 63,845 $ 71,841 Fully eligible active plan participants ............. -- -- Other active plan participants ...................... 67,970 46,583 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets and accrued postretirement benefit expense .............. $131,815 $118,424 ======== ========
21 Net periodic postretirement benefit expense for the periods indicated included the following components:
1996 1995 1994 -------- -------- -------- Service cost-benefits attributed to service during the period ......... $ 3,917 $ 3,518 $ 6,205 Interest cost on accumulated postretirement benefit obligation .... 9,474 5,839 12,105 Amortization of unrecognized net gain ............................. (5,202) -- -- ------- -------- ------- Net periodic postretirement benefit expense....................... $ 8,189 $ 9,357 $18,310 ======== ======== =======
For measurement purposes, an 11.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the fiscal year ended December 31, 1996, dropping to an annual rate of 5.5% after 6 years. The health care cost trend rate assumption has a significant effect on the amounts reported. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8%. NOTE 11 - Regulatory Capital The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. At year end, capital levels (in millions) for the Company and the Bank were substantially the same. Actual capital levels, minimum required levels and levels needed to be classified as well capitalized for the Company are summarized below:
Minimum Required To Be Well Capitalized Minimum Required Under Prompt for Capital Corrective Actual Adequacy Purposes Action Regulations --------------- ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1996 Total capital (to risk-weighted assets)...... $30.2 16.0% $15.1 8.0% $18.9 10.0% Tier 1 capital (to risk-weighted assets)..... $27.8 14.7% $ 7.6 4.0% $11.3 6.0% Tier 1 capital to total assets. $27.8 9.3% $ 9.0 3.0% $15.0 5.0% 1995 Total capital (to risk-weighted assets)...... $29.4 17.1% $13.8 8.0% $17.2 10.0% Tier 1 capital (to risk-weighted assets)..... $27.2 15.8% $ 6.9 4.0% $10.3 6.0% Tier 1 capital to total assets. $27.2 9.7% $ 8.4 3.0% $14.0 5.0%
The Company and the Bank were categorized as well capitalized at December 31, 1996. The Company's ability to pay dividends is entirely dependent upon the Bank's ability to pay dividends to the Company. Under Indiana law, the Bank may pay dividends, no more often than quarterly, to the extent of its undivided profits (less losses, bad debts and expenses). However, the Indiana Department of Financial Institutions approval is required to pay dividends in any year in excess of the Bank's net profits for the current year and the prior two years. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in the light of the financial condition of the Bank. NOTE 12 - Stock Option Plan The Board of Directors has adopted the 1994 Stock Option and Incentive Plan (the "Incentive Plan"), which was approved by shareholders at the 1994 annual meeting. Pursuant to the Incentive Plan, an aggregate of 60,000 shares of the Company's common stock were reserved for issuance in respect of incentive awards granted to officers and other employees of the Company and the Bank. Awards granted under the Incentive Plan may be in the form of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, or non-incentive stock options or restricted stock. The purposes of the Plan are to attract and retain the best available personnel, to provide additional incentives for all employees and to encourage their continued employment by facilitating employees' purchases of an equity interest in the Company. Effective upon the July 31, 1994 holding company formation, all options then outstanding under the Bank's prior stock option plan became options to purchase an equal number of shares of the Company's common stock under the Incentive Plan, on the same terms. Financial Accounting Standard No. 123, which became effective for 1996, requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans. No compensation cost was recognized for stock options during 1996 and 1995.
1996 1995 ------------- -------------- Net income as reported $2,188,662 $3,101,203 Pro forma net income 2,182,421 3,095,782 Earnings per share as reported $1.59 $2.25 Pro forma earnings per share $1.58 $2.25
In future years, the pro forma effect of not applying this standard is expected to increase as additional options are granted. Information about option grants is provided on the following schedule. 22
Weighted-average Number Weighted-average fair value of options exercise price of grants ---------- ---------------- ---------------- Outstanding, January 1, 1994 ....... 13,116 $ 8.66 $ Granted ............................ -- -- -- Exercised .......................... 3,792 4.94 Forfeited .......................... -- -- Expired ............................ 100 2.50 ------ Outstanding, December 31, 1994 ..... 9,224 10.29 Granted ............................ 14,500 21.25 2.53 Exercised .......................... 1,352 10.30 Forfeited .......................... -- -- Expired ............................ -- -- ----- Outstanding, December 31, 1995 ..... 22,372 17.39 Granted ............................ 3,400 27.00 2.06 Exercised .......................... 158 12.88 Forfeited .......................... -- -- Expired ............................ -- -- ------ Outstanding, December 31, 1996 ..... 25,614 18.70 ======
Options exerciseable at year-end are as follows. Number Weighted-average of options exercise price ------------- ----------------- 1994 9,224 $10.29 1995 7,912 $10.35 1996 7,794 $10.35 At December 31, 1996, options outstanding were as follows: Number of options 25,614 Range of exercise price $9.31 - $27.00 Weighted-average exercise price $18.70 Weighted-average remaining option life 5.8 years For options now exerciseable: Number 7,794 Weighted-average exercise price $10.35 The fair value of options granted during 1996 and 1995 is estimated using the following weighted-average information: risk-free interest rate of 5.42% and 7.75%, expected life of 7 years, expected volatility of stock price of 5.45%, and expected dividends of 4.26% and 5.18% per year. NOTE 13 - Related Party Transactions The Bank had aggregate loans outstanding to directors and executive officers (with individual balances exceeding $60,000) of $1,763,338 at December 31, 1996 and $1,530,198 at December 31, 1995. For the year ended December 31, 1996, the following activity occurred on these loans: Aggregate balance - December 31, 1995.. $ 1,530,198 New loans ............................. 734,244 Repayments ............................ (501,104) ---------- Aggregate balance - December 31, 1996.. $ 1,763,338 =========== NOTE 14 - Commitments and Contingencies The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments which include commitments to make loans and standby letters of credit are not reflected in the accompanying consolidated financial statements. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to originate loans and standby letters of credit is represented by the contractual amount of those instruments. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items. Since commitments to make loans may expire without being used, the amounts does not necessarily represent future cash commitments. The Company had outstanding commitments to originate loans as follows:
Fixed Variable Rate Rate Total ----------- ----------- ----------- December 31, 1996: Real estate ................. $ 6,346,296 $12,606,397 $18,952,693 Consumer loans .............. -- 280,578 280,578 Commercial business ......... -- 14,878,263 14,878,263 ----------- ----------- ----------- Total ...................... $ 6,346,296 $27,765,238 $34,111,534 =========== =========== =========== Fixed Variable Rate Rate Total ----------- ----------- ----------- December 31, 1995: Real estate ................. $ 4,588,504 $12,107,386 $16,695,890 Consumer loans .............. -- 6,324 6,324 Commercial business ......... -- 10,455,970 10,455,970 ----------- ----------- ----------- Total ...................... $ 4,588,504 $22,569,680 $27,158,184 =========== =========== ===========
The $6,346,296 in fixed rate commitments outstanding at December 31, 1996 had interest rates ranging from 7.00% to 9.50%, for a period not to exceed forty-five days. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At December 31, 1996, the Company had standby letters of credit totaling $519,350. The Company evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral obtained may include accounts receivable, inventory, property, land or other assets. The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 15 - Fair Values of Financial Instruments SFAS No. 107 "Disclosure about Fair Value of Financial Instruments" prescribes that the Company disclose the estimated fair value of its financial instruments. The following table shows those values and the related carrying values as of the dates indicated. Items which are not financial instruments are not included. 23
December 31, 1996 ---------------------------------- Carrying Estimated Value Fair Value ------------- -------------- Cash and cash equivalents ............ $ 6,508,822 $ 6,509,000 Securities held-to-maturity .......... 40,023,992 39,909,000 Loans receivable, net ................ 241,808,878 241,702,000 Demand and savings deposits .......... (102,797,853) (102,798,000) Certificates of deposit .............. (153,621,824) (153,787,000) Borrowed funds ....................... (12,260,507) (12,261,000) December 31, 1995 ---------------------------------- Carrying Estimated Value Fair Value ------------- -------------- Cash and cash equivalents ............ $ 14,943,704 $ 14,944,000 Securities held-to-maturity .......... 38,001,081 38,279,000 Loans receivable, net ................ 219,463,019 220,071,000 Demand and savings deposits .......... (95,937,691) (95,938,000) Certificates of deposit .............. (152,006,998) (152,283,000) Borrowed funds ....................... (3,138,829) (3,139,000)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1996 and 1995. The estimated fair value for cash and cash equivalents is considered to approximate cost. The estimated fair value for securities is based on quoted market values for the individual securities or equivalent securities. The estimated fair value for commercial loans is based on estimates of the difference in interest rates the Company would charge the borrowers for similar such loans with similar maturities made at December 31, 1996 and 1995, applied for an estimated time period until the loan is assumed to reprice or be paid. The estimated fair value for other loans is based on estimates of the rate the Company would charge for similar such loans at December 31, 1996 and 1995, applied for the time period until estimated repayment. The estimated fair value for demand and savings deposits is based on their carrying value. The estimated fair value for certificates of deposits is based on estimates of the rate the Company would pay on such deposits at December 31, 1996 and 1995, applied for the time period until maturity. The estimated fair value for borrowed funds is considered to approximate cost. The estimated fair value of other financial instruments, including accrued interest receivable and payable, and off-balance sheet loan commitments approximate cost and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of such items at December 31, 1996 and 1995, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1996 and 1995 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These included, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the earnings potential of the Bank's trust department, the trained work force, customer goodwill and similar items. NOTE 16 - Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data are summarized below as follows: Year ended December 31, 1996:
March 31, June 30, September 30, December 31, 1996 1996 1996 1996 ----------- ----------- ------------ ------------ Total interest income ..... $ 5,446,966 $ 5,531,626 $ 5,633,226 $ 5,725,091 Total interest expense .... 2,808,979 2,777,254 2,817,835 2,882,579 ----------- ----------- ----------- ----------- Net interest income ....... 2,637,987 2,754,372 2,815,391 2,842,512 Provision for loan losses . 15,000 17,500 22,500 30,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses. 2,622,987 2,736,872 2,792,891 2,812,512 Total noninterest income .. 177,502 164,690 166,525 173,124 Total noninterest expense . 1,628,882 1,631,732 3,198,854 1,579,973 ----------- ----------- ----------- ----------- Income before income taxes ............ 1,171,607 1,269,830 (239,438) 1,405,663 Income tax expenses ...... 466,600 506,600 (91,650) 537,450 ----------- ----------- ----------- ----------- Net income ............... $ 705,007 $ 763,230 $ (147,788) $ 868,213 =========== =========== =========== =========== Earnings per share ....... $ 0.51 $ 0.56 $ (0.11) $ 0.63 =========== =========== =========== ===========
Year ended December 31, 1995:
March 31, June 30, September 30, December 31, 1995 1995 1995 1995 ---------- ---------- ----------- ---------- Total interest income ...... $5,153,802 $5,270,477 $5,321,006 $5,377,373 Total interest expense ..... 2,368,124 2,607,615 2,729,302 2,779,168 ---------- ---------- ---------- ---------- Net interest income ........ 2,785,678 2,662,362 2,591,704 2,598,205 Provision for loan losses .. 27,500 17,500 15,000 20,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses . 2,758,178 2,645,362 2,576,704 2,578,205 Total noninterest income ... 165,800 144,842 156,506 218,291 Total noninterest expense .. 1,536,817 1,550,786 1,537,081 1,491,601 ---------- ---------- ---------- ---------- Income before income taxes .............. 1,387,161 1,239,418 1,196,129 1,304,895 Income tax expenses ........ 553,575 493,425 476,600 502,800 ---------- ---------- ---------- ---------- Net income ................. $ 833,586 $ 745,993 $ 719,529 $ 802,095 ========== ========== ========== ========== Earnings per share ......... $ 0.61 $ 0.54 $ 0.53 $ 0.58 ========== ========== ========== ==========
24 NOTE 17 - Parent Company Only Statements
NorthWest Indiana Bancorp Condensed Balance Sheet December 31, -------------------------- 1996 1995 ----------- ---------- Assets Cash on deposit with Peoples Bank .............. $ 52,877 $ 40,530 Investment in Peoples Bank ..................... 27,782,574 27,183,243 Dividends receivable from Peoples Bank ......... 445,000 380,000 Other assets ................................... 4,750 14,700 ----------- ----------- Total assets .................................. $28,285,201 $27,618,473 =========== =========== Liabilities and stockholders' equity Dividends payable .............................. $ 441,464 $ 379,345 Other liabilities .............................. 28,500 35,000 ----------- ----------- Total liabilities ............................. 469,964 414,345 Common stock ................................... 344,899 344,859 Additional paid in capital ..................... 2,929,587 2,927,595 Retained earnings .............................. 24,540,751 23,931,674 ----------- ----------- Total stockholders' equity .................... 27,815,237 27,204,128 ----------- ----------- Total liabilities and stockholders' equity .... $28,285,201 $27,618,473 =========== ===========
NorthWest Indiana Bancorp Condensed Statements of Income
Five Months Year Ended Year Ended Ended December 31, December 31, December 31, 1996 1995 1994 ----------- ----------- ----------- Operating income Dividends from Peoples Bank ................... $ 1,625,000 $ 1,552,000 $ 787,785 Operating expenses .............. 58,669 108,823 -- ----------- ----------- ----------- Income before income taxes and equity in undistributed income of Peoples Bank ......... 1,566,331 1,443,177 787,785 Provision for income taxes ...... (23,000) (43,600) -- ----------- ----------- ----------- Income before equity in undistributed income of Peoples Bank ......... 1,589,331 1,486,777 787,785 Equity in undistributed income of Peoples Bank ......... 599,331 1,614,426 552,037 ----------- ----------- ----------- Net Income ...................... $ 2,188,662 $ 3,101,203 $ 1,339,822 =========== =========== ===========
NorthWest Indiana Bancorp Condensed Statements of Cash Flows Five Months Year Ended Year Ended Ended December 31, December 31, December 31, 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................. $ 2,188,662 $ 3,101,203 $ 1,339,822 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed net income of Peoples Bank ............ (599,331) (1,614,426) (552,037) Change in other assets .... (55,050) 4,300 (399,000) Change in other liabilities (6,500) 35,373 -- ----------- ----------- ----------- Total adjustments ........ (660,881) (1,574,753) (951,037) ----------- ----------- ----------- Net cash from operating activities . 1,527,781 1,526,450 388,785 CASH FLOWS FROM INVESTING ACTIVITIES ....... -- -- -- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ............. (1,517,466) (1,517,013) (378,785) Proceeds from issuance of capital stock ......... 2,032 13,929 7,164 ----------- ----------- ----------- Net cash from financing activities .... (1,515,434) (1,503,084) (371,621) ----------- ----------- ----------- Net change in cash .......... 12,347 23,366 17,164 Cash at beginning of year ... 40,530 17,164 -- ----------- ----------- ----------- CASH AT END OF YEAR ......... $ 52,877 $ 40,530 $ 17,164 =========== =========== ===========
NOTE 18 - Current 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 revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements has not yet been determined. 25 MARKET INFORMATION The Company's Common Stock is traded in the over-the-counter market and is quoted in the National Quotation Bureau's "Pink Sheets". The Company's stock is not actively traded. As of February 28, 1997, the Company had 1,380,846 shares of common stock outstanding, excluding fractional shares, and 593 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or "street" name through brokerage firms. Set forth below are the high and low bid prices during each quarter for the fiscal year ended December 31, 1996 and December 31, 1995. The bid prices reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Also set forth is information concerning the dividends declared by the Company during the periods reported. Note 11 to the Financial Statements describes regulatory limits on the Company's ability to pay dividends. All references to the number of shares and per share data have been restated to reflect the stock splits (see Note 1).
Per Share Prices Dividends Declared Per High Low Common Share ------ ------ ------------ Fiscal Year Ended December 31, 1996 1st Quarter $30.00 $25.50 $.275 - -------------------------------------------------------------------- 2nd Quarter 31.13 30.00 .275 - -------------------------------------------------------------------- 3rd Quarter 31.13 30.00 .275 - -------------------------------------------------------------------- 4th Quarter 31.13 31.13 .320 - -------------------------------------------------------------------- Fiscal Year Ended December 31, 1995 1st Quarter $22.50 $20.75 $.275 - -------------------------------------------------------------------- 2nd Quarter 25.00 22.50 .275 - -------------------------------------------------------------------- 3rd Quarter 25.50 25.00 .275 - -------------------------------------------------------------------- 4th Quarter 27.00 25.50 .275
- --------------------------------------------------------------------------------
MARKET PRICE PER SHARE June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 $15.63 $15.88 $21.25 $27.00 $31.13
The market price per share represents the last sales price prior to the close of the periods indicated. The Company's stock is not actively traded. At the present time the Company's stock is traded in the over-the-counter market and is quoted in the National Quotation Bureau's "Pink Sheets". ================================================================================
BOOK VALUE PER SHARE June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 $16.59 $17.37 $18.58 $19.72 $20.16
The Bank's earnings have increased the book value of the Company's stock from $16.59 at June 30, 1993 to $20.16 per share at December 31, 1996. On December 2, 1996, the Company effected a two-for-one split of its common stock. Book value per share has been restated for all periods presented to reflect the split. ================================================================================
EARNINGS PER COMMON SHARE June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993 1993 1994 1995 1996 $2.25 $1.33 $2.35 $2.25 $1.59
Earnings for 1996 totaled $2.2 million resulting in an earnings per share (EPS) of $1.59. On December 2, 1996, the Company effected a two-for-one split of its common stock. The decrease in the EPS for 1996 reflects the one-time special assessment on SAIF-assessable deposits to recapitalize SAIF. ================================================================================
5 YEAR TOTAL RETURN CRSP Market Index CRSP Bank Index Bancorp $ 227 $325 $340
The management of Northwest Indiana Bancorp is committed to maximizing shareholder value. The Company's stock performance on a total return basis compares favorably with the total returns of the CRSP (Center for Research in Securities Prices at the University of Chicago) Index for the Nasdaq Stock Market (CRSP Market Index) and for Nasdaq Bank Stocks (CRSP Bank Index). The total return is measured using both stock price appreciation and the effect of the continuous reinvestment of dividend payments. The graph shows that an initial $100 investment in the Bancorp stock on December 31, 1991, would be worth $340 on December 31, 1996. ================================================================================ PEOPLES MANAGEMENT TEAM [photo of Management Team] MANAGEMENT TEAM (l to r): Vice President, Chief Financial Officer Edward J. Furticella, Vice President, Chief Lending Officer Joel Gorelick, Senior Vice President, General Counsel, Trust Officer and Corporate Secretary Frank J. Bochnowski, Vice President for Housing Finance Daniel W. Moser, Chairman and Chief Executive Officer David A. Bochnowski and Vice President, Retail Banking Rodney L. Grove. 27 PEOPLES BOARD OF DIRECTORS [Photo of David A. Bochnowski] David A. Bochnowski Chairman and Chief Executive Officer of the Company Munster, Indiana [Photo of Gloria C. Gray] Gloria C. Gray Vice President and Treasurer of Career Development Consultants, Munster, Indiana [Photo of Jerome F. Vrabel] Jerome F. Vrabel Vice President, ED&F Man International Inc. Chicago, Illinois [Photo of James J. Crandall] James J. Crandall (right) Retired Attorney [Photo of John J. Wadas, Jr.] John J. Wadas, Jr. Dentist practicing in Munster and East Chicago, Indiana 28 [Photo of Frank J. Bochnowski and Stanley E. Mize] Stanley E. Mize (right) President of Towne & Countree Auto Sales and Co-owner of Lake Shore Ford Frank J. Bochnowski (left) Senior Vice President and Corporate Secretary [Photo of Leroy F. Cataldi] Leroy F. Cataldi President of Cataldi Prescription Shop, Dyer, Indiana [Photo of Lourdes M. Dennison] Lourdes M. Dennison Administrative Director, Dennison Surgical Corporation Merrillville, Indiana [Photo of Benjamin A. Bochnowski] [Photo of Harold G. Reuth] Benjamin A. Bochnowski (left) Advisory Director Harold G. Reuth (right) Director Emeritus 29 BRANCH OFFICES [photo of East Chicago Branch] East Chicago Branch (l to r): Veronica Perez, Malinda Caraballo, Meredith Rolewski, Manager Christopher Grencik, Raquel Avila, Delia Mata, Tia Airington and La Coiya Henderson. [photo of Dyer Branch] Dyer Branch (seated l to r): Marijo Rosellini, Brandy Bakker, (back l to r): Tracy Proffitt and Shirley Esboldt. Not pictured: Manager Jacqueline Mireles and Eileen Tobias. [photo of Woodmar Branch] Woodmar Branch (seated l to r): Denise Keilman, Elaine Chase, (back l to r): Donna Kominiak, Amber Jaeger, Nakia Dumas, Cynthia Panicucci and Assistant Vice President Barbara Zura. Not pictured: Diana Dowling. [photo of Munster Branch] Munster Branch (l to r): Carla Dohl, Joshlyne Freeman, Karen Laude and Assistant Vice President Jill Knight. Not pictured: Nicole Lammertin, Scott Matucha and Maria Rubio. [photo of Merrillville/Taft Branch] Merrillville/Taft Branch (front): Mary Lynne Urbanski, (back l to r): Heather Sharkey, Tinisha Greenwell, Kimberly Hartlerode and Assistant Vice President Marilyn Repp. Not pictured: Betty Rachowicz and Sandra Sigler. [photo of Schererville Branch] Schererville Branch (seated l to r): Cindy Miles, Nicole Lopez, (back l to r): Mettie Clark, Manager Shannon Franko, Marilyn Germek and Julie Baker. Not pictured: Robyn Towasnicki and Kelly Triezenberg. [photo of Merrillville/Broadway Branch] Merrillville/ Broadway Branch (l to r): Wendy Glover, Manager Heather Mayden, Ave Colby, Kathy Wenzel and Colleen Wigmore. Not pictured: Sarah Furman. 30 CORPORATE DEPARTMENTS [photo of Administration Department] Administration (l to r): Irene Calvin, Assistant Vice President Linda Kollada, Keith Koziatek, Stacy Januszewski and Genetra Bailey. [photo of Operations Department] Operations (front l to r): Suzanne Allred, Susan Meyer, Mary Lorance, Susan Wojno, Rhoda Bolden, Michaelene Smith, (back l to r): Kevin Crump, Julie Riese, Deborah Moricz, Tanya Mathews, Assistant Vice President Robert Lowry, Assistant Vice President Arlene Wohadlo and Charlotte Conn. Not pictured: Theresa Johnson. [photo of Trust Department] Trust Department (l to r): Audrey Tredway, Lisa Ortiz, Michelle Manchak, Assistant Vice President Stephan Ziemba, Marie Muniz, Joyce Barr and Earlene Malachinski. [photo of Mortgage Loan Department] Mortgage Loans (seated l to r): Linda Banis, Sylvia Magallanez, Joy Pejkovich, Elizabeth Ehlin, (middle l to r): Karen Sulek, Barbara Grothaus, Melanie Wilkinson, Lucy Cantu, Laura Amptmeyer, (back l to r): Assistant Vice President Robert Soohey, Tricia Kluga, Margaret Travis, Assistant Vice President Mary Mulroe, Patricia Mrvan and Marvin Tucker. [photo of Commercial Loan Department] Commercial Loan Department (front l to r): Janet Knoerzer, Ruth Oros, (center l to r): Jennifer Brown, Bonnie Kistler, (back l to r): Assistant Vice President Terry Gadberry and Todd Scheub. [photo of Consumer Loan Department] Consumer Loan Department (seated): Dawn Shearer, (l to r): Sharon Vacendak, Manager James Lehr and Clovese McGhee. 31 CORPORATE INFORMATION Corporate Headquarters 9204 Columbia Avenue Munster, Indiana 46321 Telephone 219/836-9690 Peoples Bank SB Officers David A. Bochnowski.. ...Chairman and Chief Executive Officer* Joel Gorelick..... .......Vice President, Chief Lending Officer* Edward J. Furticella ....Vice President, Chief Financial Officer* Frank J. Bochnowski .....Senior Vice President, General Counsel, Trust Officer and Corporate Secretary* Daniel W. Moser.............Vice President for Housing Finance Rodney L. Grove.............Vice President, Retail Banking * Holds similar office with NorthWest Indiana Bancorp Directors of NorthWest Indiana Bancorp and Peoples Bank SB David A. Bochnowski Chairman and Chief Executive Officer of the Company Munster, Indiana Leroy F. Cataldi President of Cataldi Prescription Shop, Dyer, Indiana Gloria C. Gray Vice President and Treasurer of Career Development Consultants, Munster, Indiana Lourdes M. Dennison Administrative Director, Dennison Surgical Corporation, Merrillville, Indiana John J. Wadas, Jr. Dentist practicing in Munster and East Chicago, Indiana Jerome F. Vrabel Vice President, ED&F Man International Inc., Chicago, Illinois, a commodities brokerage firm on the Chicago Board of Trade James J. Crandall Retired Attorney Stanley E. Mize President of Towne & Countree Auto Sales and Co-owner of Lake Shore Ford Advisory Director Benjamin A. Bochnowski Directors Emeriti Harold G. Rueth Albert J. Lesniak Peoples Bank SB Management Personnel Accounting Robert T. Lowry, Assistant Vice President, Controller Arlene M. Wohadlo, Assistant Vice President Branches Shannon E. Franko, Schererville Christopher A. Grencik, East Chicago Jill M. Knight, Assistant Vice President, Munster Heather M. Mayden, Merrillville (Broadway) Jacqueline Mireles, Dyer Marilyn K. Repp, Assistant Vice President, Merrillville (Taft Street) Barbara J. Zura, Assistant Vice President, Woodmar Business Development Averill C. Colby, III Commercial Lending Terry R. Gadberry, Assistant Vice President Todd M. Scheub Consumer Lending James P. Lehr Sharon V. Vacendak Housing Finance Robert J. Soohey, Assistant Vice President Sylvia Magallanez Marvin O. Tucker Human Resources Linda L. Kollada, Assistant Vice President Information Services Tanya A. Mathews Loan Administration Mary D. Mulroe, Assistant Vice President Staff Internal Auditor Stacy A. Januszewski Trust Stephan A. Ziemba, Assistant Vice President Stock Transfer Agent The Bank acts as the transfer agent for the Company's common stock. Independent Auditors Crowe, Chizek and Company LLP 330 East Jefferson Boulevard P. O. Box 7 South Bend, Indiana 46624 Special Legal Counsel Baker & Daniels 300 North Meridian Street Suite 2700 Indianapolis, Indiana 46204 Annual Shareholders Meeting The Annual Meeting of Shareholders of NorthWest Indiana Bancorp will be held at the Wicker Park Social Center, Rts. 41 & 6, Highland, Indiana, on Thursday, April 17, 1997 at 8:30 a.m. A COPY OF THE COMPANY'S FORM 10-K, INCLUDING FINANCIAL STATEMENT SCHEDULES AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, NORTHWEST INDIANA BANCORP, 9204 COLUMBIA AVENUE, MUNSTER, INDIANA 46321. 32 Inside Back Cover is blank NORTHWEST INDIANA - ------------------------ BANCORP CORPORATE HEADQUARTERS, 9204 Columbia Avenue Munster, Indiana 46321 219/836-9690 [PEOPLES BANK LOGO] EAST CHICAGO, 4901 Indianapolis Blvd., 397-5010 HAMMOND, 7120 Indianapolis Blvd., 844-7210 DYER, 1300 Sheffield Avenue, 322-2530 MUNSTER, 9204 Columbia Avenue, 836-9690 SCHERERVILLE, 141 W. Lincoln Highway, 865-4300 MERRILLVILLE, 7915 Taft Street, 769-8452 8600 Broadway, 685-8600 FDIC Insured