1997
Annual
MEETING THE Report
CHALLENGE -----------------------------
OF COMMUNITY BANKING
[Photo of
Business
Customer]
[Photo of
Community [Photo of
Project] Mortgage
Customer]
[Photo of
Checking
Customer] [Photo of
Business
Customer]
[Photo of
Business
Customer ] [Photo of
Trust
Customer]
[NorthWest Indiana Bancorp Logo]
MEETING THE
CHALLENGE
OF COMMUNITY BANKING
To Our Customers and Shareholders:
Since 1910, Peoples Bank has been meeting the challenge of community banking.
The Bank's success and now that of our holding company, the NorthWest Indiana
Bancorp, has been linked for eighty seven years to the progress of our
community.
As a community bank, we are mindful of the challenge posed by larger
regional and of Community Banking national financial institutions. Competitive
rates and service, while important, are not the only factors in a customer's
banking decision. Customers also want to do business with people they know,
trust, and who are empowered to make decisions at the local level.
[Photo of
Home]
1997
Annual
Report
-----------------------------
[Photo of
Business
Customer]
"People's Bank treats me the way I want to be treated...just like I strive to
treat my customers at River Oaks Lincoln Mercury. Whether it's a business
matter, personal account or trust department issue, Peoples Bank can give you
the personal touch that only a smaller bank can provide."
Fran Hoffman River
Oaks Lincoln Mercury
[Photo of
Mortgage
Customer]
Left to right:
Sylvia Magallanez,
Peoples Mortgage Loan Officer and
Pamelyn and Robert Robinson and Caesar
"Thirty years ago Peoples gave us a loan on our home. We got wonderful service
and have enjoyed a great relationship with them. So when it came time to move
and purchase a new home, we knew we wanted to stay with Peoples, and the choice
has been a great one!"
Robert and Pamelyn Robinson
Mortgage Customers
1
[Photo of
Business
Customer]
In my role as Clerk-Treasurer for the Town of Schererville, I have to do the
best I can investing the Town's dollars. Peoples Bank meets that need by
providing competitive rates on our checking and sweep accounts, excellent
customer service, and up to date products like PC Banking. Peoples Bank made it
apparent they are extremely interested in helping the Town with its banking
business."
Janice Malinowski
Schererville Clerk Treasurer
[Aerial View of
Barrington
Ridge Estates]
"It's a pleasure doing business with a community bank like Peoples. They
provided development financing for my Barrington Ridge residential subdivision
project and were able to give me the answers and solutions I needed...without
having to call out of town like the 'big banks' do. I think the world of them."
Charles "Bud" Grainer
Builder and Developer
Barrington Ridge Estates
Our mission is to be the leading provider of high quality deposit,
loan, and trust products and services to our customers in each of the
communities we serve. Our future success depends on our ability to redeploy our
customers' deposits into housing, consumer, and small business credit which
expands the local economy and improves the quality of life in our communities.
Banking is a privilege, not a right. We are grateful
for our banking charter and for the umbrella offered to our depositors by
federal deposit insurance. We manage our business, however, as if our reputation
for prudent banking practices was the dominant factor in the banking
relationship decision.
Our capital ratio stood at 9.2% at the end of 1997, a strong figure
substantially exceeding our regulatory requirement. The Bancorp reported record
earnings of $3.4 million during 1997. Our return on assets (ROA), a key measure
of financial performance, was 1.13%.
2
High asset quality stands out as another indicator of our financial
strength. At year end our ratio of non-performing loans to total loans was
0.44%, a figure well below industry norms. Despite this low figure, the
Bancorp's allowance for loan losses stood at 1.13% of outstanding loans, a
reserve position designed to insulate our performance in the event of change in
the business cycle.
Meeting the challenge of community banking requires an understanding of
our community's credit needs and a commitment to their funding. During 1997, our
loan portfolio grew $27.5 million or 11.2% which reflects the high level of
confidence consumers and business have in our local economy as well as the
ability of our loan officers to provide timely responses to customers' loan
applications. Guided by our strong underwriting standards, our loan officers
respond to customers without resorting to the bureaucratic process of some of
our larger competitors.
[Photo of
Business
Customer]
"Peoples Bank goes beyond the lender-borrower relationship. They were a catalyst
in the creation of our new 46,000 sq. ft. facility in Portage, and provided all
of the support we needed to benefit from a 504 SBA loan program. Peoples
enthusiastically embraced our project. Now we can give something back to our
community through the creation of new jobs and a state-of-the-art facility."
Dave Lawson
Harbor Motors
[Photo of
Business
Customer]
"Peoples Bank has been there for me and my company when we've needed it most.
When an opportunity to advance my commercial heat treating company materialized,
People's Bank quickly responded and provided support. People's has shown faith
in me and my business decisions...and we're both enjoying the benefits of a
great relationship."
Mary Stogner
Tri-State Metal
3
[Photo of
Checking
Customer]
"If you're paying for checking you"re not banking at Peoples."
Brian Johnson
Munster High School Senior
[Photo of
Trust
Customer]
"Meeting the customer's needs is what Peoples Bank is all about. When I bring my
clients to Peoples Bank, I'm confident the Trust Department has the knowledge
and expertise to tailor the right financial vehicle to suit their needs."
Darnail Lyles
Attorney
The community banking challenge includes providing quality services to
our deposit customers. Our philosophy permits the ability to work one on one
with a teller at no extra charge. In addition to old fashion lobby services we
constantly upgrade our technological capabilities so we can offer
non-traditional banking including customer access to their accounts through
telephone and on-line banking along with ATM and VISA debit cards.
As a community bank we are also challenged to provide trust services to
our customers. Our effort encompasses the administration of estates and
guardianships, trusts, including land trusts, IRA and Keogh investments, and
investment agency accounts for our commercial customers. Our trust department
emphasizes personalized services and a high degree of customer satisfaction
which resulted in a 14.1% increase in the book value of assets to $75.2 million
at the end of 1997. At year end the market value of trust assets was $129.2
million.
4
All banks, not just community banks, face the challenge of the year
2000 problem and whether our computers and those of our vendors and customers
can accurately read the date associated with the beginning of the next century.
Our board of directors has approved an action plan which has already assessed
our current position and we are prepared to implement the steps necessary to
avoid any interruption of our operations because of the century date change. The
costs of this plan are not expected to have a material impact on our operations.
Meeting the expectations of our shareholders provides a distinct
challenge for a community bank. The costs related to expanding our business are
constantly weighed against the return alternative investments would bring to our
owners. For example, our new Merrillville Broadway office increased our
operating expenses, but our deposits there exceeded $10 million last year, which
has positive long run implications for our bottom line. Likewise, our investment
in technology was more than offset by a 56.3% increase in non-interest income
during 1997.
[Photo of
Business
Customer]
"Since April 1997, we have dedicated significant resources to solving the year
2000 computer issues and are doing everything possible to prevent interruption
in our services or business operations."
Tanya Mathews
Peoples Bank, Manager
Information Services
[Photo of
Business
Customer]
Left to right:
Ernesto Rosa,
and Steve Niedert
"I've worked long, hard hours my whole life, and always dreamed of rewarding
myself with a Corvette. With easy financing and low interest rates, Peoples Bank
made that dream become a reality for me."
Ernesto Rosa
Car Loan Customer
[Photo of
Business
Outdoor Sign]
"People's Bank was instrumental in financing my new business. All of the
employees have provided prompt and professional service, and with a number of
convenient banking locations throughout Lake County, Peoples meets all of my
business and banking needs."
Steve A. Niedert
U.S.A. Corvette
& Accessories
5
[photo of
community
project]
"For over 27 years, Peoples Bank has been there for us. When no one else would
take a mortgage for our home in the Horace Mann area, Peoples took care of it.
Now our relationship with them has grown and they've stepped up to support
programs like the HMANIO project. They've really become one of the champions of
HMANIO, Inc. We truly value our relationship."
Finis Springer
Executive Director, HMANIO, CDC
Gary, Indiana
Left to right:
Darnell N. Bolton,
Finis Springer,
Rosie Thomas
and Virgil Ashley
[Photo of
Business
Customer]
"We at Ogden Engineering have been a satisfied customer of Peoples for years.
Whether we needed an extended conventional credit line or assurance in securing
an SBA import/export line of credit, Peoples has been there to advise and assist
us with all of our financial needs."
L. Neal Bannister
Ralph Ogden
Ogden Engineering,
Northwest Indiana Exporter of the Year
Left to right:
Ralph Ogden,
and
L. Neal Bannister
Shareholders should be pleased that our assets grew 6.7% to $320
million at the end of 1997. Our return on equity (ROE) was a respectable 11.87%
during the year and the marketplace rewarded our investors with a 35% increase
in our stock price to $42.13 at year end. The board of directors increased the
total dividend paid to shareholders to $1.8 million in 1997 compared to $1.5
million in 1996, an increase of 16.5%.
In the final analysis, the real challenge of community banking is to
understand, relate, and respond to the people we serve. Each year we support the
banking needs of our consumer and commercial customers and we especially
appreciate the opportunity to work with families who have done business with the
Peoples Bank for two, three, and even four generations.
We look forward to the opportunity to work with you in 1998.
/s/ David A. Bochnowski
Sincerely,
David A. Bochnowski
Chairman and Chief Executive Officer
6
Meeting the
Challenge
of Community Banking
1997
Annual
Report
Financial
Information
"We manage our
business...as if our
reputation for prudent banking practices
was the dominant
factor in the banking
relationship decision."
[NorthWest Indiana
Bancorp Logo]
7
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands of Dollars, except Per Share Data)
Fiscal Year Ended December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 (1) 1993
------------ ------------ ------------ ------------ ------------ ------------
Statement of Income:
Total interest income....... $ 23,669 $ 22,337 $ 21,123 $ 19,122 $ 9,360 $ 19,035
Total interest expense...... 11,721 11,287 10,484 8,079 4,015 8,485
------------ ------------ ------------ ------------ ------------ ------------
Net interest income......... 11,948 11,050 10,639 11,043 5,345 10,550
Provision for loan losses... 221 85 80 145 319 711
------------ ------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses. 11,727 10,965 10,559 10,898 5,026 9,839
------------ ------------ ------------ ------------ ------------ ------------
Noninterest income.......... 1,066 682 685 493 253 749
Noninterest expense......... 7,154 8,039 6,117 6,031 3,011 5,378
------------ ------------ ------------ ------------ ------------ ------------
Net noninterest expense..... 6,088 7,357 5,432 5,538 2,758 4,629
------------ ------------ ------------ ------------ ------------ ------------
Income tax expenses......... 2,223 1,419 2,026 2,132 902 2,158
Cumulative effect of changes
in accounting............. - - - - 450 -
------------ ------------ ------------ ------------ ------------ ------------
Net income.................. $ 3,416 $ 2,189 $ 3,101 $ 3,228 $ 1,816 $3,052
============ ============ ============ ============ ============ ============
Earnings per common share... $2.47 $1.59 $2.25 $2.35 $1.33 $2.25
Earnings per common share,
assuming dilution......... $2.45 $1.58 $2.24 $2.33 $1.32 $2.19
Cash dividends declared
per common share.......... $1.28 $1.15 $1.10 $1.10 $0.50 $0.80
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 1993
------------ ------------ ------------ ------------ ------------ ------------
Balance Sheet:
Total assets................ $ 319,609 $299,419 $ 280,911 $266,343 $ 251,481 $246,180
Loans receivable............ 272,213 244,696 222,293 221,930 204,205 202,083
Investment securities....... 29,362 40,024 38,001 33,678 33,639 28,910
Deposits.................... 272,090 256,420 247,945 234,639 222,945 219,133
Borrowed funds.............. 14,628 12,261 3,139 3,151 2,087 993
Total stockholders' equity.. 29,482 27,815 27,204 25,606 23,874 22,691
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 (1) (2) 1993
------------- ------------ ------------ ------------- ------------- ------------
Interest Rate Spread During Period:
Average effective yield on
loans and investment
securities................ 8.16% 7.98% 8.06% 7.66% 7.75% 8.24%
Average effective cost of
deposits and borrowings... 4.32% 4.32% 4.33% 3.48% 3.63% 4.04%
------------ ------------ ------------ ------------ ------------ ------------
Interest rate spread........ 3.84% 3.66% 3.73% 4.18% 4.12% 4.20%
============ ============ ============ ============ ============ ============
Net interest margin.............. 3.94% 3.79% 3.91% 4.25% 4.27% 4.44%
Return on assets................. 1.13% 0.75% 1.14% 1.24% 1.45% 1.28%
Return on equity................. 11.87% 7.90% 11.74% 13.04% 15.51% 14.00%
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 1993
------------- ------------ ------------ ------------- ------------- ------------
Tier I capital to
risk-weighted assets...... 13.8% 14.7% 15.8% 15.9% 15.5% 14.9%
Total capital to
risk-weighted assets...... 15.0% 16.0% 17.1% 17.2% 16.8% 16.1%
Tier I capital leverage ratio 9.2% 9.3% 9.7% 9.6% 9.5% 9.2%
Allowance for loan losses to
total loans............... 1.13% 1.18% 1.27% 1.24% 1.26% 1.15%
Allowance for loan losses to
non-performing loans...... 257.84% 247.40% 268.25% 176.46% 454.75% 382.34%
Non-performing loans to
total loans............... 0.44% 0.48% 0.47% 0.70% 0.27% 0.30%
Total loan accounts......... 4,764 4,404 4,606 4,671 4,654 4,661
Total deposit accounts...... 25.443 24,666 23,730 22,738 21,204 21,330
Total branches (all full service) 7 7 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.
8
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------ ------------ ------------
$ 19,744 $ 20,709 $ 20,042 $ 18,313
10,698 12,896 13,145 11,872
------------ ------------ ------------ ------------
9,046 7,813 6,897 6,441
665 238 130 188
------------ ------------ ------------ ------------
8,381 7,575 6,767 6,253
------------ ------------ ------------ ------------
726 757 622 854
4,795 4,625 4,357 4,057
------------ ------------ ------------ ------------
4,069 3,868 3,735 3,203
------------ ------------ ------------ ------------
1,849 1,505 992 1,024
- - - -
------------ ------------ ------------ ------------
$ 2,463 $ 2,202 $ 2,040 $ 2,026
============ ============ ============ ============
$1.85 $1.65 $1.54 $1.55
$1.75 $1.58 $1.47 $1.49
$0.68 $0.22 $0.15 $0.23
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------ ------------ ------------
$227,183 $ 220,053 $ 208,796 $ 192,269
183,366 177,421 173,244 156,925
28,910 25,160 24,983 24,885
202,823 196,880 188,621 174,729
609 799 604 -
20,667 18,972 16,955 14,986
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------- ------------ ------------
9.20% 10.08% 10.28% 9.85%
5.39% 6.75% 7.25% 6.86%
------------ ------------ ------------ ------------
3.81% 3.33% 3.03% 2.99%
============ ============ ============ ============
4.04% 3.80% 3.42% 3.36%
1.10% 1.03% 1.01% 1.06%
12.38% 12.31% 12.82% 14.51%
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------- ------------ ------------
14.7% 14.1% 13.1% N/A
15.9% 14.8% 13.7% N/A
9.1% 8.6% 8.1% 7.8%
0.88% 0.53% 0.42% 0.43%
231.51% 117.96% 155.93% 129.81%
0.38% 0.45% 0.27% 0.33%
4,755 4,793 4,428 4,907
20,834 21,200 21,492 20,932
6 6 6 5
Business
NorthWest Indiana Bancorp (the Bancorp) is a bank holding company
registered with the Board of Governors of the Federal Reserve System. Peoples
Bank SB (the Bank), an Indiana savings bank, is a wholly owned subsidiary of the
Bancorp. The Bancorp has no other business activity other than being the holding
company for Peoples Bank SB.
The Bank conducts business from its main office in Munster and its other
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, 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 Bancorp's capital stock is traded in the over-the-counter market and
quoted in the National Quotation Bureau's "Pink Sheets". On February 28, 1998,
the Bancorp had 1,381,512 shares of common stock outstanding, excluding
fractional shares, and 592 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.
[GRAPHIC OMITTED]
TOTAL ASSET COMPOSITION
(DOLLARS IN MILLIONS)
Commercial Real Estate and
Multifamily $64.8(20.3%)
Commercial Business
and Other $23.6(7.4%)
Consumer $5.7(1.8%)
Other Assets $14.5(4.5%)
Investments and Interest Bearing
Liabilities $32.9(10.3%)
Construction and Land
Development $21.4(6.7%)
Residential Real Estate,
Including Home Equity - $156.7(49.0%)
At December 31, 1997, the Bancorp had total assets of $319.6 million.
Interest-earning assets totaled $305.1 million and represented 95.5% of total
assets.
- --------------------------------------------------------------------------------
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Bancorp'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 fees and service charges,
trust department income, gains and losses from the sale of loans, provisions for
loan losses, income taxes and operating expenses.
At December 31, 1997, the Bancorp had total assets of $319.6 million and
total deposits of $272.1 million. 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. At December 31, 1997, stockholders' equity totaled $29.5
million or 9.2% of total assets, with book value per share at $21.34. Net income
for 1997 was $3.4 million, or $2.47 per common share and $2.45, assuming
dilution. The return on average assets (ROA) was 1.13%, while the return on
average stockholders' equity (ROE) was 11.87%.
[GRAPHIC OMITTED]
TOTAL ASSETS
(DOLLARS IN MILLIONS)
1993 $251.5
1994 $266.3
1995 $280.9
1996 $299.4
1997 #319.6
Total assets have increased from $251.5 million at December 31, 1993 to $319.6
million at December 31, 1997. Growth during 1997 totaled $20.2 million or 6.7%.
- --------------------------------------------------------------------------------
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 contractual terms of
fifteen years or less. The actual cash flows 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 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.
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. Borrowed money is used 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 advances from the FHLBI. FHLBI advances with maturities ranging from one to
five years are used to fund securities and loans of comparable duration, as well
as, to reduce the impact that movements in short-term interest rates have on the
Bank's overall cost of funds. The Bank does not obtain funds through brokers.
Quantitative and Qualitative Disclosures about Market Risk
The Bank's primary market risk exposure is interest rate risk. Interest
rate risk (IRR) is the risk that the Bank's earnings and capital will be
adversely affected by changes in interest rates. The primary approach to IRR
management is one which focuses on adjustments to the Bank's asset/liability mix
in order to limit the magnitude of IRR. The board of directors has delegated the
responsibility for measuring, monitoring and controlling IRR to the Bank's
asset/liability management committee (ALCO). The ALCO is responsible for
developing and implementing IRR management strategies, establishing and
maintaining a system of limits and controls, and establishing and utilizing an
IRR measurement system. The ALCO, which is made up of members of senior
management, generally meets monthly, with board presentations occurring
quarterly.
The Bank's exposure to interest rate risk is due to repricing or mismatch
risk, basis risk, embedded option risk and
10
yield curve risk. Repricing risk is the risk of adverse consequence from a
change in interest rates that arises because of differences in the timing of
when those interest rate changes affect the Bank's assets and liabilities.
Basis risk is the risk that the spread, or rate difference, between instruments
of similar maturities will change. Option risk arises whenever Bank products
give customers the right, but not the obligation, to alter the quantity or
timing of cash flows. Yield curve risk is the risk that changes in prevailing
interest rates will affect instruments of different maturities by different
amounts. Because the Bank is liability sensitive, i.e., it has more rate
sensitive liabilities than rate sensitive assets maturing or repricing within a
one year time period, asset/liability management strategies designed to control
IRR include a continued focus on construction lending, adjustable rate
residential loans, equity lines of credit, and adjustable rate commercial real
estate and commercial business loans. 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. Thirty year fixed rate
residential loans are underwritten according to guidelines of the Federal Home
Loan Mortgage Corporation (FHLMC) and are generally sold to the FHLMC directly
for cash in the secondary market. Increasing the amount of interest-earning
assets that are rate sensitive, extending the maturities of customer deposits,
increasing the balances of checking/NOW accounts and utilizing cost effective
borrowings are all part of management's commitment toward reducing the Bank's
overall vulnerability to interest rate risk. While these steps may reduce the
overall vulnerability to interest rate risk, the Bank will still 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 maturing or repricing within a one
year time period.
The table below provides forward-looking information about the Bancorp's
financial instruments that are sensitive to changes in interest rates as of
December 31, 1997. The Bancorp had no derivative financial instruments or
trading portfolio as of December 31, 1997. The table incorporates the Bank's
internal system generated data as related to the maturity and
repayment/withdrawal of interest-earning assets and interest-bearing
liabilities. For loans, securities, and liabilities with contractual maturities,
the table presents principal cash flows and related weighted-average interest
rates by contractual maturities as well as the Bank's historical experience of
the impact of interest-rate fluctuations on the prepayment of residential loans.
From a risk management
TABULAR PRESENTATION: QUANTITATIVE DISCLOSURES OF MARKET RISK
(Dollars in thousands) PRINCIPAL AMOUNT MATURING IN:
------------------------------------------------------
1998 1999 2000 2001
------- ------- ------- -------
Rate-sensitive assets:
Fixed-interest-rate loans $ 20.495 $ 10.1 9.431 $ 6.832
Average interest rate 8.35% 8.24% 8.21% 7.89%
Variable-interest-rate loans 34,541 14,682 7,273 10,581
Average interest rate 9.38% 9.04% 8.69% 8.68%
Total loans 55,036 24,829 16,704 17,413
Average interest rate 8.99% 8.71% 8.42% 8.37%
Securities 8,491 6,569 5,548 3,094
Average interest rate 5.52% 6.00% 6.03% 6.50%
Other interest-bearing assets 3,570 -- -- --
Average interest rate 5.70% 0.00% 0.00% 0.00%
Total rate-sensitive assets 67,097 31,398 22,252 20,507
Average interest rate 8.37% 8.15% 7.82% 8.09%
Rate-sensitive liabilities:
Checking and other non-interest
bearing deposits 834 417 417 --
Average interest rate 0.00% 0.00% 0.00% 0.00%
NOW accounts 1,183 592 591 --
Average interest rate 2.04% 2.04% 2.04% 0.00%
Savings and Money market accounts 7,742 10,521 10,521 --
Average interest rate 3.18% 3.20% 3.20% 0.00%
Certificates of Deposit 145,399 15,810 3,791 855
Average interest rate 5.54% 5.71% 5.82% 5.77%
Total Deposits 155,158 27,340 15,320 855
Average interest rate 5.37% 4.58% 3.72% 5.77%
Fixed-interest-rate borrowings 8,628 4,000 2,000 --
Average interest rate 5.43% 5.99% 5.71% 0.00%
Total rate-sensitive
liabilities 163,786 31,340 17,320 855
Average interest rate 5.37% 4.76% 3.95% 5.77%
PRINCIPAL AMOUNT MATURING IN:
----------------------------------- FAIR VALUE
2002 THEREAFTER TOTAL 12/31/97
------- --------- -------- ---------
Fixed-interest-rate loans $ 6,057 $ 37,100 90,062 $ 90,510
Average interest rate 7.77% 7.80% 8.02%
Variable-interest-rate loans 6,696 108,378 182,151 181,450
Average interest rate 8.53% 8.10% 8.49%
Total loans 12,753 145,478 272,213 271,960
Average interest rate 8.17% 8.05% 8.35%
Securities 504 5,156 29,362 29,498
Average interest rate 6.26% 7.73% 6.23%
Other interest-bearing assets -- -- 3,570 3,570
Average interest rate 0.00% 0.00% 5.70%
Total rate-sensitive assets 13,257 150,634 305,145 305,028
Average interest rate 8.10% 8.04% 8.11%
Rate-sensitive liabilities:
Checking and other non-interest
bearing deposits -- 15,017 16,685 16,685
Average interest rate 0.00% 0.00%
NOW accounts -- 21,290 23,656 23,656
Average interest rate 0.00% 2.04% 2.04%
Savings and Money market accounts -- 37,110 65,894 65,894
Average interest rate 0.00% 3.00% 3.08%
Certificates of Deposit -- -- 165,855 166,043
Average interest rate 0.00% 0.00% 5.56%
Total Deposits -- 73,417 272,090 272,278
Average interest rate 0.00% 2.11% 4.32%
Fixed-interest-rate borrowings -- -- 14,628 14,628
Average interest rate 0.00% 0.00% 5.62%
Total rate-sensitive
liabilities -- 73,417 286,718 286,906
Average interest rate 0.00% 2.11% 4.38%
11
perspective, however, the Bancorp believes that repricing dates, as opposed to
contractual maturity dates, may be more relevant in analyzing the value of
financial instruments. For core deposits (for example, checking, NOW, savings,
and money market deposit accounts) that have no contractual maturity, the table
presents principal cash flows and, as applicable, related weighted-average
interest rates based on the Bank's historical experience, management's judgment,
and statistical analysis, as applicable, concerning their most likely withdrawal
behaviors.
Financial Condition
During the year ended December 31, 1997, total assets increased by $20.2
million (6.7%), with interest-earning assets increasing by $19.4 million
(6.8%). At December 31, 1997, interest-earning assets totaled $305.1 million
and represented 95.5% of total assets. Loans totaled $272.2 million and
represented 89.2% of interest-earning assets, 85.2% of total assets and 100.0%
of total deposits. The loan portfolio includes $21.4 million (7.9%) in
construction and land development loans, $156.7 million (57.5%) in residential
real estate loans, $64.8 million (23.8%) in commercial and multifamily real
estate loans, $5.7 million (2.1%) in consumer loans, and $23.6 million (8.7%)
in commercial business and other loans. During 1997, loans increased by $27.5
million (11.2%). Loan demand was strong in all areas as evidenced by the
growth in the real estate loans (9.5%), consumer loans (15.8%) and commercial
business and other loans (31.6%). Adjustable rate loans comprised 67% of total
loans at year end. Loan growth was due to a strong local economy, an
aggressive customer calling program and an aggressive marketing program.
Assuming the continuation of the current strength of the local economy, the
current interest rate environment, and the Bank's aggressive marketing efforts,
management believes that loan growth should remain strong during 1998.
[GRAPHIC OMITTED]
LOAN COMPOSITION
(DOLLARS IN MILLIONS)
Commercial Real Estate
And Multifamily - $64.8(23.8%)
Commercial Business
and Other - $23.6(8.7%)
Consumer - $5.7(2.1%)
Construction and Land
Development - $21.4(7.9%)
Residential Real Estate,
Including Home Equity - $156.7(57.5%)
At December 31, 1997, the loan portfolio totaled $272.2 million and represented
89.2% of interest-earning assets.
- --------------------------------------------------------------------------------
During 1997, the Bank sold $1.7 million in fixed rate mortgages compared to
$699 thousand in 1996 and $1.3 million in 1995. The amounts include 23 loans for
1997, 10 loans for 1996 and 15 loans for 1995. All loans sold had contractual
maturities of thirty years. Net gains realized from the sales totaled $26
thousand, $1 thousand and $19 thousand for 1997, 1996 and 1995. Mortgage loan
servicing income totaled $21 thousand for 1997 and 1996, and $23 thousand for
1995. At December 31, 1997, the Bank had no loans classified as held for sale.
During 1998, the Bank will continue to sell thirty year fixed rate mortgage
loans on a case-by-case basis as part of its efforts to manage interest rate
risk.
[GRAPHIC OMITTED]
TOTAL LOANS
(DOLLARS IN MILLIONS)
1993 $204.2
1994 $221.9
1995 $222.3
1996 $244.7
1997 $272.2
During 1997, loans increased by $27.5 million or 11.2%. Loan growth was due to a
strong local economy, an aggressive customer calling program and an aggressive
marketing program.
- --------------------------------------------------------------------------------
At December 31, 1997, the Bank's investment portfolio totaled $29.4 million
and was invested as follows: 66.9% in U.S. government agency debt securities,
22.3% in U.S. government debt securities, 5.2% in U.S. government agency
mortgage-backed securities and 5.6% in FHLBI common stock. In addition, the Bank
had $3.6 million in interest-bearing balances at the FHLBI. During 1997,
investment securities decreased by $10.7 million (26.6%) as maturing securities
were used to provide funding for loan portfolio growth. During 1998, the Bank
expects to fund loan growth with a mix of deposits and borrowed funds.
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. At December 31, 1997, the Bank had $1.2 million in
non-performing loans. The December 31, 1997 balance includes $966 thousand in
loans accounted for on a non-accrual basis and $226 thousand in accruing loans
which were contractually past due 90 days or more. The total of these
non-performing loans represents 0.44% of the total loan portfolio and 0.37% of
total assets. The amount of non-accruing loans includes 15 residential real
estate loans, 1 commercial real estate loan, 1 commercial business loan and 3
consumer loans. The amount of accruing loans which are contractually past due 90
days or more includes 3 residential real estate loans and 2 consumer loans. At
December 31, 1997, $1.3 million of the Bank's loans were classified as
substandard. The total represents 10 residential real estate loans, 2 commercial
real estate loans, 5 commercial business loans and 6 consumer loans. There was 1
consumer loan for $5 thousand classified as doubtful. There were no loans
classified as loss.
12
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, 1997, 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.
At December 31, 1997, the Bank had $259 thousand in foreclosed real estate.
The total includes 5 residential properties and represents 0.08% of total
assets.
[GRAPHIC OMITTED]
NON-PERFORMING LOANS TO TOTAL LOANS
1993 0.27%
1994 0.70%
1995 0.47%
1996 0.48%
1997 0.44%
Management believes that the credit risk profile of the loan portfolio is
relatively low. At December 31, 1997, the Bank's ratio of non-performing loans
to total loans was 0.44% (forty-four hundredths of one percent) which was below
the industry norm.
- --------------------------------------------------------------------------------
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 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 1997, amounts provided to the ALL
account totaled $221 thousand compared to $85 thousand for 1996 and $80 thousand
for 1995. The amount provided during 1997 was based on loan activity, changes
within the loan portfolio mix, and resulting changes in management's assessment
of portfolio risk. Charge-offs net of recoveries totaled $34 thousand during
1997.
[GRAPHIC OMITTED]
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS
1993 1.26%
1994 1.24%
1995 1.27%
1996 1.18%
1997 1.13%
At December 31, 1997, the Bank had $3.1 million in the Allowance for Loan Losses
account. The amount represents 1.13% of loans outstanding and 257.9% of
non-performing loans.
- --------------------------------------------------------------------------------
At December 31, 1997, the balance in the ALL account totaled $3.1 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
evaluated on a pooled basis. At December 31, 1997, no portion of the ALL 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, 1997.
Deposits are the major source of funds for lending and other investment
purposes. At December 31, 1997, deposits totaled $272.1 million. During 1997,
deposit growth totaled $15.7 million (6.1%). Savings accounts increased $6
thousand (0.0%), money market deposit accounts (MMDAs) decreased $124 thousand
(0.6%), NOW accounts decreased $251 thousand (1.0%), checking accounts increased
$3.8 million (29.6%) and certificates of deposit increased by $12.2 million
(8.0%). At December 31, 1997, the deposit base was comprised of 16.0% savings
accounts, 8.2% MMDAs, 8.7% NOW accounts, 6.1% checking accounts and 61.0%
certificates of deposit. At December 31, 1997, repurchase agreements totaled
$4.5 million. Other short-term borrowings totaled $2.1 million. The Bancorp had
$8 million in FHLBI advances with a weighted average maturity of 3.3 years.
[GRAPHIC OMITTED]
TOTAL DEPOSITS
(DOLLARS IN MILLIONS)
1993 $222.9
1994 $234.6
1995 $247.9
1996 $256.4
1997 $272.1
Deposits are the major source of funds for lending and other investment
purposes. During 1997, deposits increased by $15.7 million or 6.1%.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals,
and pay dividends and operating expenses. The Bank's primary goal for liquidity
management is to ensure that at all times it can meet the cash demands of its
depositors and its loan customers. A secondary purpose of liquidity management
is profit management. Because profit and liquidity are often conflicting
objectives, management attempts to maximize the Bank's net interest margin by
making adequate, but not excessive, liquidity provisions. Finally, because the
Bank is
13
subject to legal reserve requirements under Federal Reserve Regulation D,
liquidity is managed to ensure that the Bank maintains an adequate level of
legal reserves.
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 borrowings, i.e., repurchase agreements and advances from the
FHLBI as a source of funds.
[GRAPHIC OMITTED]
CAPITAL TO TOTAL ASSETS
1993 9.5%
1994 9.6%
1995 9.7%
1996 9.3%
1997 9.2%
Management firmly believes that the safety and soundness of the Bancorp
is enhanced by maintaining a high level of capital. At December 31, 1997, the
Bancorp's capital exceeded all regulatory capital requirements. The Bancorp 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 13.8% and total capital to risk-weighted assets was
15.0%.
- --------------------------------------------------------------------------------
During 1997, cash and cash equivalents increased by $4.1 million compared
to a $8.4 million decrease for 1996 and a $9.2 million increase for 1995. During
1997, cash provided by operating activities totaled $5.2 million, compared to
$2.4 million for 1996 and $3.1 million for 1995. The increase during 1997 was
due to increased earnings and cash flows from loan sales. Cash flows from
investing activities reflect strong loan demand throughout 1997. Maturing
securities held-to-maturity were used to provide funding for loan growth. Loans
made net of payments received totaled $24.8 million during 1997, compared to
$22.6 million for 1996 and $711 thousand for 1995. Cash flows from financing
activities totaled $16.3 million during 1997, compared to $16.1 million for 1996
and $11.8 million for 1995. During 1997, the Bancorp paid dividends on common
stock of $1.8 million. In addition, the Bank used both deposits and borrowed
money to fund loan growth. Deposit growth during 1997 totaled $15.7 million,
compared to $8.5 million for 1996 and $13.3 million for 1995. The increase in
borrowed funds totaled $2.3 million during 1997, compared to $9.1 million for
1996 and a decrease of $12 thousand for 1995. The increase in borrowed funds as
a source of funds, provided a cost effective alternative to certificates of
deposit as price competition within the local market area became very
competitive during 1997.
At December 31, 1997, outstanding commitments to fund loans totaled $41.7
million. Approximately 85% of the commitments were at variable rates. Management
believes that 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 1997, stockholders' equity increased
by $1.7 million (6.0%). The increase resulted primarily from earnings of $3.4
million for 1997. In addition, $18 thousand represents proceeds from the
exercise of 1,877 stock options. The Bancorp paid $1.8 million in cash dividends
during 1997. At December 31, 1997, book value per share was $21.34 compared to
$20.16 at December 31, 1996.
The Bancorp 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
Bancorp 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 Bancorp 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 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, 1997, the Bancorp's capital
exceeded all regulatory capital requirements. At December 31, 1997, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
The dollar amounts are in millions.
Required for To be well
Actual adequate capital capitalized
---------------- ------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital to
risk-weighted assets.. $32.2 15.0% $17.1 8.0% $21.4 10.0%
Tier I capital to
risk-weighted assets.. $29.5 13.8% $ 8.6 4.0% $12.8 6.0%
Tier I capital to
adjusted assets....... $29.5 9.2% $ 9.6 3.0% $16.0 5.0%
14
RESULTS OF OPERATIONS - COMPARISON OF 1997 TO 1996.
Net income for 1997 was $3.4 million compared to $2.2 million for 1996, an
increase of $1.2 million (56.1%). The earnings represent a return on average
assets of 1.13% for 1997 compared to 0.75% for 1996. The return on average
equity was 11.87% for 1997 compared to 7.90% for 1996.
The net income for 1996 reflects 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%.
[GRAPHIC OMITTED]
NET INTEREST MARGIN
1993* 4.27%
1994 4.25%
1995 3.91%
1996 3.79%
1997 3.94%
The net interest margin is total interest income minus total interest expense
stated as a percentage of average total assets. During 1997, the increase was
due to higher yields on interest-earning assets and a reduction in the Bank's
cost of funds.
* Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
Net interest income for 1997 was $11.9 million, up $898 thousand (8.1%)
from $11.1 million for 1996. The growth in net interest income was due to the
growth in average interest-earning assets, increased yields on interest-earning
assets and a lower cost of funds. Interest-earning assets averaged $290.1
million for 1997, up $10.2 million (3.6%) from $279.9 million for 1996. The
weighted average yield on interest-earning assets was 8.16% for 1997 compared to
7.98% for 1996. The weighted average cost of funds was 4.32% for 1997 compared
to 4.33% for 1996. The impact of the 8.16% return on interest-earning assets and
the 4.32% cost of funds resulted in an interest rate spread of 3.84% for 1997
compared to 3.65% for 1996. During 1997, total interest income increased by $1.3
million (6.0%) while total interest expense increased by $434 thousand (3.8%).
The net interest margin was 3.94% for 1997 compared to 3.79% for 1996.
During 1997, interest income from loans increased by $2.0 million (10.1%)
compared to 1996. The increase was due to an increase in yield and an increase
in average balances for the loan portfolio. The weighted average yield on loans
outstanding was 8.41% for 1997 compared to 8.35% for 1996. Higher average loan
balances have contributed to the increase in interest income as loans averaged
$254.2 million for 1997, up $21.7 million (9.3%) from $232.5 million for 1996.
During 1997, interest income on investments and other deposits decreased by $630
thousand (21.5%) compared to 1996. The decrease was due to lower average daily
balances as maturing securities and short-term investments were used to fund
loan growth. Securities and other deposits averaged $35.8 million for 1997, down
$11.6 million (24.5%) from $47.4 million for 1996, as maturing securities were
used to provide funding for loan growth. The weighted average yield on
investments and other deposits was 6.42% for 1997 compared to 6.18% for 1996.
Interest expense for deposits increased by $241 thousand (2.2%) during
1997. The increase was due to higher average balances as deposits averaged
$263.1 million for 1997, up $7.5 million (2.9%) from $255.6 million for 1996.
The weighted average rate paid on deposits for 1997 was 4.30% compared to 4.33%
for 1996. Interest expense on borrowed funds increased by $193 thousand (87.3%)
during 1997 due to the increased cost of borrowed funds and higher average
balances. The weighted average cost of borrowed funds was 5.13% for 1997
compared to 4.62% for 1996. The increase was due to lengthening the maturities
of borrowed funds. Borrowed funds averaged $8.1 million, up $3.3 million (68.8%)
from $4.8 million for 1996.
During 1997, management focused on initiatives designed to review and
enhance noninterest income. As a result, noninterest income for 1997 was $1.1
million, up $384 thousand (56.3%) from $682 thousand for 1996. During 1997,
income from fees and service charges increased $208 thousand (42.7%) due to an
increase in the number of customer account relationships and the implementation
of new fee and service charge pricing schedules and procedures. Income from
Trust operations increased by $66 thousand (34.7%) due to increased fees from
services provided and growth, as the market value of the trust department's
assets totaled $129.2 million at December 31, 1997 compared to $88.2 million at
December 31, 1996. In addition, gains from the sale of fixed rate loans,
foreclosed real estate and other real estate properties held by the Bank
contributed to the increase in noninterest income.
Noninterest expense for 1997 was $7.2 million, down $885 thousand (11.0%)
from $8.0 million for 1996. The decrease was due to the special SAIF assessment
of $1.6 million during 1996. Excluding the SAIF assessment of $1.6 million
during 1996. Excluding the SAIF assessment results in an increase of
noninterest expense of $674 thousand (10.4%) for 1997 compared to 1996. In
general, increases in noninterest expense have resulted from the operation of
the Merrillville, Indiana, Broadway branch facility which opened during
September 1996, and costs related to investments in new technologies. The
increase in compensation and benefits was due to additiona staffing for the
Merrillville facility and annual salary increases. Other expense changes were
due to standard increases in bank oeprations. The decrease in the federal
insurance premium reflects lower premiums for SAIF deposits due to the
recapitalization of SAIF during 1996. The Bancorp's efficiency ratio for 1997
was 55.0% compared to 55.2% for 1996. The 1996 efficienty ratio excludes the
special SAIF assessment. The ratio is determined by dividing total noninterest
expense by the sum of net interest income and total noninterest income for the
period.
15
Income tax expenses for 1997 totaled $2.2 million compared to $1.4 million
for 1996, an increase of $804 thousand (56.7%). The increase was due to the
non-reoccurence of the 1996 SAIF assessment and an increase in pretax earnings
during 1997. The combined effective federal and state tax rates for the Bancorp
were 39% for 1997 and 1996.
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 represented 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 1996
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%).
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 million 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 $3 thousand (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 (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, Broadway 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 Bancorp'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. The combined effective federal and
state tax rates for the Bancorp were 39% for 1996 compared to 40% for 1995.
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
16
restructure regulation of the banking industry and its participants' powers,
particularly with respect to insurance and securities activities. Based on what
is presently known about these initiatives, management does not believe that the
Bancorp'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 Bancorp'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.
Year 2000
The year 2000 problem stems from computer programs that identify the year
with two digits instead of four. The problem with this code is that in the year
2000, `00' may be interpreted as 1900 or not processed at all. The year 2000
problem is not limited to one type of software or hardware. Machines and
programs affected include mainframes, personal computers, networks, ATMs, and
other items such as elevators, infrastructures, and telephone systems.
The Bancorp has implemented an action plan to address the century date
change issue so that service and business operations will not be interrupted in
the year 2000. A project leader, a team of employees and a consulting group have
analyzed daily operations, business forms, software, hardware and equipment for
year 2000 compliance. Due to the Bancorp's reliance upon external parties for
business operations, ongoing communication with third party vendors has been
established to monitor their year 2000 efforts. All systems and interfaces will
be tested internally to confirm reported compliance. The Bancorp does not expect
the cost of year 2000 compliance to have a material effect on its business,
financial position or results of operations.
[GRAPHIC OMITTED]
RETURN ON ASSETS
1993* 1.45%
1994 1.24%
1995 1.14%
1996 0.75%
1997 1.13%
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 increase in the ROA for 1997 was due to an increase in the Bancorp's
net interest margin, noninterest income, and the one-time special assessment on
SAIF-assessable deposits to recapitalize SAIF during 1996.
*Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
RETURN ON EQUITY
1993* 15.5%
1994 11.04%
1995 1.14%
1996 7.90%
1997 11.87%
Return on equity (ROE) is determined by stating net income as a percentage of
average stockholders' equity. The ratio is important to the Bancorp's
stockholders because it measures the return on their invested capital. The
increase in ROE for 1997 reflects record earnings due to increases in net
interest margin and noninterest income.
*Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
17
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
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, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996 and the results of its operations and
its cash flows for the years ended December 31, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
January 9, 1998
18
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31,
---------------------------------
1997 1996
------------- -------------
ASSETS
Cash and non-interest bearing balances in financial institutions............... $ 7,083 $ 5,509
Interest bearing balances in financial institutions............................ 3,570 1,000
------------- -------------
Total cash and cash equivalents.............................................. 10,653 6,509
Securities held-to-maturity (fair value: December 31, 1997 - $29,498;
December 31, 1996 - $39,909)................................................. 29,362 40,024
Loans receivable............................................................... 272,213 244,696
Less: allowance for loan losses................................................ (3,074) (2,887)
------------- -------------
Net loans receivable......................................................... 269,139 241,809
Accrued interest receivable.................................................... 2,195 2,153
Premises and equipment......................................................... 6,820 7,086
Foreclosed real estate......................................................... 259 189
Deferred income taxes.......................................................... 794 706
Other assets................................................................... 387 943
------------- -------------
Total assets................................................................. $319,609 $299,419
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing......................................................... $ 16,685 $ 12,879
Interest bearing............................................................. 255,405 243,541
------------- -------------
Total...................................................................... 272,090 256,420
Borrowed funds................................................................. 14,628 12,261
Accrued expenses and other liabilities......................................... 3,409 2,923
------------- -------------
Total liabilities............................................................ 290,127 271,604
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, 1997 - 1,381,472 shares;
December 31, 1996 - 1,379,595 shares......................................... 345 345
Additional paid in capital..................................................... 2,948 2,930
Retained earnings - substantially restricted................................... 26,189 24,540
------------- -------------
Total stockholders' equity................................................... 29,482 27,815
------------- -------------
Total liabilities and stockholders' equity................................... $319,609 $299,419
============= ==============
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Interest income:
Loans receivable
Real estate loans.................................. $19,128 $17,523 $17,015
Commercial loans................................... 1,780 1,522 1,412
Consumer loans..................................... 462 363 297
------------ ----------- -----------
Total loan interest.............................. 21,370 19,408 18,724
Securities held-to-maturity.......................... 2,155 2,605 2,055
Other interest earning assets........................ 144 324 343
------------ ----------- -----------
Total interest income.............................. 23,669 22,337 21,122
------------ ----------- -----------
Interest expense:
Deposits............................................. 11,307 11,066 10,367
Borrowed funds....................................... 414 221 117
------------ ----------- -----------
Total interest expense............................. 11,721 11,287 10,484
------------ ----------- -----------
Net interest income....................................... 11,948 11,050 10,638
Provision for loan losses................................. 221 85 80
------------ ----------- -----------
Net interest income after provision for loan losses....... 11,727 10,965 10,558
------------ ----------- -----------
Noninterest income:
Gain on sale of loans, net........................... 26 1 19
Gain on sale of foreclosed real estate............... 28 4 51
Fees and service charges............................. 695 487 428
Trust operations..................................... 256 190 179
Other................................................ 61 - 8
------------ ----------- -----------
Total noninterest income........................... 1,066 682 685
------------ ----------- -----------
Noninterest expense:
Compensation and benefits............................ 3,645 3,213 3,049
Occupancy and equipment.............................. 1,350 1,050 842
Federal insurance premium............................ 163 1,979 536
Advertising.......................................... 145 159 157
Data processing...................................... 368 299 272
Other................................................ 1,483 1,339 1,260
------------ ----------- -----------
Total noninterest expense.......................... 7,154 8,039 6,116
------------ ----------- -----------
Income before income taxes................................ 5,639 3,608 5,127
Income tax expenses....................................... 2,223 1,419 2,026
------------ ----------- -----------
Net income................................................ $ 3,416 $ 2,189 $ 3,101
============ =========== ===========
Earnings per common share................................. $ 2.47 $ 1.59 $ 2.25
============ =========== ===========
Earnings per common share, assuming dilution.............. $ 2.45 $ 1.58 $ 2.24
============ =========== ===========
Dividend declared per common share........................ $ 1.28 $ 1.15 $ 1.10
============ =========== ===========
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
------------ ------------ ------------ -------------
Balance at January 1, 1995.................................... $ 345 $ 2,914 $ 22,347 $ 25,606
Issuance of 1,352 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 14 - 14
Cash dividends, $1.10 per share.......................... - - (1,517) (1,517)
Net income............................................... - - 3,101 3,101
------------ ------------ ------------ -------------
Balance at December 31, 1995.................................. 345 2,928 23,931 27,204
Issuance of 159 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 2 - 2
Cash dividends, $1.15 per share.......................... - - (1,580) (1,580)
Net income............................................... - - 2,189 2,189
------------ ------------ ------------ -------------
Balance at December 31, 1996.................................. 345 2,930 24,540 27,815
Issuance of 1,877 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 18 - 18
Cash dividends, $1.28 per share.......................... - - (1,767) (1,767)
Net income............................................... - - 3,416 3,416
------------ ------------ ------------ -------------
Balance at December 31, 1997.................................. $ 345 $ 2,948 $ 26,189 $ 29,482
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 3,416 $ 2,189 $ 3,101
----------- ----------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale...................... (1,732) (700) (1,247)
Sale of loans originated for sale.................. 1,758 699 1,312
Depreciation and amortization, net of accretion.... 710 553 393
Net gains on sale of loans......................... (26) (1) (19)
Net gains on sale of fixed assets.................. (41) - -
Net gains on sale of foreclosed real estate........ (28) (4) (51)
Provision for loan losses.......................... 221 85 80
Net change in unearned interest on loans........... (5) (1) (12)
Change in deferred taxes........................... (88) (61) 244
Change in deferred loan fees....................... (30) (1) (75)
Change in interest receivable...................... (42) (61) (272)
Change in other assets............................. 556 (520) (45)
Change in accrued expenses and other liabilities... 486 239 (322)
----------- ----------- ----------
Total adjustments................................ 1,739 227 (14)
----------- ----------- ----------
Net cash from operating activities............... 5,155 2,416 3,087
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in interest bearing time deposits in
other financial institutions....................... - - 493
Proceeds from maturities of securities held-to-maturity 10,748 12,671 8,000
Purchase of securities held-to-maturity.............. (549) (15,164) (12,772)
Principal collected on mortgage-backed securities.... 414 460 446
Loan participations purchased........................ (3,240) - (33)
Net change in loans receivable....................... (24,807) (22,587) (711)
Purchase of premises and equipment................... (454) (2,373) (1,647)
Sale of premises and equipment....................... 100 - -
Proceeds from sale of foreclosed real estate......... 489 61 547
----------- ----------- ----------
Net cash from investing activities................. (17,299) (26,932) (5,677)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits................................... 15,670 8,475 13,306
Proceeds from FHLB advances.......................... 23,000 7,000 -
Repayment of FHLB advances........................... (22,000) - -
Change in other borrowed funds....................... 1,367 2,121 (12)
Proceeds from issuance of capital stock.............. 18 2 14
Dividends paid....................................... (1,767) (1,517) (1,517)
----------- ----------- ----------
Net cash from financing activities................. 16,288 16,081 11,791
----------- ----------- ----------
Net change in cash and cash equivalents............ 4,144 (8,435) 9,201
Cash and cash equivalents at beginning of period..... 6,509 14,944 5,743
----------- ----------- ----------
Cash and cash equivalents at end of period........... $ 10,653 $ 6,509 $ 14,944
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................... $ 11,668 $ 11,314 $ 10,452
Income taxes....................................... $ 1,790 $ 2,045 $ 1,815
Transfers from loans to foreclosed real estate....... $ 531 $ 160 $ 423
See accompanying notes to consolidated financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED
December 31, 1997, 1996 and 1995.
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of NorthWest Indiana Bancorp (the Bancorp), 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 Bancorp 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.
The formation of the Bancorp and the acquisition of Peoples Bank SB by the
Bancorp was an internal reorganization accounted for at historical cost. The
Bancorp has no other business activity other than being a holding company for
the Bank. The Bancorp's earnings are dependent upon the earnings of the Bank.
Peoples Service Corporation is inactive. At December 31, 1997, the Bank had an
investment balance of $10,000 in Peoples Service Corporation. During 1997, PSA
Insurance Corporation was dissolved. 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 18. Substantially
all operations are in the banking industry.
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 Bancorp grants residential, commercial
real estate, commercial business and installment loans to customers primarily of
Lake County, in north west Indiana. Substantially all loans are secured by
specific items of collateral including residences, business assets and consumer
assets.
Cash Flow Reporting - For purposes of the statement of cash flows, the
Bancorp considers cash on hand, non-interest bearing balances in financial
institutions, all interest-bearing balances in financial institutions with
original maturities of ninety days or less and federal funds sold to be cash and
cash equivalents. The Bancorp reports net cash flows for customer loan and
deposit transactions and short-term borrowings with maturities of 90 days or
less.
Securities - The Bancorp classifies securities into held-to-maturity,
available-for-sale, or trading categories. Held-to-maturity securities are those
which the Bancorp has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Bancorp 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.
Other securities such as Federal Home Loan Bank stock are carried at cost.
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. Securities are
written down to fair value when a decline in fair value is not temporary.
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
23
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. 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. 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,
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.
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 Bancorp,
resulting in the recognition of gains or losses at the time of sale. The Bancorp
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.
Long-term Assets - These assets are reviewed for impairment when events
indicate their carrying amount may not be recovered from future undiscounted
cash flows. If impaired, the assets are recorded at discounted amounts.
Repurchase Agreements - Substantially all repurchase agreement liabilities
represent amounts advanced by various customers that are not covered by federal
deposit insurance and are secured by securities held-to-maturity owned by the
Bancorp.
Postretirement Benefits Other Than Pensions - The Bancorp 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 the employees have rendered service to the Bancorp.
Income Taxes - The Bancorp 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.
Loss Contingencies - Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated.
Earnings per Share - Earnings per common share is based on weighted-average
common shares outstanding. Earnings per common share, assuming dilution
considers the issue of any potentially dilutive common shares. The accounting
standard for computing earnings per share was revised for 1997, and all earnings
per share previously reported are restated to follow the new standard. On each
of February 28, 1995 and December 2, 1996 , the Bancorp effected a two-for-one
common stock split as a share dividend. All references in the accompanying
financial statements to the number of shares and per share data have been
restated to reflect the stock splits.
Fair Value of Financial Instruments - Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassification - Certain amounts appearing in the consolidated financial
statements and notes thereto for the years ended December 31, 1996 and 1995,
have been reclassified to conform to the December 31, 1997 presentation.
NOTE 2 - Securities
The amortized cost and fair value of securities held-to-maturity are
summarized as follows:
(DOLLARS IN THOUSANDS)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ------- ------- -------
At December 31, 1997:
Debt securities:
U.S. government and
federal agencies ... $26,185 $ 131 $ (45) $26,271
Mortgage-backed
securities ......... 1,531 50 - 1,581
------- ------- ------- -------
Total debt securities 27,716 181 (45) 27,852
Other securities .... 1,646 - - 1,646
------- ------- ------- -------
Total ............. $29,362 $ 181 $ (45) $29,498
======= ======= ======= =======
24
(DOLLARS IN THOUSANDS)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
AT DECEMBER 31, 1996:
Debt securities:
U.S. government and
federal agencies .... $ 36,483 $ 92 $ (217) $ 36,358
Mortgage-backed
securities .......... 1,944 16 (6) 1,954
-------- -------- -------- --------
Total debt securities 38,427 108 (223) 38,312
Other securities ..... 1,597 -- -- 1,597
-------- -------- -------- --------
Total .............. $ 40,024 $ 108 $ (223) $ 39,909
======== ======== ======== ========
The amortized cost and fair value of debt securities held-to-maturity at
December 31, 1997, 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.
(DOLLARS IN THOUSANDS)
AMORTIZED FAIR
COST VALUE
--------- -------
Due in one year or less .......................... $ 8,491 $ 8,481
Due after one year through five years ............ 15,694 15,766
Due after five years through ten years ........... 2,000 2,024
Mortgage-backed securities ....................... 1,531 1,581
------- -------
Total ........................................... $27,716 $27,852
======= =======
There were no sales of securities during the years ended December 31, 1997,
1996 and 1995. Securities with carrying values of $10,091,000 and $6,671,000
were pledged as of December 31, 1997 and 1996 as collateral for public funds,
repurchase agreements and for other purposes as permitted or required by law.
NOTE 3 - Loans Receivable
Loans are summarized below as of the dates indicated:
(DOLLARS IN THOUSANDS)
1997 1996
---------- ----------
Loans secured by real estate:
Construction and land development .............. $21,440 $13,248
Residential, including home equity ............. 156,651 151,343
Commercial real estate and other dwelling ...... 64,831 57,258
-------- --------
Total loans secured by real estate .......... 242,922 221,849
Consumer loans .................................. 5,661 4,890
Commercial business and other ................... 23,630 17,957
-------- --------
Loans receivable ............................ $272,213 $244,696
======== ========
Activity in the allowance for loan losses is summarized below for the years
indicated:
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
Balance at beginning of period ....... $ 2,887 $ 2,830 $ 2,751
Provision charged to income .......... 221 85 80
Loans charged off .................... (34) (28) (2)
Recoveries ........................... -- -- 1
------- ------- -------
Balance at end of period ............. $ 3,074 $ 2,887 $ 2,830
======= ======= =======
At December 31, 1997 and 1996, no portion of the allowance for loan losses
was allocated to impaired loan balances as the Bancorp had no loans it
considered to be impaired loans as of or for the years ended December 31, 1997
and 1996.
NOTE 4 - Loan Servicing
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation
(FHLMC) are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans are summarized below:
(DOLLARS IN THOUSANDS)
1997 1996
Mortgage loan portfolios
serviced for FHLMC ........................ 7,976 $7,152
===== ======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $125,000 and $128,000 at December 31, 1997 and
1996.
NOTE 5 - Premises and Equipment, Net Premises and equipment are summarized
below:
(DOLLARS IN THOUSANDS)
1997 1996
-------- --------
Cost:
Land ........................................ $ 1,663 $ 1,721
Buildings and improvements .................. 5,317 5,229
Furniture and equipment ..................... 3,470 3,104
-------- --------
Total cost ............................. 10,450 10,054
Less accumulated depreciation
and amortization ............................ (3,630) (2,968)
-------- --------
Premises and equipment, net ............ $ 6,820 $ 7,086
======== ========
NOTE 6 - Income Taxes
Components of the income tax expenses consist of the following for the
years indicated:
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
Federal:
Current ........................ $ 1,824 $ 1,071 $ 1,377
Deferred ....................... (71) 57 221
State:
Current ........................ 487 287 405
Deferred ....................... (17) 4 23
------- ------- -------
Income tax expenses .............. $ 2,223 $ 1,419 $ 2,026
======= ======= =======
The differences between the income tax expenses shown on the statement of
income and amounts computed by applying the statutory federal income tax rate to
income before tax expenses consists of the following:
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
Federal statutory rate ................ 34% 34% 34%
Tax expense at statutory rate ......... $ 1,917 $ 1,227 $ 1,743
State tax, net of federal effect ...... 310 195 283
Other ................................. (4) (3) --
------- ------- -------
Total income tax expenses ............. $ 2,223 $ 1,419 $ 2,026
======= ======= =======
25
The components of the net deferred tax asset recorded in the consolidated
balance sheet are as follows:
(DOLLARS IN THOUSANDS)
1997 1996
------- -------
Deferred tax assets:
Bad debt ...................................... $ 363 $ 298
Deferred loan fees ............................ 169 174
Deferred compensation ......................... 463 430
Other ......................................... 73 76
------- -------
Total deferred tax assets .................... 1,068 978
Deferred tax liabilities:
Depreciation .................................. (249) (216)
Other ......................................... (25) (56)
------- -------
Total deferred tax liabilities ............... (274) (272)
Valuation allowance ............................ -- --
------- -------
Net deferred tax assets ...................... $ 794 $ 706
======= =======
The Bancorp 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, 1997 and 1996
includes approximately $5,982,000 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 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 $2,034,000 at December 31,
1997. Tax legislation passed in August 1996 now requires the Bancorp to deduct a
provision for bad debts for tax purposes based on actual loss experience and to
recapture the excess bad debt reserve accumulated in tax years after 1986. The
related amount of deferred tax which must be recaptured is $855,000 and is
payable over a six year period beginning in 1998.
NOTE 7 - Deposits
The aggregate amount of certificates of deposit with a balance of $100,000
or more was $39,666,000 at December 31, 1997 and $26,100,000 at December 31,
1996.
At December 31, 1997, scheduled maturities of certificates of deposit were
as follows:
(Dollars in thousands)
1998........... $ 145,399
1999........... 15,810
2000........... 3,791
2001........... 855
------------
Total...... $ 165,855
============
NOTE 8 - Borrowed Funds Borrowed funds is summarized below:
(DOLLARS IN THOUSANDS)
1997 1996
---------- ----------
Repurchase agreements .......................... $ 4,541 $ 3,993
Fixed rate advances from the FHLB .............. 4,000 7,000
Putable advances from the FHLB ................. 4,000 --
Other .......................................... 2,087 1,268
------- -------
Total ........................................ $14,628 $12,261
======= =======
Repurchase agreements generally mature within one year and are secured by
FHLMC participation certificates or U.S. government securities, under the
Bancorp's control. Information concerning these retail repurchase agreements is
summarized below:
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
Ending balance ....................................... $4,541 $3,993
Average balance during the year ...................... 4,308 3,599
Maximum month-end balance during the year ............ 4,975 5,419
Securities underlying the agreements at year end:
Carrying value ...................................... 7,988 5,572
Fair value .......................................... 8,014 5,559
Average interest rate during the year ................ 5.43% 5.27%
At December 31, 1997, the following Federal Home Loan Bank advances were
outstanding:
(DOLLARS IN THOUSANDS)
1997
--------
5.98% FHLB fixed advance, due October 12, 1999 $ 2,000
5.99% FHLB fixed advance, due October 28, 1999 2,000
5.71% FHLB putable advance, due December 16, 2002 2,000
5.35% FHLB putable advance, due December 30, 2002 2,000
--------
Total............................ $ 8,000
========
The putable advance which carries an interest rate of 5.71%, is fixed for
three years and may adjust quarterly to the three-month LIBOR two years
thereafter. The putable advance which carries an interest rate of 5.35%, is
fixed for one year and may adjust quarterly to the three-month LIBOR four years
thereafter. Once the advance interest rate adjusts, the Bancorp has the option
to prepay the putable advance on specified quarterly interest rate reset dates.
Pursuant to collateral agreements with the Federal Home Loan Bank, advances are
secured under a blanket lien arrangement by securities and mortgage loans with
carrying values of approximately $157,019,000 at December 31, 1997.
NOTE 9 - Employees' Benefit Plans
The Bancorp 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 Bancorp. 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 Bancorp's Board of Directors. Contributions during the years
ended December 31, 1997, 1996 and 1995 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 $204,000, $185,000 and $203,000 for the years ended December 31,
1997, 1996 and 1995.
The Bancorp 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 Bancorp's Board of Directors. Contributions during the year
ended December 31, 1997
26
were based on 1.0% of the participants total compensation excluding incentives.
No contributions to the ESOP were made during the years ended December 31, 1996
and 1995. The ESOP held 1,094 shares of the Bancorp's common stock as of
December 31, 1997, all of which have been allocated to participants. The ESOP
expense amounted to $23,000, $0 and $0 for the years ended December 31, 1997,
1996 and 1995.
NOTE 10 - Defined Benefit Postretirement Plan
The Bancorp 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 Bancorp 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 Bancorp's consolidated balance sheet:
(Dollars in thousands)
1997 1996
---------- ---------
Accumulated postretirement benefit obligations (APBO):
Retirees................................................ $ 56 $ 58
Fully eligible active plan participants................. -- --
Other active plan participants.......................... 63 54
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets..................... 119 112
Unrecognized net gain................................... 64 70
---- ----
Net postretirement benefit liability.................... $183 $182
==== ====
Net periodic postretirement benefit expense for the periods indicated
included the following components:
(Dollars in thousands)
1997 1996 1995
--------- ---------- ----------
Service cost-benefits attributed
to service during the period..................... $ 4 $ 4 $4
Interest cost on accumulated
postretirement benefit obligation................ 9 9 5
Amortization of unrecognized
net gain......................................... (6) (5) -
--- --- --
Net periodic postretirement
benefit expense.................................. $ 7 $ 8 $9
=== === ==
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, 1997, dropping to an annual rate of 5.5% after 4 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%. A 1% increase in the health care cost
trend rate assumption would not have a material impact on the APBO or expense.
NOTE 11 - Regulatory Capital
The Bancorp 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 Bancorp and the Bank
were substantially the same. Actual capital levels, minimum required levels
and levels needed to be classified as well capitalized for the Bancorp 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
-------- ------- ------- ------- -------- --------
1997
Total capital
(to risk-weighted assets) $ 32.2 15.0% $ 17.1 8.0% $ 21.4 10.0%
Tier I capital (to
risk-weighted assets) .... $ 29.5 13.8% $ 8.6 4.0% $ 12.8 6 .0
Tier I capital (to
adjusted assets) ......... $ 29.5 9.2% $ 9.6 3.0% $ 16.0 5.0%
1996
Total capital
(to risk-weighted assets) $ 30.2 16.0% $ 15.1 8.0% $ 18.9 10.0%
Tier I capital
(to risk-weighted assets) $ 27.8 14.7% $ 7.6 4.0% $ 11.3 6.0%
Tier I capital
(to adjusted assets) $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
The Bancorp and the Bank were categorized as well capitalized at December 31,
1997 and 1996. There are no conditions or events since December 31, 1997 that
management believes have changed the Bancorp's or Bank's category.
The Bancorp's ability to pay dividends is entirely dependent upon the
Bank's ability to pay dividends to the Bancorp. Under Indiana law, the Bank may
pay dividends, no more often than quarterly, to the extent of its undivided
profits (generally, earnings less losses, bad debts, taxes and other operating
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 retained net profits for the prior two years (approximately
$3,842,000 at December 31, 1997).
27
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 120,000 shares of the
Bancorp's common stock were reserved for issuance in respect of incentive awards
granted to officers and other employees of the Bancorp 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 Bancorp. 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
Bancorp'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 fair value method been used to measure compensation cost
(Dollars in thousands, except per share data)
1997 1996 1995
--------- ---------- ----------
Net income as reported .................. $ 3,416 $ 2,189 $ 3,101
Pro forma net income .................... 3,405 2,182 3,096
Earnings per common share
as reported ......................... $ 2.47 $ 1.59 $ 2.25
Pro forma earnings
per common share .................... $ 2.47 $ 1.58 $ 2.25
Earnings per common share,
assuming dilution as reported ....... $ 2.45 $ 1.58 $ 2.24
Pro forma earnings per common
share, assuming dilution ............ $ 2.44 $ 1.57 $ 2.23
The fair value of options granted during 1997, 1996 and 1995 is estimated
using the following weighted-average information: risk-free interest rate of
6.50%, 5.42% and 7.75%, expected life of 7 to 8 years, expected volatility of
stock price of 5.62% for 1997 and 5.45% for 1996 and 1995, and expected
dividends of 4.00%, 4.26% and 5.18% for 1997, 1996 and 1995. In future years,
the pro forma effect of not applying this standard is expected to increase as
additional options are granted.
Options granted prior to 1995 were immediately exerciseable. Options
granted since 1995 generally are exerciseable upon completion of five years of
service after the date of grant. Information about option grants is provided in
the following schedule:
Weighted- Weighted-average
Number average fair value
of options exercise price of grants
------- ----------- ------------
Outstanding, January 1, 1995 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
Granted................. 8,050 32.00 4.23
Exercised............... 1,877 9.85
Forfeited............... 50 32.00
Expired................. - -
-------
Outstanding, December 31, 1997 31,737 22.57
=======
Options exerciseable at year-end are as follows:
Number Weighted-average
of options exercise price
------------- -----------------
1995 7,912 $10.35
1996 7,794 $10.35
1997 5,957 $10.58
At December 31, 1997, options outstanding were as follows:
Number of options 31,737
Range of exercise price $9.31 - $32.00
Weighted-average exercise price $22.57
Weighted-average remaining option life 5.1 years
NOTE 13 - Earnings Per Share
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations for
the years ended December 31, 1997, 1996 and 1995 is presented below.
1997 1996 1995
--------- ---------- ----------
Earnings Per Common Share:
Net income available to
common stockholders ............... $3,416,000 $2,189,000 $3,101,000
========== ========== ==========
Weighted average common
shares outstanding ................ 1,381,151 1,379,519 1,378,808
========== ========== ==========
Earnings Per Common Share ....... $ 2.47 $ 1.59 $ 2.25
========== ========== ==========
Earnings Per Common Share,
Assuming Dilution:
Net income available to
common stockholders ............... $3,416,000 $2,189,000 $3,101,000
========== ========== ==========
Weighted average common
shares outstanding......1,381,151 . 1,379,519 1,378,808
Add: dilutive effect of assumed
stock option exercises ............. 14,633 9,728 7,000
---------- ---------- ----------
Weighted average common and
dilutive potential shares
outstanding........................ 1,395,784 1,389,247 1,385,808
========== ========== ==========
Earnings Per Common Share,
assuming dilution ............ $ 2.45 $ 1.58 $ 2.24
========== ========== ==========
28
NOTE 14 - Related Party Transactions
The Bank had aggregate loans outstanding to directors and executive
officers (with individual balances exceeding $60,000) of $3,138,000 at December
31, 1997 and $1,763,000 at December 31, 1996. For the year ended December 31,
1997, the following activity occurred on these loans:
(Dollars in thousands)
Aggregate balance - December 31, 1996.. $ 1,763
New loans ............................. 2,034
Repayments ............................ (659)
-----------
Aggregate balance - December 31, 1997.. $ 3,138
===========
NOTE 15 - Commitments and Contingencies
The Bancorp 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 Bancorp'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 Bancorp 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 amount
does not necessarily represent future cash commitments.
The Bancorp had outstanding commitments to originate loans as follows:
(Dollars in thousands)
Fixed Variable
Rate Rate Total
--------- ---------- ---------
December 31, 1997:
Real estate............ $ 6,457 $ 16,848 $ 23,305
Consumer loans......... - 229 229
Commercial business.... - 18,120 18,120
--------- ---------- ---------
Total................. $ 6,457 $ 35,197 $ 41,654
========= ========== =========
(Dollars in thousands)
Fixed Variable
Rate Rate Total
--------- ---------- ---------
December 31, 1996:
Real estate............ $ 6,346 $ 12,606 $ 18,952
Consumer loans......... - 281 281
Commercial business.... - 14,879 14,879
--------- ---------- ---------
Total................. $ 6,346 $ 27,766 $ 34,112
========= ========== =========
The $6,457,000 in fixed rate commitments outstanding at December 31, 1997
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 Bancorp
to guarantee the performance of a customer to a third party. At December 31,
1997 and 1996, the Bancorp had standby letters of credit totaling $501,000 and
$519,000. The Bancorp evaluates each customer's creditworthiness on a case by
case basis. The amount of collateral obtained, if deemed necessary by the
Bancorp 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 Bancorp 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 Bancorp.
NOTE 16 - Fair Values of Financial Instruments
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments"
prescribes that the Bancorp 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.
(Dollars in thousands)
December 31, 1997
----------------------------
Carrying Estimated
Value Fair Value
------------- --------------
Cash and cash equivalents $ 10,653 $ 10,653
Securities held-to-maturity 29,362 29,498
Loans receivable, net.... 269,139 268,886
Demand and savings deposits (106,235) (106,235)
Certificates of deposit.. (165,855) (166,043)
Borrowed funds........... (14,628) (14,628)
(Dollars in thousands)
December 31, 1996
----------------------------
Carrying Estimated
Value Fair Value
------------- --------------
Cash and cash equivalents $ 6,509 $ 6,509
Securities held-to-maturity 40,024 39,909
Loans receivable, net.... 241,809 241,702
Demand and savings deposits (102,798) (102,798)
Certificates of deposit.. (153,622) (153,787)
Borrowed funds........... (12,261) (12,261)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1997 and 1996. 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
loans is based on estimates of the rate the Bancorp would charge for similar
such loans at December 31, 1997 and 1996, 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 Bancorp would pay on such
deposits at December 31, 1997 and 1996, 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 Bancorp to
have disposed of such items at December 31, 1997 and 1996, the estimated fair
values would necessarily have been achieved at that date,
29
since market values may differ depending on various circumstances. The estimated
fair values at December 31, 1997 and 1996 should not necessarily be considered
to apply at subsequent dates.
In addition, other assets and liabilities of the Bancorp that are not
defined as financial instruments 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 17 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are summarized below as follows:
Year ended December 31, 1997:
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- --------- ---------- ------------
Total interest income $ 5,669 $ 5,854 $ 5,978 $ 6,168
Total interest expense 2,790 2,898 2,963 3,070
--------- ------- -------- -------
Net interest income 2,879 2,956 3,015 3,098
Provision for loan losses 49 32 55 85
--------- ------- -------- -------
Net interest income after
provision for loan losses 2,830 2,924 2,960 3,013
Total noninterest income 340 216 246 264
Total noninterest expense 1,772 1,746 1,807 1,829
--------- ------- -------- -------
Income before
income taxes...... 1,398 1,394 1,399 1,448
Income tax expenses 559 550 559 555
--------- ------- -------- -------
Net income......... $ 839 $ 844 $ 840 $ 893
========= ======= ======== =======
Earnings per share. $ 0.61 $ 0.61 $ 0.61 $ 0.64
========= ======= ======== =======
Earnings per share,
assuming dilution. $ 0.60 $ 0.61 $ 0 .60 $ 0.64
========= ======= ======== =======
Year ended December 31, 1996:
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
------- ------- ------------ -----------
Total interest income ............. $ 5,447 $ 5,532 $5,633 $ 5,725
Total interest expense ............ 2,809 2,777 2,817 2,884
------- ------- ------ -------
Net interest income ............... 2,638 2,755 2,816 2,841
Provision for loan losses ......... 15 18 23 29
------- ------- ------ -------
Net interest income after
provision for loan losses ........ 2,623 2,737 2,793 2,812
Total noninterest income .......... 178 165 167 172
Total noninterest expense ......... 1,629 1,632 3,200 1,578
------- ------- ------ -------
Income before
income taxes ..................... 1,172 1,270 (240) 1,406
Income tax expenses ............... 467 507 (92) 537
------- ------- ------ -------
Net income ........................ $ 705 $ 763 $ (148) $ 869
------- ------- ------ -------
Earnings per share ................ $ 0.51 $ 0.56 $ (0.11) $ 0.63
------- ------- ------ -------
Earnings per share,
assuming dilution ................ $ 0.51 $ 0.56 $ 0.12) $ 0.63
------- ------- ------ -------
The net income for the quarter ended September 30, 1996, reflects 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 during the third quarter.
NOTE 18 - Parent Company Only Statements
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Balance Sheet
December 31,
------------------------
1997 1996
--------- ---------
Assets
Cash on deposit with Peoples Bank .................. $ 13 $ 53
Investment in Peoples Bank ......................... 29,475 27,783
Dividends receivable from Peoples Bank ............. 455 445
Other assets ....................................... 5 4
------- -------
Total assets ...................................... $29,948 $28,285
======= =======
Liabilities and stockholders' equity
Dividends payable .................................. $ 442 $ 441
Other liabilities .................................. 24 29
------- -------
Total liabilities ................................. 466 470
Common stock ....................................... 345 345
Additional paid in capital ......................... 2,948 2,930
Retained earnings .................................. 26,189 24,540
------- -------
Total stockholders' equity ........................ 29,482 27,815
------- -------
Total liabilities and stockholders' equity ........ $ 29,948 $ 28,285
======= =======
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Statements of Income
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------- ------- -------
Operating income
Dividends from
Peoples Bank ..................... $ 1,770 $ 1,625 $ 1,552
Operating expenses ................ 76 59 109
------- ------- -------
Income before income taxes
and equity in undistributed
income of Peoples Bank ........... 1,694 1,566 1,443
Provision for income taxes ........ (30) (23) (44)
------- ------- -------
Income before equity
in undistributed
income of Peoples Bank ........... 1,724 1,589 1,487
Equity in undistributed
income of Peoples Bank ........... 1,692 600 1,614
------- ------- -------
Net Income ........................ $ 3,416 $ 2,189 $ 3,101
======= ======= =======
30
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Statements of Cash Flows
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------- ------- -------
Cash flows from operating
activities
Net income ........................... $ 3,416 $ 2,189 $ 3,101
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
net income of
Peoples Bank ..................... (1,692) (600) (1,614)
Change in other assets ............. (11) (54) 4
Change in other liabilities ........ (4) (7) 35
------- ------- -------
Total adjustments ................. (1,707) (661) (1,575)
------- ------- -------
Net cash from
operating activities .......... 1,709 1,528 1,526
Cash flows from
investing activities ................ -- -- --
Cash flows from
financing activities
Dividends paid ...................... (1,767) (1,517) (1,517)
Proceeds from issuance
of capital stock .................. 18 1 15
------- ------- -------
Net cash from
financing activities ............. (1,749) (1,516) (1,502)
------- ------- -------
Net change in cash ................... (40) 12 24
Cash at beginning of year ............ 53 41 17
------- ------- -------
Cash at end of year .................. $ 13 $ 53 $ 41
======= ======= =======
NOTE 19 - Current Accounting Issues
Statement of Financial Accounting Standard (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
was issued by the Financial Accounting Standards Board in 1997. 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. Management does not believe the
Standard will have a significant impact on the financial statements.
The Financial Accounting Standards Board (FASB) issued SFAS 130, Reporting
Comprehensive Income, which is effective for fiscal years and interim periods
beginning after December 15, 1997. The Statement provides standards for
reporting and display of comprehensive income and its components. Comprehensive
income is defined as all changes in equity other than those resulting from
investments by owners or distributions by owners. Net income is, therefore, a
component of comprehensive income. The most common items of other comprehensive
income include unrealized gains or losses on securities available for sale,
gains and losses on certain foreign currency transactions, and minimum pension
liability adjustments. The Statement does not mandate a specific format for
reporting comprehensive income. Companies will generally choose between adding
the items of other comprehensive income to the income statement, adding them to
the statement of changes in shareholders' equity or displaying a new financial
statement, the Statement of Comprehensive Income. Adoption of this Statement
will have no impact on net income.
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS 131 provides new guidance for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. SFAS 131 supersedes the industry approach to segment disclosures
previously required by SFAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing it with a method of segment reporting which is based on
the structure of an enterprise's internal organization reporting. The Statement
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for financial
statement periods beginning after December 15, 1997. Management does not
anticipate that this statement will have a significant impact on reporting in
future periods.
31
Market Information
The Bancorp's Common Stock is traded in the over-the-counter market and is
quoted in the National Quotation Bureau's "Pink Sheets". The Bancorp's stock is
not actively traded. As of February 28, 1998, the Bancorp had 1,381,512 shares
of common stock outstanding, excluding fractional shares, and 592 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 years ended
December 31, 1997 and December 31, 1996. 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 Bancorp during the periods reported. Note 11 to the
Financial Statements describes regulatory limits on the Bancorp'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, 1997 1st Quarter $ 36.00 $ 30.00 $ .320
- ------------------------------------------------------------------------
2nd Quarter 37.00 36.00 .320
- ------------------------------------------------------------------------
3rd Quarter 41.88 36.50 .320
- ------------------------------------------------------------------------
4th Quarter 42.50 40.00 .320
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
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
- ------------------------------------------------------------------------
===============================================================================
[THREE COMBINED GRAPHICS]
1993* 1994 1995 1996 1997
Market Price Per share (1) $15.88 $21.25 $27.00 $31.13 $42.13
Book Value Per Share (2) $17.37 $18.58 $19.72 $20.16 $21.34
Earnings Per Common Share (3) $ 1.33 $ 2.35 $ 2.25 $ 1.59 $ 2.47
(1) The market price per share represents the last sales price prior to the
close of the periods indicated. The Bancorp's stock is not actively traded.
At the present time the Bancorp's stock is traded in the over-the-counter
market and is quoted in the National Quotation Bureau's "Pink Sheets".
(2) The Bank's earnings have increased the book value of the Bancorp's stock
from $17.37 at December 31,1993 to $21.34 per share at December 31, 1997.
(3) Earnings for 1997 totaled $3.4 million resulting in an earnings per share
(EPS) of $2.47.
*Six month period due to change in fiscal year end.
===============================================================================
[GRAPHIC OMITTED]
5 YEAR TOTAL RETURN
CRSP Market Index $240
CRSP Bank Index $377
Bancorp $367
===============================================================================
The management of Northwest Indiana Bancorp is committed to maximizing
shareholder value. The Bancorp'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, 1992, would be
worth $367 on December 31, 1997.
===============================================================================
32
1997
Annual
Report
Leadership
Group
Board of Directors
Corporate Information
Meeting the
Challenge
of Community Banking
"Customers... want to do business with people they know, trust, and who are
empowered to make decisions at the local level."
NORTHWEST INDIANA
===================
BANCORP
Leadership
Group
[PHOTO OF LEADERSHIP TEAM]
Standing left to right: Robert T. Lowry, Vice President, Controller, David W.
Homrich, Assistant Vice President, Munster Branch Manager, Mary D. Mulroe,
Assistant Vice President, Manager of Loan Administration, Joel Gorelick, Vice
President, Chief Lending Officer, Terry R. Gadberry, Assistant Vice President,
Commercial Loan Officer, Rodney L. Grove, Vice President Retail Banking, David
A. Bochnowski, Chairman and Chief Executive Officer, Daniel W. Moser, Vice
President for Housing Finance, Frank J. Bochnowski, Senior Vice President,
General Counsel, Trust Officer and Corporate Secretary, Edward J. Furticella,
Vice President, Chief Financial Officer, Marilyn K. Repp, Assistant Vice
President, Merrillville/Taft Branch Manager, Jill M. Knight, Assistant Vice
President, Merrillville/Broadway Branch Manager, Robert J. Soohey, Assistant
Vice President, Manager of Housing Finance, and Stephan A. Ziemba, Assistant
Vice President, Trust Officer
Seated left to right: Barbara J. Zura, Assistant Vice President, Woodmar Branch
Manager, Arlene M. Wohadlo, Assistant Vice President, Manager of Accounting, and
Linda L. Kollada, Assistant Vice President, Human Resource Manager.
34
BOARD OF DIRECTORS
The Board of Directors brings 211 years of combined
community banking experience to our shareholders.
photo of
chairman of the photo of photo of
board board member chairman emeritus
DAVID A. BOCHNOWSKI - 21 Years LEROY F. CATALDI - 21 Years BENJAMIN A. BOCHNOWSKI
Chairman and Chief Executive Officer Manager of Cataldi Prescription Shop, Chairman Emeritus, Advisory Director
Dyer, Indiana 45 years Community Banking Experience
photo of photo of photo of
board member board member director emeritus
GLORIA GRAY - 15 Years LOURDES M. DENNISON - 14 Years HAROLD G. REUTH
Retired Vice President and Treasurer Administrative Director, Dennison Director Emeritus
of Career Development Consultants, Surgical Corp. 30 Years Community Banking Experience
Munster, Indiana Merrillville, Indiana
photo of photo of
board member board member
JOHN J. WADAS, JR. - 13 Years JEROME F. VRABEL - 13 Years
Dentist practicing in Munster Vice President, ED&F Man
and East Chicago, Indiana International Inc.
Chicago, Illinois
photo of photo of
board member board member
JAMES J. CRANDALL - 40 Years STANLEY E. MIZE - 1 Year
Retired Attorney President of Towne &
Countree Auto Sales and
Co-owner of Lake Shore Ford
35
Corporate Information
CORPORATE HEADQUARTERS PEOPLES BANK SB OFFICERS PEOPLES BANK SB
9204 COLUMBIA AVENUE David A. Bochnowski MANAGEMENT PERSONNEL
MUNSTER, INDIANA 46321 Chairman and Chief Executive Officer* Accounting
Joel Gorelick Arlene M. Wohadlo,
TELEPHONE Vice President, Chief Lending Officer* Assistant Vice President
219/836-9690 Edward J. Furticella
Vice President, Chief Financial Officer* Branches
Frank J. Bochnowski Shannon E. Franko, Schererville
Senior Vice President, General Counsel, Catherine L. Gonzalez, East Chicago
Trust Officer and Corporate Secretary* Christopher A. Grencik, Dyer
Daniel W. Moser David W. Homrich,
Vice President for Housing Finance Assistant Vice President, Munster
Rodney L. Grove Jill M. Knight, Assistant Vice President,
Vice President, Retail Banking Merrillville (Broadway)
Robert T. Lowry Marilyn K. Repp, Assistant Vice President,
Vice President, Controller Merrillville (Taft Street)
*Holds similar office with NorthWest Indiana Barbara J. Zura, Assistant Vice President,
Bancorp Woodmar
DIRECTORS OF NORTHWEST INDIANA BANCORP Commercial Lending
AND PEOPLES BANK SB Terry R. Gadberry, Assistant Vice President
David A. Bochnowski Todd M. Scheub
Chairman and Chief Executive
STOCK TRANSFER AGENT Officer of the Bancorp Consumer Lending
The Bank acts as the Munster, Indiana James P. Lehr
transfer agent for the Clovese R. Robinson
Bancorp's common stock. Leroy R. Cataldi Sharon V. Vacendak
Manager of Cataldi Prescription Shop,
INDEPENDENT AUDITORS Dyer, Indiana Housing Finance
Crowe, Chizek and Robert J. Soohey, Assistant Vice President
Company LLP Gloria C. Gray Sylvia Magallanez
330 East Jefferson Boulevard Retired Vice President and Treasurer Marvin O. Tucker
P.O. Box 7 of Career Development Consultants,
South Bend, Indiana 46624 Munster, Indiana Human Resource
Linda L. Kollada, Assistant Vice President
SPECIAL LEGAL COUNSEL Lourdes M. Dennison
Baker & Daniels Administrative Director,
300 North Meridian Street Kumpol Dennison Surgical Corporation, Information Services
Suite 2700 Merrillville, Indiana Tanya A. Mathews
Indianapolis, Indiana 46204
John J. Wadas, Jr. Loan Administration
ANNUAL SHAREHOLDERS MEETING Dentist practicing in Munster and Mary D. Mulroe, Assistant Vice President
The Annual Meeting of East Chicago, Indiana
Shareholders of NorthWest Management Development
Indiana Bancorp will be held Jerome F. Vrabel Meredith L. Rolewski
at the Wicker Park Social Vice President, ED&F Man Michael J. Shimala
Center, Rts. 41 & 6, Highland, International Inc., Chicago, Illinois,
Indiana, on Wednesday, April a commodities brokerage firm on the Staff Internal Auditor
22, 1998 at 8:30 a.m. Chicago Board of Trade Stacy A. Januszewski
James J. Crandall Trust
Retired Attorney Stephan A. Ziemba, Assistant
A copy of the Bancorp's Form Vice President
10-K, including financial Stanley E. Mize
statement schedules as filed President of Towne & Countree Auto
with the Securities and Sales and Co-owner of Lake Shore Ford
Exchange Commission, will be
furnished without charge to Chairman Emeritus, Advisory Director
shareholders as of the Benjamin A. Bochnowski
record date upon written
request to the Corporate Directors Emeriti
Secretary, NorthWest Harold G. Rueth
Indiana Bancorp, 9204 Albert J. Lesniak
Columbia Avenue, Munster
Indiana 46321.
36
NorthWest Indiana
_________________
BANCORP
CORPORATE HEADQUARTERS,
9204 Columbia Avenue
Munster, Indiana 46321
219/836-9690
Peoples Bank
SINCE 1910
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