SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 22, 1999
ANB CORPORATION
---------------
(Exact name of registrant as specified in its charter)
Indiana 0-18925 35-1612066
------- ------- ----------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
120 West Charles Street, Muncie, Indiana 47305
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (765) 747-7575
Item 5. Other Events
On April 22, 1999, ANB Corporation (the "Registrant") completed its pooling of
interests acquisition of Farmers State Bancorp ("Farmers"). As a result of such
acquisition, the Registrant's historical financial statements have been
restated.
Attached as an exhibit is the Registrant's Supplement to the 1998 Annual Report,
which sets forth on a restated basis to reflect the Farmers acquisition,
selected financial data, management's discussion and analysis of financial
condition and results of operations, the Registrant's consolidated balance sheet
as of December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998.
Item 7. Exhibits
(c) Exhibits
(27) Financial Data Schedule
(99) Supplement to the 1998 Annual Report
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report on Form 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
Date: January 4, 2000 By: /s/ JAMES R. SCHRECONGOST
James R. Schrecongost, Vice Chairman,
President, and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ANB CORPORATION'S SUPPLEMENT TO THE 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 31,449 25,176 24,284
<INT-BEARING-DEPOSITS> 3,003 391 74
<FED-FUNDS-SOLD> 5,200 1,725 3,275
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 88,896 76,256 79,909
<INVESTMENTS-CARRYING> 9,131 11,343 16,396
<INVESTMENTS-MARKET> 9,267 11,467 16,568
<LOANS> 536,236 475,063 440,208
<ALLOWANCE> 4,822 4,606 4,509
<TOTAL-ASSETS> 708,564 616,383 584,944
<DEPOSITS> 590,800 491,881 486,106
<SHORT-TERM> 22,456 40,221 30,715
<LIABILITIES-OTHER> 5,369 5,429 5,388
<LONG-TERM> 19,530 13,115 2,000
0 0 0
0 0 0
<COMMON> 5,398 5,362 5,375
<OTHER-SE> 65,011 60,375 55,360
<TOTAL-LIABILITIES-AND-EQUITY> 708,564 616,383 584,944
<INTEREST-LOAN> 43,427 40,911 37,704
<INTEREST-INVEST> 5,632 5,524 6,188
<INTEREST-OTHER> 1,115 427 539
<INTEREST-TOTAL> 50,174 46,862 44,431
<INTEREST-DEPOSIT> 19,713 19,035 18,921
<INTEREST-EXPENSE> 22,665 20,785 19,848
<INTEREST-INCOME-NET> 27,509 26,077 24,583
<LOAN-LOSSES> 1,502 1,027 1,156
<SECURITIES-GAINS> 725 (13) 0
<EXPENSE-OTHER> 23,628 20,851 20,344
<INCOME-PRETAX> 12,661 12,143 10,445
<INCOME-PRE-EXTRAORDINARY> 12,661 12,143 10,445
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,456 8,041 7,070
<EPS-BASIC> 1.57 1.50 1.31
<EPS-DILUTED> 1.54 1.48 1.29
<YIELD-ACTUAL> 4.79 4.98 4.93
<LOANS-NON> 1,237 546 1,345
<LOANS-PAST> 973 966 884
<LOANS-TROUBLED> 243 590 63
<LOANS-PROBLEM> 1,322 518 517
<ALLOWANCE-OPEN> 4,606 4,509 3,996
<CHARGE-OFFS> 1,419 1,149 725
<RECOVERIES> 133 219 82
<ALLOWANCE-CLOSE> 4,822 4,606 4,509
<ALLOWANCE-DOMESTIC> 4,822 4,606 4,509
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 264 503 908
</TABLE>
Exhibit 99
ANB Corporation
Supplement to the 1998 Annual Report
Restated to reflect the pooling of interests accounting acquisition of Farmers
State Bancorp on April 22, 1999.
ANB Corporation Selected Financial Data
(Dollars in Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Net interest income $ 27,509 $ 26,077 $ 24,583 $ 23,190 $ 20,906
Provision for loan losses 1,502 1,027 1,156 1,144 402
Net interest income
after provision for loan losses 26,007 25,050 23,427 22,046 20,504
Net income 8,456 8,041 7,070 6,226 5,726
Dividends 3,690 3,270 2,843 2,440 2,194
Average shares outstanding:
Basic 5,386,371 5,349,890 5,391,809 5,478,970 5,480,181
Diluted 5,501,616 5,451,073 5,486,769 5,565,303 5,564,315
PER SHARE:*
Basic net income $ 1.57 $ 1.50 $ 1.31 $ 1.14 $ 1.04
Diluted net income 1.54 1.48 1.29 1.12 1.03
Dividends 0.72 0.64 0.55 0.46 0.41
Stockholders' equity 13.04 12.26 11.30 10.75 9.72
Market stock price at year end 23.88 26.13 20.00 15.75 12.00
AT YEAR END:
Total assets $ 708,564 $ 616,383 $ 584,944 $ 573,226 $ 527,207
Loans, net 531,414 470,457 435,699 402,190 375,876
Deposits 590,800 491,881 486,106 495,832 456,721
Federal Home Loan Bank advances 36,145 39,615 14,000 2,395 395
Stockholders' equity 70,409 65,737 60,735 58,381 53,366
</TABLE>
*Per share amounts have been restated to give retroactive effect to the 1995
stock split.
<PAGE>
Management's Discussion and Analysis of the Financial
Condition and Results of Operations of the Company
The following discussion and analysis is intended to cover the significant
factors affecting the Company's consolidated financial statements from January
1, 1996, to December 31, 1998. It is designed to provide a more comprehensive
review of the operating results and financial position than could be obtained
from an analysis of the financial statements alone. It should, however, be read
in conjunction with the financial statements and notes included elsewhere
herein.
Analysis of Results of Operations Net Income. 1998 was the most profitable year
in the history of the Company. Net income for 1998 rose to $8.456 million, an
increase of $415 thousand or 5.2% over the previous high of $8.041 million which
was reported in 1997. Net income results for 1997 were higher by 13.7% or $971
thousand when compared to the $7.070 million net income recorded in 1996.
Basic net income per common share for 1998, 1997, and 1996 was $1.57, $1.50, and
$1.31 respectively. Basic net income per common share increased 4.7% for 1998
over 1997, following an increase of 14.5% in 1997 when compared to 1996.
Diluted net income per common share for 1998, 1997, and 1996 was $1.54, $1.48,
and $1.29 respectively. Diluted net income per common share increased 4.1% for
1998 over 1997, following an increase of 14.7% in 1997 when compared to 1996.
The compound annual growth rate in diluted earnings per share has been 11.1% for
the three year period beginning January 1, 1996 and ending December 31, 1998.
A significant contributor in 1998 to the Company's record earnings was the
continued quality growth in the loan portfolio, and the resulting higher level
of net interest income generated. Net interest income grew by 5.4% in 1998 over
1997, while net interest margin, stated on a fully taxable equivalent basis,
declined 19 basis points from the record high of 4.98% reached in 1997. Also
having a positive impact on 1998 results were a 18.7% increase in fees generated
by the Company's fiduciary activities and sales and calls of investment
securities resulting in gains of $725 thousand.
The following table presents certain key performance ratios for the last three
years:
1998 1997 1996
Return on average assets..................... 1.31% 1.37% 1.26%
Return on average equity..................... 12.56 12.98 12.18
Efficiency ratio*............................ 59.77 57.74 60.21
Average earning assets to average assets..... 93.12 93.49 93.57
Net interest spread**........................ 4.19 4.32 4.28
Net interest margin**........................ 4.79 4.98 4.93
* Excludes one-time special assessment of $589 thousand in 1996.
** Fully taxable equivalent basis
<PAGE>
Other factors impacting the net income of the Company are discussed below.
Net Interest Income. 1998 can be best described as a successful year for the
Company from a balance sheet growth perspective. Throughout the year aggressive
loan portfolio expansion goals were met on a regular basis. It should also be
noted that in addition to portfolio lending, the Company originated $30 million
of single-family fixed-rate mortgage loans that were sold in the secondary
market. Initially, the portfolio production was funded primarily with borrowed
money, until the Company's lead bank took advantage of an opportunity to acquire
six bank branch offices that held approximately $90 million in deposits. This
new source of liquidity not only provided the base for continued loan portfolio
growth, but more importantly it represented the establishment of an immediate
significant presence in two new markets with an expanded customer base to
cross-sell other financial products and services.
This significant asset growth achieved by the Company in 1998 was critical to
its efforts to raise net interest income in the continuing difficult flat yield
curve interest rate environment that had developed a year earlier. With most
financial institutions employing aggressive growth strategies to drive earnings,
fierce price competition resulted in a net interest margin squeeze that deeply
impacted the financial institutions industries.
Throughout 1998, the United States economy appeared somewhat immune to the
foreign economic turbulence that had permeated the globe. In an effort to
further protect the nation from potential problems related to changing
conditions both at home and abroad, beginning in late September and continuing
through mid-November, the Federal Reserve enacted a series of three federal
funds rate cuts. The Company's banks followed the lead of the larger regional
banks and quickly followed suit with identical cuts to their prime lending rate,
a move necessary to remain competitive, but at the cost of creating further
pressure on net interest margin for the near term.
In anticipation of these challenging economic conditions, the Company is
continuously developing alternative strategies to deal with the expected effect
on the volume and nature of loan demand, as well as deposit activity. The
Company strives to remain prepared to react to even minor changes in its
economic environment, and attempts to fine tune strategies in tandem with
changes in its market. This proactive approach is designed to support a macro
strategy of focusing on loan portfolio growth as the primary driver of earnings,
with funding alternatives being evaluated on an incremental cost basis with full
consideration given to the ancillary benefits that can be derived from adding to
the Company's retail customer deposit base.
The Company's strategies continued to produce the desired results, as net
interest income was once again raised substantially over the record level of the
prior year, 1997.
An increase or decrease in net interest income, the Company's primary source of
revenue, is the combined result of volume and rate changes for both earning
assets and interest-bearing liabilities. As stated earlier, loan volume
continued to be the principal factor in another record level of net interest
income. The new production was funded through multiple strategies involving
principally borrowings and then acquired deposits, in addition to the capital
provided by earnings. In a limited capacity, borrowings from the Federal Home
Loan Bank ("FHLB") often serve as an attractive alternative funding source from
a marginal cost perspective, but long term highly profitable balance sheet
growth requires new retail customers and their typically lower cost deposit
balances.
Although net interest spread (average yield on earning assets net of average
cost of interest-bearing liabilities) decreased somewhat in 1998 from the prior
year results, the Company relied on moderate growth in net average earning
assets (average earning assets net of average interest-bearing liabilities)
coupled with its significant balance sheet growth to continue to push net
interest income to a new record level.
<PAGE>
Net interest income on a tax-equivalent basis for 1998 of $28.886 million
exceeded the 1997 total of $27.417 million by $1.469 million, or 5.4%. The 1997
total represented a similar improvement over the prior year, $1.471 million, or
5.7%, increase over 1996 net interest income on a tax-equivalent basis of
$25.946 million. The growth for 1997 was primarily a function of growth in net
average earning assets coupled with an improvement in the net interest spread.
It should be noted, though, that the consistent net interest income growth for
the Company in recent years, as well as for the rest of the industry, was also
somewhat dependent upon generally favorable conditions for economic growth.
Total interest income on a tax-equivalent basis of $51.551 million for 1998 was
$3.349 million, or 6.9%, higher than the $48.202 million earned in 1997. The
increase was due to the greater volume of business, represented by a $52.238
million, or 9.5%, growth in average earning assets from $550.265 million to
$602.503 million. The yield on average earning assets fell 20 basis points from
8.76% for 1997 to 8.56% for 1998. The lower yield in 1998 reflected a lower
interest rate environment compared to the prior year.
In 1997, total interest income on a tax-equivalent basis rose 5.3% from the
$45.794 earned in 1996. The 1997 improvement was accomplished through a $23.956
million, or 4.6%, growth in average earning assets coupled with a 6 basis points
increase in yield to 8.76%. Relatively comparable yields on earning assets for
the most recent three years were a function of the generally low interest rate
volatility environment.
The deposits purchased in September of 1998 were the primary factor in average
interest-bearing deposits for the year rising $30.629 million, an 7.0% increase,
to $468.067 million from $437.438 million for 1997. The growth for 1997, all
internally generated, was $5.102 million, a modest gain of 1.2% over the 1996
average of $432.336 million.
In early 1998, the Company accelerated its use of Federal Home Loan Bank
advances to fund the expansion of the loan portfolio, which ultimately resulted
in average total borrowed money for the year growing $20.548 million to $50.914
million, a 67.7% increase over $30.366 million in average borrowings for 1997.
The greater reliance on borrowings to fund loans, while also providing
additional benefit as an interest rate risk management tool, began in 1997 when
the total of average borrowed money increased by $13.575 million, or 80.8%, to
$30.366 million, compared to only $16.791 million for 1996.
The increase in total interest expense for 1998 was primarily a function of
volume growth, as the average cost of funds dropped 7 basis points to 4.37%. One
component of that cost, money market investment accounts, did grow in both
volume and rate as customers migrated to this product attracted by both its
competitive rate and liquidity attribute. Total interest expense for 1998 of
$22.665 million was $1.880 million, or 9.0%, above the 1997 total of $20.785
million.
In 1997, total interest expense grew 4.7% from the total of $19.848 million
recorded for 1996. The increase was also primarily related to volume changes,
with the total net increase to a significant degree mitigated by rate reductions
achieved in the certificates of deposit category. Funding strategies and market
conditions resulted in a 4.44% cost of funds, a slight increase of two basis
points over the 4.42% cost for 1996.
<PAGE>
Net average earning assets (average earning assets net of average
interest-bearing liabilities) were increased to $83.522 million in 1998, from
$82.461 million in 1997 and $77.182 million in 1996, or annual increases of 1.3%
and 6.8%, for 1998 and 1997, respectively. The lower growth rate in 1998 was a
result of several factors, one of which was the impact from the purchase of the
six bank branches with the related premium paid for the purchased transaction.
Another factor, also one that is expected to provide significant future bottom
line benefit, was the Company's substantial investment in technology. The net
growth in net average earning assets was accomplished primarily through the
utilization of funds available from undistributed earnings and from an increase
in average total balances in non-interest bearing demand deposits during each of
the two years.
The Company's growth strategies produced a healthy increase in net interest
income in 1998, despite a 13 basis point drop in its net interest spread rate to
4.19% from the 1997 total of 4.32%, which had represented a 4 basis point gain
over the 4.28% achieved in 1996.
The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earnings assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year multiplied times the
prior year's interest rate, while the interest rate changes were computed as the
difference in rate between the current and prior year multiplied times the
volume of the prior year. Volume/rate variances have been allocated on the basis
of the absolute relationship between volume variances and rate variances.
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
(In Thousands on Fully Taxable Equivalent Basis)
1998 OVER 1997 1997 OVER 1996
VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Federal funds sold................. $ 263 $ (4) $ 259 $ (159) $ 4 $ (155)
Interest-bearing deposits.......... 274 6 280 10 (1) 9
Investment securities.............. 491 (247) 244 (714) 54 (660)
Loans.............................. 3,176 (610) 2,566 3,220 (6) 3,214
-------- ----- -------- ------- ------ -------
Total.......................... 4,204 (855) 3,349 2,357 51 2,408
-------- ----- -------- ------- ------ -------
INTEREST EXPENSE
NOW accounts....................... 91 (325) (234) 64 (20) 44
Money market investment accounts... 457 75 532 (19) 28 9
Savings deposits................... 1 (72) (71) (45) 1 (44)
Certificates of deposit............ 681 (232) 449 263 (157) 106
Short-term borrowings.............. (221) (46) (267) 109 35 144
Federal Home Loan Bank advances.... 1,467 4 1,471 682 (4) 678
-------- ----- -------- ------- ------ -------
Total.......................... 2,476 (596) 1,880 1,054 (117) 937
-------- ----- -------- ------- ------ -------
Change in net interest income(fully
taxable equivalent basis).......... $ 1,728 $(259) 1,469 $ 1,303 $ 168 1,471
======== ===== ======= ======
Tax equivalent adjustment............... (37) 23
-------- -------
Change in net interest income........... $ 1,432 $ 1,494
======== =======
</TABLE>
<PAGE>
Provision for Loan Losses, Allowances for Loan Losses, and Net Charge-offs.
During 1998, 1997, and 1996, the Company provided $1.502 million, $1.027
million, and $1.156 million, respectively, to replenish the allowance for loan
losses for charge-offs recorded, maintain an adequate balance for potential
losses that may exist in the portfolio, and provide for growth in the various
components of the Company's loan portfolio.
The allowance for loan losses at year end 1998, 1997, and 1996 was $4.822
million, $4.606 million, and $4.509 million, respectively. Total loan balances
at the end of these periods were $536.236 million, $475.062 million, and
$440.208 million, and the ratio of the allowance for loan losses to total loan
balances was 0.90%, 0.97%, and 1.02%, respectively.
The allowance for loan losses included $435 thousand at December 31, 1998, and
$236 thousand at December 31, 1997, for loans considered by the Company to be
impaired. Impaired loans totaled $1.810 million and $708 thousand at December
31, 1998 and 1997, respectively.
Net charge-offs in 1998 were $1.286 million compared to $930 thousand in 1997
and $643 thousand in 1996. The ratio of net charge-offs to average outstanding
loans for 1998, 1997, and 1996 was 0.26%, 0.20%, and 0.15%, respectively. That
compares favorably to the Company's peer group for the years 1997 and 1996, and
is higher than peer group for 1998. Late in the fourth quarter of 1998, the
Company charged off a commercial loan in the amount of approximately $620
thousand. The Company and its counsel are pursuing the borrower in an effort to
recover a portion of the loss incurred.
The Company's dollar amount of outstanding real estate mortgage loans comprised
approximately 65% of the Company's total loan portfolio at year end 1998. For
1998 the Company had real estate mortgage loan charge-offs of $55 thousand and
recoveries of $53 thousand resulting in a net charge-off of $2 thousand for the
year. As shown in the summary of loan loss table below, real estate mortgage
charge-offs less recoveries for the five-year period ending December 31, 1998
were $292 thousand, or an average of approximately $58 thousand a year. The
ratio of average real estate mortgage net charge-offs to average real estate
mortgage loans during this five-year period was only 0.02%.
Based on management's analysis of the composition of the loan portfolio and
current economic conditions, management considers the current allowance for loan
losses to be adequate.
<PAGE>
Summary of Loan Loss Experience
The following table summarizes the loan loss experience for the years indicated.
<TABLE>
<CAPTION>
(In Thousands Except for Ratios)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at January 1........................... $ 4,606 $ 4,509 $ 3,996 $ 3,744 $ 2,453
------- ------- ------- ------- -------
Additions resulting from acquisitions.......... 1,105
-------
Charge-offs
Commercial................................. 896 717 301 554 278
Real estate mortgage....................... 55 97 177 261 114
Loans to individuals....................... 468 335 247 286 196
------- ------- ------- ------- -------
Total charge-offs..................... 1,419 1,149 725 1,101 588
------- ------- ------- ------- -------
Recoveries
Commercial................................. 35 83 17 40 57
Real estate mortgages...................... 53 53 20 64 222
Loans to individuals....................... 45 83 45 105 86
------- ------- ------- ------- -------
Total recoveries...................... 133 219 82 209 365
------- ------- ------- ------- -------
Net charge-offs................................ 1,286 930 643 892 223
------- ------- ------- ------- -------
Provision for loan losses...................... 1,502 1,027 1,156 1,144 409
------- ------- ------- ------- -------
Balance at December 31......................... $ 4,822 $ 4,606 $ 4,509 $ 3,996 $ 3,744
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period.. 0.26% 0.20% 0.15% 0.23% 0.06%
</TABLE>
Allocation of the Allowance for Loan Losses at December 31
- ----------------------------------------------------------
Presented below is an analysis of the composition of the allowance for loan
losses (in thousands) and per cent of loans in each category to total loans:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Amount Per Cent Amount Per Cent Amount Per Cent
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31:
Commercial $ 1,953 21.2% $1,651 22.9% $1,551 20.5%
Term federal funds sold 1.6 .3 1.3
Real estate mortgage 1,623 65.2 1,423 64.6 1,228 64.5
Loans to individuals 920 10.6 996 10.9 794 12.7
Tax exempt and other 62 1.4 33 1.3 28 1.0
Unallocated 264 503 908
----------------------------------------------------------------------------------
Totals $4,822 100.0% $4,606 100.0% $4,509 100.0%
==================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Amount Per Cent Amount Per Cent
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at December 31:
Commercial $1,033 20.7% $1,103 20.2%
Term federal funds sold 2.2 2.6
Real estate mortgage 1,131 64.1 1,504 63.7
Loans to individuals 704 12.1 613 12.5
Tax exempt and other 15 .9 23 1.0
Unallocated 1,113 501
--------------------------------------------------
Totals $3,996 100.0% $3,744 100.0%
==================================================
</TABLE>
Loan Loss Charge-off Procedures
- -------------------------------
The subsidiary financial institutions have weekly loan committee meetings at
which loans in excess of certain amounts are approved or disapproved and loan
delinquencies, maturities and problems are reviewed.
The boards of directors of the subsidiaries receive and review reports on loans
monthly, including information on new and renewed, delinquent and problem loans.
All chargeoffs are reported to and approved by the subsidiaries' boards monthly.
Loans are charged off when a determination is made that all or a portion of a
loan is uncollectible or as a result of examinations by regulators and the
independent auditors.
Provision for Loan Losses
- -------------------------
In banking, loan losses are one of the costs of doing business. Although the
financial institutions' management emphasize the early detection and chargeoff
of loan losses, it is inevitable that at any time certain losses exist in the
portfolio which have not been specifically identified. Accordingly, the
provision for loan losses is charged to earnings on an anticipatory basis, and
recognized loan losses are deducted from the allowance so established. Over
time, all net loan losses must be charged to earnings. During the year, an
estimate of the loss experience for the year serves as a starting point in
determining the appropriate level for the provision. However, the amount
actually provided in any period may be greater or less than net loan losses,
based on management's judgment as to the appropriate level of the allowance for
loan losses. The determination of the provision in any period is based on
management's continuing review and evaluation of the loan portfolio, and its
judgment as to the impact of current economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, the current condition and
amount of loans outstanding, and the probability of collecting all amounts due.
<PAGE>
Other Income. The following table shows the components of other income for 1998,
1997, and 1996.
(In Thousands)
1998 1997 1996
Fiduciary activities............................... $ 6,097 $ 5,138 $ 4,470
Service charges on deposit accounts................ 1,720 1,671 1,610
Other customer fees................................ 626 474 542
Other income....................................... 878 569 581
------- ------- -------
Subtotal...................................... 9,321 7,852 7,203
Investment securities gains (losses), net.......... 725 (13)
Net loans sold gains............................... 236 105 159
------- ------- -------
Total other income............................ $10,282 $ 7,944 $ 7,362
======= ======= =======
Other income includes income items that are not directly related to the
Company's interest-earning assets. From 1997 to 1998, other income, excluding
net investment securities gains (losses) and net loans sold gains, increased
$1.469 million, or 18.7%, following a 1996 to 1997 increase of $649 thousand, or
9.0%. The 1998 increase in other income, excluding net investment securities
gains (losses) and net loans sold gains, was predominantly the result of
increased fees from fiduciary activities, other customer fees, and other income.
In 1998 fiduciary activities fees increased $959 thousand, or 18.7%, over 1997
due to net growth in fiduciary accounts and assets under management. During the
period from 1996 to 1997, fiduciary activities fees experienced a 14.9%, or $668
thousand increase. Other customer fees increased $152 thousand, or 32.1%, from
1997 to 1998 following a decline in the 1996 to 1997 period of $68 thousand. The
1998 growth in other customer fees was primarily attributable to increased
revenue from fees associated with ATM and check card delivery. Other income
increased $309 thousand from 1997 to 1998 which was principally the result of a
recovery of $205 thousand in losses that were incurred in prior years and the
reversal of a contingency loss that had been accrued in prior years. The
increase in other income followed a decrease in other income of $12 thousand
from 1996 to 1997.
From 1997 to 1998, service charges on deposit accounts experienced a modest
growth of 2.9%, or $49 thousand. From 1996 to 1997, service charges on deposit
accounts increased $61 thousand, or 3.8%.
In 1998, market opportunities and calls of investment securities allowed the
Company to realize net investment securities gains of $725 thousand. In 1998 the
Company recorded net loans sold gains of $236 thousand which represented an
increase of $131 thousand over 1997. From 1996 to 1997 net loans sold gains
decreased $54 thousand.
<PAGE>
Other Expenses. The following table shows the components of other expenses for
1998, 1997, and 1996.
(In Thousands)
1998 1997 1996
Salaries and employee benefits........................ $12,759 $11,669 $11,220
Premises and equipment expenses....................... 4,183 3,418 2,972
Advertising........................................... 871 562 520
Professional fees..................................... 430 446 332
Deposit insurance expense............................. 105 35 871
Printing and office supplies.......................... 779 690 642
Amortization of goodwill and core deposit intangibles. 631 459 375
Other expenses........................................ 3,870 3,572 3,412
------- ------- -------
Total other expenses............................. $23,628 $20,851 $20,344
======= ======= =======
Other expenses are noninterest operating expenses of the Company. Total other
expenses increased $2.777 million, or 13.3%, from 1997 to 1998, and $507
thousand, or 2.5%, from 1996 to 1997.
Salaries and employee benefits increased 9.3%, or $1,090 thousand, from 1997 to
1998, and 4.0%, or $449 thousand, from 1996 to 1997. The 1998 increase was
primarily due to the addition of staff in the acquisition of the Anderson and
Zionsville branches by American National in September,1998. The 4.0% increase
from 1996 to 1997 was principally due to the addition of staff due to the
acquisition of the Parker branch in April, 1997 and expansion into the
Indianapolis market by ANTIM.
Premises and equipment expenses increased $765 thousand from 1997 to 1998 and
$446 thousand from 1996 to 1997. Primarily, these increases reflect the
Company's commitment to technology with the mid-year 1997 purchase of a
corporate in-house core data processing system for the banking affiliates as
well as the fourth quarter 1997 upgrade of ANTIM's core accounting software.
Due to the Company's increased emphasis on marketing programs, as well as the
Company's expansion into the Anderson and Zionsville markets, advertising costs
increased $309 thousand from 1997 to 1998. The 1998 increase followed a modest
increase from 1996 to 1997 of $42 thousand.
Following an increase of $114 thousand from 1996 to 1997, professional fees
declined $16 thousand from 1997 to 1998. The 1996 to 1997 increase was primarily
attributable to costs associated with the acquisition of the Parker branch by
Peoples and a minority interest in Indiana Trust Company by ANTIM.
Deposit insurance premiums increased $70 thousand from 1997 to 1998 following a
1996 to 1997 decrease of $836 thousand. In 1996, the Federal Deposit Insurance
Corporation lowered the rate assessed on deposits insured by the Bank Insurance
Fund resulting in a reduction in federal deposit insurance expense.
<PAGE>
Printing and office supplies increased 12.9%, or $89 thousand, from 1997 to 1998
and 7.5%, or $48 thousand, from 1996 to 1997. The increases were essentially due
to general cost increases as well as the acquisition of forms and supplies for
new offices.
Amortization of goodwill and core deposit intangibles increased $172 thousand,
or 37.5% from 1997 to 1998 and $84 thousand, or 22.4%, from 1996 to 1997. The
increase in amortization of goodwill and core deposit intangibles is
attributable to the acquisition of the Anderson and Zionsville branches in 1998,
the Parker branch in 1997, and the minority interest in Indiana Trust in 1997.
Other expenses increased $298 thousand, or 8.3% from 1997 to 1998. The 1998
increase includes increased fees for various services utilized by the Company.
From 1996 to 1997 the Company recorded a moderate increase in other expenses of
$160 thousand, or 4.7%.
Income Taxes. Income tax expense for 1998, 1997, and 1996 was $4.205 million,
$4.102 million, and $3.375 million, respectively. The Company invests in
tax-exempt municipal securities as its principal strategy to reduce federal
income taxes. The Company also receives state tax credits for a portion of
interest earned on qualified loans made to urban enterprise zone businesses and
residents. The law provisions for the enterprise zone state tax credit expired
in 1998 for the Company's lead bank and will not be available for years 1999 and
beyond.
The effective tax rates for 1998, 1997, and 1996 were 33.2%, 33.8% and 32.3%,
respectively. The increase in income tax expense is generally due to increases
in income upon which applicable federal and state income taxes are calculated.
BALANCE SHEET ANALYSIS Average Balances and Interest. The Company's balance
sheet growth in 1998, driven primarily by continuing strong loan demand, spiked
sharply in September when the lead bank closed the transaction for the purchase
of six bank branch offices that held approximately $90 million in deposits.
Average total assets for 1998 of $647.010 million represented a significant
$58.400 million, or 9.9%, gain over the total of $588.610 million for 1997,
which by comparison was $26.124 million, or 4.6%, above the average total assets
of $562.486 million for 1996.
Well-designed strategic objectives, coupled with a cooperative economic climate,
once again produced solid growth in the Company's loan portfolio. Average total
loans of $491.770 million for 1998 exceeded by $35.782 million, or 7.8%, the
1997 average of $455.988 million. 1997 also was a very strong growth year, as
average total loans increased $35.828 million, or 8.5%, over the prior year
average of $420.160 million.
<PAGE>
The Company's portfolio of investment securities and overnight investments grew
dramatically in September with the cash acquired in the transaction that added
the six bank branch offices. The new funds revitalized a liquidity position that
had been allowed to decline in anticipation of the transaction closing. They
were placed primarily in short term investments, as management had plans to use
the funds for liability restructuring, and to support strategies expected to
further the expansion of the Company's loan portfolio. Relatedly, the total
investment portfolio, including overnight investments, average balance for 1998
of $110.733 million represented a substantial $16.456 million, or 17.5%,
increase over the 1997 total of $94.277 million. In 1997, investment portfolio
funds were redeployed to take advantage of more profitable lending
opportunities, and the total portfolio average balance fell $11.872 million, or
11.2%, from the 1996 total of $106.149 million. This multipurpose portfolio
serves as a ready source of liquidity, can be restructured to mitigate interest
rate risk in other areas of the balance sheet, and provides further
diversification of the Company's total portfolio of earning assets.
Although the purchase of the six bank branch offices was instrumental in the
9.5% growth of average earning assets to $602.503 million for 1998, the premium
paid on the acquired deposits caused a negative effect on the ratio of average
earning assets to average total assets. As a result, this key ratio decreased
slightly in 1998 to 93.1%, compared to 93.5% and 93.6% for 1997 and 1996,
respectively. Average earning assets of $550.265 million for 1997 represented a
$23.956 million, or 4.6%, increase over the 1996 average.
Average total deposits for 1998 of $523.722 million were up $32.912 million, or
6.7%, above the prior year. Approximately $25 million of the increase in the
average resulted from the purchased deposits. In 1997, average total deposits
for the year of $490.810 million represented a $10.129 million, or 2.1%,
increase over 1996.
As strong loan demand carried over into 1998, the Company encountered an
increasing need to fund loan production through wholesale funding sources and
decided to increase its use of FHLB credit products. This strategy allowed the
Company to continue to meet the home financing needs of the communities it
serves, grow its residential mortgage loan portfolio, and add longer term
liabilities to mitigate interest rate risk in the balance sheet. The new
residential mortgages also qualify as eligible collateral for additional
borrowings from the FHLB. This substantial borrowing activity in 1998 resulted
in average FHLB borrowings increasing by $24.803 million, or 131.8%, over the
1997 average to $43.623 million. In 1997, FHLB borrowings averaged $18.820
million, which was $11.577 million, or 159.8%, higher than 1996. Due to a
declining need, average short term borrowings dropped in 1998 to $7.291 million,
compared to $11.546 million and $9.548 million for 1997 and 1996, respectively.
Strategies employed by the Company's management, together with continuing
favorable economic conditions in recent years, have resulted in consistent and
respectable net interest income growth. Net interest income on a tax equivalent
basis for 1998 reached $28.886 million, compared to $27.417 million for 1997 and
$25.946 million for 1996. The results for the most recent two years reflect
increases of $1.469 million, or 5.4%, and $1.471 million, or 5.7%, for 1998 and
1997, respectively.
A summary of average earning assets and interest-bearing liabilities is set
forth below, together with the interest earned (on a tax-equivalent basis) and
paid on each major type of earning asset and interest-bearing liability account.
The average yield of the earning assets and the average rate paid on the
interest-bearing liabilities is also summarized.
<PAGE>
(In Thousands Except for Ratios)
<TABLE>
<CAPTION>
1998 1997 1996
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE (%) BALANCE EXPENSE RATE (%) BALANCE EXPENSE RATE (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.................. $ 7,882 $ 422 5.35% $ 2,971 $ 163 5.49% $ 5,867 $ 318 5.42%
Interest-bearing deposits........... 5,477 298 5.44% 419 18 4.30% 182 9 4.95%
Investment securities
Taxable.......................... 52,528 3,322 6.32% 46,960 3,040 6.47% 55,979 3,615 6.46%
Tax-exempt....................... 44,846 3,966 8.84% 43,927 4,004 9.12% 44,121 4,089 9.27%
-------- ------- -------- ------- -------- -------
Total investment securities..... 97,374 7,288 7.48% 90,887 7,044 7.75% 100,100 7,704 7.70%
Loans*
Commercial....................... 109,736 10,772 9.82% 99,247 9,796 9.87% 96,250 9,384 9.75%
Term federal funds............... 5,726 311 5.43% 3,475 191 5.50% 5,528 295 5.34%
Real estate mortgage............. 319,034 27,013 8.47% 296,855 25,537 8.60% 263,738 22,800 8.64%
Loans to individuals............. 52,988 5,090 9.61% 53,772 5,236 9.74% 52,211 5,098 9.76%
Tax exempt....................... 4,286 357 8.33% 2,639 217 8.22% 2,433 186 7.64%
-------- ------- -------- ------- -------- -------
Total loans..................... 491,770 43,543 8.85% 455,988 40,977 8.99% 420,160 37,763 8.99%
-------- ------- -------- ------- -------- -------
Total earning assets.......... 602,503 51,551 8.56% 550,265 48,202 8.76% 526,309 45,794 8.70%
------- ------- -------
Allowance for loan losses........... (4,619) (4,411) (3,985)
Cash and due from banks............. 19,812 18,637 17,680
Premises and equipment.............. 13,636 11,915 10,691
Other assets........................ 15,678 12,204 11,791
-------- -------- --------
Total assets..................... $647,010 51,551 $588,610 48,202 $562,486 45,794
======== ------- ======== ------- ======== -------
LIABILITIES
Interest-bearing deposits
NOW accounts..................... $88,802 1,861 2.10% $ 84,961 2,095 2.47% $82,375 2,051 2.49%
Money market investment accounts. 56,993 1,887 3.31% 43,091 1,355 3.14% 43,704 1,346 3.08%
Savings deposits................. 35,289 837 2.37% 35,266 908 2.57% 37,023 952 2.57%
Certificates of deposit.......... 286,983 15,127 5.27% 274,120 14,678 5.35% 269,234 14,572 5.41%
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits.. 468,067 19,712 4.21% 437,438 19,036 4.35% 432,336 18,921 4.38%
Short-term borrowings............... 7,291 373 5.12% 11,546 640 5.54% 9,548 496 5.19%
FHLB advances....................... 43,623 2,580 5.91% 18,820 1,109 5.89% 7,243 431 5.95%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 518,981 22,665 4.37% 467,804 20,785 4.44% 449,127 19,848 4.42%
Non-interest bearing demand deposits 55,655 53,372 48,345
Other liabilities................... 5,042 5,468 6,974
-------- -------- --------
Total liabilities............. 579,678 526,644 504,446
STOCKHOLDERS' EQUITY................... 67,332 61,966 58,040
-------- ------- -------- ------- -------- -------
Total liabilities and
stockholders' equity....... $647,010 22,665 3.76** $588,610 20,785 3.78** $562,486 19,848 3.77**
======== ------- ======== ------- ======== -------
Net interest income........... $28,886 4.79% $27,417 4.98% $25,946 4.93%
======= ======= =======
Adjustment to convert tax-exempt
investment securities and loans to
fully taxable equivalent basis,
using marginal rate of 34% after
adjustment for effect of
non-deductible interest expense
attributed to such assets $ 1,377 $ 1,340 $ 1,363
======= ======= =======
</TABLE>
* Loans held for sale are included with loans. Nonaccruing loans have been
included in the average balances.
** Total interest expense divided by total earning assets
<PAGE>
Assets. The Company's total assets grew dramatically in 1998, primarily a result
of the purchase of six bank branch offices, and totaled $708.564 million at year
end. This new record level represented $92.181 million, or 15.0%, growth over
the December 31, 1997, total assets balance of $616.383 million. In 1997, total
assets rose to a Company high at that time, finishing the year $31.439 million,
or 5.4%, higher than the December 31, 1996, total of $584.944 million.
The investment securities portfolio of $98.027 million at December 31, 1998, was
considerably higher than the balance a year earlier of $87.599 million. The
change was primarily a result of the influx of cash from the purchased branches,
most of which was invested in short term instruments and then used to fund loans
and liability restructuring. Approximately $6 million of longer term municipal
securities were sold late in the year in anticipation of additional cash being
needed to fund the significant volume in both the mortgage loan and commercial
loan pipelines.
Investment securities classified as available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings, but reported in
a separate component of stockholders' equity. As a result of a management
decision to maintain greater liquidity and flexibility within the portfolio,
securities classified as available for sale represented approximately 91% of the
portfolio at December 31, 1998. This compares to 87% and 83% at years ended
1997 and 1996, respectively.
The mix of the portfolio also changed materially during 1998, as the Company
increased its position in Federal agency notes from $10.749 million to $33.621
million. The additions were mostly callable notes that offered an initial return
significantly higher than fixed maturity alternatives.
The total of $87.599 million in investment securities at December 31, 1997, was
down $8.706 million from the prior year end. The decline in the portfolio during
1997 was primarily a function of meeting loan growth opportunities with
strategies designed to enhance the return on the Company's earning assets.
The available-for-sale investment portfolio totals include unrealized gains net
of unrealized losses totaling $1.501 million and $2.414 million at December 31,
1998 and 1997, respectively. As market conditions result in the recording of
adjustments to the carrying value of investment securities classified as
available for sale, corresponding entries, reduced by related income taxes, may
increase or decrease stockholders' equity.
Securities with a carrying value of $16.686 million, or 17.0% of the total
investment portfolio at December 31, 1998, were scheduled to mature within one
year. The following table shows the mix of the investment securities portfolio
for each of the last three years at December 31, and the maturity distribution
at year end 1998:
<PAGE>
(In Thousands Except for Ratios)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE (1) 1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury...................... $ 9,102 10.2% $19,773 25.9% $23,244 29.1%
Federal agencies................... 32,121 36.1% 9,749 12.8% 8,175 10.2%
State and municipal................ 37,208 42.0% 45,821 60.1% 44,493 55.6%
Mortgage-backed securities......... 9,968 11.2% 3,107 3.9%
Marketable equity securities....... 397 0.4% 813 1.1% 690 0.9%
Corporate obligations.............. 100 0.1% 100 0.1% 200 0.3%
------- ------ ------- ------ ------- ------
$88,896 100.0% $76,256 100.0% $79,909 100.0%
======= ====== ======= ====== ======= ======
(1) Available-for-sale securities are carried at market value
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY 1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury...................... $ 5,745 62.9% $ 8,366 73.8% $13,328 81.2%
Federal agencies................... 1,500 16.4% 1,000 8.8% 698 4.3%
State and municipal................ 1,886 20.7% 1,977 17.4% 2,160 13.2%
Mortgage-backed securities......... 210 1.3%
------- ------ ------- ------ ------- ------
$ 9,131 100.0% $11,343 100.0% $16,396 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
Available-for-sale state and municipal securities decreased $8.613 million, or
18.8%, from 1997 to 1998 due to sales and calls of state and municipal
securities.
<PAGE>
The maturity distribution and average yields for the securities portfolio at
December 31, 1998 were:
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years 5-10 Years Over 10 Years
--------------------------------------------------------------------------------------------
Amount Yield* Amount Yield* Amount Yield* Amount Yield*
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale(2)
U. S. Treasury $ 2,555 6.7% $ 6,354 6.2%
Federal agencies 4,971 5.3 13,027 5.9 $14,076 6.1%
State and municipal* 4,425 10.3 5,137 8.3 13,098 8.9 $13,216 8.5%
Corporate obligations 100 5.5
Mortgage-backed securities 1,013 7.0 910 6.5 8,116 6.7
Other securities 397 7.2
--------------------------------------------------------------------------------------------
Totals $ 12,448 7.4% $ 25,531 6.5% $28,084 7.4% $21,332 7.8%
=========== =========== =========== ===========
Distribution Percent 14.2% 29.2% 32.1% 24.5%
(2) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
</TABLE>
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years 5-10 Years Over 10 Years
--------------------------------------------------------------------------------------------
Amount Yield* Amount Yield* Amount Yield* Amount Yield*
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
U. S. Treasury $ 3,702 6.6% $ 2,043 6.5%
Federal agencies 1,000 6.2 $ 500 6.1%
State and municipal* 500 6.1 1,386 6.7
--------------------------------------------------------------------------------------------
Totals $ 4,202 6.6% $ 4,429 6.5% $ 500 6.1%
=========== =========== ===========
Distribution Percent 46.0% 48.5% 5.5%
</TABLE>
* Interest yields on state and municipal securities are presented on a fully
taxable equivalent basis using a 34% rate after adjustment for effect of
non-deductible interest expense attributed to such investments.
<PAGE>
Loans. The Company continued to rely primarily on loan portfolio growth to drive
earnings growth, with positive results being achieved throughout 1998. The
principal ingredients for another successful year of portfolio management were
effective marketing strategies, strong relationship development, and an economic
climate that presented the necessary opportunities for significant new lending
activity. The Company's efforts in 1998 produced a substantial $61.173 million,
or 12.9%, increase in portfolio size from $475.063 million at prior year end to
$536.236 million at December 31, 1998. By comparison, in 1997 the loan portfolio
growth was $34.855 million, or 7.9%, over the 1996 year end portfolio of
$440.208 million The portfolio growth for 1998 was concentrated mostly in real
estate loans originated for both residential and commercial properties, as
borrowers took advantage of relatively low long term interest rates, resulting
in significant refinancing activity, with some migration from adjustable rate
products. Using cash available from the purchase of the six bank branch offices,
the Company was able to selectively grow that portion of the portfolio, while
continuing to sell loans to Federal Home Loan Mortgage Corporation. The Company
views growth of its loan servicing portfolio as a strategy essential to
expanding its customer base, in addition to producing a rising fee income
annuity.
In 1998 the Company grew real estate loans by $42.729 million, or 13.9%, to
$349.684 million from $306.955 million at December 31, 1997. Real estate loans
represented 65.2% and 64.6% of the total loan portfolio at December 31, 1998 and
1997, respectively. The Company's aggressive secondary market operations in 1998
produced a $9.251 million, or 15.9%, increase in mortgage loans serviced for
others from $58.265 million on December 31, 1997, to $67.516 at year end 1998.
<PAGE>
In 1998, commercial loan growth slowed from the prior year, being impacted by
early repayments and financing opportunities in the commercial mortgage area.
Improving cash flow for many customers resulted in lower line of credit usage,
and several major commercial loan relationships were paid as local businesses
were sold. In spite of these impediments, the Company was still able to realize
a $5.404 million, or 5.0%, increase in balances to $113.943 million, compared to
$108.539 million at December 31, 1997.
1998 followed an extremely successful growth year in 1997, during which the
Company was able to generate a significant $18.159 million, or 20.1%, increase
over the December 31, 1996, total of $90.380 million in commercial loan
balances.
The Company was also rewarded in 1998 for its considerable effort in
implementing growth strategies for the consumer loan component of the portfolio,
as total balances reached $56.731 million at December 31, 1998, a $4.894
million, or 9.4%, gain over the prior year end total of $51.837 million.
Types of Loans
- --------------
The loan portfolio at the dates indicated is presented below:
<TABLE>
<CAPTION>
December 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 113,943 $108,539 $ 90,380 $ 84,258 $76,740
Term federal funds sold 8,623 1,500 5,500 8,784 9,969
Real estate mortgage 349,684 306,955 284,059 260,306 241,646
Individuals' loans for
household expenditures 56,731 51,837 55,718 49,059 47,292
Tax-exempt and other loans 7,255 6,232 4,551 3,779 3,972
------------------------------------------------------------------------------
Total loans $536,236 $475,063 $440,208 $406,186 $379,619
==============================================================================
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
- ------------------------------------------------------------------
Presented in the table below are the maturities of the commercial loan portfolio
and the sensitivity of the portfolio at December 31, 1998 as to predetermined or
adjustable interest rates.
<TABLE>
<CAPTION>
Within 1-5 Over
1 Year Years 5 Years Total
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed rate loans $ 20,502 $ 18,802 $2,645 $ 41,949
Variable rate loans 49,725 16,799 5,470 71,994
---------------------------------------------------------------------
Totals $ 70,227 $ 35,601 $8,115 $ 113,943
=====================================================================
Per cent 61.7% 31.2% 7.1% 100.0%
</TABLE>
Principal balances of term loans included in the 1-5 Years and Over 5 Years
categories are shown based on maturity date.
<PAGE>
Risk Elements
- -------------
Nonaccrual, past due and restructured loans
<TABLE>
<CAPTION>
December 31 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 1,237 $ 546 $1,345 $1,184 $2,472
Accruing loans contractually
past due 90 days or more as to
interest or principal payments 973 966 884 583 1,034
Restructured loans 243 590 63 880 156
Impaired loans included in the above table 488 190 720
</TABLE>
Nonaccruing loans are loans which are reclassified to a nonaccruing status when
in management's judgment the collateral value and financial condition of the
borrower do not justify accruing interest. Interest previously recorded but not
deemed collectible is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
No interest income for the year ended December 31, 1998 was recognized on the
nonaccruing and restructured loans listed in the table above, whereas interest
income of $24,000 would have been recognized under their original loan terms.
Potential problem loans:
Management has identified additional impaired loans of $1,322,000 as of December
31, 1998, not included in the risk element table, about which there are doubts
as to the borrowers' ability to comply with present repayment terms. Loans are
considered to be impaired when it becomes probable that the bank subsidiaries
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.
Risk elements are considered by management in determining the appropriate level
of the allowance for loan losses.
Other Assets. Emphasis on continuing to add new technology to better serve the
Company's existing customers and gain new ones, and the purchase of the six bank
branch offices were the chief factors responsible for the net book value of
premises and equipment increasing by $389 thousand to $13.443 million at
December 31, 1998. In 1997, the Company's revamping of its technology systems,
including the installation of a new core processing system and a computer
network linking all offices, resulted in significant investment costs that were
the primary factor in a $2.456 million rise in the carrying value of premises
and equipment for the year.
The $332 thousand and $1.986 million increases in 1998 and 1997, respectively,
for total Federal Reserve and FHLB stock were due to additional investments
required to support a higher credit line at the FHLB.
The balance of core deposit intangibles and goodwill was $6.913 million higher
at December 31, 1998, than a year earlier as a result of the purchase of the
bank branches.
Deposits. Through early 1998 the loan portfolio growth had been fueled primarily
by borrowings from the FHLB, and the Company's lead bank began to approach its
credit limit with that facility when the opportunity surfaced to bid on six bank
offices with approximately $90 million in deposits. Being the successful bidder
not only provided the funds to increase the pace of loan portfolio growth in
1998, but also shored up a weakened liquidity position, created an immediate
significant presence in two new markets for further business development, and
broadened the customer base to spread the rising costs for the new technology so
critical to carrying the Company into the new millennium.
<PAGE>
In 1998, competition for deposits among financial institutions heated up and
certificate of deposit "specials" became more widely used and more aggressively
priced. The continuing climb of the stock market and attractive returns on
alternative investments available through non-bank competitors also created a
difficult environment for internally generated deposit account growth. The
Company's continuing efforts to manage the marginal cost of new retail deposits
further increased the difficulty in achieving meaningful growth in total deposit
account balances.
The deposits acquired in 1998, coupled with moderate internal growth, resulted
in total deposits at December 31, 1998, of $590.800 million, an increase of
$98.919 million, or 20.1%, more than the prior year end. By comparison, total
deposits of $491.881 million at December 31, 1997, represented a slight gain for
the year of $5.775 million, or 1.2%.
Due to a relatively low interest rate environment and a very flat yield curve
that offered minimal incentive for customers to lock in long term rates, funds
continued to migrate to daily money market deposit accounts and short term
certificates of deposit. As of December 31, 1998, 40.9% of interest-bearing
deposits were in daily accounts, compared to only 37.9% at December 31, 1997.
Additionally, 78.6% of all certificate of deposit balances at December 31, 1998,
were scheduled to mature within one year. By comparison, a year earlier 72.4% of
all certificate balances were scheduled to mature within twelve months.
<PAGE>
This shift in the retail deposit mix to more liquid instruments creates
significant challenges for management from both an interest rate risk and
customer retention perspective. The Asset/Liability Management committees of the
Company's banks meet on a regular basis, with special meetings called as needed,
to deal with these issues and fine tune strategies designed to meet earnings
objectives.
DEPOSITS
The following table shows the average amount of deposits and the average rate of
interest paid thereon for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $55,655 $ 53,372 $ 48,345
NOW accounts 88,802 2.1% 84,961 2.5% 82,375 2.5%
Money market investment accounts 56,993 3.3 43,091 3.1 43,704 3.1
Savings 35,289 2.4 35,266 2.6 37,023 2.6
Certificates of deposit 286,983 5.3 274,120 5.4 269,234 5.4
-------------- -------------- --------------
Totals $523,722 $490,810 $480,681
============== ============== ==============
</TABLE>
As of December 31, 1998, certificates of deposit and other time deposits of
$100,000 or more mature as follows:
<TABLE>
<CAPTION>
3-6 6-12 Over
3 Months Months Months 12 Months Total
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit $45,844 $13,856 $ 7,635 $ 9,663 $76,998
Per cent 59.5% 18.0% 10.0% 12.5% 100.0%
</TABLE>
<PAGE>
Borrowed Funds. As stated earlier, the Company relied heavily on FHLB borrowings
in 1997 and through early 1998 to fund the considerable growth of the loan
portfolio. There was a significant paydown of these borrowings in the last
quarter of 1998. Using the cash from the retail deposits acquired with the
purchase of the bank branches, the Company reduced total borrowings from the
FHLB to $36.145 million at December 31, 1998, $3.470 million less than a year
earlier. By contrast, the December 31, 1997, total of $39.615 million was
$25.615 million higher than the prior year end.
At times the Company will fund large long term loans with FHLB borrowings to
lock in a spread and minimize interest rate risk in the balance sheet. These and
other interest rate risk management strategies have resulted in $19.530 million,
or 54.0%, of the dollar amount of FHLB advances on the books at year end 1998
having scheduled maturity dates beyond one year.
The availability of FHLB borrowings as an alternative funding source to new
deposits also allows the Company's management to price deposits with reasonable
consideration given to controlling the marginal cost of growth.
Federal funds, repurchase agreements, and U.S. Treasury tax notes are all
borrowing instruments used to meet the short-term cash needs of the Company.
These short-term borrowings totaled $5.841 million at December 31, 1998, down
$7.880 million, or 57.4%, from a year earlier. This substantial change was also
primarily a result of the availability of funds from the purchased bank
branches.
Total borrowed funds were reduced substantially in the last quarter of 1998 to
$41.986 million at December 31, 1998, down $11.350 million, or 21.3% lower than
a year earlier.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Short-term borrowings
Federal funds purchased $ 6,375 $ 7,325
Securities sold under repurchase agreements $ 4,321 3,980 7,203
U. S. Treasury demand notes 1,520 3,366 4,187
---------------------------------------------------
Totals $ 5,841 $13,721 $18,715
===================================================
</TABLE>
Securities sold under repurchase agreements are borrowings maturing within one
year and are secured by U. S. Treasury and Federal agencies securities.
<PAGE>
Pertinent information with respect to short-term borrowings is summarized below:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate on outstanding balance
Securities sold under repurchase agreements 4.3% 5.1% 5.1%
Total short-term borrowings 4.2 5.9 6.1
Weighted average interest rate paid on short-term
borrowings during the year 5.1 5.5 5.2
Highest amount outstanding at any month end
during the year (in thousands)
Securities sold under repurchase agreements $5,353 $ 6,932 $ 7,203
Total short-term borrowings 14,673 19,669 18,715
Average short-term borrowings outstanding
during the year (in thousands) 7,291 11,546 9,548
</TABLE>
Liquidity, Interest Rate Sensitivity, and Market Risk. The principal objective
of liquidity management is to insure the availability of sufficient funds to
meet borrowers' credit requirements and depositor withdrawal needs on a
continual basis, while maintaining a responsive program of investing excess
funds until the need arises for their use. Funds management committees are
responsible for monitoring the liquidity position on a monthly basis at each
affiliate. Outside sources for temporary primary liquidity, which include the
federal funds market and the Federal Reserve discount window, are available
should such a situation develop.
During 1998 and 1997, funds principally provided through net income, advances
from the Federal Home Loan Bank and a reduction in the Company's average daily
federal funds sold position were used by the Company to take advantage of loan
demand. In addition, in September 1998, deposits acquired in the acquisition of
the branches by American National provided additional funds to meet loan demand.
Interest rate sensitive assets and liabilities are monitored monthly by the
Asset/Liability Management committees. A rate sensitive asset is any asset that
can be repriced upward or downward within a specific time frame, and likewise, a
rate sensitive liability is any liability that can be repriced upward or
downward within the identical time frame. Measuring interest rate sensitivity is
an important fundamental to develop so that proper management of interest
margins can be achieved, thereby avoiding wide variances in net interest income
and net income. A positive or negative gap results from the measurement of rate
sensitivity, and this gap can be expressed as a percentage of total assets. The
lower the negative or positive gap, the less likely a severe earnings swing will
occur during periods of rapidly changing interest rates.
On December 31, 1998, the Company had $285.694 million in rate-sensitive assets
and $373.064 million in rate-sensitive liabilities which matured or could be
repriced within one year. For this one year time frame, the Company had a
negative rate sensitivity gap. A negative rate sensitivity gap is beneficial to
the Company's net interest income during a time when interest rates are falling,
and could adversely impact the Company's net interest income during a period in
which interest rates are rising. The Company's current negative gap for the one
year time frame expressed as a percentage of total assets is 12.3%.
The following table shows the gap position of the Company at December 31, 1998.
<PAGE>
(In Thousands Except for Ratios)
<TABLE>
<CAPTION>
0-3 3-6 TOTAL 6 6-12 TOTAL 12 OVER 12 CURRENT
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS BALANCE
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold................. $ 5,200 $ 5,200 $ 5,200 $ 5,200
Interest-bearing deposits in banks. 3,003 3,003 3,003 3,003
Securities available for sale
Taxable........................ 5,233 $988 6,221 $1,822 8,043 $43,645 51,688
Tax-exempt..................... 3,840 3,840 601 4,441 32,767 37,208
Securities held to maturity
Taxable........................ 3,702 3,702 3,543 7,245
Tax-exempt..................... 500 500 1,386 1,886
Mortgage loans held for sale....... 311 311 311 311
Loans.............................. 114,997 59,939 174,936 80,913 255,849 280,387 536,236
Federal Reserve and Federal Home
Loan Bank stock................... 4,645 4,645 4,645 386 5,031
-------- ------- -------- ------- -------- -------- --------
Totals.................... 137,229 60,927 198,156 87,538 285,694 362,114 647,808
-------- ------- -------- ------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Deposits
NOW accounts................... 10,614 9,457 20,071 15,927 35,998 61,293 97,291
Money market accounts.......... 25,790 17,457 43,247 19,812 63,059 16,762 79,821
Regular savings................ 1,670 1,593 3,263 2,977 6,240 30,463 36,703
Certificates of deposit........ 139,477 50,977 190,454 54,857 245,311 63,345 308,656
Short-term borrowings.............. 5,841 5,841 5,841 5,841
Federal Home Loan Bank advances.... 3,500 1,000 4,500 12,115 16,615 19,530 36,145
-------- ------- -------- ------- -------- -------- --------
Totals.................... 186,892 80,484 267,376 105,688 373,064 191,393 564,457
-------- ------- -------- ------- -------- -------- --------
Rate sensitivity gap positive
(negative)............................. $(49,663) $(19,557) $(69,220) $(18,150) $(87,370)
======== ======= ======== ======= ========
Rate sensitivity gap as a percent of
total assets........................... (7.0%) (2.8%) (9.8%) (2.6%) (12.3%)
Percent of earning assets to
interest-bearing liabilities........... 73.4% 74.1% 76.6%
</TABLE>
Market risk is the risk of loss in financial instruments arising from adverse
changes in market rates and prices. Interest rate risk is the primary source of
market risk for the Company. Interest rate risk is always present in the
Company's balance sheet, impacting the Company's performance and value. The
Company's Asset/Liability Management committees monitor and manage interest rate
risk on an ongoing basis.
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. When interest rates change, the interest income and expense
streams associated with the Company's financial instruments change, thereby
impacting net interest income. The Company uses a rate sensitivity gap analysis
and rate shock analysis for estimating the impact on interest margin in the
event of market interest rate changes. The timing mismatch between the
re-pricing of assets and liabilities is at the core of interest rate risk. If
re-pricing opportunities of assets and liabilities were identical, there would
be no risk and the spread between the two would remain constant if assets and
liabilities were priced off of the same index or yield curve. However, in
reality the mismatch exists, and it is the Company's challenge to quantify and
manage the timing difference of the interest spread.
<PAGE>
Based on the Company's model utilized, if market interest rates were to
immediately increase 100 basis points, the Company would experience a slight
decline in earnings, due to a decrease in net interest income of approximately
$240 thousand over a one year time period. This hypothetical estimate is based
on numerous assumptions including yield curve shape and loan amortization. In
addition, maturing balances are replaced with new balances at the new rate level
and repricing balances are adjusted to the new rate shock level. The analysis
assesses the behavior of earning assets and interest-bearing liabilities and
assumes that account rate behavior correlates to economic behavior. The Company
cannot make any assurances as to the predictive nature of these assumptions, nor
can it assess the impact of such variables as prepayment and refinancing levels,
depositor withdrawals, customer product preference changes, and competitive
factors as well as other internal and external variables. In addition, this
analysis cannot reflect actions taken by the Company's Asset/Liability
Management committee; therefore, this analysis should not be relied upon as
indicative of expected operating results.
Capital. A strong capital position continues to be a primary goal of the
Company. Accordingly, capital positions are monitored on an ongoing basis to
ensure that the Company maintains adequate capital and that its affiliate banks
maintain ratios in excess of those considered by regulatory authorities to be
"well capitalized." Bank regulators have adopted regulations that define five
capital levels: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized, and critically undercapitalized.
Bank regulators have also adopted "risk adjusted" capital ratios for banks and
bank holding companies. These risk based guidelines require the assignment of
risk weightings to all assets and certain off-balance sheet items. Banks are
required to have a total risk-based capital ratio of 10% or greater to be
considered "well capitalized." At December 31, 1998, Peoples was well
capitalized with a total risk-based capital ratio of 10.9% and Farmers State
Bank was well capitalized with a total risk-based capital ratio of 17.4%.
American National's ratio was 9.4%, which was in excess of an adequate capital
ratio of 8.0% and less than the well capitalized ratio of 10.0%. The Company's
total risk-based capital ratio at December 31, 1998, was 13.0%.
Branch expansion by the Company's lead bank will require additional capital be
injected at the bank level to support new loan growth which is anticipated to
occur. To facilitate the additional capital needs, the Company plans to
reallocate capital among its affiliates thus achieving a more efficient and
effective use of capital. In addition, the Company is considering other outside
sources of funds available to satisfy its capital needs.
For the three years ended December 31, 1998, the Company recorded net income
totaling $23.567 million. Total stockholders' equity has grown from $58.381
million on January 1, 1996, to $70.409 million at year end 1998, an increase of
$12.028 million or 20.6% for the three-year period. Shareholders have received a
total of $9.803 million in cash dividends, which represents a dividend payout of
net income equal to 41.6% during this three-year period. In August of 1998, the
Company's Board of Directors approved increasing the quarterly dividend from
$0.17 to $0.19 a share effective with the third quarter of 1998. This 11.8%
increase in the quarterly dividend rate marked the nineteenth consecutive year
dividends have grown at a rate of 10.8% or more. The average increase in total
dividends paid per share during the last fifteen years has been 16.2%.
The following table shows various capital and performance ratios for the last
three years:
<PAGE>
1998 1997 1996
Capital ratios
Total capital to risk-weighted assets.............. 13.0% 14.7% 14.8%
Tier I capital to risk-weighted assets............. 12.0 13.7 13.8
Tier I capital to average assets (leverage ratio).. 8.2 9.9 9.6
Dividend payout ratio*.................................. 43.6 40.1 40.2
Increases in annual dividends paid...................... 12.5 16.4 19.6
Total return to investors**............................. (6.1) 34.6 30.9
Market value as a % of book value.......................183.4 213.5 175.6
Price/earnings multiple at year end..................... 15.5 17.7 15.5
Average equity to average assets ratio.................. 10.4 10.5 10.3
* Total dividends to net income
**Market value change with dividends reinvested
Year 2000. A significant issue in the banking industry and for the economy
overall relates to the year 2000. The Year 2000 ("Y2K") issue is the result of
computer programs being written using two digits rather than four digits to
define the applicable year. In 1997 the Company and each of its affiliates
formed Year 2000 committees to address Y2K issues. These committees included key
members of the operations and technology staff, representatives of functional
business units, and senior management. A plan was created and is regularly
evaluated by senior management and the respective affiliate Boards of Directors.
An inventory of all software and hardware used throughout the company was
completed, and letters were sent to all parties to track the Y2K status of
vendors providing services and equipment. The Company continues to monitor
progress of these parties and any new parties with which the Company does
business. Of the systems and applications used, a determination was made to
identify those that were "mission-critical" to the operations of the Company.
In 1997 the Company upgraded the core data processing system used by the banking
affiliates and also several other peripheral systems. In addition, ANTIM
upgraded its core accounting system. These upgrades placed the Company on the
cutting edge of technology along with the added benefit of the Year 2000
readiness that was provided by the new systems. Since the Company relies
predominately on third-party vendors for its systems, there has been no internal
software to have rewritten.
The total cost to the Company for the Year 2000 project is estimated to be
between $140 thousand and $215 thousand. Approximately $70 thousand of the total
cost relates to equipment acquisition which is depreciable under the Company's
premises and equipment policy. In 1999, additional funds have been provided in
the Company's operating budget to address Y2K issues. A substantial amount of
the costs incurred under Y2K is an acceleration of costs that would have been
incurred in the normal course of business. The total cost of Y2K readiness has
not been, and is not anticipated to be, material to the financial position,
results of operations, or cash flow of the Company.
The Company has spent considerable time testing its core processing systems for
Year 2000 compliance and is pleased to report that no Y2K deficiencies have been
found. All other "mission-critical" systems have been tested or are currently in
the testing process. To date, we have found no cause for concern with any of
these systems. Other "non-mission-critical" software and hardware is being
tested to assure that no major problems arise as we approach the new millennium.
All testing is substantially complete and will be finished by June 30, 1999.
One critical area each banking affiliate has addressed is the potential risk
associated with borrowers who have not addressed their own Year 2000 status.
Each bank has determined a risk-based assessment of its customers, and key
customers have been contacted. Those customers with some substantial risk are
being handled on a case by case basis.
Realizing that even our best efforts could still result in some minor
disruptions, the Company is in the process of developing a contingency plan for
all critical systems in the event that one of these should fail. This plan is
being rewritten and will be completed by June 30, 1999.
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
Reporting Comprehensive Income. The Financial Accounting Standards Board
("FASB") issued Statement No. 130, "Reporting Comprehensive Income" establishing
standards for the reporting of comprehensive income and its components in
financial statements. Enterprises that have no items of other comprehensive
income in any period presented are excluded from the scope of this Statement.
Statement No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Upon implementing this new statement, an enterprise will classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
Statement No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. The Company adopted
Statement No. 130 for 1998.
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 established standards for the way that public business enterprises
report selected information about operating segments in financial reports issued
to shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers.
Statement No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operation decision-maker in deciding how to allocate
resources and in assessing performance.
Statement No. 131 is effective for financial statements for periods beginning
after December 15, 1997. The Company reported segment information beginning in
1998.
Accounting for Derivative Instruments and Hedging Activities. Statement No. 133
requires companies to record derivatives on the balance sheet at their fair
value. Statement No. 133 also acknowledges that the method of recording a gain
or loss depends on the use of the derivative. If certain conditions are met, a
derivative may be specifically designed as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
Statement No. 133 amends Statement No. 52 and supersedes Statement Nos. 80, 105,
and 119. Statement No. 107 is amended to include the disclosure provision about
the concentrations of credit risk from Statement No. 105. Several Emerging
Issues Task Force consensuses are also changed or nullified by the provisions of
Statement No. 133.
Statement No. 133 will be effective for all fiscal years beginning after June
15, 1999.
<PAGE>
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. Statement No. 134
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends Statement No. 65.
Statement No. 65, as previously amended by Statement Nos. 115 and 125, required
a mortgage banking enterprise to classify a mortgage-backed-security as a
trading security following the securitization of the mortgage loan held for
sale. This Statement further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities must classify the resulting mortgage-backed security or other
retained interests based on the entity's ability and intent to sell or hold
those investments.
The determination of the appropriate classification for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise now
conforms to Statement No. 115. The only requirement the new Statement No. 134
adds is that if an entity has a sales commitment in place, the security must be
classified into trading.
This Statement is effective for the first fiscal quarter beginning after
December 15, 1998. On the date this Statement is initially applied, an entity
may reclassify mortgage-backed securities and other beneficial interest retained
after the securitization of mortgage loans held for sale from the trading
category, except for those with sales commitments in place. Those securities and
other interest shall be classified based on the entity's present ability and
intent to hold the investments.
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The Accounting Standards Executive Committee ("AcSEC") has issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". This SOP standardizes the accounting treatment of
internal use computer software.
For the purposes of this SOP, internal-use software is software that is
acquired, internally developed, or modified solely to meet the entity's internal
needs with no plan to market the software externally.
This SOP applies to all nongovernmental entities and is effective for financial
statements for fiscal years beginning after December 15, 1998. The SOP's
provisions should be applied to computer software costs incurred in those fiscal
years for all projects, including those projects in progress upon initial
application of this SOP. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued.
<PAGE>
ANB CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Table of Contents
Page
- -------------------------------------------------------------------------
Independent Auditor's Report 1
Financial Statements
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors
ANB Corporation
Muncie, Indiana
We have audited the accompanying consolidated balance sheet of ANB Corporation
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 described above present
fairly, in all material respects, the consolidated financial position of ANB
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Olive LLP
Indianapolis, Indiana
January 29, 1999, except for
Note 2 as to which the date is April 22, 1999, and for
the second paragraph of Note 18 as to which the date is
March 31, 1999
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In Thousands Except Share Data)
<S> <C> <C>
Assets
Cash and due from banks $ 31,449 $ 25,176
Federal funds sold 5,200 1,725
Interest-bearing demand deposits 3,003 391
--------------------------------------
Cash and cash equivalents 39,652 27,292
Investment securities
Available for sale 88,896 76,256
Held to maturity (fair value of $9,267 and $11,467) 9,131 11,343
--------------------------------------
Total investment securities 98,027 87,599
Mortgage loans held for sale 311 76
Loans, net of allowance for loan losses of $4,822 and $4,606 531,414 470,457
Premises and equipment 13,443 13,054
Federal Reserve and Federal Home Loan Bank stock 5,031 4,699
Foreclosed assets 345 558
Interest receivable 5,564 5,413
Core deposit intangibles and goodwill 11,963 5,050
Other assets 2,814 2,185
--------------------------------------
Total assets $708,564 $616,383
======================================
Liabilities
Deposits
Noninterest bearing $ 68,329 $ 59,539
Interest bearing 522,471 432,342
--------------------------------------
Total deposits 590,800 491,881
Short-term borrowings 5,841 13,721
Federal Home Loan Bank advances 36,145 39,615
Interest payable 2,063 1,576
Other liabilities 3,306 3,853
--------------------------------------
Total liabilities 638,155 550,646
--------------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, without par value
Authorized and unissued--250,000 shares
Common stock, $1 stated value
Authorized--20,000,000 shares
Issued and outstanding--5,398,091 and 5,361,841 shares 5,398 5,362
Paid-in capital 12,370 11,312
Paid-in capital--stock options 256 335
Retained earnings 51,470 47,265
Accumulated other comprehensive income 915 1,463
--------------------------------------
Total stockholders' equity 70,409 65,737
--------------------------------------
Total liabilities and stockholders' equity $708,564 $616,383
======================================
</TABLE>
See notes to consolidated financial statements.
(2)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(In Thousands Except Share Data)
<S> <C> <C> <C>
Interest Income
Loans receivable
Taxable $43,186 $40,761 $37,577
Tax exempt 241 150 127
Investment securities
Taxable 2,927 2,792 3,404
Tax exempt 2,705 2,732 2,784
Federal funds sold 422 163 318
Other interest and dividend income 693 264 221
------------------------------------------
Total interest income 50,174 46,862 44,431
------------------------------------------
Interest Expense
Deposits 19,713 19,035 18,921
Short-term borrowings 372 640 496
Federal Home Loan Bank advances 2,580 1,110 431
------------------------------------------
Total interest expense 22,665 20,785 19,848
------------------------------------------
Net Interest Income 27,509 26,077 24,583
Provision for loan losses 1,502 1,027 1,156
------------------------------------------
Net Interest Income After Provision for Loan Losses 26,007 25,050 23,427
------------------------------------------
Other Income
Fiduciary activities 6,097 5,138 4,470
Service charges on deposit accounts 1,720 1,671 1,610
Other customer fees 626 474 542
Investment securities gains (losses), net 725 (13)
Net loans sold gains 236 105 159
Other income 878 569 581
------------------------------------------
Total other income 10,282 7,944 7,362
------------------------------------------
Other Expenses
Salaries and employee benefits 12,759 11,669 11,220
Premises and equipment expenses 4,183 3,418 2,972
Advertising 871 562 520
Professional fees 430 446 332
Deposit insurance expense 105 35 871
Printing and office supplies 779 690 642
Amortization of goodwill and core deposit intangibles 631 459 375
Other expenses 3,870 3,572 3,412
------------------------------------------
Total other expenses 23,628 20,851 20,344
------------------------------------------
Income Before Income Tax 12,661 12,143 10,445
Income tax expense 4,205 4,102 3,375
------------------------------------------
Net Income $ 8,456 $ 8,041 $ 7,070
==========================================
Basic Earnings Per Share $1.57 $1.50 $1.31
==========================================
Diluted Earnings Per Share $1.54 $1.48 $1.29
==========================================
See notes to consolidated financial statements.
(3)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
</TABLE>
<TABLE>
<CAPTION>
Compensatory Stock
Options
Common Stock ------------------------
-------------------- Prepaid
Shares Paid-in Paid-in Compensation Comprehensive
Outstanding Amount Capital Capital Expense Income
- ------------------------------------------------------------------------------------------------------------------
(In Thousands Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 5,428,810 $5,429 $10,197 $466 $(68)
Net income $7,070
Unrealized losses on securities,
net of reclassification (781)
adjustment
----------------
Total comprehensive income $6,289
================
Cash dividends ($.55 per share)
Exercise of stock options 39,950 40 287 (57)
Stock tendered in exercise of
stock options (10,488) (10) (13)
Compensation expense related to
options granted 56
Compensatory stock options (12) 12
cancelled
Tax benefit on stock options 109
exercised
Stock sold 508 10
Stock repurchases (107,845) (108) (196)
Stock issued under dividend
reinvestment and stock
purchase plan 23,759 24 401
--------------------------------------------------------------
Balances, December 31, 1996 5,374,694 5,375 10,795 397
Net income $8,041
Unrealized gains on securities,
net of reclassification 204
adjustment
----------------
Total comprehensive income $8,245
================
Cash dividends ($.64 per share)
Exercise of stock options 29,200 29 233 (62)
Stock tendered in exercise of
stock options (9,132) (9) (14)
Tax benefit on stock options 136
exercised
Stock sold 1,134 1 11
Stock repurchases (54,405) (54) (255)
Stock issued under dividend
reinvestment and stock
purchase plan 20,350 20 406
--------------------------------------------------------------
Balances, December 31, 1997 5,361,841 5,362 11,312 335
Net income $8,456
Unrealized losses on securities,
net of reclassification (548)
adjustment
----------------
Total comprehensive income $7,908
================
Cash dividends ($.72 per share)
Exercise of stock options 41,300 41 396 (79)
Stock tendered in exercise of
stock options (7,305) (7) (11)
Tax benefit on stock options 248
exercised
Stock sold 340 4
Stock repurchases (15,702) (16) (26)
Stock issued under dividend
reinvestment and stock
purchase plan 17,617 18 447
==============================================================
Balances, December 31, 1998 5,398,091 $5,398 $12,370 $256 $ 0
==============================================================
<PAGE>
Accumulated
Other
Retained Comprehensive
Earnings Income Total
- -----------------------------------------------------------------------------
<C> <C> <C> <C>
Balances, January 1, 1996 $40,317 $2,040 $58,381
Net income 7,070 7,070
Unrealized losses on securities,
net of reclassification (781) (781)
adjustment
Total comprehensive income
Cash dividends ($.55 per share) (2,843) (2,843)
Exercise of stock options 270
Stock tendered in exercise of
stock options (157) (180)
Compensation expense related to
options granted 56
Compensatory stock options
cancelled
Tax benefit on stock options 109
exercised
Stock sold 10
Stock repurchases (1,478) (1,782)
Stock issued under dividend
reinvestment and stock
purchase plan 425
----------------------------------------
Balances, December 31, 1996 42,909 1,259 60,735
Net income 8,041 8,041
Unrealized gains on securities,
net of reclassification 204 204
adjustment
Total comprehensive income
Cash dividends ($.64 per share) (3,270) (3,270)
Exercise of stock options 200
Stock tendered in exercise of
stock options (159) (182)
Tax benefit on stock options 136
exercised
Stock sold 12
Stock repurchases (256) (565)
Stock issued under dividend
reinvestment and stock
purchase plan 426
----------------------------------------
Balances, December 31, 1997 47,265 1,463 65,737
Net income 8,456 8,456
Unrealized losses on securities,
net of reclassification (548) (548)
adjustment
Total comprehensive income
Cash dividends ($.72 per share) (3,690) (3,690)
Exercise of stock options 358
Stock tendered in exercise of
stock options (182) (200)
Tax benefit on stock options 248
exercised
Stock sold 4
Stock repurchases (379) (421)
Stock issued under dividend
reinvestment and stock
purchase plan 465
========================================
Balances, December 31, 1998 $51,470 $ 915 $70,409
========================================
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating Activities
Net income $ 8,456 $ 8,041 $ 7,070
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 1,502 1,027 1,156
Depreciation and amortization 2,140 1,466 1,261
Amortization of goodwill and core deposit intangibles 631 459 375
Deferred income tax (102) (329) (382)
Investment securities amortization, net 55 49 66
Investment securities (gains) losses (725) 13
Net loans sold gains (236) (105) (159)
Mortgage loans originated for sale (29,739) (10,588) (10,924)
Proceeds from sale of mortgage loans 29,739 10,821 11,008
Net change in
Accounts receivable for loans sold 163
Interest receivable (151) (313) 11
Interest payable 157 (56) (256)
Other adjustments (816) 284 191
--------------------------------------
Net cash provided by operating activities 10,911 10,769 9,580
--------------------------------------
Investing Activities
Net change in marketable equity securities available for sale 415 (123) 251
Purchases of securities available for sale (53,068) (11,973) (19,579)
Purchases of securities held to maturity (1,000) (1,096) (809)
Proceeds from calls and maturities of securities available for sale 23,088 8,950 12,627
Proceeds from calls and maturities of securities held to maturity 3,185 6,077 5,300
Proceeds from sales of securities available for sale 16,709 7,146 250
Net change in loans (62,666) (36,027) (35,115)
Purchases of premises and equipment (1,985) (3,823) (1,029)
Proceeds from sale of foreclosed real estate 448 299 253
Purchase of Federal Home Loan Bank stock (332) (1,986) (52)
Net cash received (paid) in acquisitions 82,252 7,342 (399)
Other investing activities 105 21 24
--------------------------------------
Net cash provided (used) by investing activities 7,151 (25,193) (38,278)
--------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 27,068 755 (7,047)
Certificates of deposit (18,184) (4,050) (2,670)
Short-term borrowings (7,880) (4,994) 10,770
Proceeds from Federal Home Loan Bank advances 31,530 46,495 15,000
Repayment of Federal Home Loan Bank advances (35,000) (20,880) (3,395)
Cash dividends (3,690) (3,270) (2,843)
Stock repurchases (421) (565) (1,782)
Proceeds from sale of stock 4 12 10
Exercise of stock options 406 154 199
Dividend reinvestment and stock purchase plan 465 426 425
--------------------------------------
Net cash provided (used) by financing activities (5,702) 14,083 8,667
--------------------------------------
Net Change in Cash and Cash Equivalents 12,360 (341) (20,031)
Cash and Cash Equivalents, Beginning of Year 27,292 27,633 47,664
--------------------------------------
Cash and Cash Equivalents, End of Year $39,652 $27,292 $27,633
======================================
Additional Cash Flows Information
Interest paid $22,179 $20,841 $20,195
Income tax paid 4,417 4,224 3,670
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of ANB Corporation (Company) and its
wholly owned subsidiaries, American National Bank and Trust Company of Muncie
(American National), Peoples Loan & Trust Bank (Peoples), The Farmers State Bank
(Farmers), and American National Trust and Investment Management Company
(ANTIM), and ANB Financial Planning Services (ANBFPS), a subsidiary of American
National, conform to generally accepted accounting principles and general
practices followed by the banking industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and 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. Actual
results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the banks and other subsidiaries. The bank and trust company
subsidiaries operate under national and state bank charters and provide full
banking services and trust services. Accordingly, these subsidiaries are subject
to regulation by the Office of the Comptroller of the Currency; Department of
Financial Institutions, State of Indiana; Division of Financial Institutions,
State of Ohio; and the Federal Deposit Insurance Corporation.
The banking subsidiaries generate commercial, mortgage and consumer loans and
receive deposits from customers located primarily in Boone, Delaware, Jay,
Madison, Randolph and Wayne Counties, Indiana; Darke County, Ohio and
surrounding counties. The loans are generally secured by specific items of
collateral including real property, consumer assets and business assets.
American National also engages in loan servicing for investors. ANTIM provides
trust and asset management services, and ANBFPS is engaged in the selling of
financial services.
Consolidation--The consolidated financial statements include the accounts of the
Company and subsidiaries after elimination of all material intercompany
transactions.
Investment securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Net unrealized losses are recognized through a valuation allowance by
charges to income.
(6)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. A loan is impaired when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Loan payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Company
considers its investment in one-to-four family residential loans and installment
loans to be homogeneous and therefore excluded from separate identification of
evaluation of impairment. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1998 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the areas
within which the banking subsidiaries operate would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line and the declining balance
methods based principally on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Reserve and Federal Home Loan Bank stock are required investments for
institutions that are members of the Federal Reserve Bank (FRB) and Federal Home
Loan Bank (FHLB) systems. The required investment in the common stock is based
on a predetermined formula.
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Core deposit intangibles and goodwill are being amortized on straight-line or
accelerated methods over periods from 10 to 20 years. Such assets are
periodically evaluated as to the recoverability of their carrying value.
Stock options subsequent to 1993 are granted for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and, accordingly, recognizes no compensation expense
for the stock option grants.
(7)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.
Earnings per share have been computed based upon the weighted average common and
potential common shares outstanding during each year.
Note 2 -- Merger
In October 1998, the Company entered into an Agreement and Plan of Merger
(Agreement) with Farmers State Bancorp (Farmers Bancorp), Union City, Ohio. The
merger was consummated on April 22, 1999. Under the Agreement, stockholders of
Farmers Bancorp received 5.4 shares of Company common stock for each share of
common stock of Farmers Bancorp owned, or a total of approximately 841,000
shares. Total assets, total deposits and stockholders' equity were $92,624,
$82,366 and $9,813 at December 31, 1998. The merger was accounted for using the
pooling-of-interests method of accounting. The majority of merger and related
costs was charged against net income in 1999.
The financial information contained herein reflects the merger and reports the
financial condition and results of operations as though the merger occurred as
of January 1, 1996. Separate operating results of the combined enterprises for
the periods prior to the merger were as follows:
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------
Net interest income
ANB Corporation $23,953 $22,504 $21,028
Farmers State Bancorp 3,556 3,573 3,555
-----------------------------------------
Combined $27,509 $26,077 $24,583
=========================================
Net income
ANB Corporation $7,775 $7,007 $6,006
Farmers State Bancorp 681 1,034 1,064
-----------------------------------------
Combined $8,456 $8,041 $7,070
=========================================
Basic earnings per share
ANB Corporation $1.44 $1.31 $1.11
Farmers State Bancorp .13 .19 .20
-----------------------------------------
Combined $1.57 $1.50 $1.31
=========================================
Diluted earnings per share
ANB Corporation $1.41 $1.29 $1.10
Farmers State Bancorp .13 .19 .19
-----------------------------------------
Combined $1.54 $1.48 $1.29
=========================================
(8)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 3 -- Branch Acquisitions
In September 1998, the Company purchased branches in Boone and Madison counties.
These branch acquisitions were accounted for using the purchase method of
accounting. Total assets acquired, including cash of $82,252, and total
liabilities assumed, including deposits at fair value of $90,196, totaled
$90,543. The results of operations of the branches have been included since
their acquisition dates. Intangible assets are being amortized over estimated
useful lives.
In April 1997, the Company purchased a branch in Randolph County. Total assets
acquired, including cash of $7,852, and total deposit liabilities assumed
totaled $9,070.
Note 4 -- Restriction on Cash and Due From Banks
The banking subsidiaries are required to maintain reserve funds in cash and/or
on deposit with the FRB. The reserve required at December 31, 1998, was $7,498.
Note 5 -- Investment Securities
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Gains Losses Fair
December 31 Cost Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U. S. Treasury $ 8,909 $ 193 $ 9,102
Federal agencies 32,074 128 $ 81 32,121
State and municipal 35,876 1,335 3 37,208
Mortgage-backed securities 10,039 7 78 9,968
Marketable equity securities 397 397
Corporate obligations 100 100
------------------------------------------------------------------
Total available for sale 87,395 1,663 162 88,896
------------------------------------------------------------------
Held to maturity
U. S. Treasury 5,745 98 5,843
Federal agencies 1,500 10 1,510
State and municipal 1,886 28 1,914
------------------------------------------------------------------
Total held to maturity 9,131 136 9,267
------------------------------------------------------------------
Total investment securities $96,526 $1,799 $162 $98,163
==================================================================
</TABLE>
(9)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Gains Losses Fair
December 31 Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U. S. Treasury $19,619 $ 162 $ 8 $19,773
Federal agencies 9,742 23 16 9,749
State and municipal 43,568 2,256 3 45,821
Marketable equity securities 813 813
Corporate obligations 100 100
----------------------------------------------------------------
Total available for sale 73,842 2,441 27 76,256
----------------------------------------------------------------
Held to maturity
U. S. Treasury 8,366 109 3 8,472
Federal agencies 1,000 1,000
State and municipal 1,977 19 1 1,995
----------------------------------------------------------------
Total held to maturity 11,343 128 4 11,467
----------------------------------------------------------------
Total investment securities $85,185 $2,569 $31 $87,723
================================================================
</TABLE>
Marketable equity securities consist of shares in a mutual fund which invests in
money market instruments including federal funds and repurchase agreements.
The amortized cost and fair value of securities available for sale at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $4,202 $4,242 $12,051 $12,087
One to five years 4,429 4,519 24,518 24,931
Five to ten years 500 506 27,174 27,772
After ten years 13,216 13,741
------------------------------------------------------------------
9,131 9,267 76,959 78,531
Mortgage-backed securities 10,039 9,968
Marketable equity securities 397 397
------------------------------------------------------------------
Totals $9,131 $9,267 $87,395 $88,896
==================================================================
</TABLE>
Securities with a total carrying value of $49,861 and $40,448 were pledged at
December 31, 1998 and 1997 to secure certain deposits and for other purposes
as permitted or required by law.
(10)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Proceeds from sales of securities available for sale during 1998 and 1997 were
$16,709 and $7,146. Gross gains of $583 and $31 and gross losses of $2 and $44
were realized on the 1998 and 1997 sales. Gains from securities called included
in the consolidated statement of income were $144 for 1998.
The tax expense (benefit) for securities gains (losses) was $287 for 1998 and
$(5) for 1997.
Note 6 -- Loans and Allowance
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and industrial loans $113,943 $108,539
Term federal funds sold 8,623 1,500
Real estate loans
One-to-four family properties 210,447 180,196
Other 139,237 126,759
Individuals' loans for household and other personal expenditures 56,731 51,837
Tax-exempt loans 4,711 3,602
Other loans 2,544 2,630
--------------------------------------
Total loans 536,236 475,063
Allowance for loan losses (4,822) (4,606)
--------------------------------------
Net loans $531,414 $470,457
======================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, January 1 $4,606 $4,509 $3,996
Provision for losses 1,502 1,027 1,156
Recoveries on loans 133 219 82
Loans charged off (1,419) (1,149) (725)
----------------------------------------------------
Balances, December 31 $4,822 $4,606 $4,509
====================================================
</TABLE>
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with an allowance $1,726 $518
Impaired loans for which the discounted cash flows or collateral value exceeds the
carrying value of the loan 84 190
------------------------------
Total impaired loans $1,810 $708
==============================
Allowance for impaired loans (included in the Company's allowance for loan losses) $434 $236
==============================
</TABLE>
(11)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average balance of impaired loans $1,947 $839 $1,152
Interest income recognized on impaired loans 114 46 56
Cash-basis interest included above 114 46 56
</TABLE>
Note 7 -- Premises and Equipment
<TABLE>
<CAPTION>
December 31 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,614 $ 2,576
Buildings 9,454 9,212
Leasehold improvements 702 563
Equipment 12,566 11,299
--------------------------------------
Total cost 25,336 23,650
Accumulated depreciation (11,893) (10,596)
--------------------------------------
Net $13,443 $13,054
======================================
</TABLE>
Note 8 -- Deposits
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $245,441 $189,485
Savings deposits 36,703 33,834
Certificates and other time deposits of $100,000 or more 76,998 66,464
Other certificates and time deposits 231,658 202,098
-------------------------------------
Total deposits $590,800 $491,881
=====================================
</TABLE>
Certificates and other time deposits maturing in years ending after December 31,
1998:
1999 $242,485
2000 44,043
2001 16,804
2002 2,264
2003 3,060
----------
$308,656
==========
(12)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 9 -- Short-Term Borrowings
December 31 1998 1997
- ---------------------------------------------------------------------------
Federal funds purchased $ 6,375
Securities sold under repurchase agreements $4,321 3,980
U. S. Treasury demand notes 1,520 3,366
-------------------------
Total short-term borrowings $5,841 $13,721
=========================
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. The obligations are secured by U. S. Treasury
securities, and such collateral is held in safekeeping by financial
institutions. The maximum amount of outstanding agreements at any month end
during 1998 and 1997 totaled $5,353 and $6,932 and the monthly average of such
agreements totaled $3,771 and $5,488. The agreements at December 31, 1998 mature
on a daily basis.
Note 10 -- Federal Home Loan Bank Advances
FHLB advances were $36,145 and $39,615 at December 31, 1998 and 1997. Maturities
by year for advances at December 31, 1998 are $16,615 in 1999; $8,500 in 2000;
$6,140 in 2003 and $4,890 in 2008. The weighted average interest rate at
December 31, 1998 and 1997 was 5.67% and 5.93%.
These advances are secured by first mortgage loans and investment securities
totaling $197,228 and $156,217 at December 31, 1998 and 1997. Advances are
subject to restrictions or penalties in the event of prepayment.
Note 11 -- Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others totaled $67,516 and $58,265 at December 31, 1998 and 1997.
Retained mortgage servicing rights on originated or purchased loans capitalized
by the Company are not material.
(13)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 12 -- Income Tax
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $3,327 $3,423 $2,861
State 980 1,008 896
Deferred
Federal (137) (308) (318)
State 35 (21) (64)
--------------------------------------
Total income tax expense $4,205 $4,102 $3,375
======================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $4,305 $4,129 $3,551
Tax exempt interest (877) (855) (870)
Effect of state income taxes 670 651 549
Nondeductible goodwill amortization 128 122 121
Other (21) 55 24
--------------------------------------
Actual tax expense $4,205 $4,102 $3,375
======================================
</TABLE>
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
December 31 1998 1997
- ------------------------------------------------------------------------
Assets
Allowance for loan losses $1,250 $940
Pensions and employee benefits 565 537
Directors' fees 221 209
Stock option compensation 109 142
Other 10
------------------------------
Total assets 2,145 1,838
------------------------------
Liabilities
Depreciation (641) (625)
State income tax (108) (123)
FHLB dividends (110) (110)
Securities available for sale (584) (950)
Other (204)
------------------------------
Total liabilities (1,647) (1,808)
------------------------------
$ 498 $ 30
==============================
No valuation allowance was necessary at any time during 1998, 1997 or 1996.
(14)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 13 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1998
---------------------------------------------------
Tax (Expense)
Before-Tax Amount Benefit Net-of-Tax Amount
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(327) $130 $(197)
Less: reclassification adjustment for gains realized in net income 581 (230) 351
---------------------------------------------------
Net unrealized losses $(908) $360 $(548)
===================================================
1997
---------------------------------------------------
Tax (Expense)
Before-Tax Amount Benefit Net-of-Tax Amount
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $325 $(129) $196
Less: reclassification adjustment for losses realized in net income (13) 5 (8)
---------------------------------------------------
Net unrealized gains $338 $(134) $204
===================================================
1996
---------------------------------------------------
Tax (Expense)
Before-Tax Amount Benefit Net-of-Tax Amount
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $(1,293) $512 $(781)
===================================================
</TABLE>
Note 14 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
banking subsidiaries' exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The banking subsidiaries use the same credit
policies in making such commitments as they do for instruments that are included
in the consolidated balance sheet.
(15)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1998 1997
- -----------------------------------------------------------------------------
Commitments to extend credit $88,617 $77,876
Standby letters of credit 2,357 1,169
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The banking subsidiaries evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banking subsidiaries upon extension of
credit, is based on management's credit evaluation. Collateral held varies but
may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banking
subsidiaries to guarantee the performance of a customer to a third party.
The Company has entered into agreements with eleven officers which provide for
salary continuation for a three-year period under certain circumstances
following a change of control of the Company, as defined. Under the terms of the
agreements, these payments could occur if, during a two-year period following a
change of control, such officers are terminated other than for cause or
unreasonable changes are made in their employment relationships.
In September 1997, ANTIM acquired a 15% interest in the outstanding shares of
common stock of Indiana Trust & Investment Management Company (Indiana Trust), a
trust company located in Mishawaka, Indiana, for a purchase price of
approximately $510, including goodwill of $313. The investment was recorded
using the equity method of accounting. ANTIM is obligated to acquire the
remaining outstanding shares of common stock of Indiana Trust for cash or
Company stock in 2002 or earlier, subject to various terms and conditions set
forth in the Stock Acquisition Agreement. The agreement contains terms and
conditions related to the determination of the purchase price of the stock, a
change in control of the Company or ANTIM, Indiana Trust shareholder changes,
its termination and other matters.
The Company and its subsidiaries are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
(16)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 15 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Company and subsidiaries does business. If remediation efforts of the
Company or third parties with which the Company and subsidiaries does business
are not successful, the Year 2000 Issue could have negative effects on the
Company's financial condition and results of operations in the near term.
Note 16 -- Dividends and Capital Restrictions
Without prior approval, current regulations allow American National, Peoples,
Farmers and ANTIM to pay dividends to the Company not exceeding net profits (as
defined) for the current year plus those for the previous two years. As a result
of these restrictions, net assets of these subsidiaries not available for
payment of dividends to the Company were approximately $59,272 as of December
31, 1998. Total net assets of these subsidiaries at such date were $67,529. As a
practical matter, the subsidiaries' dividends are restricted to a lesser amount
because of the need to maintain adequate capital structures.
Note 17 -- Stock Transactions
In July 1998, the Company approved a new program to repurchase its common stock
to provide shares for issuance under its stock option and dividend reinvestment
plans. The plan was cancelled in December 1998. The Company repurchased 15,702;
54,405 and 107,845 shares of its common stock in 1998, 1997 and 1996 under stock
repurchase programs.
Pursuant to the stock option plans, the Company redeemed 7,305; 9,132 and 10,488
shares of its common stock and issued 41,300; 29,200 and 39,950 shares of common
stock in 1998, 1997 and 1996, respectively. Tax benefits of $248; $136 and $109
related to the exercise of stock options were credited to paid-in capital in
1998, 1997 and 1996.
The Company approved a Dividend Reinvestment and Stock Purchase Plan in 1994
enabling stockholders to elect to have their cash dividends on all shares held
automatically reinvested in additional shares of the Company's common stock. In
addition, stockholders may elect to make optional cash payments up to an
aggregate of $5,000 per quarter for the purchase of additional shares of common
stock. The stock is credited to participant accounts at fair market value.
Dividends are reinvested on a quarterly basis on the applicable dividend payment
date that began with the October 1994 dividend payment. The plan made 200,000
shares available for purchase. At December 31, 1998, 106,020 shares of common
stock remained available for purchase under the plan.
(17)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 18 -- Regulatory Capital
The Company and banking subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies and are assigned to a
capital category. The assigned capital category is largely determined by three
ratios that are calculated according to the regulations: total risk-adjusted
capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part of
the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1998 and 1997,
the banking subsidiaries are categorized as well capitalized and met all subject
capital adequacy requirements, except for American National at December 31,
1998, which was categorized as adequately capitalized for the total
risk-adjusted capital ratio. There are no conditions or events since December
31, 1998, that management believes have changed the Company's or bank
subsidiaries' classification, except that as of March 31, 1999, American
National was categorized as well capitalized for the total risk-adjusted capital
ratio as a result of receiving capital contributions from the Company.
(18)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
The Company's and subsidiary banks' actual and required capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
Required for Adequate To Be Well
Actual Capital (1) Capitalized (1)
---------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital 1 (to risk-weighted assets)
Consolidated $61,726 13.0% $38,115 8.0% N/A
American National 27,070 9.4% 23,012 8.0% $28,765 10.0%
Peoples 14,866 10.9% 10,868 8.0% 13,585 10.0%
Farmers 10,329 17.4% 4,760 8.0% 5,949 10.0%
Tier I capital 1 (to risk-weighted assets)
Consolidated 57,390 12.0% 19,057 4.0% N/A
American National 24,782 8.6% 11,506 4.0% 17,259 6.0%
Peoples 13,567 10.0% 5,434 4.0% 8,151 6.0%
Farmers 9,580 16.1% 2,380 4.0% 3,570 6.0%
Tier I capital 1 (to average assets)
Consolidated 57,390 8.2% 27,831 4.0% N/A
American National 24,782 5.8% 17,172 4.0% 21,465 5.0%
Peoples 13,567 8.2% 6,632 4.0% 8,290 5.0%
Farmers 9,580 10.2% 3,754 4.0% 4,693 5.0%
As of December 31, 1997
Total capital 1 (to risk-weighted assets)
Consolidated $63,395 14.7% $34,539 8.0% N/A
American National 31,663 12.3% 20,551 8.0% $25,689 10.0%
Peoples 13,467 11.8% 9,094 8.0% 11,367 10.0%
Farmers 10,115 17.1% 4,732 8.0% 5,915 10.0%
Tier I capital 1 (to risk-weighted assets)
Consolidated 59,153 13.7% 17,339 4.0% N/A
American National 29,380 11.4% 10,276 4.0% 15,414 6.0%
Peoples 12,254 10.8% 4,547 4.0% 6,820 6.0%
Farmers 9,370 15.8% 2,367 4.0% 3,549 6.0%
Tier I capital 1 (to average assets)
Consolidated 59,153 9.9% 23,959 4.0% N/A
American National 29,380 8.3% 14,082 4.0% 17,602 5.0%
Peoples 12,254 8.1% 6,060 4.0% 7,575 5.0%
Farmers 9,370 10.3% 3,639 4.0% 4,549 5.0%
</TABLE>
(1) As defined by regulatory agencies
(19)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 19 -- Employee Benefit Plans
The Company's defined-benefit pension plan covers substantially all of its
employees. The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements:
December 31 1998 1997
- ---------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $8,922 $8,027
Service cost 466 474
Interest cost 635 589
Actuarial loss 845 439
Benefits paid (332) (607)
-------------------------
Benefit obligation at end of year 10,536 8,922
-------------------------
Change in plan assets
Fair value of plan assets at beginning of year 9,967 8,901
Actual return on plan assets 1,265 1,592
Employer contribution 55 81
Benefits paid (332) (607)
-------------------------
Fair value of plan assets at end of year 10,955 9,967
-------------------------
Funded status 419 1,045
Unrecognized net actuarial loss (gain) 276 (158)
Unrecognized prior service cost (373) (407)
Unrecognized transition asset (450) (527)
-------------------------
Accrued benefit cost $ (128) $ (47)
=========================
Plan assets at fair value related to the Company
Company common stock 1,002 1,024
Collective investment funds managed by ANTIM 518 893
(20)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $466 $474 $486
Interest cost 635 589 548
Expected return on plan assets (855) (762) (688)
Amortization of transition adjustment (77) (77) (77)
Amortization of prior service cost (34) (34) (34)
Recognized net actuarial loss 25
-----------------------------
Net periodic benefit cost $135 $190 $260
=============================
Assumptions used in the accounting were:
Discount rate 7.25% 7.25% 7.50%
Rate of increase in compensation 4.50% 4.50% 4.50%
Expected long-term rate of return on assets 8.70% 8.70% 8.70%
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The Company matches employees' contributions at a
specified rate of base salary contributed by participants. The Company also has
a stock investment plan under which employees may, at their option, purchase
stock of the Company. The Company contributes 20 percent of employees'
contributions. The expense for these plans was $195 for 1998, $187 for 1997 and
$158 for 1996.
Note 20 -- Related Party Transactions
The Banks have entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
Balances, January 1, 1998 $20,618
Changes in composition of related parties (1,373)
New loans, including renewals 6,099
Payments, etc., including renewals (10,816)
------------
Balances, December 31, 1998 $14,528
============
Deposits from related parties held by the subsidiary banks at December 31, 1998
totaled $6,312.
(21)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 21 -- Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services of generating loans and receiving deposits
from customers. The Company, through ANTIM, its trust company subsidiary, also
provides trust and asset management services. The following is a summary of
selected data for the various business segments:
<TABLE>
<CAPTION>
Banking Trust
Services Services Company(1) Eliminations(2) Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Total interest income $49,944 $230 $50,174
Total non-interest income 4,303 6,143 $10,687 $(10,851) 10,282
Total interest expense 22,665 22,665
Total non-interest expense 16,345 4,913 3,240 (870) 23,628
Income before income tax 13,735 1,460 7,447 (9,981) 12,661
Income tax expense (benefit) 4,615 599 (1,009) 4,205
Total assets 703,301 8,121 70,932 (73,790) 708,564
Capital expenditures 915 698 543 (171) 1,985
Goodwill acquired 6,688 6,688
Depreciation and amortization 1,899 383 489 2,771
1997
Total interest income $46,599 $263 $46,862
Total non-interest income 2,969 5,179 $9,062 $(9,266) 7,944
Total interest expense 20,785 20,785
Total non-interest expense 15,547 4,225 1,517 (438) 20,851
Income before income tax 12,208 1,218 7,545 (8,828) 12,143
Income tax expense (benefit) 4,101 497 (496) 4,102
Total assets 607,532 7,604 66,375 (65,128) 616,383
Capital expenditures 1,899 197 1,727 3,823
Goodwill acquired 890 313 1,203
Depreciation and amortization 1,540 261 124 1,925
1996
Total interest income $44,209 $222 $44,431
Total non-interest income 3,142 4,409 $7,786 $(7,975) 7,362
Total interest expense 19,848 19,848
Total non-interest expense 15,980 3,716 1,013 (365) 20,344
Income before income tax 10,368 914 6,773 (7,610) 10,445
Income tax expense (benefit) 3,296 376 (297) 3,375
Total assets 578,583 7,140 60,899 (61,678) 584,944
Capital expenditures 929 96 13 (9) 1,029
Goodwill acquired 372 372
Depreciation and amortization 1,366 225 45 1,636
</TABLE>
(1) From parent company only statements
(2) Eliminations include intercompany dividends and undistributed income of
Company subsidiaries from parent company only statements; Company revenues
of $697 for 1998, $218 for 1997 and $120 for 1996 from banking subsidiaries
and revenues between segments of $173 for 1998, $220 for 1997 and $245 for
1996.
(22)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 22 -- Stock Option Plans
Under the Company's stock option plans, which are accounted for in accordance
with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, and related interpretations, the Company grants selected
executives and other key employees and directors stock option awards. The
exercise price of each option since 1994 was equal to the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized. The excess of fair market value over the option price at date of
grant for grants prior to 1994 granted at 75% of fair market value was recorded
as prepaid compensation expense and allocated to paid-in capital. The Company
recorded amortization of prepaid compensation expense of $56,000 for 1996 as a
charge to income.
Under terms of the ANB Corporation Stock Option Plan (1990 Plan) for key
employees, 300,000 shares of Company common stock shall be available for grant,
and the option price upon exercise shall not be less than 75% of fair market
value of such stock at date of grant. Options granted shall be exercisable in
four annual installments, on a cumulative basis, beginning one year after date
of grant, or upon a change in control of the Company as defined in the 1990
Plan, a purchase of Company stock pursuant to a tender offer or exchange offer,
or a merger or sale of assets in which the Company does not survive as an
independent entity. The period for exercising options shall not exceed ten
years. There were 9,800 shares available for grant under the 1990 Plan as of
December 31, 1998.
Under terms of the ANB Corporation 1995 Stock Option Plan (1995 Plan) for key
employees, 300,000 shares of Company common stock shall be available for
granting both incentive (ISO's) and non-qualified stock options. The option
price to be paid upon exercise shall be not less than fair market value at date
of grant. The period for exercising options shall not exceed ten years from the
date of grant. The options shall be exercisable in four annual installments, on
a cumulative basis, beginning one year after date of grant, after reaching age
65, upon circumstances or earlier times determined by the Compensation Committee
or upon a change in control as defined in the 1995 Plan. There were 120,500
shares available for grant under the 1995 Plan as of December 31, 1998.
Under terms of the ANB Corporation 1996 Directors' Stock Option Plan (Directors'
Plan), 96,000 shares of Company stock shall be available for granting
non-qualified stock options. The option price to be paid upon exercise shall be
not less than fair market value at date of grant. The period for exercising
options shall not exceed ten years from the date of grant. Options granted shall
be exercisable in four annual installments, on a cumulative basis, beginning one
year after date of grant. Exercise rights terminate thirty days after status as
a director terminates other than for retirement after age 70, death or
disability. There were 16,000 options available for grant under the Directors'
Plan as of December 31, 1998. Options for up to 27,000 shares (at exchange
ratio) under a terminated Farmers Bancorp plan were also authorized in 1996.
(23)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Although the Company has elected to follow APB Opinion No. 25, Statement of
Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of
net income and earnings per share as if the Company had accounted for its
employee stock options under that Statement. The fair value of each option grant
was estimated on the grant date using an option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 4.7 and 5.6% 5.8 and 6.6% 6.2 and 6.5%
Dividend yields 2.7% 2.9% 3.0 and 4.1%
Expected volatility factors of market price of common stock 13.0% 11.0% 11.0%
Weighted-average expected life of the options 6 years 6 years 6 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $8,456 $8,041 $7,070
Pro forma 8,314 7,973 7,046
Basic earnings per share As reported 1.57 1.50 1.31
Pro forma 1.54 1.49 1.31
Diluted earnings per share As reported 1.54 1.48 1.29
Pro forma 1.51 1.46 1.28
</TABLE>
During the initial phase-in period of SFAS No. 123, the effects of applying this
Statement are not likely to be representative of the effects on reported net
income for future years because options vest over several years and additional
awards generally are made each year.
(24)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
The following is a summary of the status of the Company's stock option plans and
changes in those plans as of and for the years ended December 31, 1998, 1997,
and 1996.
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-Average Weighted-Average
Average Exercise Price Exercise Price
Options Shares Exercise Price Shares Shares
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 385,800 $14.00 340,250 $11.30 305,150 $8.97
Granted 73,500 25.85 76,000 23.29 80,800 17.93
Exercised (41,300) 8.69 (29,200) 6.86 (39,950) 6.75
Cancelled (2,500) 15.58 (1,250) 18.78 (5,750) 10.52
-------------- ----------- ------------
Outstanding at end of year 415,500 16.62 385,800 14.00 340,250 11.30
============== =========== ============
Options exercisable at year end 229,700 214,625 189,700
Weighted-average fair value of options
granted during the year $4.37 $3.96 $3.04
</TABLE>
As of December 31, 1998, other information in exercise price ranges for options
outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-Average
Number Remaining Average Number Exercise Price
Exercise Price Ranges of Shares Contractual Life Exercise Price of Shares
- ---------------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$5.44 - 6.56 75,300 2.3 years $6.09 75,300 $6.09
8.80 - 12.38 85,300 4.7 years 10.62 74,500 10.70
15.44 - 20.38 136,400 7.7 years 17.94 68,650 17.51
24.06 - 28.75 118,500 9.5 years 26.10 11,250 26.50
=========== ============
Total 415,500 6.7 years 16.62 229,700 12.00
=========== ============
</TABLE>
(25)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 23 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Per Share Average Per Share Average Per Share
Year Ended December 31 Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders $8,456 5,386,371 $1.57 $8,041 5,349,890 $1.50 $7,070 5,391,809 $1.31
========== ==========
==========
Effect Of Dilutive Stock Options
115,245 101,183 94,960
--------------------- --------------------- --------------------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $8,456 5,501,616 $1.54 $8,041 5,451,073 $1.48 $7,070 5,486,769 $1.29
============================================================================================
</TABLE>
Options to purchase 28,000 shares of common stock at $28.75 per share and 45,000
shares at $26.50 per share were outstanding at December 31, 1998 and 1997,
respectively, but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
Note 24 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans are estimated using discounted cash flow
analyses and using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FRB and FHLB Stock--Fair value of FRB and FHLB stock is based on the price at
which it may be resold to the FRB and FHLB.
Interest Receivable/Payable--The fair values of accrued interest
receivable/payable approximate carrying values.
(26)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Short-term Borrowings--The interest rates on short-term borrowings approximate
market rates, and thus the fair values approximate carrying values.
FHLB Advances--The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current FHLB advance rates for
periods comparable to the remaining terms to maturity of these advances.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $39,652 $39,652 $27,292 $27,292
Investment securities available for sale 88,896 88,896 76,256 76,256
Investment securities held to maturity 9,131 9,267 11,343 11,467
Loans including loans held for sale, net 531,725 536,490 470,533 472,280
Stock in FRB and FHLB 5,031 5,031 4,699 4,699
Interest receivable 5,564 5,564 5,413 5,413
Liabilities
Deposits 590,800 592,634 491,881 492,970
Short-term borrowings 5,841 5,841 13,721 13,721
FHLB advances 36,145 36,512 39,615 39,629
Interest payable 2,063 2,063 1,576 1,576
</TABLE>
(27)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Note 25 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash on deposit $ 665 $ 683
Investment securities available for sale 15 15
Investment in subsidiaries 67,529 63,581
Core deposit intangibles and goodwill 47 75
Premises and equipment 1,735 1,653
Other assets 941 368
--------------------------
Total assets $70,932 $66,375
==========================
Liabilities $ 523 $ 638
Stockholders' Equity 70,409 65,737
--------------------------
Total liabilities and stockholders' equity $70,932 $66,375
==========================
</TABLE>
(28)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $5,484 $5,069 $10,795
Other income 706 234 120
---------------------------------
Total income 6,190 5,303 10,915
---------------------------------
Expenses
Amortization of core deposit intangibles, goodwill and fair value
adjustments 34 38 43
Salaries and employee benefits 1,823 915 626
Compensation expense for stock options 56
Premises and equipment 778 161 8
Professional fees 165 85 62
Other expenses 440 318 218
---------------------------------
Total expenses 3,240 1,517 1,013
---------------------------------
Income before income tax and equity in undistributed income of subsidiaries
2,950 3,786 9,902
Income tax benefit 1,009 496 297
---------------------------------
Income before equity in undistributed income of subsidiaries 3,959 4,282 10,199
Equity in undistributed (distribution in excess of) income of subsidiaries
4,497 3,759 (3,129)
---------------------------------
Net Income $8,456 $8,041 $ 7,070
=================================
</TABLE>
(29)
<PAGE>
ANB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $8,456 $8,041 $7,070
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed income of subsidiaries (4,497) (3,759) 3,129
Noncash dividend (6,426)
Depreciation 461 92 8
Other adjustments (659) 550 (62)
-----------------------------------
Net cash provided by operating activities 3,761 4,924 3,719
-----------------------------------
Investing Activities
Net change in marketable equity securities available for sale (1) (14)
Purchases of premises and equipment (543) (1,727) (13)
-----------------------------------
Net cash used by investing activities (543) (1,728) (27)
-----------------------------------
Financing Activities
Cash dividends (3,690) (3,270) (2,843)
Proceeds from sale of stock 4 12 10
Stock repurchases (421) (565) (1,782)
Exercise of stock options 406 154 199
Dividend reinvestment and stock purchase plan 465 426 425
-----------------------------------
Net cash used by financing activities (3,236) (3,243) (3,991)
-----------------------------------
Net Change in Cash on Deposit (18) (47) (299)
Cash on Deposit at Beginning of Year 683 730 1,029
-----------------------------------
Cash on Deposit at End of Year $ 665 $ 683 $ 730
===================================
</TABLE>
(30)
