<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from __________ to __________
Commission file number 0-26128
NORTHWEST INDIANA BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1927981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9204 COLUMBIA AVENUE 46321
MUNSTER, INDIANA (Zip Code)
(Address of principal executive offices)
(219) 836-9690
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Based on the average bid and ask prices for the registrant's Common Stock at
February 28, 1997, at that date, the aggregate market value of the voting stock
held by nonaffiliates of the registrant (assuming solely for the purposes of
this calculation that all directors and executive officers of the registrant are
"affiliates") was $27,456,096.
There were 1,380,846 shares of the registrant's Common Stock, without par value,
outstanding at February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
1. 1996 Annual Report to Shareholders. (Parts II and IV)
2. Definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders. (Part III)
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
NorthWest Indiana Bancorp, an Indiana corporation (the "Company"), was
incorporated on January 31, 1994, and is the holding company for Peoples Bank SB
(the "Bank"), the resulting Indiana savings bank in the conversion of Peoples
Bank from a federal stock savings bank to an Indiana stock savings bank.
Pursuant to the conversion, on July 31, 1994, all of the outstanding stock of
Peoples Bank was converted into shares of Common Stock, without par value, of
the Company. As a result, Peoples Bank SB is a wholly owned subsidiary of the
Company. The Company has no other business activity other than being the holding
company for Peoples Bank SB.
The Bank is primarily engaged in the business of attracting deposits
from the general public and the origination of loans, mostly upon the security
of single family residences, and to a lesser extent commercial real estate and
construction loans, as well as various types of consumer loans and commercial
business loans, within its primary market area of Lake County, in northwest
Indiana. In addition, the Bank's trust department provides estate planning,
guardianships, land trusts, retirement planning, self-directed IRA and Keogh
accounts, investment agency accounts, and serves as personal representative of
estates and acts as trustee for revocable and irrevocable trusts.
The Bank's deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), an agency of the federal government. As
the holding company for the Bank, the Company is subject to comprehensive
examination, supervision and regulation by the Board of Governors of the Federal
Reserve System ("FRB"), while the Bank is subject to comprehensive examination,
supervision and regulation by both the FDIC and the Indiana Department of
Financial Institutions ("DFI"). The Bank is also subject to regulation by the
FRB governing reserves required to be maintained against certain deposits and
other matters. The Bank is also a member of the Federal Home Loan Bank ("FHLB")
of Indianapolis, which is one of the twelve regional banks comprising the system
of Federal Home Loan Banks ("FHLB System").
The Company maintains its corporate office at 9204 Columbia Avenue,
Munster, Indiana, from which it oversees the operation of its seven branch
locations. For further information, see "Properties."
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FORWARD-LOOKING STATEMENTS
Statements contained in this filing on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. The Company cautions readers that
forward-looking statements, including without limitation those relating to the
Company's future business prospects, interest income and expense, net income,
liquidity, and capital needs are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements, due, among other things, to factors identified in
this filing, including the following:
REGULATORY RISK. The banking industry is heavily regulated. These
regulations are intended to protect depositors, not shareholders. As discussed
above, the Bank and Company are subject to regulation and supervision by the
DFI, FDIC, and FRB. The burden imposed by federal and state regulations puts
banks at a competitive disadvantage compared to less regulated competitors such
as finance companies, mortgage banking companies and leasing companies. The
banking industry continues to lose market share to competitors. In addition,
legislative reactions to the problems of the thrift industry have increased the
regulatory and supervisory requirements for financial institutions, which have
resulted and will continue to result in increased operating expenses, and which
during 1996 resulted in a substantial deposit insurance assessment as described
below.
LEGISLATION. Because of concerns relating to the competitiveness and
the safety and soundness of the industry, Congress continues to consider a
number of wide-ranging proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to combine banks and thrifts under a unified charter, to
combine regulatory agencies, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of depository institutions,
bank holding companies, and competitors of depository institutions. Management
cannot predict whether or in what form any of these proposals will be adopted or
the extent to which the business of the Company or the Bank may be affected
thereby.
CREDIT RISK. One of the greatest risks facing lenders is credit risk,
that is, the risk of losing principal and interest due to a borrower's failure
to perform according to the terms of a loan agreement. While management attempts
to provide an allowance for loan losses at a level adequate to cover losses
based on loan portfolio growth, past loss experience, general economic
conditions, information about specific borrower situations, and other factors,
future adjustments to reserves may become necessary, and net income could be
significantly affected, if circumstances differ substantially from assumptions
used with respect to such factors.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. The Bank's primary market area
for deposits and loans encompasses Lake County, in northwest Indiana, where all
of its offices are located. Ninety-five percent of the Bank's business
activities are within this area. This concentration exposes the Bank to risks
resulting from changes in the local economy. A dramatic drop in local real
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estate values would, for example, adversely affect the quality of the Bank's
loan portfolio.
INTEREST RATE RISK. The Bank's earnings depend to a great extent upon
the level of net interest income, which is the difference between interest
income earned on loans and investments and the interest expense paid on deposits
and other borrowings. While the Bank attempts to balance the maturities of the
Bank's assets in relation to maturities of liabilities (gap management), gap
management is not an exact science. Rather, it involves estimates as to how
changes in the general level of interest rates will impact the yields earned on
assets and the rates paid on liabilities. Moreover, rate changes can vary
depending upon the level of rates and competitive factors. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could have an adverse effect on net interest margins
and results of operations of the Company. For example, as further discussed in
Management's Discussion and Analysis to the Company's Annual Report to
Shareholders, given the current gap, the Bank will be adversely affected by a
rising or high interest rate environment.
COMPETITION. The activities of the Company and the Bank in the
geographic market served involve competition with other banks as well as with
other financial institutions and enterprises, many of which have substantially
greater resources than those available to the Company. In addition, non-bank
competitors are generally not subject to the extensive regulation applicable to
the Company and the Bank.
LENDING ACTIVITIES
GENERAL. Over the years, the Bank has directed its lending efforts
toward the origination of loans with adjustable rates and/or shorter terms to
maturity. Product offerings include adjustable rate residential and commercial
mortgages, commercial business loans tied to the prime interest rate, variable
rate home equity lines of credit and consumer loans. All programs are marketed
aggressively and priced competitively. Fixed rate loans generally have a
contractual maturity of fifteen years or less. These loans are made at rates of
interest which exceed those of adjustable rate products thereby offering some
protection against the possibility of escalating interest rates.
The Bank is primarily a portfolio lender. Mortgage banking activities
are limited to the sale of fixed rate mortgage loans with contractual maturities
of thirty years. These loans are sold in the secondary market because of the
additional exposure to interest rate risk associated with this product. All loan
sales are made to the Federal Home Loan Mortgage Corporation ("FHLMC") using the
Freddie Mac "Gold Cash Program". Sales within this program avoid issues relating
to the valuation of excess servicing rights, as well as costs associated with
asset securitization. Loans are sold in the secondary market with servicing
retained by the Bank. All loans held for sale are recorded at the lower of cost
or market value.
Under Indiana Law, an Indiana stock savings bank generally may not make
any loan to a borrower or its related entities if the total of all such loans by
the savings bank exceeds 15% of its capital and unimpaired surplus (plus up
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to an additional 10% of capital and unimpaired surplus, in the case of loans
fully collateralized by readily marketable collateral); provided, however, that
certain specified types of loans are exempted from these limitations or subject
to different limitations. The maximum amount which the Bank could have loaned to
one borrower and the borrower's related entities at December 31, 1996, under the
15% of capital and surplus limitation was approximately $4,605,000. At December
31, 1996, the Bank had no loans which exceeded the regulatory limitations.
At December 31, 1996, there were no concentrations of loans in any type
of industry which exceeded 10% of total loans that were not otherwise disclosed
as a loan category.
LOAN PORTFOLIO. The following table sets forth selected data relating
to the composition of the Bank's loan portfolio by type of loan and type of
security at the end of each of the last five years. The amounts are in thousands
(000's).
<TABLE>
<CAPTION>
1996 1995 1994 1993 1993(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Type of loan:
Conventional real estate loans:
Construction and
development loans $ 13,248 $ 8,913 $ 8,451 $ 4,893 $ 5,870
Loans on existing
properties (2) 208,601 194,779 196,468 182,571 179,299
Consumer loans 4,890 3,527 3,172 3,833 3,912
Commercial business, other(3) 17,957 15,074 13,839 12,908 13,002
-------- -------- -------- -------- --------
Loans receivable(4) $244,696 $222,293 $221,930 $204,205 $202,083
======== ======== ======== ======== ========
Type of security:
Real estate:
1-to-4 family $164,590 $152,485 $152,208 $136,806 $132,106
Other dwelling units, land
and commercial real estate 57,259 51,207 52,711 50,658 53,063
Consumer loans 4,619 3,335 2,960 3,370 3,587
Commercial business, other(3) 16,306 13,893 13,288 12,520 12,083
-------- -------- -------- -------- --------
Loans receivable (4) $242,774 $220,920 $221,167 $203,354 $200,839
======== ======== ======== ======== ========
Average loans outstanding
during the period (4) $232,465 $221,352 $213,349 $202,106 $192,409
======== ======== ======== ======== ========
<FN>
(1) During the fourth quarter of 1993, the Bank changed its fiscal year-end
from June 30 to December 31.
(2) Includes construction loans converted to permanent loans and commercial
real estate loans.
(3) Includes government loans and overdrafts to deposit accounts.
(4) Net of unearned income and deferred loan fees.
</TABLE>
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LOAN ORIGINATIONS, PURCHASES AND SALES. Set forth below is a table
showing loan origination and sale activity for each of the last three years.
The amounts are in thousands (000's).
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction and development loans $ 16,244 $ 9,434 $13,685
Loans on existing property 26,811 12,914 27,791
Loans refinanced 10,253 15,961 17,470
------- ------- -------
Total conventional real estate
loans originated 53,308 38,309 58,946
Commercial business loans 53,580 41,844 34,657
Consumer loans 7,290 4,690 2,505
-------- ------- -------
Total loans originated $114,178 $84,843 $96,108
======== ======= =======
Loan participations purchased $ -- $ 33 $ 94
======== ======= =======
Whole loans and participations sold $ 2,011 $ 2,986 $ 933
======== ======= =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1996, regarding the dollar amount of loans in the
Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Contractual principal repayments of
loans do not necessarily reflect the actual term of the loan portfolio. The
average life of mortgage loans is substantially less than their contractual
terms because of loan prepayments and because of enforcement of due-on-sale
clauses, which give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the property
subject to the mortgage and the loan is not repaid. The amounts are stated in
thousand's (000's).
<TABLE>
<CAPTION>
Maturing
----------------------------------------------
After one
Within but within After
one year five years five years Total
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Real estate loans $ 36,384 $ 55,836 $ 129,629 $221,849
Consumer loans 2,263 2,607 20 4,890
Commercial business loans 11,761 5,336 860 17,957
-------- ----------- ---------- --------
Total loans receivable $ 50,408 $ 63,779 $ 130,509 $244,696
======== =========== ========== ========
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from December 31, 1996, which have predetermined interest rates or have
floating or adjustable interest rates. The amounts are stated in thousands
(000's).
<TABLE>
<CAPTION>
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- ---------
<S> <C> <C> <C>
Real estate loans $65,756 $119,709 $185,465
Consumer loans 2,330 297 2,627
Commercial business loans 2,542 3,654 6,196
------- -------- --------
Total $70,628 $123,660 $194,288
======= ======== ========
</TABLE>
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LENDING AREA. The primary lending area of the Bank encompasses all of
Lake County in northwest Indiana, where a majority of loan activity is
concentrated. The Bank is also an active lender in Porter, LaPorte, Newton and
Jasper counties in Indiana. During the past 15 years, the communities of
Munster, Highland, Crown Point, Dyer, St. John, Merrillville and Schererville
have experienced rapid growth and, therefore, have provided the greatest lending
opportunities. At December 31, 1996, the housing vacancy rate in Bank's primary
lending area was below 5%.
LOAN COMMITMENTS. At the present time, residential real estate loan
commitments must be accepted within 14 days by the borrower(s) signing a
commitment acceptance and paying required loan fees. Fixed rate loans must close
within 45 days of the date of the application, while adjustable loans must close
within 60 days of the date of the application. Days are measured by calendar
days from the date on the commitment letter. Approximately 90% of all
commitments issued are exercised by borrowers. Loan commitments on commercial
real estate and non-mortgage loans are given under various terms and conditions
as may be warranted by the project.
LOAN ORIGINATION FEES. All loan origination and commitment fees, as
well as incremental direct loan origination costs, are deferred and amortized
into income as yield adjustments over the contractual lives of the related
loans.
LOAN ORIGINATION PROCEDURE. The primary sources for loan originations
are referrals from real estate brokers and builders, solicitations by the Bank's
lending staff, and advertising of loan programs and rates. The Bank employs no
staff appraisers. All appraisals are performed by fee appraisers that have been
approved by the Bank's Board of Directors and who meet all federal guidelines
and state licensing and certification requirements.
Designated officers of the Bank have authorities, established by the
Bank's Board of Directors, to approve loans. Loans from $350,000 to $600,000 may
be approved by a committee of senior officers of the Bank. All loans in excess
of $600,000 must be approved by the Bank's Board of Directors or its Executive
Committee. (All members of the Bank's Board of Directors and Executive Committee
are also members of the Company's Board of Directors and Executive Committee,
respectively.) Loans to executive officers of the Bank or the Company and their
affiliated parties must be approved by a disinterested majority of the Bank's
Board of Directors. Loans to directors and principal shareholders must be
approved by a disinterested majority of the Bank's Board of Directors when the
extension of credit exceeds $50,000 or, when the aggregated amount of all
extensions of credit exceeds $500,000.
All loans secured by personal property must be covered by insurance in
an amount sufficient to cover the full amount of the loan. All loans secured by
real estate must be covered by insurance in an amount sufficient to cover the
full amount of the loan or restore the property to its original state. First
mortgage loans must be covered by a lenders title insurance policy in the amount
of the loan.
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THE CURRENT LENDING PROGRAMS
RESIDENTIAL MORTGAGE LOANS. The primary lending activity of the Bank
has been the granting of conventional mortgage loans to enable borrowers to
purchase existing homes or construct new homes. The residential loan portfolio
also includes loans on two-to-four family dwellings. Conventional loans are made
up to a maximum of 95% of the appraised value of the property, or purchase price
if lower than the appraisal. For loans made in excess of 80% of value, private
mortgage insurance is required in an amount sufficient to reduce the Bank's
exposure to 80% or less of the appraised value of the property. Loans insured by
private mortgage insurance companies can be made for up to 95% of value. During
1996, over 90% of mortgage loans closed were conventional loans with borrowers
having 20% or more equity in the property. This type of loan does not require
private mortgage insurance because of the borrower's level of equity investment.
All fixed-rate loans currently being originated conform to FHLMC
guidelines for loans purchased under the 1-to-4 family program. Loan interest
rates are determined based on secondary market yield requirements and local
market conditions. Thirty year fixed rate mortgage loans have been sold and/or
classified as held for sale to control exposure to interest rate risk.
The Bank has offered Adjustable Rate Mortgage Loans ("ARMs") since
1984. The "Mini-Fixed ARM" has been very popular with Bank customers. The
"Mini-Fixed" mortgage reprices annually after a three or five year period. ARM
originations totaled $26.1 million for 1996, $19.5 million for 1995, and $27.8
million during 1994. During 1996, ARMs represented 49% of total mortgage loan
originations. The ability of the Bank to successfully market ARM's depends upon
loan demand, prevailing interest rates, volatility of interest rates, public
acceptance of such loans, and terms offered by competitors.
The 15 year mortgage loan program has gained wide acceptance in the
Bank's primary market area. As a result of the shortened maturity of the 15 year
loan, the product has been priced an average of 50 basis points less than the
comparable 30 year loan offering. Mortgage applicants for the 15 year loan tend
to have a larger than normal down payment; this, coupled with the larger
principal and interest payment amount, has caused the 15 year mortgage loan
portfolio to consist, to a significant extent, of second time home buyers whose
underwriting qualifications tend to be above average.
CONSTRUCTION LOANS. Construction loans on residential properties are
made primarily to individuals. The maximum loan to value ratio is 80% of either
the current appraised value or the cost of construction, whichever is less.
Residential construction loans are typically made for periods of six months to
one year. Loans are also made for the construction of commercial properties. All
such loans are made in accordance with well defined underwriting standards,
subject to prior lease of the mortgaged property, and in most cases, are
personally guaranteed by the borrower. In general, loans made do not exceed 75%
of the appraised value of the property.
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COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans are
typically made to a maximum of 75% of the appraised value. Such loans are
generally made on an adjustable rate basis. Loans are typically made for a
maximum term of 25 years with a balloon feature calling for a full repayment
within 7 to 10 years from the date of the loan, or for a term of 15 years with
no balloon. The balloon feature affords the Bank the opportunity to restructure
the loan if economic conditions so warrant. Commercial real estate loans include
loans secured by commercial rental units, apartments, condominium developments,
small shopping centers, commercial/industrial properties, and other retail and
commercial developments.
While commercial real estate lending is generally considered to involve
a higher degree of risk than single-family residential lending due to the
concentration of principal in a limited number of loans and the effects of
general economic conditions on real estate developers and managers, the Bank has
endeavored to reduce this risk in several ways. In originating commercial real
estate loans, the Bank considers the feasibility of the project, the financial
strength of the borrowers and lessees, the managerial ability of the borrowers,
the location of the project and the economic environment. Management evaluates
the debt coverage ratio and analyzes the reliability of cash flows, as well as
the quality of earnings. All such loans are made in accordance with well defined
underwriting standards and are generally supported by personal guarantees.
Loans for the construction of commercial retail properties and
commercial real estate loans are generally located within an area permitting
physical inspection and regular review of business records. Projects financed
outside of the Bank's primary lending area generally involve borrowers and
guarantors who are or were previous customers and residents of the Bank's
immediate lending area.
CONSUMER LOANS. The Bank offers consumer loans to individuals for most
personal, household or family purposes. Consumer loans are either secured by
adequate collateral, or unsecured. Unsecured loans are based on the strength of
the applicant's financial condition. All borrowers must meet current
underwriting standards. The consumer loan program includes both fixed and
variable rate products. The Bank purchases indirect dealer paper from various
well established businesses in its immediate banking area.
HOME EQUITY LINE OF CREDIT. The Bank offers "Prime Line", a revolving
line of credit secured by the equity in the borrower's home. The offering which
is tied to the prime rate of interest requires borrowers to repay 1.5% of their
outstanding balance each month. In most cases, Prime Line loans will require a
second mortgage appraisal and a second mortgage lenders title insurance policy.
Loans are made up to a maximum of 80% of the appraised value of the property
less any outstanding liens.
HOME IMPROVEMENT LOANS AND EQUITY LOANS--FIXED TERM. Home improvement
and equity loans are made up to a maximum of 80% of the appraised value of the
improved property, less any outstanding liens. These loans are offered on both a
fixed and variable rate basis with a maximum term of 120 months. All home equity
loans are made on a direct basis to borrowers.
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COMMERCIAL BUSINESS LOANS. Although the Bank's priority in extending
various types of commercial business loans changes from time to time, the basic
considerations in determining the makeup of the commercial business loan
portfolio are economic factors, regulatory requirements and money market
conditions. The Bank seeks commercial loan relationships from the local business
community and from its present customers. Conservative lending policies based
upon sound credit analysis govern the extension of commercial credit. The
following loans, although not inclusive, are considered preferable for the
Bank's commercial loan portfolio: loans collateralized by liquid assets; loans
secured by general use machinery and equipment; secured short-term working
capital loans to established businesses; short-term loans with established
sources of repayment and secured by sufficient equity and real estate; and
unsecured loans to customers whose character and capacity to repay are firmly
established. Although conservative lending policies have been applied to
commercial business loans, the Bank regards the exercise of its commercial
lending authority as vital to its asset restructuring program.
NON-PERFORMING ASSETS, ASSET CLASSIFICATION AND PROVISION FOR LOAN LOSSES
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. Residential mortgage loans are generally placed
on non-accrual status when either principal or interest is 120 days or more past
due. Consumer loans are generally placed on non-accrual status when the loan is
90 days or more past due. Consumer loans are generally charged off when the loan
becomes over 120 days delinquent. Commercial business and commercial real estate
loans are generally placed on non-accrual status when the loan is 90 days or
more past due. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance, tax and insurance reserve,
or recorded as interest income, depending on the assessment of the ultimate
collectability of the loan.
The Bank's mortgage loan collection procedures provide that, when a
mortgage loan is 15 days or more delinquent, the borrower will be contacted by
mail and payment requested. If the delinquency continues, subsequent efforts
will be made to contact the delinquent borrower. In certain instances, the Bank
will recast the loan or grant a limited moratorium on loan payments to enable
the borrower to reorganize financial affairs. If the loan continues in a
delinquent status for 60 days, the Bank will generally initiate foreclosure
proceedings. Any property acquired as the result of foreclosure or by voluntary
transfer of property made to avoid foreclosure is classified as foreclosed real
estate until such time as it is sold or otherwise disposed of by the Bank.
Foreclosed real estate is recorded at the lower of cost (the unpaid balance at
date of acquisition plus foreclosure costs, costs related to the sale of the
foreclosed real estate and other related costs) or fair value at the date of
acquisition and carried at the lower of acquisition value or net realizable
value subsequent to the date of acquisition. Any write-down of the property is
charged to the allowance for loan losses. Losses on disposition, including
expenses incurred in connection with the disposition, are charged to operations.
Collection procedures for consumer loans provide that when a consumer loan
becomes 10 days delinquent, the borrower will be contacted by mail and payment
requested. If the delinquency continues, subsequent efforts will be made to
contact the delinquent borrower. In
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certain instances, the Bank may grant a payment deferral. If a loan continues
delinquent after 90 days and all collection efforts have been exhausted, the
Bank will initiate legal proceedings. Collection procedures for commercial
business loans provide that when a commercial loan becomes 10 days delinquent,
the borrower will be contacted by mail and payment requested. If the delinquency
continues, subsequent efforts will be made to contact the delinquent borrower
pursuant to the commercial loan collection policy. In certain instances, the
Bank may grant a payment deferral or restructure the loan. Once it has been
determined that collection efforts are unsuccessful, the Bank will initiate
legal proceedings.
The table which follows sets forth information with respect to the
Bank's non-performing assets for the periods indicated. During the periods
shown, the Bank had no troubled debt restructurings which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than market rates. The amounts are stated in thousands (000's).
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------------ ------------
1996 1995 1994 1993 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 583 $ 361 $ 786 $ 146 $ 179
Commercial 45 --- 82 88 86
Commercial business 111 --- --- --- 228
Consumer 49 11 6 --- 29
------ ------ ----- ----- -----
Total $ 788 $ 372 $ 874 $ 234 $ 522
====== ====== ===== ===== =====
Accruing loans which are contractually past due 90 days or more:
Real estate:
Residential $ 373 $ 637 $ 575 $ 334 $ 83
Commercial --- --- --- --- ---
Commercial business 5 --- 104 --- ---
Consumer 1 46 6 --- 1
------ ------ ----- ----- -----
Total $ 379 $ 683 $ 685 $ 334 $ 84
====== ====== ===== ===== =====
Total of non-accrual
and 90 days past due $1,167 $1,055 $1,559 $ 568 $ 606
====== ====== ====== ===== =====
Ratio of non-performing
loans to total assets 0.39% 0.38% 0.59% 0.23% 0.25%
Ratio of non-performing
loans to total loans 0.48% 0.47% 0.70% 0.27% 0.30%
Foreclosed real estate $ 189 $ 86 $ 160 $ 183 $ 97
====== ====== ====== ===== =====
Ratio of foreclosed real
estate to total assets 0.06% 0.03% 0.06% 0.07% 0.04%
</TABLE>
During 1996, gross interest income of $90,672 would have been recorded
on loans accounted for on a non-accrual basis if the loans had been current
throughout the period. Interest on such loans included in income during the
period amounted to $56,426.
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Federal regulations require savings banks to classify their own loans
and to establish appropriate general and specific allowances, subject to
regulatory review. These regulations are designed to encourage management to
evaluate loans on a case-by-case basis and to discourage automatic
classifications. Loans classified as substandard or doubtful must be evaluated
by management to determine loan loss reserves. Loans classified as loss must
either be written off or reserved for by a specific allowance. Amounts reported
in the general loan loss reserve are included in the calculation of the Bank's
total risk-based capital requirement (to the extent that the amount does not
exceed 1.25% of total risk-based assets), but are not included in tier-one
leverage ratio calculations, tier-one risk-based capital requirements, or in
capital under Generally Accepted Accounting Principles ("GAAP"). Amounts
reserved for by a specific allowance are not counted toward capital for purposes
of any of the regulatory capital requirements. At December 31, 1996, $877
thousand of the Bank's loans were classified as substandard. The total
represents 14 residential real estate loans, one commercial real estate loan,
five commercial business loans and four consumer loans. There were no loans
classified as doubtful or loss.
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses ("ALL") is maintained. Because
estimating the risk of loss and the amount of loss on any loan is necessarily
subjective, the ALL is maintained by management at a level considered adequate
to cover losses based on loan portfolio growth, past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. Although management believes that it uses
the best information available to make such estimations, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial estimations. While management may periodically allocate portions of the
allowance for specific problem loans, the whole allowance is available for any
loan charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur. The allocation of the ALL reflects
consideration of the facts and circumstances that affect the repayment of
individual loans, as well as, loans which have been pooled as of the evaluation
date, with particular attention given to loans which have been classified as
substandard, doubtful or loss. The allocation of the ALL during periods prior to
December 31, 1993, was based on the relative size of the loan categories within
the total loan portfolio.
11
<PAGE> 13
The table which follows sets forth the allowance for loan losses and
related ratios for the periods indicated. There were no charge-offs or
recoveries of real estate construction loans or commercial real estate loans
during the periods presented. The amounts are in thousands (000's).
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------------- -----------
1996 1995 1994 1993 1993
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,830 $2,751 $2,583 $2,317 $1,609
Loans charged-off:
Real estate - residential (28) - - - (8)
Commercial business - - (7) (30) -
Consumer - (2) (3) (28) (2)
------- ------ ------ ------ -------
Total charge-offs (28) (2) (10) (58) (10)
Recoveries:
Real estate - residential - - - - -
Commercial business - - 1 - -
Consumer - 1 33 5 7
------- ------ ------ ------ -------
Total recoveries - 1 34 5 7
Net (charge-offs)/recoveries (28) (1) 24 (53) (3)
------- ------ ------ ------ -------
Provision for loan losses 85 80 144 319 711
------- ------ ------ ------ -------
Balance at end of period $2,887 $2,830 $2,751 $2,583 $2,317
======= ====== ====== ====== =======
ALL to loans outstanding 1.18% 1.27% 1.24% 1.26% 1.15%
ALL to nonperforming loans 247.4% 268.3% 160.0% 454.8% 382.3%
Net charge-offs/recoveries
to average loans out-
standing during the period 0.01% 0.00% 0.01% 0.03% 0.00%
</TABLE>
The table below shows the allocation of the allowance for loan losses
on the dates indicated. The dollar amounts are in thousands (000's). The percent
columns represent the percentage of loans in each category to total loans.
<TABLE>
<CAPTION>
At December 31, At June 30,
----------------------------------------------- ------------
1996 1995 1994 1993 1993
---------- ----------- ----------- ----------- ---------
$ % $ % $ % $ % $ %
---- ---- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 372 61.8 372 64.6 387 64.8 280 64.6 1,224 62.5
Commercial and
other dwelling 880 23.4 860 23.0 834 23.8 1,225 24.8 522 26.3
Construction and
development 153 5.4 130 4.0 105 3.8 --- 2.4 --- 2.9
Consumer loans 110 2.0 110 1.6 111 1.4 132 1.9 105 1.9
Commercial business
and other 650 7.4 650 6.8 626 6.2 946 6.3 466 6.4
Unallocated 722 708 688 --- ---
----- ----- ----- ----- ----- ----- ----- ----- ------ -----
Total 2,887 100.0 2,830 100.0 2,751 100.0 2,583 100.0 2,317 100.0
===== ===== ===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
12
<PAGE> 14
INVESTMENT ACTIVITIES
The primary objective of the investment portfolio is to provide for the
liquidity needs of the Bank and to contribute to profitability by providing a
stable flow of dependable earnings. Securities will generally be classified as
held to maturity at the time of purchase, as management has both the positive
intent and the ability to hold securities to maturity. While securities may be
classified as available for sale at the time of purchase, no securities will be
classified as trading investments. At December 31, 1996, all investment
securities were classified as held to maturity. It has been the policy of the
Bank to invest its excess cash in U.S. government securities and federal agency
obligations. In addition, short-term funds are generally invested as
interest-bearing balances in financial institutions and federal funds. At
December 31, 1996, the Bank's investment portfolio totaled $40.0 million. In
addition, the Bank had $1.0 million in interest-bearing balances at the FHLB of
Indianapolis.
The table below shows the carrying values of the components of the
investment securities portfolio at the dates indicated. The amounts are in
thousands (000's).
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
U.S. government securities $11,549 $ 9,985 $ 9,486
U.S. government agencies 24,934 24,015 19,917
Mortgage-backed securities 1,944 2,404 2,850
FHLB stock 1,597 1,597 1,425
------- ------- -------
Totals $40,024 $38,001 $33,678
======= ======= =======
</TABLE>
The contractual maturities and weighted average yields for the U.S.
government securities, agency securities and mortgaged-backed securities at
December 31, 1996, are summarized as follows. The amounts are in thousands
(000's).
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years 5-10 Years After 10 Years
------------- ------------- ------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
securities $4,995 5.95% $ 6,554 5.81% $ -- --% $ -- --%
U.S. government
agencies 2,247 5.90 19,687 6.08 3,000 6.27 -- --
Mortgaged-backed
securities -- -- 24 8.41 305 8.50 1,615 8.34
------ ---- ------- ---- ------ ---- ------ ----
Totals $7,242 5.93% $26,265 6.01% $3,305 6.48% $1,615 8.34%
====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from maturing investment securities and certificates of deposit, dividend
receipts from the investment portfolio, loan principal repayments, repurchase
agreements, advances from the Federal Home Bank of Indianapolis and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short
13
<PAGE> 15
term basis to compensate for reductions in the availability of other sources of
funds. They may also be used on a longer term basis for general business
purposes. The Bank uses repurchase agreements and advances from the federal Home
Loan Bank of Indianapolis for short-term borrowings. At December 31, 1996, the
Bank had $4.0 million in repurchase agreements. Other short-term borrowings
totaled $8.3 million, of which $7.0 million represents a variable rate advance.
The Bank had no long-term borrowings.
DEPOSITS. Retail and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a broad selection
of deposit instruments including savings accounts, NOW and Super NOW accounts,
checking accounts, money market type accounts, certificate accounts currently
ranging in maturity from ten days to 42 months, and retirement savings plans.
Deposit accounts vary as to terms, with the principal differences being the
minimum balance required, the time period the funds must remain on deposit and
the interest rate. The deregulation of federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and to be flexible in
meeting the threat of net deposit outflows. The Bank does not obtain funds
through brokers.
The following table presents the average daily amount of deposits and
rates paid on such for the years indicated. The amounts are in thousands
(000's).
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ---------------
Average Average Average
Amount rate % Amount rate % Amount rate %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 13,122 0.00% $ 10,859 0.00% $ 8,787 0.00%
NOW accounts 23,034 2.29 20,425 2.28 18,199 2.60
MMDA accounts 22,495 3.27 23,294 3.26 32,914 2.78
Savings accounts 43,521 3.02 42,189 3.01 44,480 3.02
Certificates of deposit 153,433 5.53 143,005 5.51 125,429 4.21
-------- ------- ------- ------- --------- ------
Total deposits $255,605 4.33% $239,772 4.32% $229,809 3.49%
======== ======= ======== ======= ========= =======
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1996 are summarized as follows. The amounts are
in thousands (000's).
3 months or less $14,305
Over 3 months through 6 months 6,039
Over 6 months through 12 months 3,807
Over 12 months 1,949
-------
Total $26,100
=======
BORROWINGS. Borrowed money is used on a short term basis to compensate
for reductions in the availability of other sources of funds and is generally
accomplished through repurchase agreements and a line of credit with the FHLBI.
Securities sold under agreements to repurchase mature within one year.
Repurchase agreements are generally secured by FHLMC mortgage-backed securities
or U.S. government securities under the Bank's control.
14
<PAGE> 16
The following table sets forth the balances in short-term borrowings on
the dates indicated. The amounts are stated in thousands (000's).
<TABLE>
<CAPTION>
At December 31,
--------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Repurchase agreements $ 3,993 $ 2,403 $ 697
Federal Home Loan Bank advance 7,000 -- --
Other borrowings 1,268 735 2,454
------- ------- -------
Total borrowings $12,261 $ 3,138 $ 3,151
======= ======= =======
</TABLE>
The following table sets forth certain information regarding repurchase
agreements by the Bank at the end of and during the periods indicated. The
amounts are stated in thousands (000's).
<TABLE>
<CAPTION>
At December 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance $ 3,993 $ 2,403 $ 697
Securities underlying the agreements:
Ending book value 5,572 3,364 1,051
Ending market value 5,559 3,538 1,008
Weighted average rate paid (1) 5.19% 5.60% 5.08%
</TABLE>
<TABLE>
<CAPTION>
For year ended December 31,
---------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Highest month-end balance $ 5,419 $ 2,403 $ 2,217
Approximate average outstanding balance 3,599 1,593 1,189
Approximate weighted average rate
paid on securities sold under
agreements to repurchase (2) 5.27% 5.65% 4.62%
<FN>
- ------------------------
(1) The weighted average rate for each period is calculated by weighting the
principal balances outstanding for the various interest rates.
(2) The weighted average rate is calculated by dividing the interest expense for
the period by the average monthly balances of securities sold under
agreements to repurchase outstanding for the period.
</TABLE>
TRUST POWERS
The activities of the trust department include the management of
self-directed investments, IRA and Keogh plans, investment agency accounts, land
trusts, serving as court-appointed executor of estates and as guardian or
conservator of estates, and trustee with discretionary investment authority for
revocable and irrevocable trusts. At December 31, 1996, the book value of the
trust department's assets totaled $65.9 million.
15
<PAGE> 17
ANALYSIS OF PROFITABILITY AND KEY OPERATING RATIOS
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL.
The net earnings of the Bank depend primarily upon the "spread"
(difference) between (a) the income it receives from its loan portfolio and
other investments and (b) its cost of money, consisting principally of the
interest paid on savings accounts and on other borrowings.
The following table presents the weighted average yields on loans and
investment securities, the weighted average cost of interest-bearing deposits
and short-term borrowings, and the interest rate spread at December 31, 1996.
Weighted average yield:
Interest-bearing balances in financial institutions 6.95%
Securities held-to-maturity 6.24
Net loans receivable 8.24
Total interest-earning assets 7.96
Weighted average cost:
Interest bearing deposits 4.28
Short-term borrowings 5.90
Total interest-bearing liabilities 4.36
Interest rate spread:
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing deposits 3.60
FINANCIAL RATIOS AND THE ANALYSIS OF CHANGES IN NET INTEREST INCOME
The tables below set forth certain financial ratios of the Company for
the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Return on average assets 0.75% 1.14% 1.24%
Return on average equity 7.90 11.74 13.04
Average equity-to-average
assets ratio 9.51 9.72 9.54
Dividend payout ratio 72.17 48.92 46.94
<CAPTION>
At December 31,
---------------------------
1996 1995 1994
------ ------- -----
<S> <C> <C> <C>
Total stockholders' equity to
total assets 9.29% 9.68% 9.61%
</TABLE>
The table on the following page presents average balance sheet amounts,
the related interest income or expense, and average rates earned or paid for the
periods indicated.
16
<PAGE> 18
<TABLE>
<CAPTION>
The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented
in the following table. The amounts are stated in thousands (000's).
---------------------------------------------------------------------------------
Year ended December 31, 1996 Year ended December 31, 1995
------------------------------------ -----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing balances
in financial institutions $ 3,846 $ 266 6.92 % $ 4,520 $ 278 6.15 %
Federal funds sold 1,068 58 5.43 1,131 66 5.84
Securities 42,513 2,605 6.13 35,139 2,055 5.85
--------- -------- --------- --------
Total investments 47,427 2,929 6.18 40,790 2,399 5.88
--------- -------- --------- --------
Loans:*
Real estate mortgage loans 212,161 17,523 8.26 203,709 17,015 8.35
Commercial business loans 16,014 1,522 9.50 14,174 1,412 9.96
Consumer loans 4,290 363 8.46 3,469 297 8.56
--------- -------- --------- --------
Total loans 232,465 19,408 8.35 221,352 18,724 8.46
--------- -------- --------- --------
Total interest-earning asset 279,892 22,337 7.98 262,142 21,123 8.06
-------- --------
Allowance for loan losses (2,854) (2,792)
Cash and due from banks 4,994 4,576
Premises and equipment 6,153 4,662
Other assets 3,098 3,272
--------- ---------
Total assets $ 291,283 $ 271,860
========= =========
Liabilities:
Demand deposit $ 13,122 0.00 0.00 % $ 10,859 0.00 0.00 %
NOW accounts 23,034 528 2.29 20,425 465 2.28
Money market demand accounts 22,495 736 3.27 23,294 759 3.26
Savings accounts 43,521 1,315 3.02 42,189 1,269 3.01
Certificates of deposit 153,433 8,487 5.53 143,005 7,874 5.51
--------- -------- --------- --------
Total interest-bearing deposits 255,605 11,066 4.33 239,772 10,367 4.32
Short-term borrowings 4,780 221 4.62 2,479 117 4.72
--------- -------- --------- --------
Total interest-bearing liabilities 260,385 11,287 4.33 242,251 10,484 4.33
Other liabilities 3,191 3,192
--------- ---------
Total liabilities 263,576 245,443
Stockholders' equity 27,707 26,417
Total liabilities and
stockholders' equity $ 291,283 11,287 4.03 ** $ 271,860 10,484 4.00 **
========= ======== ========= --------
Net interest income $ 11,050 3.65 % $ 10,639 3.73 %
======== ========
<CAPTION>
-----------------------------------
Year ended December 31, 1994
-----------------------------------
Interest
Average Income/ Average
Balance Expense Rate
-----------------------------------
<S> <C> <C> <C>
Assets:
Interest bearing balances
in financial institutions $ 3,425 $ 159 4.64 %
Federal funds sold 482 21 4.36
Securities 32,449 1,807 5.57
--------- --------
Total investments 36,356 1,987 5.47
--------- --------
Loans:*
Real estate mortgage loans 194,415 15,686 8.07
Commercial business loans 15,114 1,148 7.60
Consumer loans 3,820 301 7.88
--------- --------
Total loans 213,349 17,135 8.03
--------- --------
Total interest-earning asset 249,705 19,122 7.66
--------
Allowance for loan losses (2,669)
Cash and due from banks 5,437
Premises and equipment 3,855
Other assets 3,806
---------
Total assets $ 260,134
=========
Liabilities:
Demand deposit $ 8,787 0.00 0.00 %
NOW accounts 18,199 473 2.60
Money market demand accounts 32,914 914 2.78
Savings accounts 44,480 1,342 3.02
Certificates of deposit 125,429 5,282 4.21
--------- --------
Total interest-bearing deposits 229,809 8,011 3.49
Short-term borrowings 1,694 68 4.01
--------- --------
Total interest-bearing liabilities 231,503 8,079 3.49
Other liabilities 3,817
---------
Total liabilities 235,320
Stockholders' equity 24,814
---------
Total liabilities and
stockholders' equity $ 260,134 8,079 3.24 **
========= --------
Net interest income $ 11,043 4.17 %
========
<FN>
- ---------------------------------------------------------------------------
* Non-accruing loans have been included in the average balances.
** Total interest expense divided by total interest-earning assets.
</TABLE>
17
<PAGE> 19
<TABLE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest income and interest expense of the Company for
the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on
changes attributable to: (1) changes in volume ( change in volume multiplied by old rate) and (2) changes in rate (change in rate
multiplied by old volume). Changes attributable to both rate and volume which cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate. The amounts are stated in thousands (000's).
<CAPTION>
Year Ended December 31, Year Ended December 31,
---------------------------------- ------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------- ------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due To Due To
---------------------------------- ------------------------------------
Volume Rate Total Volume Rate Total
--------- ------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 930 $ (245) $ 685 $ 657 $ 931 $ 1,588
Securities 448 102 550 154 94 248
Other interest-earning assets (48) 27 (21) 95 69 164
--------- ------- ------- -------- -------- --------
Total interest-earning assets 1,330 (116) 1,214 906 1,094 2,000
--------- ------- ------- -------- -------- --------
Interest Expense:
Deposits 651 47 698 500 1,856 2,356
Borrowings and Federal Home
Loan Bank Advances 106 (2) 104 36 12 48
--------- ------- ------- -------- -------- --------
Total interest-bearing
liabilities 757 45 802 536 1,868 2,404
--------- ------- ------- -------- -------- --------
Net change in net interest
income/(expense) $ 573 $ (161) $ 412 $ 370 $ (774) $ (404)
========= ======= ======= ======== ======== ========
<CAPTION>
Year Ended December 31,
---------------------------------
1994 vs. 1993
---------------------------------
Increase/(Decrease)
Due To
---------------------------------
Volume Rate Total
---------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 1,138 $ (675) $ 463
Securities 128 (106) 22
Other interest-earning assets (181) 18 (163)
--------- ------- -------
Total interest-earning assets 1,085 (763) 322
--------- ------- -------
Interest Expense:
Deposits 359 (368) (9)
Borrowings and Federal Home
Loan Bank Advances 30 (7) 23
--------- ------- -------
Total interest-bearing
liabilities 389 (375) 14
--------- ------- -------
Net change in net interest
income/(expense) $ 696 $ (388) $ 308
========= ======= =======
</TABLE>
18
<PAGE> 20
BANK SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries, which are incorporated
under the laws of the State of Indiana. Peoples Service Corporation offered a
securities brokerage/annuity program to customers from October 1987 to September
1990. It has been inactive since the discontinuance of the brokerage program.
During the fiscal year ended June 30, 1993, Peoples Service Corporation received
authority from the FDIC to sell insurance annuities. No activity has been
reported in this area. The assets of Peoples Service Corporation consist of an
intercompany savings account.
PSA Insurance Corporation, another wholly-owned subsidiary, was
incorporated in 1976 to act as an agent or broker for insurance companies, and
to invest in other ventures and properties as it deemed to be in its best
interests. During fiscal 1987, Peoples sold the insurance accounts of PSA
Insurance Corporation. Since the sale, the assets of PSA Insurance Corporation
consist of three real estate lots.
At December 31, 1996, the Bank had investment balances of $10,000 and
$44,950 in Peoples Service Corporation and PSA Insurance Corporation,
respectively.
The Consolidated Financial Statements of the Company include the
assets, liabilities, net worth and results of operations of the Bank and its
subsidiaries. Significant intercompany transactions have been eliminated in the
consolidation. For further information on the Bank's subsidiaries, see Note 1 of
Notes to Consolidated Financial Statements.
COMPETITION
The Bank's primary market area for deposits and mortgage and other
loans encompasses Lake County, in northwest Indiana, where all of its offices
are located. Ninety-five percent of the Bank's business activities are within
this area.
The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The Bank's
most direct competition for deposits has historically come from commercial banks
and from savings and loan associations located in its primary market area.
Particularly in times of high interest rates, the Bank has had significant
competition from money market mutual funds and other firms offering financial
services. The Bank's competition for loans comes principally from savings and
loan associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other institutional lenders.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts,
competitive interest rates, convenient branch locations, drive-up facilities,
automatic teller machines, tax-deferred retirement programs and other
miscellaneous services.
19
<PAGE> 21
The Bank believes that it has a minority share of the deposits and
residential mortgage loan market within its primary market area.
PERSONNEL
As of December 31, 1996, the Bank had 89 full-time and 21 part-time
employees. The employees are not represented by a collective bargaining
agreement. Management believes its employee relations are good. The Company has
four officers (listed below under "Executive Officers of the Company"), but has
no other employees. The Company's officers also are full-time employees of the
Bank, and are compensated by the Bank.
REGULATION AND SUPERVISION
BANK HOLDING COMPANY REGULATION. As a registered bank holding company
for the Bank, the Company is subject to the regulation and supervision of the
FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bank
holding companies are required to file periodic reports with and are subject to
periodic examination by the FRB.
Under the BHCA, without the prior approval of the FRB, the Company may
not acquire direct or indirect control of more than 5% of the voting stock or
substantially all of the assets of any company, including a bank, and may not
merge or consolidate with another bank holding company. In addition, the Company
is generally prohibited by the BHCA from engaging in any nonbanking business
unless such business is determined by the FRB to be so closely related to
banking as to be a proper incident thereto. Under the BHCA, the FRB has the
authority to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
Under FRB policy, a bank holding company is expected to serve as a
source of financial and managerial strength to its subsidiary banks. It is the
policy of the FRB that, pursuant to this requirement, a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. This support
may be required by the FRB at times when the Company may not have the resources
to provide it or, for other reasons, would not be inclined to provide it.
Additionally, under the Federal Deposit Insurance Corporation Improvements Act
of 1991 ("FDICIA"), a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become
"undercapitalized" (as defined in the statute) with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
that is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan.
20
<PAGE> 22
SAVINGS BANK REGULATION. As an Indiana stock savings bank, the Bank is
subject to federal regulation and supervision by the FDIC and to state
regulation and supervision by the Indiana Department of Financial Institutions
(the "DFI"). The Bank's deposit accounts are insured by the SAIF, which is
administered by the FDIC. The Bank is not a member of the Federal Reserve
System.
Both federal and Indiana law extensively regulate various aspects of
the banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires savings banks, among other things, to make deposited funds
available within specified time periods.
Under FDICIA, insured state chartered banks are prohibited from
engaging as principal in activities that are not permitted for national banks,
unless: (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund, and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. The Board of
Directors does not believe that these restrictions will have a material adverse
effect on the Bank.
DEPOSIT INSURANCE AND THE BANKING INDUSTRY. The Bank's deposits are
insured up to $100,000 per insured account by the SAIF. The Deposit Insurance
Funds Act of 1996 (the "Funds Act") required the FDIC to take steps to
recapitalize the SAIF and to change the basis on which funds are raised to make
the scheduled payments on the FICO bonds issued in 1987 to replenish the Federal
Savings and Loan Insurance Corporation. As part of the SAIF recapitalization,
during 1996 the Bank paid a special assessment of $1.6 million. The Funds Act
generally limited future SAIF assessments to the level required to maintain its
capitalization. Accordingly, periodic SAIF insurance assessments have fallen
toward the level paid by BIF members, thereby reducing a competitive advantage
for BIF members. While SAIF members continue to face higher FICO bond
assessments than BIF members, the disparity is small relative to the former
disparity in insurance assessments.
The Funds Act and recent legislative and regulatory initiatives propose
changes to the regulatory structure of the banking industry, including proposals
to reduce regulatory burdens and expand bank powers. It is not possible to
predict whether, or in what form, the proposed changes will take effect or how
they will affect the Company.
BRANCHES AND AFFILIATES. The establishment of branches by the Bank is
subject to approval of the DFI and FDIC and geographic limits established by
state laws. In 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). This Act facilitates
the interstate expansion and consolidation of banking organizations by
permitting, among other things,(i) bank holding companies that are adequately
capitalized and managed to acquire banks located in states outside their home
state regardless of whether such acquisitions are authorized under the law of
the host state, (ii) the interstate merger of banks after June 1, 1997, subject
to the right of individual states to "opt in" or to "opt out" of this authority
before that date, and (iii) banks to establish new branches on an interstate
basis provided that such action is
21
<PAGE> 23
specifically authorized by the law of the host state. During 1996, Indiana
"opted in" to the provisions described in clauses (ii) and (iii) above. The
effect of this new law may be to increase competition in the Bank's market area,
although the extent and timing of this increase cannot be predicted.
TRANSACTIONS WITH AFFILIATES. Under Indiana law, the Bank is subject to
Sections 22(h), 23A and 23B of the Federal Reserve Act which restrict financial
transactions between banks and affiliated companies, such as the Company. The
statute limits credit transactions between a bank and its executive officers and
its affiliates, prescribes terms and conditions for bank affiliate transactions
deemed to be consistent with safe and sound banking practices, and restricts the
types of collateral security permitted in connection with a bank's extension of
credit to an affiliate.
CAPITAL REQUIREMENTS. The FRB and the FDIC have issued substantially
similar risk-based and leverage capital guidelines that are applicable to the
Company and the Bank. These guidelines require a minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the Company and the
Bank are subject to a Tier I (leverage) capital ratio which requires a minimum
level of Tier I capital to average total consolidated assets of 3% in the case
of financial institutions that have the highest regulatory examination ratings
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a ratio of at least 1% to 2% above the
stated minimum.
FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. The FDIC has adopted regulations to implement
the prompt corrective action provisions of FDICIA which, among other things,
define the relevant capital measures for five capital categories. An institution
is deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% of greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
22
<PAGE> 24
The following table shows that, at December 31, 1996, the Company's
capital exceeded all regulatory capital requirements. At December 31, 1996, the
Company's and the Bank's regulatory capital ratios were identical. At December
31, 1996, the Company and the Bank were categorized as well capitalized. The
dollar amounts are in millions.
<TABLE>
<CAPTION>
Required for To be well
Actual adequate capital capitalized
------------- ---------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
risk-weighted assets $30.2 16.0% $15.1 8.0% $18.9 10.0%
Tier 1 capital
to risk-weighted assets $27.8 14.7% $ 7.6 4.0% $11.3 6.0%
Tier I capital to
total assets $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
</TABLE>
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
The Company is unable to predict whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
DIVIDEND LIMITATIONS. The Company is a legal entity separate and
distinct from the Bank. The source of the Company's cash flow, including cash
flow to pay dividends on the Company's Common Stock, is the payment of dividends
to the Company by the Bank. Under Indiana law, the Bank may pay dividends, no
more often than quarterly, to the extent of its undivided profits (less losses,
bad debts and expenses). However, DFI approval is required to pay dividends in
any year in excess of the Bank's net profits for the current year and the prior
two years. Also, the FDIC has the authority to prohibit the Bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the financial condition of the Bank. In
addition, under FRB supervisory policy, a bank holding company generally should
not maintain its existing rate of cash dividends on common shares unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
assets, quality, and overall financial condition.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), the Bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC in connection with its
examination of the Bank, to assess its record of meeting the credit needs of its
community and to take that record into account in its evaluation of certain
applications by the Bank. As of the date of its most recent regulatory
examination, the Bank was rated "outstanding" with respect to its CRA
compliance.
23
<PAGE> 25
In May 1995, the FDIC and other Federal banking agencies amended their
regulations concerning the CRA. Among other things, the revised regulations
implement a new evaluation system that will rate banks based on their
performance in meeting community financial needs. In particular, the revised
system will evaluate the degree to which a bank is performing under tests and
standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (i) lending, (ii)
service delivery systems and (iii) investments. The revised regulations also
specify that a bank's CRA performance will be considered in its expansion (e.g.,
branching) proposals and may be the basis for approving, denying or conditioning
the approval of an application.
FEDERAL TAXATION
Generally, financial institutions are taxed for federal income tax
purposes like other corporations. There are special rules governing foreclosure
on property securing loans, the dividends received deduction, and the bad debt
deduction.
No gain or loss is recognized, and no debt is considered worthless, or
partially worthless, as the result of a financial institution having bid in at
foreclosure or otherwise reduced to ownership or possession any property which
was security for any loan. The basis of property so acquired is the basis of the
loan for which the property was secured increased by costs of acquisition.
The amount of the intercorporate dividends received deduction is
reduced by the percentage of taxable income allowed as a bad debt deduction. The
dividends received deduction is allocated between the portion of income subject
to tax and the portion that is allocated as a bad debt reserve deduction.
The Company files federal income tax returns on a calendar year basis.
State chartered savings banks such as the Bank that meet certain definitional
tests and other conditions prescribed by the Internal Revenue Code of 1986 (the
"Code"), are allowed to make annual additions to a bad debt reserve that may,
within specified limits, be taken as deductions in computing net taxable income
for federal income tax purposes. The methods available for computing the amount
of the bad debt reserve deduction for "qualifying real property loans" are based
upon actual loss experience or a percentage of taxable income. The Bank has
historically elected to use the percentage of taxable income method to compute
its bad debt deduction for federal income tax purposes.
With the passage of the Small Business Job Protection Act of 1996 on
August 20, 1996, the availability of the percentage bad debt deduction was
repealed for tax years beginning after December 1, 1995. For the first tax year
beginning after December 31, 1995 and thereafter, thrift institutions, such as
the Bank will be required to utilize the experience method referred to above in
computing the tax bad debt deduction for qualifying and nonqualifying loans.
In addition, thrift institutions such as the Bank are required to
recapture the excess of the tax bad debt reserves for qualifying and
nonqualifying loans as of the end of the last tax year beginning before
24
<PAGE> 26
January 1, 1996 over the balance of those reserves as of the end of the "base
year" into taxable income evenly over a six year period beginning with the first
tax year that begins after December 31, 1995. The base tax year is the last tax
year beginning before January 1, 1988. The balance of the tax bad debt reserves
to be recaptured under the new law totaled approximately $2,500,000.
If the institution meets the "Residential Loan Requirement" explained
below, the reserve recapture can be deferred for the first or second tax year
beginning after December 31, 1995, or both. However, in any case, the six year
reserve recapture period must begin no later than the third tax year beginning
after December 31, 1995.
The Residential Loan Requirement is met for a particular year if the
principal amount of home purchase and improvement loans originated in that year
exceed the "base amount." The base amount is the average of such lending
activity for the six most recent tax years beginning before January 1, 1996. For
purposes of determining this average, the institution can elect to eliminate the
years with the highest and lowest lending activity from the calculation.
The rules described above requiring the recapture of a portion of the
tax bad debt reserves in the event the institution fails to meet the 60% asset
test have been repealed for tax years beginning after December 31, 1995.
However, the above rules that require the recapture of the excess upon certain
distributions to shareholders continue to apply to the portion of the excess
contained in the base year reserves preserved by the new law. In addition, this
portion of the excess must be recaptured into taxable income evenly over a
period of six years if the Bank ceases the business of banking. The portion of
the excess contained in the base year reserves of the bank that are preserved by
the new law total approximately $6,000,000.
In addition to the regular income tax, corporations are subject to the
corporate minimum tax. Alternative minimum tax is imposed at a minimum tax rate
of 20% on the sum of a corporation's regular taxable income (with certain
adjustments) and tax preference items, less any available exemption. Such tax
preference items includes interest on certain tax-exempt bonds issued after
August 7, 1986. For fiscal 1991, the computation was changed to use
three-quarters of adjusted current earnings in place of one-half of book income.
The alternative minimum taxable income that may be offset by net operating
losses is limited to 90% thereof and, additionally, net operating losses
available to offset minimum taxable income are themselves subject to certain
modifications and adjustments before application of the 90% test. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may, under certain
circumstances, be used as credits against regular tax liabilities in future
years.
In addition to the foregoing, the Code contains other changes from
prior federal income tax law that affect the taxation of financial institutions.
For example, effective for taxable years beginning after 1986, most
corporations, including savings banks, are required to use the accrual method of
accounting for tax purposes. Savings banks are entitled to deduct 80% of their
interest expense allocable to the purchase or carrying of tax-exempt
25
<PAGE> 27
obligations acquired after 1982 and 100% of interest attributable to obligations
acquired before 1983. Interest expense allocated to the purchase of carrying
certain tax-exempt obligations acquired after August 7, 1986, is not deductible.
The Company's federal income tax returns have not been examined by federal
authorities since the fiscal year ending June 30, 1985.
For information regarding federal taxes, see Note 6 of Notes to
Consolidated Financial Statements.
STATE TAXATION
The Company is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income" for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications, the most notable of which is the
required addback of interest that is tax-free for federal income tax purposes.
ACCOUNTING FOR INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"), which changed how GAAP applies to the treatment of
income taxes for financial statement purposes. Beginning on July 1, 1993, The
Bank adopted the provisions of SFAS No. 109. Under SFAS No. 109, the Bank
records income tax expense based on the amount of taxes due on its tax return,
plus deferred taxes computed based on the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, using enacted tax rates. Previously the Bank computed deferred
taxes for the tax effects of timing differences between financial reporting and
tax return income. At December 31, 1996, the Bank's consolidated total deferred
tax assets were $978 thousand and the consolidated total deferred tax
liabilities were $272 thousand, resulting in a consolidated net deferred tax
asset of $706 thousand. Management believes it is probable that the benefit of
the deferred tax asset will be realized after considering the historical and
anticipated future levels of pretax earnings.
ITEM 2. PROPERTIES
The Company maintains its corporate office at 9204 Columbia Avenue,
Munster, Indiana, from which it oversees the operation of the Bank's seven
banking locations. The Bank owns all of its office properties.
26
<PAGE> 28
The table below sets forth additional information with respect to the
Bank's offices as of December 31, 1996. Net book value and total investment
figures are for land, buildings, furniture and fixtures.
<TABLE>
<CAPTION>
Year Approximate
facility Net book square Total
Office location opened value footage investment
- --------------- ------ --------- ----------- ----------
<C> <C> <C> <C> <C>
9204 Columbia Avenue
Munster, In 46307 1985 $1,431,774 11,640 $2,476,832
141 W. Lincoln Highway
Schererville, In 46375 1990 1,308,954 9,444 1,903,619
7120 Indianapolis Blvd.
Hammond, In 46324 1978 335,586 2,600 678,570
1300 Sheffield
Dyer, In 46311 1976 231,316 2,100 570,869
7915 Taft
Merrillville, In 46410 1968 154,506 2,750 436,216
8600 Broadway
Merrillville, In 46410 1996 1,841,082 4,400 1,893,550
4901 Indianapolis Blvd.
East Chicago, In 46312 1995 1,274,487 4,300 1,434,145
</TABLE>
During 1995, the Company replaced its existing East Chicago, Indiana,
office location with a new facility. During 1996, the Company opened a new
full-service branch facility located in Merrillville, Indiana. The facilities
represent the Company's commitment to quality service and community development,
and provide opportunities to expand market share by attracting additional
deposits and loans from surrounding areas. At December 31, 1996, the Bank had
investments totaling $450 thousand in land which has been acquired for future
branch development. The Bank's primary recordkeeping is accomplished through the
use of microcomputer networks linked via data line to M&I Data Services, Inc.,
located in Brown Deer, Wisconsin. M&I provides real time services for mortgage
and installment loans, savings, certificates, NOW accounts and general ledger
transactions. In addition to the M&I System, the Bank utilizes a microcomputer
network for the trust department operations.
The net book value of the Bank's investment in property, premises and
equipment totaled $7.1 million at December 31, 1996. For further information,
see Note 5 of Notes to Consolidated Financial Statements in the Company's
December 31, 1996, Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to legal
proceedings incident to its business, including foreclosures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
27
<PAGE> 29
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3) of Form 10-K, the following
information is included as an unnumbered item in this Part I in lieu of being
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders:
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
AGE AT
DECEMBER 31,
1996 POSITION
------------- --------
<S> <C> <C>
David A. Bochnowski 51 Chairman and Chief Executive
Officer
Joel Gorelick 49 Vice President and Chief Lending Officer
Edward J. Furticella 49 Vice President, Chief Financial Officer
and Treasurer
Frank J. Bochnowski 58 Senior Vice President and Secretary
</TABLE>
The following is a description of the principal occupation and
employment of the executive officers of the Company during at least the past
five years:
David A. Bochnowski is chairman and chief executive officer of the
Company and the Bank, and has held these positions with the Bank since 1981. He
has been a director since 1977 and was the Bank's legal counsel from 1977 to
1981. Mr. Bochnowski is a director of America's Community Bankers and a member
of the America's Community Bankers' Government Affairs Policy Committee. He is a
director of the Northwest Indiana Forum and a Trustee of the Munster Community
Hospital. He is a former chairman of the Indiana League of Savings Institutions
and a former director of the Federal Home Loan Bank of Indianapolis. Before
joining the Bank, Mr. Bochnowski was an attorney, self-employed in private
practice. He holds a Juris Doctor degree from Georgetown University and a
Masters Degree from Howard University.
Joel Gorelick is vice president of the Company and vice president and
chief lending officer for the Bank. He is responsible for overseeing new
business development and all loan functions of the Bank. Mr. Gorelick joined the
Bank in November, 1983 as vice president of commercial lending. Mr. Gorelick is
involved in many community service organizations and presently serves as
president-elect of the Northwest Indiana Boys & Girls Club and chairman of the
board of the Northwest Indiana Regional Development Corporation. He holds a
Masters of Business Administration Degree from Indiana University and is a
graduate of the Graduate School of Banking at the University of Wisconsin at
Madison.
Edward J. Furticella is vice president, chief financial officer and
treasurer of the Company and the Bank. He is responsible for managing the Bank's
investment portfolio and daily liquidity, as well as, overseeing the activities
of accounting, systems processing and branch operations. Mr. Furticella has been
with the Bank since 1981. Mr. Furticella holds a Masters of Education, Masters
of Business Administration and a Masters of Science in Accountancy from DePaul
University. Mr. Furticella is a Certified Public
28
<PAGE> 30
Accountant (CPA) and a Certified Cash Manager (CCM). He is also a part-time
finance instructor at Purdue University Calumet and a member of the Customer
Advisory Group for the Federal Reserve Bank of Chicago.
Frank J. Bochnowski is senior vice president and secretary for the
Company and senior vice president, general counsel, trust officer and corporate
secretary for the Bank. Mr. Bochnowski assumed his current responsibilities with
the Bank as of November, 1984. He has been the Bank's attorney since 1981. Mr.
Bochnowski is a director and president of the Munster, Indiana Rotary Club and a
director and officer of the Lake County, Indiana Chapter of the American Red
Cross. He holds a Juris Doctor degree from St. John's University and a Masters
of Business Administration from Fairleigh Dickinson University. He is a graduate
of the United States Military Academy and served for twenty-one years as an army
officer, retiring in 1981 with the rank of lieutenant colonel. He is the first
cousin of the Company's President.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained under the caption "Business" and "Market
Information" in the 1996 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Consolidated
Financial Data" in the 1996 Annual Report to Shareholders is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1996 Annual Report to
Shareholders, which are listed under Item 14 herein, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no items reportable under this caption.
29
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Election of
Directors" and in the final paragraph under the section captioned "Security
Ownership by Certain Beneficial Owners and Management" in the Company's
definitive Proxy Statement for the 1997 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding the Company's executive
officers is included under the unnumbered item captioned "Executive Officers of
the Company" at the end of Part I hereof and is incorporated herein by
reference, in accordance with General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of a Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Company's definitive Proxy
Statement for its 1997 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the section captioned "Security Ownership by
Certain Beneficial Owners and Management" in the Company's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Company's definitive Proxy
Statement for its 1997 Annual Meeting of Shareholders, and in the footnote
captioned "Related Party Transactions" in the 1996 Annual Report to
Shareholders, is incorporated herein by reference. Additional information as
required per Schedule I, "Indebtedness of and to related parties - not current",
is not applicable.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following financial statements of the Company are incorporated
herein by reference to the 1996 Annual Report to Shareholders, filed as Exhibit
13 to this report:
(a) Independent Auditor's Report
(b) Consolidated Balance Sheets, December 31,
1996 and 1995
(c) Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996, 1995
and 1994
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
(f) Notes to Consolidated Financial Statements
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not present
or not present in amounts sufficient to require submission.
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
2. Plan of Conversion of Peoples Bank, A Federal Savings Bank, dated
December 18, 1993 (incorporated herein by reference to Exhibit A to the
Company's Definitive Proxy Statement/Prospectus dated March 23, 1994,
as filed pursuant to Rule 424(b) under the 1933 Act on March 28, 1994).
3.i. Articles of Incorporation (incorporated herein by reference to Exhibit
3(i) to the Company's Registration Statement on Form S-4 filed March 3,
1994 (File No. 33-76038)).
3.ii. By-Laws (incorporated herein by reference to Exhibit 3(i) to the
Company's Registration Statement on Form S-4 filed March 3, 1994 (File
No. 33-76038)).
3.iii. Amendment of By-Laws adopted July 27, 1994(incorporated herein by
reference to Exhibit 3.iii to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.1. 1994 Stock Option and Incentive Plan (incorporated herein by reference
to Exhibit A to the Company's Definitive Proxy
31
<PAGE> 33
Statement/Prospectus dated March 23, 1994, as filed pursuant to Rule
424(b) under the 1933 Act on March 28, 1994).
10.2. Employment Agreement, dated March 1, 1988, between Peoples Bank and
David A. Bochnowski (incorporated herein by reference to Exhibit 10.2
to the Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.3. Amendment, dated January 18, 1993, to the Employment Agreement referred
to in Exhibit 10.2 above (incorporated herein by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.4. Employee Stock Ownership Plan of Peoples Bank (incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.5. Unqualified Deferred Compensation Plan of Peoples Bank (incorporated
herein by reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
13. 1996 Annual Report to Shareholders.
21. Subsidiaries of the Company.
27. Financial Data Schedule.
(4) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1996.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST INDIANA BANCORP
By /s/David A. Bochnowski
------------------------------
David A. Bochnowski
Chairman of the Board and
Chief Executive Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 21, 1996:
SIGNATURE TITLE
Principal Executive Officer:
/s/David A. Bochnowski Chairman of the Board and
- ------------------------------ Chief Executive Officer
David A. Bochnowski
Principal Financial Officer and
Principal Accounting Officer:
/s/Edward J. Furticella Vice President, Chief Financial
- ------------------------------ Officer and Treasurer
Edward J. Furticella
The Board of Directors:
/s/Leroy F. Cataldi Director
- ------------------------------
Leroy F. Cataldi
/s/James J. Crandall Director
- ------------------------------
James J. Crandall
/s/Lourdes M. Dennison Director
- ------------------------------
Lourdes M. Dennison
33
<PAGE> 35
/s/Gloria C. Gray Director
- ------------------------------
Gloria C. Gray
/s/Stanley E. Mize Director
- ------------------------------
Stanley E. Mize
/s/Jerome F. Vrabel Director
- ------------------------------
Jerome F. Vrabel
/s/John J. Wadas, Jr. Director
- ------------------------------
John J. Wadas, Jr.
34
<PAGE> 36
EXHIBIT INDEX
Exhibit Description Page
13. 1996 Annual Report to Shareholders
21. Subsidiaries of the Company
27. Financial Data Schedule
35
<PAGE> 1
NorthWest Indiana
- -----------------
BANCORP
1996
ANNUAL REPORT
--------------------
BUILDING
VALUE
photo montage of
employees, new Merrillville Branch building
and housing rehab project
<PAGE> 2
Inside Front Cover is blank
<PAGE> 3
BUILDING
VALUE
Dear Shareholder:
Banking is one of America's most regulated industries and 1996 stands out as a
year when the pervasive authority of the federal government truly impacted
operating results.
During the year congress passed the Federal Deposit Insurance Funds Act
of 1996 which mandated all SAIF insured financial institutions to make a
one-time payment to recapitalize the federal deposit insurance fund. This
industry wide solution to a public policy question, while laudable, had a direct
negative effect upon the Bancorp's earnings.
The $1.6 million special assessment of the FDIC depressed income to
$2.2 million. Going forward, our deposit insurance premiums will be decidedly
less, making the Bancorp more competitive in our market place. Shareholders
should be pleased to know that without the FDIC special assessment, income would
have exceeded $3.1 million for an adjusted return on assets of 1.07%. Earnings
also were impacted by the action of the Federal Reserve to raise interest rates,
which increased our interest costs paid to depositors.
These government actions did not deter your board of directors and
management from accomplishing our mission of building investment value for our
shareholders and economic value for our customers and community.
photo montage of employees and buildings
1
<PAGE> 4
- --------------------------------------------------------------------------------
OPERATING RESULTS
- - Core earning, the difference between the Bancorp's interest income and
interest expense, rose to $11.1 million in 1996 from $10.6 million in a year
earlier.
- - Our efficiency ratio, a key measure of the Bancorp's expense management, stood
at 55.2% excluding the SAIF special assessment.
- - Peoples Bank earned an "Exceptional Performance Award" from Bauer financial
reports. Only 9% of the nation's banking institutions achieved this distinction
for strength, performance, and safety over the last eight years.
- -------------------------------------------------------------------------------
GROWTH
- - Assets grew 6.6% to $299 million.
- - Loans grew 10.1% to $244.7 with construction, commercial and consumer loans
comprising 38.2% of loans outstanding.
- - NOW account balances increased 12.5% and commercial checking accounts balances
increased 12%.
- - Trust assets grew 10.6% to $66 million.
- - Peoples Bank expanded our market share through a new branch on the Broadway
corridor in Merrillville.
photo montage of employees and buildings
2
<PAGE> 5
- --------------------------------------------------------------------------------
ASSET QUALITY
- - The ratio of non-performing loans to total loans was 0.48% (forty eight
hundredths of one percent).
- - Foreclosed real estate was 0.06% (six-hundredths of one percent) of total
assets.
- - At year end, the allowance for loan losses (ALL) totaled $2.9 million or 1.18%
of total loans.
- --------------------------------------------------------------------------------
SHAREHOLDERS
- - Implemented a two-for-one stock split.
- - Increased dividends per share during the fourth quarter by 16.4%.
- - Price of stock appreciated 15.3% during 1996 over 1995.
- - Total return to shareholders out performed the CRSP Index for the Nasdaq Stock
Market and the CRSP Index for the Nasdaq Bank Stocks for the five year period
ended December 31, 1996.
Your directors and management continue to be committed to building a
locally owned, independent community bank. Resources have been allocated to
develop the people, products, and technology essential to meet the challenges of
our banking and non-banking competitors. Despite this year's adversity, our
employees continued to provide quality service which in the final analysis
creates customer trust, shareholder value, and a superior banking performance.
/s/ David A. Bochnowski
Sincerely,
DAVID A. BOCHNOWSKI
Chairman and Chief Executive Officer
photo montage of employees and buildings
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands of Dollars, except Per Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, December 31, December 31, December 31, June 30, June 30,
1996 1995 1994 1993 (1) 1993 1992
------------ ------------ ------------ ------------ ----------- -----------
Statement of Income:
<S> <C> <C> <C> <C> <C> <C>
Total interest income....... $ 22,337 $ 21,123 $ 19,122 $ 9,360 $ 19,035 $ 19,744
Total interest expense...... 11,287 10,484 8,079 4,015 8,485 10,698
------------ ------------ ------------ ------------ ----------- -----------
Net interest income......... 11,050 10,639 11,043 5,345 10,550 9,046
Provision for loan losses... 85 80 145 319 711 665
------------ ------------ ------------ ------------ ----------- -----------
Net interest income after
provision for loan losses. 10,965 10,559 10,898 5,026 9,839 8,381
------------ ------------ ------------ ------------ ----------- -----------
Noninterest income.......... 682 685 493 253 749 726
Noninterest expense......... 8,039 6,117 6,031 3,011 5,378 4,795
------------ ------------ ------------ ------------ ----------- -----------
Net noninterest expense..... 7,357 5,432 5,538 2,758 4,629 4,069
------------ ------------ ------------ ------------ ----------- -----------
Income tax expenses......... 1,419 2,026 2,132 902 2,158 1,849
Cumulative effect of changes
in accounting............. - - - 450 - -
------------ ------------ ------------ ------------ ----------- -----------
Net income.................. $ 2,189 $ 3,101 $ 3,228 $ 1,816 $ 3,052 $ 2,463
============ ============ ============ ============ =========== ===========
Earnings per common and
common equivalent share... $1.59 $2.25 $2.35 $1.33 $2.25 $1.85
Cash dividends declared per
common share.............. $1.15 $1.10 $1.10 $0.50 $0.80 $0.68
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, June 30, June 30,
1996 1995 1994 1993 1993 1992
------------ ------------ ------------ ------------ ----------- -----------
Balance Sheet:
<S> <C> <C> <C> <C> <C> <C>
Total assets................ $ 299,419 $ 280,911 $ 266,343 $ 251,481 $ 246,180 $ 227,183
Loans receivable............ 244,696 222,293 221,930 204,205 202,083 183,366
Investment securities....... 40,024 38,001 33,678 33,639 28,910 28,910
Deposits.................... 256,420 247,945 234,639 222,945 219,133 202,823
Borrowed funds.............. 12,261 3,139 3,151 2,087 993 609
Total stockholders' equity.. 27,815 27,204 25,606 23,874 22,691 20,667
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, December 31, December 31, December 31, June 30, June 30,
1996 1995 1994 1993 (1) (2) 1993 1992
------------ ------------ ------------ ------------ ----------- -----------
Interest Rate Spread During Period:
<S> <C> <C> <C> <C> <C> <C>
Average effective yield on
loans and investment
securities.............. 7.98% 8.06% 7.66% 7.75% 8.24% 9.20%
Average effective cost of
deposits and borrowings... 4.32% 4.33% 3.48% 3.63% 4.04% 5.39%
------------ ------------- ------------- ------------- ------------ -----------
Interest rate spread........ 3.66% 3.73% 4.18% 4.12% 4.20% 3.81%
============ ============ ============ ============ =========== ===========
Net interest margin......... 3.79% 3.91% 4.25% 4.27% 4.44% 4.04%
Return on assets............ 0.75% 1.14% 1.24% 1.45% 1.28% 1.10%
Return on equity............ 7.90% 11.74% 13.04% 15.51% 14.00% 12.38%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, June 30, June 30,
1996 1995 1994 1993 1993 1992
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to
risk-weighted assets...... 14.7% 15.8% 15.9% 15.5% 14.9% 14.7%
Total risk-based capital to
risk-weighted assets...... 16.0% 17.1% 17.2% 16.8% 16.1% 15.9%
Tier 1 capital leverage ratio 9.3% 9.7% 9.6% 9.5% 9.2% 9.1%
Allowance for loan losses to
total loans............... 1.18% 1.27% 1.24% 1.26% 1.15% 0.88%
Allowance for loan losses to
non-performing loans...... 247.40% 268.25% 176.46% 454.75% 382.34% 231.51%
Non-performance loans to
total loans............... 0.48% 0.47% 0.70% 0.27% 0.30% 0.38%
Total loan accounts......... 4,404 4,606 4,671 4,654 4,661 4,755
Total deposit accounts...... 24,666 23,730 22,738 21,204 21,330 20,834
Total branches
(all full service)........ 7 6 6 6 6 6
<FN>
(1) Six month period due to change in fiscal year end.
(2) Data for six months ended December 31, 1993 has been annualized.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30,
1991 1990 1989 1988
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 20,709 $ 20,042 $ 18,313 $ 16,985
12,896 13,145 11,872 10,604
------------ ------------ ------------ ------------
7,813 6,897 6,441 6,381
238 130 188 210
------------ ------------ ------------ ------------
7,575 6,767 6,253 6,171
------------ ------------ ------------ ------------
757 622 854 811
4,625 4,357 4,057 4,001
------------ ------------ ------------ ------------
3,868 3,735 3,203 3,190
------------ ------------ ------------ ------------
1,505 992 1,024 971
- - - -
------------ ------------ ------------ ------------
$ 2,202 $ 2,040 $ 2,026 $ 2,010
============ ============ ============ ============
$1.65 $1.54 $1.55 $1.55
$0.22 $0.15 $0.23 $0.07
- -----------------------------------------------------------
June 30, June 30, June 30, June 30,
1991 1990 1989 1988
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 220,053 $ 208,796 $ 192,269 $ 188,173
177,421 173,244 156,925 147,809
25,160 24,983 24,885 20,977
196,880 188,621 174,729 172,579
799 604 - 174
18,972 16,955 14,986 13,076
- ----------------------------------------------------------
June 30, June 30, June 30, June 30,
1991 1990 1989 1988
------------ ------------- ------------ ------------
<S> <C> <C> <C>
10.08% 10.28% 9.85% 9.55%
6.75% 7.25% 6.86% 6.32%
------------ ------------ ------------ ------------
3.33% 3.03% 2.99% 3.23%
============ ============ ============ ============
3.80% 3.42% 3.36% 3.46%
1.03% 1.01% 1.06% 1.09%
12.31% 12.82% 14.51% 16.73%
- -----------------------------------------------------------
June 30, June 30, June 30, June 30,
1991 1990 1989 1988
------------ ------------- ------------ ------------
<S> <C>
14.1% 13.1% N/A N/A
14.8% 13.7% N/A N/A
8.6% 8.1% 7.8% 7.0%
0.53% 0.42% 0.43% 0.36%
117.96% 155.93% 129.81% 38.58%
0.45% 0.27% 0.33% 0.94%
4,793 4,428 4,907 5,107
21,200 21,492 20,932 20,996
6 6 5 5
</TABLE>
BUSINESS
NorthWest Indiana Bancorp (the Company) is the holding company for Peoples
Bank SB (the Bank), an Indiana stock savings bank. Peoples Bank SB is a wholly
owned subsidiary of the Company. The Company has no other business activity
other than being the holding company for Peoples Bank SB.
The Bank conducts business from its main office at Munster and its six
full-service offices located in East Chicago, Hammond, Merrillville, Dyer and
Schererville, Indiana. The Bank is primarily engaged in the business of
attracting deposits from the general public and the origination of loans secured
by single family residences and commercial real estate, as well as, and
construction loans and various types of consumer loans and commercial business
loans. In addition, the Bank's trust department provides estate administration,
estate planning, guardianships, land trusts, retirement planning, self-directed
IRA and Keogh accounts, investment agency accounts, and serves as personal
representative of estates and acts as trustee for revocable and irrevocable
trusts.
The Company's capital stock is traded in the over-the-counter market and
quoted in the National Quotation Bureau's "Pink Sheets". On December 2, 1996,
the Company effected a two-for-one common stock split. All references herein to
the number of shares and per share data reflect the stock split. On February 28,
1997, the Company had 1,380,846 shares of common stock outstanding, excluding
fractional shares, and 593 stockholders of record. This does not reflect the
number of persons or entities who may hold their stock in nominee or "street"
name through brokerage firms.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's earnings are dependent upon the earnings of the Bank. The
Bank's earnings are primarily dependent upon net interest margin. The net
interest margin is the difference between interest income earned on loans and
investments and interest expense paid on deposits and borrowings stated as a
percentage of average total assets. The net interest margin is perhaps the
clearest indicator of a financial institution's ability to generate core
earnings. The Bank's profitability is also affected by service charges, trust
department income, gains and losses from the sale of loans, provisions for loan
losses, income taxes and operating expenses.
The Bank's deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund (SAIF) which is administered by the Federal
Deposit Insurance Corporation (FDIC), an agency of the federal government. On
September 30, 1996, the President signed the Deposit Insurance Funds Act of 1996
which required a one-time special assessment on SAIF-assessable deposits to
recapitalize SAIF. The special assessment resulted in a 1996 pre-tax expense of
$1.6 million and an after-tax effect on earnings of $941 thousand. As a result
the Company reported a net income for 1996 of $2.2 million, or $1.59 per share.
The return on average assets (ROA) was 0.75%, while the return on average
stockholders' equity (ROE) was 7.90% for 1996.
Excluding the SAIF assessment, adjusted net income for 1996 was $3.1
million, or $2.27 per share compared to $3.1 million, or $2.25 per share for
1995. The adjusted ROA was 1.07%, while the adjusted ROE was 11.27% for 1996
compared to a ROA of 1.14% and a ROE of 11.74% for 1995.
For 1997, the Bank's annual insurance premium will be reduced from $0.23
per $100 of insured deposits to $0.0648 per $100. Based on December 31, 1996
total deposits, the Bank projects a federal insurance premium expense reduction
from $580 thousand at $0.23 per $100 of insured deposits to $163 thousand at
$0.0648 per $100 for 1997.
At December 31, 1996, the Company had total assets of $299.4 million and
total deposits of $256.4 million. Stockholders' equity totaled $27.8 million or
9.3% of total assets, with book value per share at $20.16.
<TABLE>
<CAPTION>
TOTAL ASSETS
(DOLLARS IN MILLIONS)
June 30, Six Months Dec. 31, Dec. 31, Dec. 31,
1993 Dec. 31, 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$246.2 $251.5 $266.3 $280.9 $299.4
<FN>
Total assets have increased from $246.2 million at June 30, 1993 to $299.4
million at December 31, 1996. Growth during 1996 totaled $18.5 million or 6.6%.
===============================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities as well as to assure adequate liquidity. These strategies
determine the characteristics and mix of the balance sheet. They affect the
interest margins, maturity patterns, interest rate sensitivity and risk, as well
as resource allocation. For the Bank, the key components of asset/liability
management are loans, investments and deposits. Over the years, the Bank has
directed its lending efforts toward construction loans, adjustable rate
residential loans, equity lines of credit, adjustable rate commercial real
estate loans and commercial business loans tied to the prime rate of interest.
Consumer loans are generally made for terms of five years or less. Fixed rate
residential real estate loans are generally made for terms of fifteen years or
less. The actual cash flow from these loans generally results in a duration
which is less than the contractual maturity, providing protection against the
possibility of rising interest rates.
The primary objective of the Bank's investment portfolio is to provide for
the liquidity needs of the Bank and to contribute to profitability by providing
a stable flow of dependable earnings. Funds are generally invested in federal
funds, interest-bearing balances in financial institutions, U.S. government
securities and federal agency obligations. Interest-bearing balances in
financial institutions include overnight deposits at the Federal Home Loan Bank
of Indianapolis (FHLBI). Investments are generally for terms ranging from one
day to five years.
The Bank's cost of funds reacts rapidly to changes in market interest rates
due to the relatively short-term nature of its deposit liabilities.
Consequently, the Bank's results of operations have been influenced by the
levels of short-term interest rates. In order to reduce exposure to
interest-rate risk, certificate accounts with maturities in excess of one year
have been aggressively marketed. In addition, product offerings are
competitively priced and maturities are carefully monitored in order to guard
against the outflow of funds. Relatively low interest rates during 1996 and
uncertainty with the direction of future rates resulted in a strong customer
preference for liquidity. Borrowed money is used on a short term basis to
compensate for reductions in the availability of other sources of funds and is
generally accomplished through repurchase agreements, as well as, through a line
of credit and short-term advances from the FHLBI. The Bank does not obtain funds
through brokers.
A primary objective of Asset/Liability Management is controlling interest
rate risk. The Bank's exposure to interest rate risk is due to the differences
in the maturities of interest-bearing liabilities and interest-earning assets,
and to the volatility of interest rates. To moderate unfavorable operating
results in periods of rising or high interest rates, the Bank restructures its
asset-liability mix on an ongoing basis. While steps have been taken which have
significantly reduced the overall vulnerability to interest rate risk, the Bank
will still
6
<PAGE> 9
be adversely affected by a rising or high interest rate environment, and is
beneficially affected by a falling or low interest rate environment because rate
sensitive liabilities exceed rate sensitive assets within a one year time
period. Increasing the amount of interest-earning assets that are rate
sensitive, extending the maturities of customer deposits and increasing the
balances of NOW/checking accounts are all part of management's commitment toward
reducing the Bank's overall vulnerability to interest rate risk.
At December 31, 1996, the Bank's one year unadjusted GAP; i.e., the
difference between interest-earning assets maturing or repricing during the next
twelve months and interest-bearing liabilities maturing in the same period as a
percentage of total assets, was -37.42%. The GAP position incorporates the
Bank's internal data as related to the maturity/repricing and
repayment/withdrawal of interest-earning assets and interest-bearing
liabilities. The Bank has not experienced the kind of earnings volatility
indicated from the unadjusted GAP, because a significant portion of the Bank's
deposits do not reprice on a contractual basis.
As is common in the banking industry, management makes adjustments to the
timing and magnitude of non-contractual deposit repricing to more accurately
reflect anticipated pricing behavior and exposure to interest rate risk. These
adjustments include assumptions on rate/volume elasticity for checking and
non-interest bearing deposits, NOW accounts, money market accounts and savings
accounts. The table which follows is first presented without adjustment for
expected repricing behavior. Then, as presented in the management adjustment
line, these balances have been distributed over a number of periods to reflect
those portions of such accounts that are expected to reprice over the respective
periods. The distribution of the balances over the repricing periods represents
an aggregation of allocations. A core amount of transaction and savings account
balances has been calculated by reviewing historical data on short-term interest
rates and account balance activity. The core balance is considered non-rate
sensitive and is classified as due/repricing between one and five years.
Management expects to continue the same methodology in response to future market
rate changes; however, management adjustments may change as customer preferences
and competitive market conditions change. All management adjustments are
reflected in the cumulative management adjusted GAP line. The cumulative GAP
reflects sensitivity to interest rate changes over time. The Bank's management
believes that the Bank's adjusted one year GAP of -6.30% has been maintained
within an acceptable range in view of the prevailing interest rate environment.
There can be no assurance that the assets and liabilities will have the
projected maturities used in developing this table. The GAP position is a static
indicator and is not a predictor of net interest income for a dynamic business
in a rapidly changing environment.
<TABLE>
<CAPTION>
GAP POSITION AT DECEMBER 31, 1996
0-3 4-12 1-5 over 5
months months years years total
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans ............ $ 39,055 $ 64,813 $ 78,436 $ 39,545 $ 221,849
Consumer loans ............... 1,172 1,394 2,310 14 4,890
Commercial business
loans and other ............. 13,621 1,830 2,433 73 17,957
Securities held-to-maturity .. 2,328 4,914 26,264 6,518 40,024
Interest-bearing balances
and federal funds ........... 1,000 -- -- -- 1,000
--------- --------- --------- --------- ---------
Total ...................... 57,176 72,951 109,443 46,150 285,720
--------- --------- --------- --------- ---------
Certificates of deposit ...... 57,976 69,137 26,509 -- 153,622
Checking and non-interest
bearing deposits ............ 12,879 -- -- -- 12,879
NOW accounts ................. 23,907 -- -- -- 23,907
Money market accounts ........ 22,359 -- -- -- 22,359
Savings accounts ............. 43,653 -- -- -- 43,653
Borrowed funds ............... 9,360 2,901 -- -- 12,261
--------- --------- --------- --------- ---------
Total ...................... 170,134 72,038 26,509 -- 268,681
--------- --------- --------- --------- ---------
AT DECEMBER 31, 1996:
GAP .......................... (112,958) 913 82,934 46,150
--------- --------- --------- ---------
Cumulative GAP................ $(112,958) $(112,045) $ (29,111) $ 17,039
========= ========= ========= =========
Cumulative GAP as a
percent of total assets .... -37.73% -37.42% -9.72% 5.69%
========= ========= ========= =========
Management adjustments ....... $ 98,639 $ 93,186 $ -- $ --
Cumulative management
adjusted GAP ................ $ (14,319) $ (18,859) $ (29,111) $ 17,039
========= ========= ========= =========
Cumulative management
adjusted GAP/total
assets ...................... -4.78% -6.30% -9.72% 5.69%
========= ========= ========= =========
</TABLE>
FINANCIAL CONDITION
During the year ended December 31, 1996, total assets increased by $18.5
million (6.6%), with interest-earning assets increasing by $17.4 million (6.5%).
At December 31, 1996, interest-earning assets totaled $285.7 million and
represented 95.4% of total assets. Loans totaled $244.7 million and represented
85.6% of interest-earning assets, 81.7% of total assets and 95.4% of total
deposits. The loan portfolio includes $13.2 million (5.4%) in construction and
land development loans, $151.3 (61.8%) in residential real estate loans, $57.3
million (23.4%) in commercial and multifamily real estate loans, $4.9 million (
2.0%) in consumer loans, and $18.0 million (7.4%) commercial business and other
loans. During 1996, loans increased by $22.4 million (10.1%). Loan demand was
strong in all areas as evidenced by the growth in the real estate loans (8.9%),
consumer loans (38.6%) and commercial business and other loans (19.1%). Loan
growth was due to a strong local economy, a formalized Bank customer calling
program and an aggressive marketing program. Adjustable rate loans comprised 63%
of total loans at year end.
7
<PAGE> 10
LOAN COMPOSITION
(DOLLARS IN MILLIONS)
Commercial Real Estate
and Multifamily - $57.3 (23.4%)
Commercial Business
and Other - $18.0 (7.4%)
Consumer - $4.9 (2.0%)
Construction and
Land Development - $13.2 (5.4%)
Residential Real Estate - $151.3 (61.8%)
At December 31, 1996, the loan portfolio totaled $244.7 million and represented
85.6% of interest-earning assets.
================================================================================
<TABLE>
<CAPTION>
TOTAL LOANS
(DOLLARS IN MILLIONS)
June 30, Six Months Dec. 31, Dec. 31, Dec. 31,
1993 Dec. 31, 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$202.1 $204.2 $221.9 $222.3 $244.7
<FN>
During 1996, loans increased by $22.4 million or 10.1%. Loan growth
was due to strong local economy, a formalized Bank customer calling program and
an aggressive marketing program.
</TABLE>
================================================================================
The Bank is primarily a portfolio lender. Mortgage banking activities are
limited to the sale of fixed rate mortgage loans with contractual maturities of
thirty years. These loans are sold in the secondary market because of the
additional exposure to interest rate risk associated with this product. The Bank
retains the servicing on all loans sold in the secondary market.
During 1996, the Bank sold $699 thousand in fixed rate mortgages compared
to $1.3 million in 1995 and $937 thousand in 1994. The amounts include 10 loans
for 1996, and 15 loans for 1995 and 1994. All loans sold had contractual
maturities of thirty years. Net gains realized from the sales totaled $1
thousand, $19 thousand and $8 thousand for 1996, 1995 and 1994. Mortgage loan
servicing income totaled $21 thousand, $23 thousand and $22 thousand for 1996,
1995 and 1994. At December 31, 1996, the Bank had no loans classified as held
for sale.
At December 31, 1996, the Bank's investment portfolio totaled $40.0 million
and was invested as follows: 62.3% in U.S. government agency debt securities,
28.9% in U.S. government debt securities, 4.8% in U.S. government agency
mortgage-backed securities and 4.0% in FHLBI common stock. In addition, the Bank
had $1.0 million in interest-bearing balances at the FHLBI. During 1996,
investment securities increased by $2.0 million (5.3%), while interest-bearing
balances in financial institutions and federal funds decreased by $7.0 million
(87.5%). Overnight investments provided funding for securities and loan
portfolio growth.
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. At December 31, 1996 the Bank had $1.2 million in
non-performing loans. The December 31, 1996 balance includes $788 thousand in
loans accounted for on a non-accrual basis and $379 thousand in accruing loans
which were contractually past due 90 days or more. The total of these
non-performing loans represents 0.48% of the total loan portfolio and 0.39% of
total assets. The amount for non-accruing loans includes 14 residential real
estate loans, one commercial real estate loan, two commercial business loans and
two consumer loans. The amount for accruing loans which are contractually past
due 90 days or more includes five residential real estate loans, one commercial
business loan and one consumer loan. At December 31, 1996, $877 thousand of the
Bank's loans were classified as substandard. The total represents 14 residential
real estate loans, one commercial real estate loan, five commercial business
loans and four consumer loans. There were no loans classified as doubtful or
loss. Management does not anticipate that any of the non-performing loans or
classified loans will materially impact future operations, liquidity or capital
resources. At December 31, 1996, there were no material credits which would
cause management to have serious doubts as to the ability of such borrowers to
comply with loan repayment terms.
<TABLE>
<CAPTION>
NON-PERFORMING LOANS TO TOTAL LOANS
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
0.30% 0.27% 0.70% 0.47% 0.48%
<FN>
Management believes that the credit risk profile of the loan portfolio is
relatively low. At December 31, 1996, the Bank's ratio of non-performing loans
to total loans was 0.48% (forty-eight hundredths of one percent) which was below
the industry norm.
</TABLE>
================================================================================
At December 31, 1996, the Bank had $189 thousand in foreclosed real estate.
The total includes three residential properties and represents 0.06% of total
assets.
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses (ALL) has been maintained. While
management may periodically allocate portions of the allowance for specific
problem
8
<PAGE> 11
loans, the entire allowance is available to absorb all credit losses that arise
from the loan portfolio and is not segregated for, or allocated to, any
particular loan or group of loans. During 1996, amounts provided to the ALL
account totaled $85 thousand compared to $80 thousand for 1995 and $145 thousand
for 1994. The amount provided during 1996 was based on loan activity, current
economic conditions and management's assessment of portfolio risk. Charge-offs
net of recoveries totaled $28 thousand during 1996.
At December 31, 1996, the balance in the ALL account totaled $2.9 million
which is considered adequate by management after evaluation of the loan
portfolio, past experience and current economic and market conditions. The
allocation of the ALL reflects consideration of the facts and circumstances that
affect the repayment of individual loans, as well as, loans which have been
pooled as of the evaluation date.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
1.15% 1.26% 1.24% 1.27% 1.18%
<FN>
At December 31, 1996, the Bank had $2.9 million in the Allowance for Loan Losses
account. The amount represents 1.18% of loans outstanding and 247.4% of
non-performing loans.
</TABLE>
================================================================================
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114), as amended by SFAS No. 118,
was adopted on January 1, 1995. Under these standards, loans considered to be
impaired are reduced to the present value of expected future cash flows or to
the fair value of collateral, by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan losses
to require an increase, the increase is reported in the provision for loan
losses. A loan is impaired when it is probable that all principal and interest
amounts will not be collected according to the loan contract. The effect of
adopting these standards did not result in the recording of additional
provisions for loan losses. At December 31, 1996, no portion of the allowance
for loan losses was allocated to impaired loan balances as the Bank had no loans
considered to be impaired loans as of, or for the year ended December 31, 1996.
Deposits are the major source of funds for lending and other investment
purposes. At December 31, 1996, deposits totaled $256.4 million. During 1996,
deposit growth totaled $8.5 million (3.4%). Savings accounts increased $1.8
million (4.2%), NOW accounts increased $2.6 million (12.5%), checking accounts
increased $1.4 million (12.0%), money market deposit accounts increased $1.1
million (5.0%) and certificates of deposit increased by $1.6 million (1.1%). At
December 31, 1996, the deposit base was comprised of 17.0% savings accounts,
8.7% MMDA's, 9.3% NOW accounts, 5.0% checking accounts and 60.0% certificates of
deposit. At December 31, 1996, repurchase agreements totaled $4.0 million. Other
short-term borrowings totaled $8.3 million, of which $7.0 million represents a
variable rate advance from the FHLBI. The Company had no long-term borrowings.
<TABLE>
<CAPTION>
TOTAL DEPOSITS
(DOLLARS IN MILLIONS)
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$219.1 $222.9 $234.6 $247.9 $256.4
<FN>
Deposits are the major source of funds for lending and other investment
purposes. During 1996 deposits increased by $8.5 million or 3.4%.
</TABLE>
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability to generate sufficient cash to fund current
loan demand, meet deposit withdrawals and pay operating expenses. Changes in the
liquidity position result from operating, investing and financing activities.
Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of net income.
The primary investing activities include loan originations, loan repayments,
investments in interest bearing balances in financial institutions, and the
purchase and maturity of investment securities. Financing activities focus
almost entirely on the generation of customer deposits. In addition, the Bank
utilizes short-term borrowings, i.e., repurchase agreements and advances from
the FHLBI as a source of funds.
During 1996, cash and cash equivalents decreased by $8.4 million compared
to a $9.2 million increase for 1995 and a $1.9 million decrease for 1994. The
decrease for 1996 was due to the reduction in interest-bearing balances in
financial institutions and federal funds, as cash flows were used for loan
originations. During 1996, cash provided by operating activities totaled $2.5
million, compared to $3.1 million for 1995 and $4.1 million for 1994. The
decrease during 1996 was due to the required payment of $1.6 million to
capitalize SAIF. Cash flows from investing activities reflect strong loan demand
throughout 1996, causing a reduction in cash and cash equivalents which had
accumulated during 1995 when loan growth was slow relative to deposit growth.
Loans made net of payments received totaled $22.6 million during 1996, compared
to $712 thousand for
9
<PAGE> 12
1995 and $18.2 million for 1994. During 1996, cash flows were also used to
purchase securities and open a new full-service branch facility located in
Merrillville, Indiana. The facility represents the Company's commitment to
quality service and community development, and provides opportunities to expand
market share by attracting additional deposits and loans from the surrounding
areas. The new facility is not expected to have a material impact on noninterest
expense. Cash flows from financing activities totaled $16.0 million during 1996,
compared to $11.8 million for 1995 and $11.3 million for 1994. During 1996, the
Company paid common stock dividends of $1.6 million. In addition, the Bank used
both deposits and borrowed money to fund loan growth. Deposit growth during 1996
totaled $8.5 million, compared to $13.3 million for 1995 and $11.7 million for
1994. The increase in borrowed funds totaled $9.1 million during 1996, compared
to a decrease of $12 thousand for 1995 and an increase of $1.1 million for 1994.
The increase in borrowed funds represents short-term borrowings which, on
average, provided a cost effective alternative to certificates of deposit as
price competition within the local market area became very competitive during
1996.
At December 31, 1996, outstanding commitments to fund loans totaled $34.1
million. Approximately 81% of the commitments were at variable rates. The Bank
has sufficient cash flow and borrowing capacity to fund all outstanding
commitments and to maintain proper levels of liquidity.
Management strongly believes that safety and soundness is enhanced by
maintaining a high level of capital. During 1996, stockholders' equity increased
by $611 thousand (2.2%). The increase resulted primarily from earnings of $2.2
million for 1996. In addition, two thousand dollars represents proceeds from the
exercise of 159 stock options. The reduction of $1.6 million represents cash
dividends for 1996. At December 31, 1996, book value per share was $20.16
compared to $19.72 reported at December 31, 1995.
<TABLE>
<CAPTION>
CAPITAL TO TOTAL ASSETS
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
9.2% 9.5% 9.6% 9.7% 9.3%
<FN>
Management firmly believes that the safety and soundness of the Company is
enhanced by maintaining a high level of capital. At December 31, 1996, the
Company's capital exceeded all regulatory capital requirements. The Company is
categorized as "well capitalized". The ratio of Tier I capital to total assets
reflects the increase in capital over the periods presented as a result of
profitability and success in managing growth. In addition, Tier I capital to
risk-weighted assets was 14.7% and total risk-based capital to risk-weighted
assets was 16.0%.
</TABLE>
================================================================================
The Company is subject to risk-based capital guidelines adopted by the
Board of Governors of the Federal Reserve System (the FRB), and the Bank is
subject to risk-based capital guidelines adopted by the FDIC. As applied to the
Company and the Bank, the FRB and FDIC capital requirements are substantially
identical. These regulations divide capital into two tiers. The first tier (Tier
I) includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets. Supplementary (Tier II) capital
includes, among other things, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan losses, subject
to certain limitations, less required deductions. The Company and the Bank are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. In addition, the FRB and FDIC regulations provide for a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets) of 3% for
financial institutions that meet certain specified criteria, including that they
have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other financial institutions are required to maintain a
Tier I leverage ratio of 3% plus an additional cushion of at least one to two
percent.
The following table shows that, at December 31, 1996, the Company's capital
exceeded all regulatory capital requirements. At December 31, 1996, the
Company's and the Bank's regulatory capital ratios were identical. The dollar
amounts are in millions.
<TABLE>
<CAPTION>
Required for To be well
Actual adequate capital capitalized
-------------- ---------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital to
risk-weighted assets ........ $30.2 16.0% $15.1 8.0% $18.9 10.0%
Tier 1 capital to
risk-weighted assets ........ $27.8 14.7% $ 7.6 4.0% $11.3 6.0%
Tier 1 capital to total assets $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
</TABLE>
On December 2, 1996, the Company effected a two-for-one split of its common
stock. All earnings per share and book value per share data herein have been
restated for all periods presented to reflect the split.
CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY
The laws and regulations affecting banks and bank holding companies are in
a state of flux. The laws, rules and the regulatory agencies in this area have
changed significantly over recent years, and there is reason to expect that
similar changes will continue in the future. It is difficult to predict the
outcome of these changes. Recent legislation has, for example, reduced the
regulatory burden on bank holding companies and may lead to consolidated
regulation of the banking industry. Other recent initiatives have removed
barriers to interstate mergers and acquisitions; encouraged lending for the
development of poor, rural, inner city and other communities; and provided
additional proposals to restructure regulation of the banking industry and its
participants' powers, particularly with respect to insurance and securities
10
<PAGE> 13
activities. Based on what is presently known about these initiatives, management
does not believe that the Company's operations will be materially adversely
affected by those initiatives that have been enacted or those pending
initiatives that may be enacted in the future.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with Generally Accepted Accounting Principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of the
Bank are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
CURRENT ACCOUNTING ISSUES
Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
has not yet been determined.
RESULTS OF OPERATIONS - COMPARISON OF 1996 TO 1995.
Net income for 1996 was $2.2 million compared to $3.1 million for 1995, a
decrease of $913 thousand (29.4%). The earnings represent a return on average
assets of 0.75% for 1996 compared to 1.14% for 1995. The return on average
equity was 7.90% for 1996 compared to 11.74% for 1995. The decrease in the
current year operating results was due to the one-time special assessment
required by the Deposit Insurance Funds Act of 1996 on SAIF-assessable deposits
to capitalize SAIF. The SAIF assessment resulted in a pre-tax expense of $1.6
million for 1996. Excluding the SAIF assessment, adjusted net income for 1996
was $3.1 million, representing an adjusted ROA of 1.07% and an adjusted ROE of
11.27%.
Net interest income for 1996 was $11.1 million, up $412 thousand (3.9%)
from $10.6 million for 1995. The growth in net interest income was due to the
growth in average interest-earning assets and a stable cost of funds.
Interest-earning assets averaged $279.9 million for 1996, up $17.8 million
(6.8%) from $262.1 million for 1995. The net interest margin was 3.79% for 1996
compared to 3.91% for 1995. The decrease was due to lower yields on
interest-earning assets as the Bank's cost of funds remained stable. During
1996, total interest income increased by $1.2 million (5.7%) while total
interest expense increased by $802 thousand (7.7%).
<TABLE>
<CAPTION>
RETURN ON ASSETS
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
1.28% 1.45% 1.24% 1.14% 0.75%
<FN>
Return on assets (ROA) indicates the overall operating efficiency of a company.
The ratio is determined by stating net income as a percentage of average total
assets. The decrease in the ROA for 1996 reflects the one-time special
assessment on SAIF-assessable deposits to recapitalize SAIF.
</TABLE>
================================================================================
During 1996, interest income from loans increased by $685 thousand (3.7%)
compared to 1995. The weighted average yield on loans outstanding was 8.35% for
1996 compared to 8.46% for 1995. Higher average loan balances have contributed
to the increase in interest income as loans averaged $232.5 million for 1996, up
$11.1 million (5.0%) from $221.4 for 1995. During 1996, interest income on
investments and other deposits increased by $530 thousand (22.1%) compared to
1995. The increase was due to higher yields and portfolio growth during 1996.
The weighted average yield on investments and other deposits was 6.17% for 1996
compared to 5.88% for 1995. The increase in yield was due to a reduction in the
average balances for federal funds sold and interest bearing balances in
financial institutions, and the investment of funds in securities with
contractual maturities ranging from three to seven years. In addition,
securities averaged $40.9 million for 1996, up $5.8 million (16.4%) from $35.1
million for 1995. The combined weighted average yield on total interest-earning
assets was 7.98% for 1996 compared to 8.06% for 1995.
Interest expense for deposits increased by $699 thousand (6.7%) during
1996. The increase was due to higher average balances as deposits averaged
$255.6 million for 1996, up $15.8 million (6.6%) from $239.8 million for 1995.
The weighted average rate paid on deposits for 1996 was 4.33% compared to 4.32%
for 1995. Interest expense on short-term borrowings increased by $104 thousand
during 1996 due to higher average balances as borrowed funds averaged $4.8
million, up $2.3 million (92.8%) from $2.5 million for 1995. The weighted
average cost of short-term borrowings was 4.62% for 1996 compared to 4.72% for
1995. The combined weighted average rate paid on deposits and borrowings for
1996 and 1995 was 4.33%. The impact of the 7.98% return on interest-earning
assets and the 4.33% cost of funds resulted in an interest rate spread of 3.65%
for 1996 compared to 3.73% for 1995.
Noninterest income for 1996 was $682 thousand, down four thousand dollars
(0.5%) from $685 thousand for 1995. The decrease was due to reduced gains from
the sale of fixed rate loans and foreclosed real estate. During 1996, income
from fees and service charges increased $59 thousand
11
<PAGE> 14
(13.9%), while income from Trust operations increased by $11 thousand (6.2%).
Noninterest expense for 1996 was $8.0 million, up $1.9 million (31.4%) from
$6.1 million for 1995. The increase was due primarily to the SAIF assessment of
$1.6 million. Excluding the SAIF assessment results in an increase of
noninterest expense of $364 thousand (6.0%) for 1996 compared to 1995. In
general, increases in noninterest expense have resulted from the expansion of
the Bank's operations and the investment in new technologies. The increase in
compensation and benefits was due to additional staffing and annual salary
increases. The increase in occupancy and equipment expense was due to the
operation of the new East Chicago, Indiana, branch facility which opened during
September 1995, the operation of the new Merrillville, Indiana, branch facility
which opened during September 1996, and depreciation related to investments in
technology. Other expense changes were due to standard increases in bank
operations. The Company's efficiency ratio, excluding the SAIF assessment, for
1996, was 55.2% compared to 54.0% for 1995. The ratio is determined by dividing
total noninterest expense minus the SAIF assessment by the sum of net interest
income and total noninterest income for the period.
Income tax expenses for 1996 totaled $1.4 million compared to $2.0 million
for 1995, a decrease of $607 thousand (30.0%). The decrease was due to a
decrease in pretax earnings during 1996.
<TABLE>
<CAPTION>
RETURN ON EQUITY
Six Months
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
14.00% 15.51% 13.04% 11.74% 7.90%
<FN>
Return on equity (ROE) is determined by stating net income as a percentage of
average stockholders' equity. The ratio is important to the Company's
stockholders because it measures the return on their invested capital. The
decrease in ROE for 1996 reflects the one-time special assessment on
SAIF-assessable deposits to recapitalize SAIF.
</TABLE>
================================================================================
RESULTS OF OPERATIONS - COMPARISON OF 1995 TO 1994.
Net income for 1995 was $3.1 million compared to $3.2 million for 1994, a
decrease of $127 thousand (3.9%). The earnings represent a return on average
assets of 1.14% for 1995 compared to 1.24% for 1994. The return on average
equity was 11.74% for 1995 compared to 13.04% for 1994. The decrease in the
operating results for 1995 was due to a decrease in net interest margin caused
by a rising cost of funds.
Net interest income for 1995 decreased by $404 thousand (3.7%) compared to
1994. The net interest margin for 1995 was 3.91% compared to 4.25% during 1994.
While total interest income increased by 10.5% during 1995, total interest
expense increased by 29.8%, causing the increase in the cost of funds for
interest-bearing liabilities to exceed the increase in the yield on
interest-earning assets.
During 1995, interest income from loans increased by $1.6 million (9.3%)
compared to 1994. The weighted average yield on loans outstanding was 8.46% for
1995 compared to 8.03% for 1994. Higher yields and higher average loan balances
contributed to the increase in interest income. During 1995, interest income on
investments and other deposits increased by $412 thousand (20.7%) compared to
1994. The increase was due to higher yields and portfolio growth during 1995.
The weighted average yield on investments and other deposits was 5.88% for 1995
compared to 5.47% for 1994. The increase was caused by the upswing in interest
rates which began during 1994. Yields on investments react rapidly to changes in
market interest rates due to the highly liquid nature of the portfolio. The
combined weighted average yield on total interest-earning assets was 8.06% for
1995 compared to 7.66% for 1994.
Interest expense for deposits increased by $2.4 million (29.4%) during
1995. The increase was due to the repricing of existing deposits at higher
interest rates and certificate of deposit growth. The weighted average rate paid
on deposits for 1995 was 4.32% compared to 3.49% for 1994. Interest expense on
short-term borrowings increased by $49 thousand during 1995 due to higher
average balances and interest rates for repurchase agreements. The weighted
average cost of short-term borrowings was 4.72% for 1995 compared to 4.07% for
1994. Interest expense on short-term borrowings totaled only $117 thousand
during 1995, due to the low level of borrowing during the period. The combined
weighted average rate paid on deposits and borrowings for 1995 was 4.33%
compared to 3.49% for 1994. The impact of the 8.06% return on interest-earning
assets and the 4.33% cost of funds resulted in an interest rate spread of 3.73%
for 1995 compared to 4.17% for 1994.
Noninterest income for 1995 was $193 thousand (39.1%) greater than that
reported during 1994. The improvement was due to increased income from Trust
operations of $34 thousand (23.2%) and increased fees and service charges of $91
thousand (27.1%). Also contributing to noninterest income during 1995 were gains
on the sale of foreclosed real estate of $51 thousand, and gains on the sale of
fixed rate loans of $19 thousand.
Noninterest expense for 1995 was $86 thousand (1.4%) greater than that
reported during 1994. The increase in compensation and benefits was due to the
additional staffing and annual salary increases. With the exception of the
federal insurance premium, other expenses remained relatively stable compared to
1994. During 1994 the Company incurred costs related to the conversion to a new
service bureau for the purpose of providing data processing services.
Income tax expenses for 1995 totaled $2.0 million compared to $2.1 million
for 1994, a decrease of $106 thousand (5.0%). The decrease was due to a decrease
in pretax earnings during 1995.
12
<PAGE> 15
[LOGO CROWE CHIZEK]
Independent Auditor's Report
Board of Directors
NorthWest Indiana Bancorp
Munster, Indiana
We have audited the accompanying consolidated balance sheets of NorthWest
Indiana Bancorp (the Company) as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NorthWest Indiana
Bancorp as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for the years ended December 31, 1996, 1995 and 1994, in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
January 9, 1997
13
<PAGE> 16
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Cash and non-interest bearing balances in financial institutions............... $ 5,508,822 $ 6,952,377
Interest bearing balances in financial institutions............................ 1,000,000 6,151,327
Federal funds sold............................................................. - 1,840,000
------------- -------------
Total cash and cash equivalents.............................................. 6,508,822 14,943,704
Securities held-to-maturity (market value: December 31, 1996 - $39,909,000;
December 31, 1995 - $38,279,000)............................................. 40,023,992 38,001,081
Loans receivable............................................................... 244,695,883 222,292,700
Less: allowance for loan losses................................................ (2,887,005) (2,829,681)
------------- -------------
Net loans receivable......................................................... 241,808,878 219,463,019
Accrued interest receivable.................................................... 2,152,672 2,091,874
Premises and equipment......................................................... 7,085,982 5,256,785
Foreclosed real estate......................................................... 188,886 86,366
Deferred income taxes.......................................................... 706,008 644,915
Other assets................................................................... 943,260 423,195
------------- -------------
Total assets................................................................. $299,418,500 $280,910,939
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits................................................ $ 12,878,557 $ 11,497,478
Interest bearing deposits.................................................... 243,541,120 236,447,211
------------- -------------
Total deposits............................................................. 256,419,677 247,944,689
Borrowed funds................................................................. 12,260,507 3,138,829
Accrued expenses and other liabilities......................................... 2,923,079 2,623,293
------------- -------------
Total liabilities............................................................ 271,603,263 253,706,811
Commitments and contingencies
Stockholders' Equity
Preferred stock, no par or stated value;
10,000,000 shares authorized, none outstanding ............................ - -
Common stock, no par or stated value; 20,000,000 shares authorized;
issued and outstanding: December 31, 1996 - 1,379,595 shares;
December 31, 1995 - 1,379,436 shares......................................... 344,899 344,859
Additional paid in capital..................................................... 2,929,587 2,927,595
Retained earnings - substantially restricted................................... 24,540,751 23,931,674
------------- -------------
Total stockholders' equity................................................... 27,815,237 27,204,128
------------- -------------
Total liabilities and stockholders' equity................................... $299,418,500 $280,910,939
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
i
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable
Real estate loans.................................. $17,522,544 $17,015,267 $14,986,332
Commercial loans................................... 1,522,360 1,411,744 1,847,743
Consumer loans..................................... 363,505 296,752 300,938
------------ ----------- -----------
Total loan interest.............................. 19,408,409 18,723,763 17,135,013
Securities held-to-maturity.......................... 2,604,759 2,054,976 1,806,621
Other interest earning assets........................ 323,741 343,919 180,340
------------ ----------- -----------
Total interest income.............................. 22,336,909 21,122,658 19,121,974
------------ ----------- -----------
Interest expense:
Deposits............................................. 11,065,874 10,367,179 8,011,495
Borrowed funds....................................... 220,773 117,030 68,311
------------ ----------- -----------
Total interest expense............................. 11,286,647 10,484,209 8,079,806
------------ ----------- -----------
Net interest income....................................... 11,050,262 10,638,449 11,042,168
Provision for loan losses................................. 85,000 80,000 144,500
------------ ----------- -----------
Net interest income after provision for loan losses....... 10,965,262 10,558,449 10,897,668
------------ ----------- -----------
Noninterest income:
Gain on sale of loans, net........................... 639 18,916 7,711
Gain on sale of foreclosed real estate............... 3,668 51,061 3,070
Fees and service charges............................. 487,351 427,855 336,748
Trust operations..................................... 190,183 179,087 145,349
Other................................................ - 8,520 -
------------ ----------- -----------
Total noninterest income........................... 681,841 685,439 492,878
------------ ----------- -----------
Noninterest expense:
Compensation and benefits............................ 3,213,151 3,049,295 2,937,347
Occupancy and equipment.............................. 1,049,626 842,108 848,951
Federal insurance premium............................ 1,979,211 536,224 513,390
Advertising.......................................... 158,579 156,511 131,036
Data processing...................................... 299,037 272,078 334,273
Other................................................ 1,339,837 1,260,069 1,265,629
------------ ----------- -----------
Total noninterest expense.......................... 8,039,441 6,116,285 6,030,626
------------ ----------- -----------
Income before income taxes................................ 3,607,662 5,127,603 5,359,920
Income tax expenses....................................... 1,419,000 2,026,400 2,132,000
------------ ----------- -----------
Net income................................................ $ 2,188,662 $ 3,101,203 $ 3,227,920
============ =========== ===========
Earnings per common and common equivalent share:
Net income............................................... $ 1.59 $ 2.25 $ 2.35
=========== =========== ===========
Dividend declared per common share........................ $ 1.15 $ 1.10 $ 1.10
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Paid-in Retained Total
Stock Capital Earnings Equity
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.................................... $ 343,573 $ 2,896,210 $ 20,634,648 $ 23,874,431
Issuance of 3,792 shares of common stock at
$2.50 - $11.50 per share, under stock option plan...... 948 17,794 - 18,742
Cash dividends, $1.10 per share.......................... - - (1,515,084) (1,515,084)
Net income for the year ended December 31, 1994.......... - - 3,227,920 3,227,920
------------ ------------ ------------ -------------
Balance at December 31, 1994.................................. 344,521 2,914,004 22,347,484 25,606,009
Issuance of 1,352 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... 338 13,591 - 13,929
Cash dividends, $1.10 per share.......................... - - (1,517,013) (1,517,013)
Net income for the year ended December 31, 1995.......... - - 3,101,203 3,101,203
------------ ------------ ------------ -------------
Balance at December 31, 1995.................................. 344,859 2,927,595 23,931,674 27,204,128
Issuance of 159 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... 40 1,992 - 2,032
Cash dividends, $1.15 per share.......................... - - (1,579,585) (1,579,585)
Net income for the year ended December 31, 1996.......... - - 2,188,662 2,188,662
------------ ------------ ------------ -------------
Balance at December 31, 1996.................................. $ 344,899 $ 2,929,587 $ 24,540,751 $ 27,815,237
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income........................................... $ 2,188,662 $ 3,101,203 $ 3,227,920
------------ ------------ -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale...................... (699,900) (1,247,100) (881,700)
Sale of loans originated for sale.................. 699,264 1,312,416 937,253
Depreciation and amortization, net of accretion.... 553,416 393,493 352,807
Net gains on sale of loans......................... (639) (18,916) (7,711)
Net gains on sale of foreclosed real estate........ (3,668) (51,061) (3,070)
Provision for loan losses.......................... 85,000 80,000 144,500
Change in unrealized premiums on loans............. - - 32,757
Net change in unearned discount on loans........... (795) (11,889) (25,791)
Change in deferred taxes........................... (61,093) 244,072 34,362
Change in deferred loan fees....................... (1,335) (74,806) 69,916
Change in interest receivable...................... (60,798) (271,987) (262,875)
Change in other assets............................. (520,065) (44,510) 142,986
Change in accrued expenses and other liabilities... 237,667 (323,830) 372,968
------------ ----------- -----------
Total adjustments.................................. 227,054 (14,118) 906,402
------------ ----------- -----------
Net cash from operating activities................. 2,415,716 3,087,085 4,134,322
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in interest bearing time deposits in
other financial institutions....................... - 493,472 1,000,000
Proceeds from maturities of securities
held-to-maturity................................... 12,671,429 8,000,000 8,500,000
Purchase of securities held-to-maturity.............. (15,164,019) (12,771,852) (9,431,047)
Principal collected on mortgage-backed securities.... 459,954 445,819 839,944
Proceeds from education loans sold................... - - 485,944
Loan participations purchased........................ - (33,440) (94,017)
Loans made net of payments received.................. (22,587,037) (711,802) (18,189,438)
Purchase of property plant and equipment............. (2,372,888) (1,646,683) (500,733)
Proceeds from sale of foreclosed real estate......... 60,731 547,231 49,456
------------ ----------- -----------
Net cash from investing activities................. (26,931,830) (5,677,255) (17,339,891)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits................................... 8,474,988 13,305,721 11,693,550
Proceeds from FHLB advances.......................... 7,000,000 - -
Change in other borrowed funds....................... 2,121,678 (11,823) 1,063,751
Proceeds from issuance of capital stock.............. 2,032 13,929 18,742
Cash dividends paid.................................. (1,517,466) (1,517,013) (1,515,084)
------------ ----------- -----------
Net cash from financing activities................. 16,081,232 11,790,814 11,260,959
------------ ----------- -----------
Net change in cash and cash equivalents............ (8,434,882) 9,200,644 (1,944,610)
Cash and cash equivalents at beginning of period..... 14,943,704 5,743,060 7,687,670
------------ ----------- -----------
Cash and cash equivalents at end of period........... $ 6,508,822 $ 14,943,704 $ 5,743,060
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................... $ 11,343,472 $ 10,456,707 $ 8,148,286
Income taxes....................................... $ 2,045,000 $ 1,815,000 $ 2,060,000
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1996, 1995 and 1994.
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of NorthWest Indiana Bancorp (the Company), its wholly-owned
subsidiary, Peoples Bank SB (the Bank), and the Bank's wholly-owned
subsidiaries, Peoples Service Corporation and PSA Insurance Corporation.
Effective July 31, 1994, the Company became a one-bank holding company for
Peoples Bank SB, an Indiana savings bank resulting from the conversion of
Peoples Bank from a federal stock savings bank to an Indiana stock savings bank.
References herein to the Company prior to July 31, 1994, are references to the
Bank and its subsidiaries. The formation of the Company and the acquisition of
Peoples Bank SB by the Company was an internal reorganization accounted for at
historical cost. The Company has no other business activity other than being a
holding company for the Bank. The Company's earnings are dependent upon the
earnings of the Bank. Both Peoples Service Corporation and PSA Insurance
Corporation are inactive. At December 31, 1996, the Company had investment
balances of $10,000 and $44,950 in Peoples Service Corporation and PSA Insurance
Corporation, respectively. All significant inter-company accounts and
transactions have been eliminated in consolidation. The parent only financial
statements for NorthWest Indiana Bancorp are presented in Note 17.
Use of Estimates - Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period, as well as the disclosures provided. Areas involving the use of
estimates and assumptions include the allowance for loan losses, fair values of
securities and other financial instruments, determination and carrying value of
impaired loans, the carrying value of loans held for sale, the accrued liability
for deferred compensation, the realization of deferred tax assets, and the
determination of depreciation of premises and equipment. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses and the fair values of securities and other financial instruments are
particularly susceptible to material change in the near term.
Concentrations of Credit Risk - The Company grants residential, commercial
real estate, commercial business and installment loans to customers primarily of
Lake County, in northwest Indiana. Substantially all loans are secured by
specific items of collateral including residences, business assets and consumer
assets.
Statements of Cash Flow - For purposes of the statement of cash flows, the
Company considers cash on hand, all interest-bearing deposits in other financial
institutions with original maturities of ninety days or less and federal funds
sold to be cash and cash equivalents. The Company reports net cash flows for
customer loan and deposit transactions and deposits made with other financial
institutions.
Securities - The Company classifies securities into held-to-maturity,
available-for-sale, or trading categories. Held-to-maturity securities are those
which the Company has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Company may decide to sell if needed for liquidity, asset-liability management
or other reasons. Available-for-sale securities are reported at fair value, with
unrealized gains and losses included as a separate component of equity, net of
tax. Trading securities are bought principally for sale in the near term and are
reported at fair value with unrealized gains and losses included in earnings.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of premium or discount, is included in earnings.
Loans Held for Sale - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income.
Loans and Loan Income - Loans are stated net of loans in process, deferred
loan fees, and unearned income. Discounts on consumer loans are recognized over
the lives of the loans using the interest method. Interest income on other loans
is accrued over the term of the loans based upon the principal outstanding
except where serious doubt exists as to the collectibility of a loan, in which
case the accrual of interest is discontinued. Income is subsequently recognized
only to the extent that cash payments are received until, in management's
judgment, the borrower has the ability to make contractual interest and
principal payments, in which case the loan is returned to accrual status..
Foreclosed Real Estate - Real estate properties acquired through, or in
lieu of, loan foreclosure are recorded at fair value at the date of foreclosure.
Costs relating to improvement of property are capitalized, whereas holding costs
are expensed. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated fair value less selling costs.
Allowance for Loan Losses - Because some loans may not be repaid in full,
an allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate based on past loss experience, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to change
over time. While management may periodically allocate portions of the allowance
for specific problem loans, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
18
<PAGE> 21
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by
SFAS No. 118, was adopted on January 1, 1995. Under these standards, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported in the
provision for loan losses. The effect of adopting this standard did not result
in the recording of additional provision for loan losses. Smaller-balance
homogeneous loans are evaluated for impairment in total. Such loans include
residential first mortgage loans secured by one-to-four family residences,
residential construction loans, and automobile, home equity and second mortgage
loans. Commercial loans and mortgage loans secured by other properties are
evaluated individually for impairment. When analysis of borrower operating
results and financial condition indicates that underlying cash flows of the
borrower's business are not adequate to meet its debt service requirements, the
loan is evaluated for impairment. Impaired loans, or portions thereof, are
charged off when deemed uncollectible. The nature of disclosures for impaired
loans is considered generally comparable to prior nonaccrual and non-performing
asset disclosures.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Premises and related components are depreciated using
the straight-line method with useful lives ranging from 26 to 40 years.
Furniture and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to
expense and improvements are capitalized. The cost and accumulated depreciation
applicable to assets retired or otherwise disposed of are eliminated from the
accounts and the gain or loss on disposition is credited or charged to
operations.
Recognition of Gains or Losses on the Sale of Loans - Loans are sold on a
net yield basis, with servicing rights and obligations retained by the Company,
resulting in the recognition of gains or losses at the time of sale. The Company
uses the purchaser's normal servicing fee in computing these gains and losses.
The resulting premiums or discounts, if any, are amortized or accreted in income
over the estimated lives of these loans sold using the level yield method.
Loan Origination Fees - Loan fees are netted with certain direct loan
origination costs, and are deferred and amortized into interest income as yield
adjustments using the interest method over the term of the related loans. When a
loan is paid off or sold, any unamortized origination fee is credited to
interest income.
Income Taxes - The Company records income tax expense based on the amount
of taxes due on its tax return, plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
Earnings per Share - On February 28, 1995 and December 2, 1996, the
Company effected a two-for-one common stock split. All references in the
accompanying financial statements to the number of shares and per share data
have been restated to reflect the two stock splits. The weighted average number
of shares used in the calculation of earnings per share are summarized below as
of the dates indicated:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Weighted average
shares outstanding.. 1,379,519 1,378,808 1,376,456
========= ========= =========
</TABLE>
The effect of common stock equivalents is not material in the periods reported.
Postretirement Benefits Other Than Pensions - The Company sponsors a
defined benefit postretirement plan that provides comprehensive major medical
benefits to all eligible retirees. Postretirement benefits are accrued based on
the expected cost of providing postretirement benefits to employees during the
years that the employees have rendered service to the Company.
Reclassification - Certain amounts appearing in the consolidated financial
statements and notes thereto for the year ended December 31, 1995 and 1994, have
been reclassified to conform to the December 31, 1996 presentation.
NOTE 2 - Securities
The amortized cost and fair value of securities held-to-maturity are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1996:
Debt securities:
U.S. government and
federal agencies ..... $36,482,782 $ 91,980 $ (216,762) $36,358,000
Mortgage-backed
securities ........... 1,944,510 16,135 (6,645) 1,954,000
----------- ----------- ----------- -----------
Total debt securities . 38,427,292 108,115 (223,407) 38,312,000
Other securities ...... 1,596,700 300 -- 1,597,000
----------- ----------- ----------- -----------
Total ............... $40,023,992 $ 108,415 $ (223,407) $39,909,000
=========== =========== =========== ===========
AT DECEMBER 31, 1995:
Debt securities:
U.S. government and
federal agencies ..... $33,999,917 $ 306,015 $ (99,932) $34,206,000
Mortgage-backed
securities ........... 2,404,464 71,618 (82) 2,476,000
----------- ----------- ----------- -----------
Total debt securities . 36,404,381 377,633 (100,014) 36,682,000
Other securities ...... 1,596,700 300 -- 1,597,000
----------- ----------- ----------- -----------
Total ............... $38,001,081 $ 377,933 $ (100,014) $38,279,000
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of debt securities held-to-maturity at
December 31, 1996, by contractual maturity, are shown on the following schedule.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
19
<PAGE> 22
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less ........................ $ 7,242,235 $ 7,253,000
Due after one year through five years .......... 26,240,547 26,112,000
Due after five years through ten years ......... 3,000,000 2,993,000
Mortgage-backed securities ..................... 1,944,510 1,954,000
----------- -----------
Total ......................................... $38,427,292 $38,312,000
=========== ===========
</TABLE>
There were no sales of securities during the year ended December 31, 1996,
1995 and 1994.
NOTE 3 - Loans Receivable
Loans are summarized below as of the dates indicated:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Loans secured by real estate:
<S> <C> <C>
Construction and land development ............ $ 13,247,600 $ 8,913,022
Residential .................................. 151,342,808 143,571,514
Commercial real estate and other dwelling .... 57,258,765 51,207,564
------------ ------------
Total loans secured by real estate ........ 221,849,173 203,692,100
Commercial business loans ..................... 17,820,797 14,948,660
Consumer loans ................................ 4,889,512 3,526,619
Government and other .......................... 136,401 125,321
------------ ------------
Loans receivable .......................... $244,695,883 $222,292,700
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized below for the
periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period .... $ 2,829,681 $ 2,751,146 $ 2,582,536
Provision charged to income ....... 85,000 80,000 144,500
Loans charged off ................. (28,203) (2,330) (9,858)
Recoveries ........................ 527 865 33,968
----------- ----------- -----------
Balance at end of period .......... $ 2,887,005 $ 2,829,681 $ 2,751,146
=========== =========== ===========
</TABLE>
At December 31, 1996 and 1995, no portion of the allowance for loan losses
was allocated to impaired loan balances as the Company had no loans it
considered to be impaired loans as of or for the year ended December 31, 1996
and 1995.
NOTE 4 - Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans are
summarized below as of the dates indicated:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
Mortgage loan portfolios serviced for:
<S> <C> <C>
FHLMC ............................ $7,152,436 $7,591,703
========== ==========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $128,000 and $160,000 at December 31, 1996 and
1995, respectively.
NOTE 5 - Premises and Equipment, Net
Premises and equipment are summarized below as of the dates indicated:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
Cost:
<S> <C> <C>
Land............................ $ 1,721,313 $ 1,271,652
Buildings and improvements...... 5,228,753 4,112,790
Furniture and equipment......... 3,104,300 2,412,838
------------ -----------
Total cost...................... 10,054,366 7,797,280
Less accumulated depreciation
and amortization ............... (2,968,384) (2,540,495)
------------ -----------
Premises and equipment, net.... $ 7,085,982 $ 5,256,785
=========== ===========
</TABLE>
NOTE 6 - Income Taxes
Components of the provision for income taxes consists of the following for
the years indicated:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current .................. $ 1,071,291 $ 1,376,742 $ 1,604,830
Deferred ................. 56,709 221,058 59,170
State:
Current .................. 286,616 405,586 492,808
Deferred ................. 4,384 23,014 (24,808)
----------- ----------- -----------
Income tax expense ......... $ 1,419,000 $ 2,026,400 $ 2,132,000
=========== =========== ===========
</TABLE>
The differences between the provision for income taxes shown on the
statement of income and amounts computed by applying the statutory federal
income tax rate to income before tax expense consists of the following for the
years indicated:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate ........... 34% 34% 34%
Tax expense at statutory rate .... $ 1,226,605 $ 1,743,385 $ 1,822,373
State tax, net of federal effect . 195,360 282,876 308,880
Other ............................ (2,965) 139 747
----------- ----------- -----------
Total income tax expense ......... $ 1,419,000 $ 2,026,400 $ 2,132,000
=========== =========== ===========
</TABLE>
The components of the net deferred tax asset recorded in the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
Deferred tax assets:
<S> <C> <C>
Bad debt........................ $ 298,239 $ 266,123
Deferred loan fees.............. 174,419 174,903
Deferred compensation........... 430,168 392,851
Other........................... 75,448 72,186
---------- ---------
Total deferred tax assets...... 978,274 906,063
Deferred tax liabilities:
Depreciation ................... (215,862) (221,716)
Other........................... (56,404) (39,432)
---------- ---------
Total deferred tax liabilities. 272,266 (261,148)
Valuation allowance.............. - -
---------- ---------
Net deferred tax assets........ $ 706,008 $ 644,915
========== ==========
</TABLE>
The Company has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad debts in
excess of the provision for such losses charged to income in the financial
statements, if any. Accordingly, retained earnings at December 31, 1996 and 1995
includes approximately $6,000,000 for which no provision for federal income
taxes has been made. If, in the future, this portion of retained earnings is
used for any purpose other than to absorb bad
20
<PAGE> 23
debt losses, federal income taxes would be imposed at the then applicable rates.
The unrecorded deferred income tax liability on the above amounts was
approximately $2,040,000 at December 31, 1996. Tax legislation passed in August
1996 now requires the Company to deduct a provision for bad debts for tax
purposes based on actual loss experience and recapture the excess bad debt
reserve accumulated in tax years after 1986. The related amount of deferred tax
liability which must be recaptured is $855,000 and is payable over a six year
period beginning no later than 1998.
NOTE 7 - Deposits
The aggregate amount of certificates of deposit with a balance of $100,000
or more was $26,099,900 at December 31, 1996 and $23,107,687 at December 31,
1995.
At December 31, 1996, scheduled maturities of certificates of deposit were
as follows for the years ended December 31:
1997 $127,112,424
1998 21,515,026
1999 3,795,951
2000 1,198,423
2001 and thereafter -
------------
$153,621,824
============
NOTE 8 - Borrowed Funds
Borrowed funds is summarized below as of the dates indicated:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Repurchase agreements ........................ $ 3,993,467 $ 2,403,347
5.75% FHLB advance, due June 30, 1997 ........ 7,000,000 --
Other ........................................ 1,267,040 735,482
----------- -----------
Total ...................................... $12,260,507 $ 3,138,829
=========== ===========
</TABLE>
Repurchase agreements generally mature within one year and are secured by
FHLMC participation certificates or U.S. government securities, under the
Company's control. Information concerning these retail repurchase agreements are
summarized as of the dates indicated:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Ending balance ..................................... $3,993,467 $2,403,347
Average balance during the year .................... 3,599,183 1,592,978
Average interest rate during the year .............. 5.27% 5.65%
Maximum month-end balance during the year .......... 5,419,296 2,403,347
Securities underlying the agreements at year end:
Carrying value .................................... $5,572,107 $3,363,545
Fair value ........................................ 5,558,621 3,538,432
</TABLE>
NOTE 9 - Employees' Benefit Plans
The Company maintains a Profit Sharing Plan and Trust for all employees who
meet the plan qualifications. Employees are eligible to participate in the
Employees' Profit Sharing Plan and Trust if they are 21 years of age or older
and have completed one year of employment with more than 1,000 hours of service
to the Company. The plan is noncontributory on the part of the employee.
Contributions to the Employees' Profit Sharing Plan and Trust are made at the
discretion of the Company's Board of Directors. Contributions during the year
ended December 31, 1996 were based on 9.0% of the participants' total
compensation excluding incentives. Participants in the plan become 100% vested
upon completion of five years of service. The benefit plan expense amounted to
$185,417 for the year ended December 31, 1996, $203,246 for the year ended
December 31, 1995 and $172,140 for the year ended December 31, 1994. In
addition, the Company maintains an Unqualified Deferred Compensation Plan. The
purpose of the Plan is to provide a means for the payment of deferred
compensation to a select group of key senior management employees of the
Company. The Plan expense amounted to $2,868 for the year ended December 31,
1996 and $3,838 for the year ended December 31, 1995. No expense was incurred
for the year ended December 31, 1994.
The Company also maintains an Employee Stock Ownership Plan (ESOP).
Eligibility and vesting requirements for the ESOP are the same as those for the
Profit Sharing Plan and Trust. Contributions to the ESOP are made at the
discretion of the Company's Board of Directors. No contributions to the ESOP
were made during the year ended December 31, 1996 and 1995. Contributions during
the year ended December 31, 1994 were based on 1.0% of the participants total
compensation excluding incentives. The ESOP held 572 shares of the Company's
common stock as of December 31, 1996, all of which have been allocated to
participants. The ESOP expense amounted to $0, $0 and $19,377 for the year ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 10 - Defined Benefit Postretirement Plan
The Company sponsors a defined benefit postretirement plan that provides
comprehensive major medical benefits to all eligible retirees. Eligible retirees
are those who have attained age 65, have completed at least 18 years of service
and are eligible for coverage under the employee group medical plan as of the
date of their retirement. Spouses of eligible retirees are covered if they were
covered as of the employee's date of retirement. Surviving spouses are covered
if they were covered at the time of the retiree's death. Dependent children of
eligible retirees are generally covered to the later of age 19 or until the
child ceases being a full-time student. Surviving dependent children are subject
to the same eligibility restrictions if they were covered at the time of the
retiree's death. The Company pays 50% of any future premium increases for
retiree medical coverage. Retirees pay 100% of the premiums for all dependent
medical coverage.
The following table sets forth a reconciliation of the funded status of the
plan with the amount reported in the Company's consolidated balance sheet as of
the dates indicated:
<TABLE>
<CAPTION>
1996 1995
-------- --------
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees ............................................ $ 63,845 $ 71,841
Fully eligible active plan participants ............. -- --
Other active plan participants ...................... 67,970 46,583
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets and
accrued postretirement benefit expense .............. $131,815 $118,424
======== ========
</TABLE>
21
<PAGE> 24
Net periodic postretirement benefit expense for the periods indicated
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits attributed
to service during the period ......... $ 3,917 $ 3,518 $ 6,205
Interest cost on accumulated
postretirement benefit obligation .... 9,474 5,839 12,105
Amortization of unrecognized
net gain ............................. (5,202) -- --
------- -------- -------
Net periodic postretirement
benefit expense....................... $ 8,189 $ 9,357 $18,310
======== ======== =======
</TABLE>
For measurement purposes, an 11.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed for the fiscal year
ended December 31, 1996, dropping to an annual rate of 5.5% after 6 years. The
health care cost trend rate assumption has a significant effect on the amounts
reported. The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8%.
NOTE 11 - Regulatory Capital
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements. The prompt corrective
action regulations provide five classifications, including well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition.
At year end, capital levels (in millions) for the Company and the Bank were
substantially the same. Actual capital levels, minimum required levels and
levels needed to be classified as well capitalized for the Company are
summarized below:
<TABLE>
<CAPTION>
Minimum
Required To Be
Well Capitalized
Minimum Required Under Prompt
for Capital Corrective
Actual Adequacy Purposes Action Regulations
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1996
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)...... $30.2 16.0% $15.1 8.0% $18.9 10.0%
Tier 1 capital
(to risk-weighted assets)..... $27.8 14.7% $ 7.6 4.0% $11.3 6.0%
Tier 1 capital to total assets. $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
1995
Total capital
(to risk-weighted assets)...... $29.4 17.1% $13.8 8.0% $17.2 10.0%
Tier 1 capital
(to risk-weighted assets)..... $27.2 15.8% $ 6.9 4.0% $10.3 6.0%
Tier 1 capital to total assets. $27.2 9.7% $ 8.4 3.0% $14.0 5.0%
</TABLE>
The Company and the Bank were categorized as well capitalized at December 31,
1996.
The Company's ability to pay dividends is entirely dependent upon the
Bank's ability to pay dividends to the Company. Under Indiana law, the Bank may
pay dividends, no more often than quarterly, to the extent of its undivided
profits (less losses, bad debts and expenses). However, the Indiana Department
of Financial Institutions approval is required to pay dividends in any year in
excess of the Bank's net profits for the current year and the prior two years.
Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of
dividends if it determines that the payment of dividends would constitute an
unsafe or unsound practice in the light of the financial condition of the Bank.
NOTE 12 - Stock Option Plan
The Board of Directors has adopted the 1994 Stock Option and Incentive Plan
(the "Incentive Plan"), which was approved by shareholders at the 1994 annual
meeting. Pursuant to the Incentive Plan, an aggregate of 60,000 shares of the
Company's common stock were reserved for issuance in respect of incentive awards
granted to officers and other employees of the Company and the Bank. Awards
granted under the Incentive Plan may be in the form of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code, or non-incentive
stock options or restricted stock. The purposes of the Plan are to attract and
retain the best available personnel, to provide additional incentives for all
employees and to encourage their continued employment by facilitating employees'
purchases of an equity interest in the Company. Effective upon the July 31, 1994
holding company formation, all options then outstanding under the Bank's prior
stock option plan became options to purchase an equal number of shares of the
Company's common stock under the Incentive Plan, on the same terms.
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. No compensation cost was recognized for stock options during
1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Net income as reported $2,188,662 $3,101,203
Pro forma net income 2,182,421 3,095,782
Earnings per share as reported $1.59 $2.25
Pro forma earnings per share $1.58 $2.25
</TABLE>
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted. Information about option
grants is provided on the following schedule.
22
<PAGE> 25
<TABLE>
<CAPTION>
Weighted-average
Number Weighted-average fair value
of options exercise price of grants
---------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding, January 1, 1994 ....... 13,116 $ 8.66 $
Granted ............................ -- -- --
Exercised .......................... 3,792 4.94
Forfeited .......................... -- --
Expired ............................ 100 2.50
------
Outstanding, December 31, 1994 ..... 9,224 10.29
Granted ............................ 14,500 21.25 2.53
Exercised .......................... 1,352 10.30
Forfeited .......................... -- --
Expired ............................ -- --
-----
Outstanding, December 31, 1995 ..... 22,372 17.39
Granted ............................ 3,400 27.00 2.06
Exercised .......................... 158 12.88
Forfeited .......................... -- --
Expired ............................ -- --
------
Outstanding, December 31, 1996 ..... 25,614 18.70
======
</TABLE>
Options exerciseable at year-end are as follows.
Number Weighted-average
of options exercise price
------------- -----------------
1994 9,224 $10.29
1995 7,912 $10.35
1996 7,794 $10.35
At December 31, 1996, options outstanding were as follows:
Number of options 25,614
Range of exercise price $9.31 - $27.00
Weighted-average exercise price $18.70
Weighted-average remaining option life 5.8 years
For options now exerciseable: Number 7,794
Weighted-average exercise price $10.35
The fair value of options granted during 1996 and 1995 is estimated using
the following weighted-average information: risk-free interest rate of 5.42% and
7.75%, expected life of 7 years, expected volatility of stock price of 5.45%,
and expected dividends of 4.26% and 5.18% per year.
NOTE 13 - Related Party Transactions
The Bank had aggregate loans outstanding to directors and executive
officers (with individual balances exceeding $60,000) of $1,763,338 at December
31, 1996 and $1,530,198 at December 31, 1995. For the year ended December 31,
1996, the following activity occurred on these loans:
Aggregate balance - December 31, 1995.. $ 1,530,198
New loans ............................. 734,244
Repayments ............................ (501,104)
----------
Aggregate balance - December 31, 1996.. $ 1,763,338
===========
NOTE 14 - Commitments and Contingencies
The Company is a party to financial instruments in the normal course of
business to meet financing needs of its customers. These financial instruments
which include commitments to make loans and standby letters of credit are not
reflected in the accompanying consolidated financial statements.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to originate loans
and standby letters of credit is represented by the contractual amount of those
instruments. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. The Company uses the
same credit policy to make such commitments as it uses for on-balance-sheet
items. Since commitments to make loans may expire without being used, the
amounts does not necessarily represent future cash commitments.
The Company had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
----------- ----------- -----------
December 31, 1996:
<S> <C> <C> <C>
Real estate ................. $ 6,346,296 $12,606,397 $18,952,693
Consumer loans .............. -- 280,578 280,578
Commercial business ......... -- 14,878,263 14,878,263
----------- ----------- -----------
Total ...................... $ 6,346,296 $27,765,238 $34,111,534
=========== =========== ===========
<CAPTION>
Fixed Variable
Rate Rate Total
----------- ----------- -----------
December 31, 1995:
<S> <C> <C> <C>
Real estate ................. $ 4,588,504 $12,107,386 $16,695,890
Consumer loans .............. -- 6,324 6,324
Commercial business ......... -- 10,455,970 10,455,970
----------- ----------- -----------
Total ...................... $ 4,588,504 $22,569,680 $27,158,184
=========== =========== ===========
</TABLE>
The $6,346,296 in fixed rate commitments outstanding at December 31, 1996
had interest rates ranging from 7.00% to 9.50%, for a period not to exceed
forty-five days.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. At December 31,
1996, the Company had standby letters of credit totaling $519,350. The Company
evaluates each customer's creditworthiness on a case by case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower. Collateral
obtained may include accounts receivable, inventory, property, land or other
assets.
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
NOTE 15 - Fair Values of Financial Instruments
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments"
prescribes that the Company disclose the estimated fair value of its financial
instruments. The following table shows those values and the related carrying
values as of the dates indicated. Items which are not financial instruments are
not included.
23
<PAGE> 26
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------
Carrying Estimated
Value Fair Value
------------- --------------
<S> <C> <C>
Cash and cash equivalents ............ $ 6,508,822 $ 6,509,000
Securities held-to-maturity .......... 40,023,992 39,909,000
Loans receivable, net ................ 241,808,878 241,702,000
Demand and savings deposits .......... (102,797,853) (102,798,000)
Certificates of deposit .............. (153,621,824) (153,787,000)
Borrowed funds ....................... (12,260,507) (12,261,000)
<CAPTION>
December 31, 1995
----------------------------------
Carrying Estimated
Value Fair Value
------------- --------------
<S> <C> <C>
Cash and cash equivalents ............ $ 14,943,704 $ 14,944,000
Securities held-to-maturity .......... 38,001,081 38,279,000
Loans receivable, net ................ 219,463,019 220,071,000
Demand and savings deposits .......... (95,937,691) (95,938,000)
Certificates of deposit .............. (152,006,998) (152,283,000)
Borrowed funds ....................... (3,138,829) (3,139,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1996 and 1995. The estimated
fair value for cash and cash equivalents is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or equivalent securities. The estimated fair value for
commercial loans is based on estimates of the difference in interest rates the
Company would charge the borrowers for similar such loans with similar
maturities made at December 31, 1996 and 1995, applied for an estimated time
period until the loan is assumed to reprice or be paid. The estimated fair value
for other loans is based on estimates of the rate the Company would charge for
similar such loans at December 31, 1996 and 1995, applied for the time period
until estimated repayment. The estimated fair value for demand and savings
deposits is based on their carrying value. The estimated fair value for
certificates of deposits is based on estimates of the rate the Company would pay
on such deposits at December 31, 1996 and 1995, applied for the time period
until maturity. The estimated fair value for borrowed funds is considered to
approximate cost. The estimated fair value of other financial instruments,
including accrued interest receivable and payable, and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Company to
have disposed of such items at December 31, 1996 and 1995, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values at
December 31, 1996 and 1995 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures, such
as premises and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These included, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of the Bank's trust department,
the trained work force, customer goodwill and similar items.
NOTE 16 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are summarized below as follows:
Year ended December 31, 1996:
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Total interest income ..... $ 5,446,966 $ 5,531,626 $ 5,633,226 $ 5,725,091
Total interest expense .... 2,808,979 2,777,254 2,817,835 2,882,579
----------- ----------- ----------- -----------
Net interest income ....... 2,637,987 2,754,372 2,815,391 2,842,512
Provision for loan losses . 15,000 17,500 22,500 30,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses. 2,622,987 2,736,872 2,792,891 2,812,512
Total noninterest income .. 177,502 164,690 166,525 173,124
Total noninterest expense . 1,628,882 1,631,732 3,198,854 1,579,973
----------- ----------- ----------- -----------
Income before
income taxes ............ 1,171,607 1,269,830 (239,438) 1,405,663
Income tax expenses ...... 466,600 506,600 (91,650) 537,450
----------- ----------- ----------- -----------
Net income ............... $ 705,007 $ 763,230 $ (147,788) $ 868,213
=========== =========== =========== ===========
Earnings per share ....... $ 0.51 $ 0.56 $ (0.11) $ 0.63
=========== =========== =========== ===========
</TABLE>
Year ended December 31, 1995:
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Total interest income ...... $5,153,802 $5,270,477 $5,321,006 $5,377,373
Total interest expense ..... 2,368,124 2,607,615 2,729,302 2,779,168
---------- ---------- ---------- ----------
Net interest income ........ 2,785,678 2,662,362 2,591,704 2,598,205
Provision for loan losses .. 27,500 17,500 15,000 20,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses . 2,758,178 2,645,362 2,576,704 2,578,205
Total noninterest income ... 165,800 144,842 156,506 218,291
Total noninterest expense .. 1,536,817 1,550,786 1,537,081 1,491,601
---------- ---------- ---------- ----------
Income before
income taxes .............. 1,387,161 1,239,418 1,196,129 1,304,895
Income tax expenses ........ 553,575 493,425 476,600 502,800
---------- ---------- ---------- ----------
Net income ................. $ 833,586 $ 745,993 $ 719,529 $ 802,095
========== ========== ========== ==========
Earnings per share ......... $ 0.61 $ 0.54 $ 0.53 $ 0.58
========== ========== ========== ==========
</TABLE>
24
<PAGE> 27
NOTE 17 - Parent Company Only Statements
<TABLE>
<CAPTION>
NorthWest Indiana Bancorp
Condensed Balance Sheet
December 31,
--------------------------
1996 1995
----------- ----------
Assets
<S> <C> <C>
Cash on deposit with Peoples Bank .............. $ 52,877 $ 40,530
Investment in Peoples Bank ..................... 27,782,574 27,183,243
Dividends receivable from Peoples Bank ......... 445,000 380,000
Other assets ................................... 4,750 14,700
----------- -----------
Total assets .................................. $28,285,201 $27,618,473
=========== ===========
Liabilities and stockholders' equity
Dividends payable .............................. $ 441,464 $ 379,345
Other liabilities .............................. 28,500 35,000
----------- -----------
Total liabilities ............................. 469,964 414,345
Common stock ................................... 344,899 344,859
Additional paid in capital ..................... 2,929,587 2,927,595
Retained earnings .............................. 24,540,751 23,931,674
----------- -----------
Total stockholders' equity .................... 27,815,237 27,204,128
----------- -----------
Total liabilities and stockholders' equity .... $28,285,201 $27,618,473
=========== ===========
</TABLE>
NorthWest Indiana Bancorp
Condensed Statements of Income
<TABLE>
<CAPTION>
Five Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating income
Dividends from
Peoples Bank ................... $ 1,625,000 $ 1,552,000 $ 787,785
Operating expenses .............. 58,669 108,823 --
----------- ----------- -----------
Income before income taxes
and equity in undistributed
income of Peoples Bank ......... 1,566,331 1,443,177 787,785
Provision for income taxes ...... (23,000) (43,600) --
----------- ----------- -----------
Income before equity
in undistributed
income of Peoples Bank ......... 1,589,331 1,486,777 787,785
Equity in undistributed
income of Peoples Bank ......... 599,331 1,614,426 552,037
----------- ----------- -----------
Net Income ...................... $ 2,188,662 $ 3,101,203 $ 1,339,822
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NorthWest Indiana Bancorp
Condensed Statements of Cash Flows
Five Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income .................. $ 2,188,662 $ 3,101,203 $ 1,339,822
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
net income of
Peoples Bank ............ (599,331) (1,614,426) (552,037)
Change in other assets .... (55,050) 4,300 (399,000)
Change in other liabilities (6,500) 35,373 --
----------- ----------- -----------
Total adjustments ........ (660,881) (1,574,753) (951,037)
----------- ----------- -----------
Net cash from
operating activities . 1,527,781 1,526,450 388,785
CASH FLOWS FROM
INVESTING ACTIVITIES ....... -- -- --
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends paid ............. (1,517,466) (1,517,013) (378,785)
Proceeds from issuance
of capital stock ......... 2,032 13,929 7,164
----------- ----------- -----------
Net cash from
financing activities .... (1,515,434) (1,503,084) (371,621)
----------- ----------- -----------
Net change in cash .......... 12,347 23,366 17,164
Cash at beginning of year ... 40,530 17,164 --
----------- ----------- -----------
CASH AT END OF YEAR ......... $ 52,877 $ 40,530 $ 17,164
=========== =========== ===========
</TABLE>
NOTE 18 - Current Accounting Issues
Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
has not yet been determined.
25
<PAGE> 28
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market and is
quoted in the National Quotation Bureau's "Pink Sheets". The Company's stock is
not actively traded. As of February 28, 1997, the Company had 1,380,846 shares
of common stock outstanding, excluding fractional shares, and 593 stockholders
of record. This does not reflect the number of persons or entities who may hold
their stock in nominee or "street" name through brokerage firms. Set forth below
are the high and low bid prices during each quarter for the fiscal year ended
December 31, 1996 and December 31, 1995. The bid prices reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Also set forth is information concerning the
dividends declared by the Company during the periods reported. Note 11 to the
Financial Statements describes regulatory limits on the Company's ability to pay
dividends. All references to the number of shares and per share data have been
restated to reflect the stock splits (see Note 1).
<TABLE>
<CAPTION>
Per Share Prices Dividends
Declared Per
High Low Common Share
------ ------ ------------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1996 1st Quarter $30.00 $25.50 $.275
- --------------------------------------------------------------------
2nd Quarter 31.13 30.00 .275
- --------------------------------------------------------------------
3rd Quarter 31.13 30.00 .275
- --------------------------------------------------------------------
4th Quarter 31.13 31.13 .320
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1995 1st Quarter $22.50 $20.75 $.275
- --------------------------------------------------------------------
2nd Quarter 25.00 22.50 .275
- --------------------------------------------------------------------
3rd Quarter 25.50 25.00 .275
- --------------------------------------------------------------------
4th Quarter 27.00 25.50 .275
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$15.63 $15.88 $21.25 $27.00 $31.13
</TABLE>
The market price per share represents the last sales price prior to the close of
the periods indicated. The Company's stock is not actively traded. At the
present time the Company's stock is traded in the over-the-counter market and is
quoted in the National Quotation Bureau's "Pink Sheets".
================================================================================
<TABLE>
<CAPTION>
BOOK VALUE PER SHARE
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$16.59 $17.37 $18.58 $19.72 $20.16
</TABLE>
The Bank's earnings have increased the book value of the Company's stock from
$16.59 at June 30, 1993 to $20.16 per share at December 31, 1996. On December 2,
1996, the Company effected a two-for-one split of its common stock. Book value
per share has been restated for all periods presented to reflect the split.
================================================================================
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1993 1994 1995 1996
<C> <C> <C> <C> <C>
$2.25 $1.33 $2.35 $2.25 $1.59
</TABLE>
Earnings for 1996 totaled $2.2 million resulting in an earnings per share (EPS)
of $1.59. On December 2, 1996, the Company effected a two-for-one split of its
common stock. The decrease in the EPS for 1996 reflects the one-time special
assessment on SAIF-assessable deposits to recapitalize SAIF.
================================================================================
<TABLE>
<CAPTION>
5 YEAR TOTAL RETURN
CRSP Market Index CRSP Bank Index Bancorp
<C> <C> <C>
$ 227 $325 $340
</TABLE>
The management of Northwest Indiana Bancorp is committed to maximizing
shareholder value. The Company's stock performance on a total return basis
compares favorably with the total returns of the CRSP (Center for Research in
Securities Prices at the University of Chicago) Index for the Nasdaq Stock
Market (CRSP Market Index) and for Nasdaq Bank Stocks (CRSP Bank Index). The
total return is measured using both stock price appreciation and the effect of
the continuous reinvestment of dividend payments. The graph shows that an
initial $100 investment in the Bancorp stock on December 31, 1991, would be
worth $340 on December 31, 1996.
================================================================================
<PAGE> 29
PEOPLES MANAGEMENT TEAM
[photo of Management Team]
MANAGEMENT TEAM (l to r): Vice President, Chief Financial Officer Edward J.
Furticella, Vice President, Chief Lending Officer Joel Gorelick, Senior Vice
President, General Counsel, Trust Officer and Corporate Secretary Frank J.
Bochnowski, Vice President for Housing Finance Daniel W. Moser, Chairman and
Chief Executive Officer David A. Bochnowski and Vice President, Retail Banking
Rodney L. Grove.
27
<PAGE> 30
PEOPLES BOARD OF DIRECTORS
[Photo of David A. Bochnowski]
David A. Bochnowski
Chairman and Chief Executive Officer of the Company
Munster, Indiana
[Photo of Gloria C. Gray]
Gloria C. Gray
Vice President and Treasurer of
Career Development Consultants, Munster, Indiana
[Photo of Jerome F. Vrabel]
Jerome F. Vrabel
Vice President, ED&F Man International Inc.
Chicago, Illinois
[Photo of James J. Crandall]
James J. Crandall (right)
Retired Attorney
[Photo of John J. Wadas, Jr.]
John J. Wadas, Jr.
Dentist practicing in Munster and East Chicago, Indiana
28
<PAGE> 31
[Photo of Frank J. Bochnowski and Stanley E. Mize]
Stanley E. Mize (right)
President of Towne & Countree Auto Sales and
Co-owner of Lake Shore Ford
Frank J. Bochnowski (left)
Senior Vice President and Corporate Secretary
[Photo of Leroy F. Cataldi]
Leroy F. Cataldi
President of Cataldi Prescription Shop,
Dyer, Indiana
[Photo of Lourdes M. Dennison]
Lourdes M. Dennison
Administrative Director, Dennison Surgical Corporation
Merrillville, Indiana
[Photo of Benjamin A. Bochnowski]
[Photo of Harold G. Reuth]
Benjamin A. Bochnowski (left)
Advisory Director
Harold G. Reuth (right)
Director Emeritus
29
<PAGE> 32
BRANCH OFFICES
[photo of East Chicago Branch]
East Chicago Branch
(l to r):
Veronica Perez, Malinda Caraballo, Meredith Rolewski, Manager Christopher
Grencik, Raquel Avila, Delia Mata, Tia Airington and La Coiya Henderson.
[photo of Dyer Branch]
Dyer Branch
(seated l to r):
Marijo Rosellini, Brandy Bakker, (back l to r): Tracy Proffitt and Shirley
Esboldt. Not pictured: Manager Jacqueline Mireles and Eileen Tobias.
[photo of Woodmar Branch]
Woodmar Branch
(seated l to r):
Denise Keilman, Elaine Chase, (back l to r): Donna Kominiak, Amber Jaeger, Nakia
Dumas, Cynthia Panicucci and Assistant Vice President Barbara Zura. Not
pictured: Diana Dowling.
[photo of Munster Branch]
Munster Branch
(l to r):
Carla Dohl, Joshlyne Freeman, Karen Laude and Assistant Vice President Jill
Knight. Not pictured: Nicole Lammertin, Scott Matucha and Maria Rubio.
[photo of Merrillville/Taft Branch]
Merrillville/Taft Branch
(front):
Mary Lynne Urbanski, (back l to r): Heather Sharkey, Tinisha Greenwell, Kimberly
Hartlerode and Assistant Vice President Marilyn Repp. Not pictured: Betty
Rachowicz and Sandra Sigler.
[photo of Schererville Branch]
Schererville Branch
(seated l to r):
Cindy Miles, Nicole Lopez, (back l to r): Mettie Clark, Manager Shannon Franko,
Marilyn Germek and Julie Baker. Not pictured: Robyn Towasnicki and Kelly
Triezenberg.
[photo of Merrillville/Broadway Branch]
Merrillville/ Broadway Branch
(l to r):
Wendy Glover, Manager Heather Mayden, Ave Colby, Kathy Wenzel and Colleen
Wigmore. Not pictured: Sarah Furman.
30
<PAGE> 33
CORPORATE DEPARTMENTS
[photo of Administration Department]
Administration
(l to r):
Irene Calvin, Assistant Vice President Linda Kollada, Keith Koziatek, Stacy
Januszewski and Genetra Bailey.
[photo of Operations Department]
Operations
(front l to r):
Suzanne Allred, Susan Meyer,
Mary Lorance, Susan Wojno, Rhoda Bolden, Michaelene Smith, (back l to r):
Kevin Crump, Julie Riese, Deborah Moricz, Tanya Mathews, Assistant
Vice President Robert Lowry, Assistant Vice President
Arlene Wohadlo and Charlotte Conn. Not pictured: Theresa Johnson.
[photo of Trust Department]
Trust Department
(l to r):
Audrey Tredway, Lisa Ortiz, Michelle Manchak, Assistant Vice President Stephan
Ziemba, Marie Muniz, Joyce Barr and Earlene Malachinski.
[photo of Mortgage Loan Department]
Mortgage Loans
(seated l to r):
Linda Banis, Sylvia Magallanez, Joy Pejkovich, Elizabeth Ehlin, (middle l to r):
Karen Sulek, Barbara Grothaus, Melanie Wilkinson, Lucy Cantu, Laura Amptmeyer,
(back l to r): Assistant Vice President Robert Soohey, Tricia Kluga, Margaret
Travis, Assistant Vice President Mary Mulroe, Patricia Mrvan and Marvin Tucker.
[photo of Commercial Loan Department]
Commercial Loan Department
(front l to r):
Janet Knoerzer, Ruth Oros, (center l to r): Jennifer Brown, Bonnie Kistler,
(back l to r): Assistant Vice President Terry Gadberry and Todd Scheub.
[photo of Consumer Loan Department]
Consumer Loan Department
(seated):
Dawn Shearer, (l to r): Sharon Vacendak, Manager James Lehr and Clovese McGhee.
31
<PAGE> 34
CORPORATE INFORMATION
Corporate Headquarters
9204 Columbia Avenue
Munster, Indiana 46321
Telephone
219/836-9690
Peoples Bank SB
Officers
David A. Bochnowski.. ...Chairman and Chief Executive Officer*
Joel Gorelick..... .......Vice President, Chief Lending Officer*
Edward J. Furticella ....Vice President, Chief Financial Officer*
Frank J. Bochnowski .....Senior Vice President, General Counsel,
Trust Officer and Corporate Secretary*
Daniel W. Moser.............Vice President for Housing Finance
Rodney L. Grove.............Vice President, Retail Banking
* Holds similar office with NorthWest Indiana Bancorp
Directors of NorthWest Indiana Bancorp and Peoples Bank SB
David A. Bochnowski
Chairman and Chief Executive
Officer of the Company
Munster, Indiana
Leroy F. Cataldi
President of Cataldi Prescription Shop,
Dyer, Indiana
Gloria C. Gray
Vice President and Treasurer of
Career Development Consultants,
Munster, Indiana
Lourdes M. Dennison
Administrative Director,
Dennison Surgical Corporation,
Merrillville, Indiana
John J. Wadas, Jr.
Dentist practicing in Munster and
East Chicago, Indiana
Jerome F. Vrabel
Vice President, ED&F Man International Inc.,
Chicago, Illinois, a commodities brokerage firm on the
Chicago Board of Trade
James J. Crandall
Retired Attorney
Stanley E. Mize
President of Towne & Countree Auto Sales and
Co-owner of Lake Shore Ford
Advisory Director
Benjamin A. Bochnowski
Directors Emeriti
Harold G. Rueth
Albert J. Lesniak
Peoples Bank SB
Management Personnel
Accounting
Robert T. Lowry, Assistant Vice President, Controller
Arlene M. Wohadlo, Assistant Vice President
Branches
Shannon E. Franko, Schererville
Christopher A. Grencik, East Chicago
Jill M. Knight, Assistant Vice President, Munster
Heather M. Mayden, Merrillville (Broadway)
Jacqueline Mireles, Dyer
Marilyn K. Repp, Assistant Vice President,
Merrillville (Taft Street)
Barbara J. Zura, Assistant Vice President, Woodmar
Business Development
Averill C. Colby, III
Commercial Lending
Terry R. Gadberry, Assistant Vice President
Todd M. Scheub
Consumer Lending
James P. Lehr
Sharon V. Vacendak
Housing Finance
Robert J. Soohey, Assistant Vice President
Sylvia Magallanez
Marvin O. Tucker
Human Resources
Linda L. Kollada, Assistant Vice President
Information Services
Tanya A. Mathews
Loan Administration
Mary D. Mulroe, Assistant Vice President
Staff Internal Auditor
Stacy A. Januszewski
Trust
Stephan A. Ziemba, Assistant Vice President
Stock Transfer Agent
The Bank acts as the transfer agent for the Company's common stock.
Independent Auditors
Crowe, Chizek and Company LLP
330 East Jefferson Boulevard
P. O. Box 7
South Bend, Indiana 46624
Special Legal Counsel
Baker & Daniels
300 North Meridian Street
Suite 2700
Indianapolis, Indiana 46204
Annual Shareholders Meeting
The Annual Meeting of Shareholders of NorthWest Indiana Bancorp will be
held at the Wicker Park Social Center, Rts. 41 & 6, Highland, Indiana, on
Thursday, April 17, 1997 at 8:30 a.m.
A COPY OF THE COMPANY'S FORM 10-K, INCLUDING FINANCIAL STATEMENT SCHEDULES AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT
CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE
CORPORATE SECRETARY, NORTHWEST INDIANA BANCORP, 9204 COLUMBIA AVENUE,
MUNSTER, INDIANA 46321.
32
<PAGE> 35
Inside Back Cover is blank
<PAGE> 36
NORTHWEST INDIANA
- ------------------------
BANCORP
CORPORATE HEADQUARTERS,
9204 Columbia Avenue
Munster, Indiana 46321
219/836-9690
[PEOPLES BANK LOGO]
EAST CHICAGO, 4901 Indianapolis Blvd., 397-5010
HAMMOND, 7120 Indianapolis Blvd., 844-7210
DYER, 1300 Sheffield Avenue, 322-2530
MUNSTER, 9204 Columbia Avenue, 836-9690
SCHERERVILLE, 141 W. Lincoln Highway, 865-4300
MERRILLVILLE, 7915 Taft Street, 769-8452
8600 Broadway, 685-8600
FDIC Insured
<PAGE> 1
EXHIBIT 21
Subsidiary of the Company
State of Incorporation
----------------------
Peoples Bank SB* Indiana
* Peoples Bank SB is wholly-owned by the Company and the operations of the Bank
are included in the Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,509
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 40,024
<INVESTMENTS-MARKET> 39,909
<LOANS> 244,696
<ALLOWANCE> 2,887
<TOTAL-ASSETS> 299,419
<DEPOSITS> 256,420
<SHORT-TERM> 12,261
<LIABILITIES-OTHER> 2,923
<LONG-TERM> 0
<COMMON> 345
0
0
<OTHER-SE> 27,470
<TOTAL-LIABILITIES-AND-EQUITY> 299,419
<INTEREST-LOAN> 19,408
<INTEREST-INVEST> 2,605
<INTEREST-OTHER> 324
<INTEREST-TOTAL> 22,337
<INTEREST-DEPOSIT> 11,066
<INTEREST-EXPENSE> 11,287
<INTEREST-INCOME-NET> 11,050
<LOAN-LOSSES> 85
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,039
<INCOME-PRETAX> 3,608
<INCOME-PRE-EXTRAORDINARY> 3,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,189
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 3.95
<LOANS-NON> 788
<LOANS-PAST> 379
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,830
<CHARGE-OFFS> 28
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,887
<ALLOWANCE-DOMESTIC> 2,165
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 722
</TABLE>
