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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
For the fiscal year ended DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
incorporation or organization) Identification No.)
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. [ ]
Based on the average bid and ask prices for the registrant's Common Stock at
February 28, 1998, at that date, the aggregate market value of the registrant's
Common 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 $35,997,822.
There were 1,381,512 shares of the registrant's Common Stock, without par value,
outstanding at February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
1. 1997 Annual Report to Shareholders. (Parts II and IV)
2. Definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders. (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
NorthWest Indiana Bancorp, an Indiana corporation (the "Bancorp"), 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 Bancorp. As a result, Peoples Bank SB is a wholly owned subsidiary of the
Bancorp. The Bancorp has no other business activity other than being the holding
company for Peoples Bank SB.
The Bank 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 Bancorp 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 Bancorp 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 Bancorp cautions readers that
forward-looking statements, including without limitation those relating to the
Bancorp'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 Bancorp 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.
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 Bancorp 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 Bancorp. To moderate unfavorable operating
results in periods of rising or high interest rates, the Bank restructures its
asset-liability mix on an ongoing basis. Increasing the amount of
interest-earning assets that are rate sensitive, extending the maturities of
customer deposits, increasing the balances of NOW/checking accounts and
utilizing cost effective borrowings are all part of management's commitment
toward reducing the Bank's overall vulnerability to interest rate risk. While
these steps may reduce the overall vulnerability to interest rate risk, the Bank
will still be adversely affected by a rising or high interest rate environment,
and is beneficially affected by a falling or low interest rate environment
because rate sensitive liabilities exceed rate sensitive assets within a one
year time period.
At December 31, 1997, 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 -41.19%. 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 material earnings volatility as a
result of 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
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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
- -11.00% 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. Further
discussion of interest rate risk can be found under the caption "Quantitative
and Qualitative Disclosures about Market Risk" in the Bancorp's 1997 Annual
Report to Shareholders.
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GAP Position at December 31, 1997
- ---------------------------------
<TABLE>
<CAPTION>
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....... $ 43,310 $49,165 $107,900 $42,548 $242,923
Consumer loans ......... 1,545 1,358 2,685 73 5,661
Commercial business
loans and other ...... 18,729 2,453 2,436 11 23,629
Securities held-to-
maturity ............. 1,501 6,990 15,715 5,156 29,362
Interest-bearing balances
and federal funds .... 3,570 --- --- --- 3,570
------- ------ --------- -------- --------
Total .............. 68,655 59,967 128,735 47,788 305,145
------- ------ --------- -------- --------
Certificates of deposit. 66,081 79,318 20,456 --- 165,855
Checking and non-interest
bearing deposits .... 16,685 --- --- --- 16,685
NOW accounts ........... 23,656 --- --- --- 23,656
Money market accounts .. 22,235 --- --- --- 22,235
Savings accounts ....... 43,659 --- --- --- 43,659
Borrowed funds ......... 3,208 5,420 6,000 --- 14,628
------- ------- --------- -------- -------
Total .............. 175,524 84,738 26,456 --- 286,718
------- ------- --------- -------- -------
<CAPTION>
At December 31, 1997:
<S> <C> <C> <C> <C>
GAP .................... (106,869) ( 24,771) 102,279 47,788
--------- --------- -------- -------
Cumulative GAP ......... $(106,869) $(131,640) $(29,361) $18,427
========= ========= ======== =======
Cumulative GAP as a per-
cent of total assets.. -33.44% -41.19% -9.19% 5.77%
========= ========= ======== =======
Management adjustments.. $ 102,059 $ 96,476 $ --- $ ---
Cumulative management
adjusted GAP ........ $ (4,810) $ (35,164) $(29,361) $18,427
========== ========== ========= =======
Cumulative management
adjusted GAP/total
assets .............. -1.50% -11.00% -9.19% 5.77%
========== ========== ========= =======
</TABLE>
COMPETITION. The activities of the Bancorp 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 Bancorp. In addition, non-bank
competitors are generally not subject to the extensive regulation applicable to
the Bancorp and the Bank.
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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. It is management's goal
that all programs are marketed aggressively and priced competitively.
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"). 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 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, 1997, under the
15% of capital and surplus limitation was approximately $4,883,000. At December
31, 1997, the Bank had no loans which exceeded the regulatory limitations.
At December 31, 1997, 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.
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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
collateral at the end of each of the last five years. The amounts are in
thousands (000's).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Type of loan:
Conventional real estate loans:
Construction and
development loans $ 21,440 $ 13,248 $ 8,913 $ 8,451 $ 4,893
Loans on existing
properties (1) 221,482 208,601 194,779 196,468 182,571
Consumer loans 5,661 4,890 3,527 3,172 3,833
Commercial business, other(2) 23,630 17,957 15,074 13,839 12,908
-------- -------- -------- -------- --------
Loans receivable(3) $272,213 $244,696 $222,293 $221,930 $204,205
======== ======== ======== ======== ========
Type of collateral:
Real estate:
1-to-4 family $178,091 $164,590 $152,485 $152,208 $136,806
Other dwelling units, land
and commercial real estate 64,831 57,259 51,207 52,711 50,658
Consumer loans 5,410 4,619 3,335 2,960 3,370
Commercial business, other(2) 21,712 16,306 13,893 13,288 12,520
-------- -------- -------- -------- --------
Loans receivable (4) $270,044 242,774 $220,920 $221,167 $203,354
======== ======== ======== ======== ========
Average loans outstanding
during the period (3) $254,219 $232,465 $221,352 $213,349 $202,106
======== ======== ======== ======== ========
<FN>
(1) Includes construction loans converted to permanent loans and commercial
real estate loans.
(2) Includes government loans and overdrafts to deposit accounts.
(3) Net of unearned income and deferred loan fees.
(4) Net of unearned income and deferred loan fees. Does not include unsecured
loans.
</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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction and development loans $ 13,168 $ 16,244 $ 9,434
Loans on existing property 23,461 26,811 12,914
Loans refinanced 14,824 10,253 15,961
------- ------- -------
Total conventional real estate
loans originated 51,453 53,308 38,309
Commercial business loans 60,944 53,580 41,844
Consumer loans 4,591 7,290 4,690
-------- -------- -------
Total loans originated $116,988 $114,178 $84,843
======== ======== =======
Loan participations purchased $ 3,240 $ -- $ 33
======== ======== =======
Whole loans and participations sold $ 1,820 $ 2,011 $ 2,986
======== ======== =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1997, 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 $ 35,946 $ 63,106 $ 143,870 $242,922
Consumer loans 2,702 2,886 73 5,661
Commercial business loans 16,388 5,707 1,535 23,630
-------- ----------- ---------- --------
Total loans receivable $ 55,036 $ 71,699 $ 145,478 $272,213
======== =========== ========== ========
</TABLE>
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The table below sets forth the dollar amount of all loans due after one
year from December 31, 1997, 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 $72,688 $134,288 $206,976
Consumer loans 2,758 201 2,959
Commercial business loans 1,713 5,529 7,242
------- -------- --------
Total $77,159 $140,018 $217,177
======= ======== ========
</TABLE>
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, 1997, the housing vacancy rate in the 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 rate 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 $600,000 to $1,000,000
are approved by the loan officers loan committee. Loans from $1,000,000 to
$1,250,000 are approved by the senior officers loan committee. All loans in
excess of $1,250,000, up to the legal lending limit of the Bank, must be
approved by the Bank's Board of Directors or its Executive Committee.
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(All members of the Bank's Board of Directors and Executive Committee are also
members of the Bancorp's Board of Directors and Executive Committee,
respectively.) Loans to executive officers of the Bank or the Bancorp 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.
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 97% 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
1997, 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, five or seven year
period. ARM originations totaled $23.6 million for 1997, $26.1 million for 1996,
and $19.5 million during 1995. During 1997, ARMs represented 46% 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.
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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 below 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 and residential contractors who are under contract
with individual purchasers. In most cases, these loans are personally guaranteed
by the borrower. 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 a confirmed loan takeout.
In most cases, these loans are personally guaranteed by the borrower. In
general, loans made do not exceed 75% of the appraised value of the property.
Commercial construction loans are typically made for periods of one year.
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. These loans are typically made for
terms of 15 to 20 years. Loans exceeding twenty years have a balloon feature
calling for a full repayment within 7 to 10 years from the date of the loan. 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 which
represent a secondary source of repayment.
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 of the Bank.
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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.
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.
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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, serious doubt exists as
to the collectibility of a loan. Loans are generally placed on non-accrual
status when either principal or interest is 90 days or more past due. Consumer
loans are generally charged off when the loan becomes over 120 days delinquent.
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 collectibility 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 their 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 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
13
<PAGE> 15
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,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a non-accrual basis:
Real estate:
Residential $ 715 $ 583 $ 361 $ 786 $ 146
Commercial 44 45 --- 82 88
Commercial business 56 111 --- --- ---
Consumer 151 49 11 6 ---
------ ------ ------ ------ ------
Total $ 966 $ 788 $ 372 $ 874 $ 234
====== ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more: Real estate:
Residential $ 220 $ 373 $ 637 $ 575 $ 334
Commercial --- --- --- --- ---
Commercial business --- 5 --- 104 ---
Consumer 6 1 46 6 ---
------ ------ ------ ------ ------
Total $ 226 $ 379 $ 683 $ 685 $ 334
====== ====== ====== ====== ======
Total of non-accrual
and 90 days past due $1,192 $1,167 $1,055 $1,559 $ 568
====== ====== ====== ====== ======
Ratio of non-performing
loans to total assets 0.37% 0.39% 0.38% 0.59% 0.23%
Ratio of non-performing
loans to total loans 0.44% 0.48% 0.47% 0.70% 0.27%
Foreclosed real estate $ 259 $ 189 $ 86 $ 160 $ 183
====== ====== ====== ====== ======
Ratio of foreclosed real
estate to total assets 0.08% 0.06% 0.03% 0.06% 0.07%
</TABLE>
During 1997, gross interest income of $111,374 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 $53,198.
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
14
<PAGE> 16
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, 1997, $1.3 million of the Bank's loans were classified as substandard. The
total represents 10 residential real estate loans, 2 commercial real estate
loans, 5 commercial business loans and 6 consumer loans. There was one consumer
loan for $5 thousand classified as doubtful. No loans were classified as 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.
At December 31, 1997, management of the Bancorp is of the opinion that
there are no loans, except those discussed above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in disclosure of such loans as nonaccrual, past due
or restructured loans.
Also, at December 31, 1997, there are no other interest bearing assets
that would be required to be disclosed as nonaccrual, past due, restructured or
potential problem if such assets were loans.
15
<PAGE> 17
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,
----------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,887 $2,830 $2,751 $2,583 $2,317
Loans charged-off:
Real estate - residential (9) (28) - - -
Commercial business (19) - - (7) (30)
Consumer (6) - (2) (3) (28)
------- ------ ------ ------ ------
Total charge-offs (34) (28) (2) (10) (58)
Recoveries:
Real estate - residential - - - - -
Commercial business - - - 1 -
Consumer - - 1 33 5
------- ------ ------ ------ ------
Total recoveries - - 1 34 5
Net (charge-offs)/recoveries (34) (28) (1) 24 (53)
------- ------ ------ ------ ------
Provision for loan losses 221 85 80 144 319
------- ------ ------ ------ ------
Balance at end of period $3,074 $2,887 $2,830 $2,751 $2,583
======= ====== ====== ====== ======
ALL to loans outstanding 1.13% 1.18% 1.27% 1.24% 1.26%
ALL to nonperforming loans 257.8% 247.4% 268.3% 160.0% 454.8%
Net charge-offs/recoveries
to average loans out-
standing during the period 0.01% 0.01% 0.00% 0.01% 0.03%
</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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 322 57.5 372 61.8 372 64.6 387 64.8 280 64.6
Commercial and
other dwelling 932 23.8 880 23.4 860 23.0 834 23.8 1,225 24.8
Construction and
development 268 7.9 153 5.4 130 4.0 105 3.8 --- 2.4
Consumer loans 153 2.1 110 2.0 110 1.6 111 1.4 132 1.9
Commercial business
and other 630 8.7 650 7.4 650 6.8 626 6.2 946 6.3
Unallocated 769 722 708 688 ---
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 3,074 100.0 2,887 100.0 2,830 100.0 2,751 100.0 2,583 100.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
16
<PAGE> 18
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, 1997, 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, 1997, the Bank's investment portfolio totaled $29.4 million. In
addition, the Bank had $3.6 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,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
U.S. government securities $ 6,537 $ 11,549 $ 9,985
U.S. government agencies 19,648 24,934 24,015
Mortgage-backed securities 1,531 1,944 2,404
FHLB stock 1,646 1,597 1,597
-------- -------- --------
Totals $ 29,362 $ 40,024 $ 38,001
======== ======== ========
</TABLE>
The contractual maturities and weighted average yields for the U.S.
government securities, agency securities and mortgaged-backed securities at
December 31, 1997, 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 $1,990 5.68% $ 4,546 6.14% $ -- --% $ -- -- %
U.S. government
agencies 6,501 5.47 11,148 6.25 2,000 7.04 -- --
Mortgaged-backed
securities -- -- 21 7.18 263 7.46 1,247 8.54
------ ---- ------- ---- ------ ---- ------ ----
Totals $8,491 5.52% $15,715 6.22% $2,263 7.09% $1,247 8.54%
====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
17
<PAGE> 19
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 (FHLBI) 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 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 FHLBI for borrowings. At
December 31, 1997, the Bank had $4.5 million in repurchase agreements. Other
borrowings totaled $10.1 million, of which $8.0 million represents FHLBI
advances.
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>
1997 1996 1995
------------------ ------------------ ------------------
Average Average Average
Amount rate % Amount rate % Amount rate %
-------- ------ -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 16,685 0.00 $ 13,122 0.00% $ 10,859 0.00%
NOW accounts 23,656 2.13 23,034 2.29 20,425 2.28
MMDA accounts 22,235 3.30 22,495 3.27 23,294 3.26
Savings accounts 43,659 3.01 43,521 3.02 42,189 3.01
Certificates of deposit 165,855 5.52 153,433 5.53 143,005 5.51
-------- ------ -------- ------- -------- -------
Total deposits $272,090 4.30 $255,605 4.33% $239,772 4.32%
======== ====== ======== ======= ======== =======
</TABLE>
18
<PAGE> 20
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1997 are summarized as follows. The amounts are
in thousands (000's).
<TABLE>
<S> <C>
3 months or less $19,533
Over 3 months through 6 months 12,949
Over 6 months through 12 months 5,077
Over 12 months 2,107
-------
Total $39,666
=======
</TABLE>
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, as well as, through a line of credit
and advances from the FHLBI. FHLBI advances with maturities ranging from one to
five years are used to fund securities and loans of comparable duration, as well
as, to reduce the impact that movements in short-term interest rates have on the
Bank's overall cost of funds. 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. The Bank does not obtain funds through brokers.
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,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Repurchase agreements $ 4,541 $ 3,993 $ 2,403
Federal Home Loan Bank advances 8,000 7,000 --
Other borrowings 2,087 1,268 735
------- ------- -------
Total borrowings $14,628 $12,261 $ 3,138
======= ======= =======
</TABLE>
19
<PAGE> 21
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,
-----------------------------
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Balance $4,541 $3,993 $2,403
Securities underlying the agreements:
Ending book value 7,988 5,572 3,364
Ending market value 8,014 5,559 3,538
Weighted average rate paid (1) 5.54% 5.19% 5.60%
<CAPTION>
For year ended December 31,
-----------------------------
1997 1996 1995
------ ------ -------
Highest month-end balance $4,975 $5,419 $2,403
Approximate average outstanding balance 4,308 3,599 1,593
Approximate weighted average rate
paid on securities sold under
agreements to repurchase (2) 5.43% 5.27% 5.65%
<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 daily 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, 1997, the market value of the
trust department's assets totaled $129.2 million.
20
<PAGE> 22
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 other borrowings, and the interest rate spread at December 31, 1997.
<TABLE>
<S> <C>
Weighted average yield:
Interest-bearing balances in financial institutions 5.70%
Securities held-to-maturity 6.23
Net loans receivable 8.35
Total interest-earning assets 8.11
Weighted average cost:
Interest bearing deposits 4.32
Borrowed funds 5.62
Total interest-bearing liabilities 4.38
Interest rate spread:
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing funds 3.73
</TABLE>
FINANCIAL RATIOS AND THE ANALYSIS OF CHANGES IN NET INTEREST INCOME
The tables below set forth certain financial ratios of the Bancorp for
the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Return on average assets 1.13% 0.75% 1.14%
Return on average equity 11.87 7.90 11.74
Average equity-to-average
assets ratio 9.49 9.51 9.72
Dividend payout ratio 51.76 72.17 48.92
<CAPTION>
At December 31,
----------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Total stockholders' equity to
total assets 9.22% 9.29% 9.68%
</TABLE>
21
<PAGE> 23
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).
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Year ended December 31, 1997 Year ended December 31, 1996 Year ended December 31, 1995
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing balances
in financial institutions $ 2,282 $ 139 6.%9 $ 3,846 $ 266 6.92% $ 4,520 $ 278 6.15%
Federal funds sold 102 5 5.32 1,068 58 5.43 1,131 66 5.84
Securities 33,454 2,155 6.44 42,513 2,605 6.13 35,139 2,055 5.85
----------- --------- ---------- --------- ---------- ---------
Total investments 35,838 2,299 6.42 47,427 2,929 6.18 40,790 2,399 5.88
----------- --------- ---------- --------- ---------- ---------
Loans:*
Real estate mortgage loans 230,420 19,128 8.30 212,161 17,523 8.26 203,709 17,015 8.35
Commercial business loans 18,380 1,780 9.68 16,014 1,522 9.50 14,174 1,412 9.96
Consumer loans 5,419 462 8.52 4,290 363 8.46 3,469 297 8.56
----------- --------- ---------- --------- ---------- ---------
Total loans 254,219 21,370 8.41 232,465 19,408 8.35 221,352 18,724 8.46
----------- --------- ---------- --------- ---------- ---------
Total interest-earning assets 290,057 23,669 8.16 279,892 22,337 7.98 262,142 21,123 8.06
--------- --------- ---------
Allowance for loan losses (2,959) (2,854) (2,792)
Cash and due from banks 6,005 4,994 4,576
Premises and equipment 6,992 6,153 4,662
Other assets 3,220 3,098 3,272
----------- ---------- ----------
Total assets $ 303,315 $ 291,283 $ 271,860
=========== ========== ==========
Liabilities:
Demand deposit $ 14,836 - 0.00% $ 13,122 - 0.00% $ 10,859 - 0.00%
NOW accounts 23,451 500 2.13 23,034 528 2.29 20,425 465 2.28
Money market demand accounts 23,115 762 3.30 22,495 736 3.27 23,294 759 3.26
Savings accounts 43,673 1,315 3.01 43,521 1,315 3.02 42,189 1,269 3.01
Certificates of deposit 158,041 8,730 5.52 153,433 8,487 5.53 143,005 7,874 5.51
----------- --------- ---------- --------- ---------- ---------
Total interest-bearing deposits 263,116 11,307 4.30 255,605 11,066 4.33 239,772 10,367 4.32
Borrowed funds 8,082 414 5.13 4,780 221 4.62 2,479 117 4.72
----------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities 271,198 11,721 4.32 260,385 11,287 4.32 242,251 10,484 4.33
Other liabilities 3,343 3,191 3,192
----------- ---------- ----------
Total liabilities 274,541 263,576 245,443
Stockholders' equity 28,774 27,707 26,417
----------- ---------- ----------
Total liabilities and
stockholders' equity $ 303,315 $ 291,283 $ 271,860
=========== --------- ========== --------- ========== ---------
Net interest income $ 11,948 $ 11,050 $ 10,639
========= ========= =========
Net interest spread 3.84% 3.66% 3.73%
Net interest margin** 3.94% 3.79% 3.91%
- ---------------------------------------------------------------------
<FN>
* Non-accruing loans have been included in the average balances.
** Net interest income divided by average total assets.
</TABLE>
22
<PAGE> 24
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bancorp 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).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------- -----------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
----------------------------- ----------------------------- ----------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due To Due To Due To
----------------------------- ----------------------------- ----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,840 $ 122 $ 1,962 $ 947 $ (263) $ 684 $ 657 $ 931 $ 1,588
Securities (578) 128 (450) 448 102 550 154 94 248
Other interest-earning assets (146) (34) (180) (48) 28 (20) 95 69 164
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,116 216 1,332 1,347 (133) 1,214 906 1,094 2,000
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Deposits 289 (48) 241 651 48 699 500 1,856 2,356
Borrowings and Federal Home
Loan Bank Advances 167 26 193 106 (2) 104 36 12 48
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 456 (22) 434 757 46 803 536 1,868 2,404
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income/(expense) $ 660 $ 238 $ 898 $ 590 $ (179) $ 411 $ 370 $ (774) $ (404)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
23
<PAGE> 25
BANK SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries, which are incorporated
under the laws of the State of Indiana. Peoples Service Corporation is inactive.
At December 31, 1997, the Bank had an investment balance of $10,000 in Peoples
Service Corporation. During 1997, PSA Insurance Corporation was dissolved.
The Consolidated Financial Statements of the Bancorp 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.
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.
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, 1997, the Bank had 94 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 Bancorp has
four officers (listed below under "Executive Officers of the Bancorp"),
24
<PAGE> 26
but has no other employees. The Bancorp'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 Bancorp 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 Bancorp 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 Bancorp
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 Bancorp 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.
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
25
<PAGE> 27
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 Bancorp.
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
26
<PAGE> 28
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
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 Bancorp. 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
Bancorp 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 allowance for loan losses.
In addition to the risk-based capital guidelines, the Bancorp 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.
27
<PAGE> 29
The following table shows that, at December 31, 1997, the Bancorp's
capital exceeded all regulatory capital requirements. At December 31, 1997, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
At December 31, 1997, the Bancorp 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 capital
risk-weighted assets $32.2 15.0% $17.1 8.0% $21.4 10.0%
Tier I capital
to risk-weighted assets $29.5 13.8% $ 8.6 4.0% $12.8 6.0%
Tier I capital to
adjusted assets $29.5 9.2% $ 9.6 3.0% $16.0 5.0%
</TABLE>
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
The Bancorp 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 Bancorp is a legal entity separate and
distinct from the Bank. The primary source of the Bancorp's cash flow, including
cash flow to pay dividends on the Bancorp's Common Stock, is the payment of
dividends to the Bancorp by the Bank. Under Indiana law, the Bank may pay
dividends, no more often than quarterly, to the extent of its undivided profits
(generally, earnings less losses, bad debts, taxes and other operating
expenses). However, DFI approval is required to pay dividends in any year in
excess of the Bank's net profits for the current year and retained net profits
for the prior two years. 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,
28
<PAGE> 30
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.
In May 1995, the FDIC and other Federal banking agencies amended their
regulations concerning the CRA. Among other things, the revised regulations
implemented a new evaluation system that rates banks based on their performance
in meeting community financial needs. In particular, the revised system
evaluates 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 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 AND STATE TAXATION
Savings institutions such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
The amount of the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) may be computed under
either the experience method or the percentage of taxable income method (based
on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly,
29
<PAGE> 31
this method has not been available for the Bank for its tax years ending
December 31, 1996 and thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying equals the amount by which
12% of the amount comprising savings accounts at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1995, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of December
31, 1987. Recapture of the excess reserves will occur over a six-year period
which will begin for the Bank for its tax year ending December 31, 1998.
Commencement of the recapture period was delayed for two years because the Bank
met certain residential lending requirements. The Bank previously established,
and will continue to maintain, a deferred tax liability with respect to its
federal tax bad debt reserves in excess of the base-year balances; accordingly,
the legislative changes will have no effect on total income tax expense for
financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal
bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of the greater
of its current or accumulated earnings and profits, redeems any of its stock, or
is liquidated. The Bank has not established a deferred federal tax liability
under SFAS No. 109 for its base-year federal tax bad debt reserves, as it does
not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environment tax equal to 0.12% of the excess
alternative minimum taxable income for the taxable year (determined
30
<PAGE> 32
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
The tax returns of the Bank or Bancorp have not been examined by the
Internal Revenue Service since its year ended June 30, 1985. In the opinion of
management, any examinations of still open returns would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Bancorp.
For additional information regarding federal taxation, see Notes to
Consolidated Financial Statements included in the 1997 Annual Report to
Stockholders attached hereto as Exhibit 13.
The Bancorp is subject to Indiana's Financial Institutions Franchise
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 tax
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
At December 31, 1997, the Bank's consolidated total deferred tax assets
were $1,068 thousand and the consolidated total deferred tax liabilities were
$274 thousand, resulting in a consolidated net deferred tax asset of $794
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 Bancorp 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.
31
<PAGE> 33
The table below sets forth additional information with respect to the
Bank's offices as of December 31, 1997. 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
- --------------- ------ ----- ------- ----------
<S> <C> <C> <C> <C>
9204 Columbia Avenue
Munster, In 46307 1985 $1,331,494 11,640 $2,587,049
141 W. Lincoln Highway
Schererville, In 46375 1990 1,324,643 9,444 2,048,783
7120 Indianapolis Blvd.
Hammond, In 46324 1978 354,969 2,600 741,943
1300 Sheffield
Dyer, In 46311 1976 207,692 2,100 575,479
7915 Taft
Merrillville, In 46410 1968 178,075 2,750 501,080
8600 Broadway
Merrillville, In 46410 1996 1,789,526 4,400 1,956,746
4901 Indianapolis Blvd.
East Chicago, In 46312 1995 1,184,318 4,300 1,437,164
</TABLE>
During 1995, the Bancorp replaced its existing East Chicago, Indiana,
office location with a new facility. During 1996, the Bancorp opened a new
full-service branch facility located in Merrillville, Indiana. The facilities
represent the Bancorp'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, 1997, 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 $6.8 million at December 31, 1997. For further information,
see Note 5 of Notes to Consolidated Financial Statements in the Bancorp's
December 31, 1997, Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Bancorp 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.
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<PAGE> 34
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 1997.
EXECUTIVE OFFICERS OF THE BANCORP
---------------------------------
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 Bancorp's Proxy Statement for the 1997 Annual Meeting of
Shareholders:
The executive officers of the Bancorp are as follows:
AGE AT
DECEMBER 31,
1997 POSITION
------------ --------
David A. Bochnowski 52 Chairman and Chief Executive
Officer
Joel Gorelick 50 Vice President and Chief Lending Officer
Edward J. Furticella 50 Vice President, Chief Financial Officer
and Treasurer
Frank J. Bochnowski 59 Senior Vice President and Secretary
The following is a description of the principal occupation and
employment of the executive officers of the Bancorp during at least the past
five years:
David A. Bochnowski is chairman and chief executive officer of the
Bancorp 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 (ACB)and
chairman of ACB Partners, Inc., the operating subsidiaries of America's
Community Banker. 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. Mr. Bochnowski serves on the Federal Reserve Thrift Institutions
Advisory Committee. 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 Bancorp 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 has most
33
<PAGE> 35
recently served as president of the Northwest Indiana Boys & Girls Club and
chairman of the board of the Northwest Indiana Regional Development Corporation.
Mr. Gorelick has been appointed as a board member for the United States Selected
Service System. Mr. Gorelick is also a volunteer for numerous youth related
sports activities. 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 Bancorp 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 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
Bancorp 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 member and past president of the Munster, Indiana Rotary Club
and a former 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 Bancorp'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 1997 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 1997 Annual Report to Shareholders is incorporated herein
by reference.
34
<PAGE> 36
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
1997 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1997 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.
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 Bancorp's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding the Bancorp's executive
officers is included under the unnumbered item captioned "Executive Officers of
the Bancorp" 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 Bancorp's definitive Proxy
Statement for its 1998 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 Bancorp's definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders is incorporated herein by
reference.
35
<PAGE> 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Bancorp's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders, and in the footnote
captioned "Related Party Transactions" in the 1997 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
---------------------
The following financial statements of the Bancorp are incorporated
herein by reference to the 1997 Annual Report to Shareholders, filed as Exhibit
13 to this report:
(a) Report of Independent Auditors
(b) Consolidated Balance Sheets, December 31, 1997 and
1996
(c) Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1997, 1996
and 1995
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
(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
Bancorp's Definitive Proxy Statement/Prospectus dated March 23, 1994,
as filed pursuant to Rule 424(b) under the 1933 Act on March 28, 1994).
36
<PAGE> 38
3.i. Articles of Incorporation (incorporated herein by reference to Exhibit
3(i) to the Bancorp'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
Bancorp'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 Bancorp'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 Bancorp's Definitive Proxy 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 Bancorp'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 Bancorp'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 Bancorp'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 Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1996).
13. 1997 Annual Report to Shareholders.
21. Subsidiaries of the Bancorp.
27. Financial Data Schedule.
(4) REPORTS ON FORM 8-K:
--------------------
No reports on Form 8-K were filed during the fourth quarter of 1997.
37
<PAGE> 39
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 23, 1998
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 18, 1998:
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
38
<PAGE> 40
/s/Lourdes M. Dennison Director
- -------------------------------
Lourdes M. Dennison
/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.
39
<PAGE> 41
EXHIBIT INDEX
Exhibit Description Page
13. 1997 Annual Report to Shareholders
21. Subsidiaries of the Bancorp
27. Financial Data Schedule
40
<PAGE> 1
1997
Annual
MEETING THE Report
CHALLENGE -----------------------------
OF COMMUNITY BANKING
[Photo of
Business
Customer]
[Photo of
Community [Photo of
Project] Mortgage
Customer]
[Photo of
Checking
Customer] [Photo of
Business
Customer]
[Photo of
Business
Customer ] [Photo of
Trust
Customer]
[NorthWest Indiana Bancorp Logo]
<PAGE> 2
MEETING THE
CHALLENGE
OF COMMUNITY BANKING
To Our Customers and Shareholders:
Since 1910, Peoples Bank has been meeting the challenge of community banking.
The Bank's success and now that of our holding company, the NorthWest Indiana
Bancorp, has been linked for eighty seven years to the progress of our
community.
As a community bank, we are mindful of the challenge posed by larger
regional and of Community Banking national financial institutions. Competitive
rates and service, while important, are not the only factors in a customer's
banking decision. Customers also want to do business with people they know,
trust, and who are empowered to make decisions at the local level.
[Photo of
Home]
1997
Annual
Report
-----------------------------
[Photo of
Business
Customer]
"People's Bank treats me the way I want to be treated...just like I strive to
treat my customers at River Oaks Lincoln Mercury. Whether it's a business
matter, personal account or trust department issue, Peoples Bank can give you
the personal touch that only a smaller bank can provide."
Fran Hoffman River
Oaks Lincoln Mercury
[Photo of
Mortgage
Customer]
Left to right:
Sylvia Magallanez,
Peoples Mortgage Loan Officer and
Pamelyn and Robert Robinson and Caesar
"Thirty years ago Peoples gave us a loan on our home. We got wonderful service
and have enjoyed a great relationship with them. So when it came time to move
and purchase a new home, we knew we wanted to stay with Peoples, and the choice
has been a great one!"
Robert and Pamelyn Robinson
Mortgage Customers
1
<PAGE> 3
[Photo of
Business
Customer]
In my role as Clerk-Treasurer for the Town of Schererville, I have to do the
best I can investing the Town's dollars. Peoples Bank meets that need by
providing competitive rates on our checking and sweep accounts, excellent
customer service, and up to date products like PC Banking. Peoples Bank made it
apparent they are extremely interested in helping the Town with its banking
business."
Janice Malinowski
Schererville Clerk Treasurer
[Aerial View of
Barrington
Ridge Estates]
"It's a pleasure doing business with a community bank like Peoples. They
provided development financing for my Barrington Ridge residential subdivision
project and were able to give me the answers and solutions I needed...without
having to call out of town like the 'big banks' do. I think the world of them."
Charles "Bud" Grainer
Builder and Developer
Barrington Ridge Estates
Our mission is to be the leading provider of high quality deposit,
loan, and trust products and services to our customers in each of the
communities we serve. Our future success depends on our ability to redeploy our
customers' deposits into housing, consumer, and small business credit which
expands the local economy and improves the quality of life in our communities.
Banking is a privilege, not a right. We are grateful
for our banking charter and for the umbrella offered to our depositors by
federal deposit insurance. We manage our business, however, as if our reputation
for prudent banking practices was the dominant factor in the banking
relationship decision.
Our capital ratio stood at 9.2% at the end of 1997, a strong figure
substantially exceeding our regulatory requirement. The Bancorp reported record
earnings of $3.4 million during 1997. Our return on assets (ROA), a key measure
of financial performance, was 1.13%.
2
<PAGE> 4
High asset quality stands out as another indicator of our financial
strength. At year end our ratio of non-performing loans to total loans was
0.44%, a figure well below industry norms. Despite this low figure, the
Bancorp's allowance for loan losses stood at 1.13% of outstanding loans, a
reserve position designed to insulate our performance in the event of change in
the business cycle.
Meeting the challenge of community banking requires an understanding of
our community's credit needs and a commitment to their funding. During 1997, our
loan portfolio grew $27.5 million or 11.2% which reflects the high level of
confidence consumers and business have in our local economy as well as the
ability of our loan officers to provide timely responses to customers' loan
applications. Guided by our strong underwriting standards, our loan officers
respond to customers without resorting to the bureaucratic process of some of
our larger competitors.
[Photo of
Business
Customer]
"Peoples Bank goes beyond the lender-borrower relationship. They were a catalyst
in the creation of our new 46,000 sq. ft. facility in Portage, and provided all
of the support we needed to benefit from a 504 SBA loan program. Peoples
enthusiastically embraced our project. Now we can give something back to our
community through the creation of new jobs and a state-of-the-art facility."
Dave Lawson
Harbor Motors
[Photo of
Business
Customer]
"Peoples Bank has been there for me and my company when we've needed it most.
When an opportunity to advance my commercial heat treating company materialized,
People's Bank quickly responded and provided support. People's has shown faith
in me and my business decisions...and we're both enjoying the benefits of a
great relationship."
Mary Stogner
Tri-State Metal
3
<PAGE> 5
[Photo of
Checking
Customer]
"If you're paying for checking you"re not banking at Peoples."
Brian Johnson
Munster High School Senior
[Photo of
Trust
Customer]
"Meeting the customer's needs is what Peoples Bank is all about. When I bring my
clients to Peoples Bank, I'm confident the Trust Department has the knowledge
and expertise to tailor the right financial vehicle to suit their needs."
Darnail Lyles
Attorney
The community banking challenge includes providing quality services to
our deposit customers. Our philosophy permits the ability to work one on one
with a teller at no extra charge. In addition to old fashion lobby services we
constantly upgrade our technological capabilities so we can offer
non-traditional banking including customer access to their accounts through
telephone and on-line banking along with ATM and VISA debit cards.
As a community bank we are also challenged to provide trust services to
our customers. Our effort encompasses the administration of estates and
guardianships, trusts, including land trusts, IRA and Keogh investments, and
investment agency accounts for our commercial customers. Our trust department
emphasizes personalized services and a high degree of customer satisfaction
which resulted in a 14.1% increase in the book value of assets to $75.2 million
at the end of 1997. At year end the market value of trust assets was $129.2
million.
4
<PAGE> 6
All banks, not just community banks, face the challenge of the year
2000 problem and whether our computers and those of our vendors and customers
can accurately read the date associated with the beginning of the next century.
Our board of directors has approved an action plan which has already assessed
our current position and we are prepared to implement the steps necessary to
avoid any interruption of our operations because of the century date change. The
costs of this plan are not expected to have a material impact on our operations.
Meeting the expectations of our shareholders provides a distinct
challenge for a community bank. The costs related to expanding our business are
constantly weighed against the return alternative investments would bring to our
owners. For example, our new Merrillville Broadway office increased our
operating expenses, but our deposits there exceeded $10 million last year, which
has positive long run implications for our bottom line. Likewise, our investment
in technology was more than offset by a 56.3% increase in non-interest income
during 1997.
[Photo of
Business
Customer]
"Since April 1997, we have dedicated significant resources to solving the year
2000 computer issues and are doing everything possible to prevent interruption
in our services or business operations."
Tanya Mathews
Peoples Bank, Manager
Information Services
[Photo of
Business
Customer]
Left to right:
Ernesto Rosa,
and Steve Niedert
"I've worked long, hard hours my whole life, and always dreamed of rewarding
myself with a Corvette. With easy financing and low interest rates, Peoples Bank
made that dream become a reality for me."
Ernesto Rosa
Car Loan Customer
[Photo of
Business
Outdoor Sign]
"People's Bank was instrumental in financing my new business. All of the
employees have provided prompt and professional service, and with a number of
convenient banking locations throughout Lake County, Peoples meets all of my
business and banking needs."
Steve A. Niedert
U.S.A. Corvette
& Accessories
5
<PAGE> 7
[photo of
community
project]
"For over 27 years, Peoples Bank has been there for us. When no one else would
take a mortgage for our home in the Horace Mann area, Peoples took care of it.
Now our relationship with them has grown and they've stepped up to support
programs like the HMANIO project. They've really become one of the champions of
HMANIO, Inc. We truly value our relationship."
Finis Springer
Executive Director, HMANIO, CDC
Gary, Indiana
Left to right:
Darnell N. Bolton,
Finis Springer,
Rosie Thomas
and Virgil Ashley
[Photo of
Business
Customer]
"We at Ogden Engineering have been a satisfied customer of Peoples for years.
Whether we needed an extended conventional credit line or assurance in securing
an SBA import/export line of credit, Peoples has been there to advise and assist
us with all of our financial needs."
L. Neal Bannister
Ralph Ogden
Ogden Engineering,
Northwest Indiana Exporter of the Year
Left to right:
Ralph Ogden,
and
L. Neal Bannister
Shareholders should be pleased that our assets grew 6.7% to $320
million at the end of 1997. Our return on equity (ROE) was a respectable 11.87%
during the year and the marketplace rewarded our investors with a 35% increase
in our stock price to $42.13 at year end. The board of directors increased the
total dividend paid to shareholders to $1.8 million in 1997 compared to $1.5
million in 1996, an increase of 16.5%.
In the final analysis, the real challenge of community banking is to
understand, relate, and respond to the people we serve. Each year we support the
banking needs of our consumer and commercial customers and we especially
appreciate the opportunity to work with families who have done business with the
Peoples Bank for two, three, and even four generations.
We look forward to the opportunity to work with you in 1998.
/s/ David A. Bochnowski
Sincerely,
David A. Bochnowski
Chairman and Chief Executive Officer
6
<PAGE> 8
Meeting the
Challenge
of Community Banking
1997
Annual
Report
Financial
Information
"We manage our
business...as if our
reputation for prudent banking practices
was the dominant
factor in the banking
relationship decision."
[NorthWest Indiana
Bancorp Logo]
7
<PAGE> 9
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, December 31, June 30,
1997 1996 1995 1994 1993 (1) 1993
------------ ------------ ------------ ------------ ------------ ------------
Statement of Income:
<S> <C> <C> <C> <C> <C> <C>
Total interest income....... $ 23,669 $ 22,337 $ 21,123 $ 19,122 $ 9,360 $ 19,035
Total interest expense...... 11,721 11,287 10,484 8,079 4,015 8,485
------------ ------------ ------------ ------------ ------------ ------------
Net interest income......... 11,948 11,050 10,639 11,043 5,345 10,550
Provision for loan losses... 221 85 80 145 319 711
------------ ------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses. 11,727 10,965 10,559 10,898 5,026 9,839
------------ ------------ ------------ ------------ ------------ ------------
Noninterest income.......... 1,066 682 685 493 253 749
Noninterest expense......... 7,154 8,039 6,117 6,031 3,011 5,378
------------ ------------ ------------ ------------ ------------ ------------
Net noninterest expense..... 6,088 7,357 5,432 5,538 2,758 4,629
------------ ------------ ------------ ------------ ------------ ------------
Income tax expenses......... 2,223 1,419 2,026 2,132 902 2,158
Cumulative effect of changes
in accounting............. - - - - 450 -
------------ ------------ ------------ ------------ ------------ ------------
Net income.................. $ 3,416 $ 2,189 $ 3,101 $ 3,228 $ 1,816 $3,052
============ ============ ============ ============ ============ ============
Earnings per common share... $2.47 $1.59 $2.25 $2.35 $1.33 $2.25
Earnings per common share,
assuming dilution......... $2.45 $1.58 $2.24 $2.33 $1.32 $2.19
Cash dividends declared
per common share.......... $1.28 $1.15 $1.10 $1.10 $0.50 $0.80
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 1993
------------ ------------ ------------ ------------ ------------ ------------
Balance Sheet:
<S> <C> <C> <C> <C> <C> <C>
Total assets................ $ 319,609 $299,419 $ 280,911 $266,343 $ 251,481 $246,180
Loans receivable............ 272,213 244,696 222,293 221,930 204,205 202,083
Investment securities....... 29,362 40,024 38,001 33,678 33,639 28,910
Deposits.................... 272,090 256,420 247,945 234,639 222,945 219,133
Borrowed funds.............. 14,628 12,261 3,139 3,151 2,087 993
Total stockholders' equity.. 29,482 27,815 27,204 25,606 23,874 22,691
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 (1) (2) 1993
------------- ------------ ------------ ------------- ------------- ------------
Interest Rate Spread During Period:
<S> <C> <C> <C> <C> <C> <C>
Average effective yield on
loans and investment
securities................ 8.16% 7.98% 8.06% 7.66% 7.75% 8.24%
Average effective cost of
deposits and borrowings... 4.32% 4.32% 4.33% 3.48% 3.63% 4.04%
------------ ------------ ------------ ------------ ------------ ------------
Interest rate spread........ 3.84% 3.66% 3.73% 4.18% 4.12% 4.20%
============ ============ ============ ============ ============ ============
Net interest margin.............. 3.94% 3.79% 3.91% 4.25% 4.27% 4.44%
Return on assets................. 1.13% 0.75% 1.14% 1.24% 1.45% 1.28%
Return on equity................. 11.87% 7.90% 11.74% 13.04% 15.51% 14.00%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, June 30,
1997 1996 1995 1994 1993 1993
------------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to
risk-weighted assets...... 13.8% 14.7% 15.8% 15.9% 15.5% 14.9%
Total capital to
risk-weighted assets...... 15.0% 16.0% 17.1% 17.2% 16.8% 16.1%
Tier I capital leverage ratio 9.2% 9.3% 9.7% 9.6% 9.5% 9.2%
Allowance for loan losses to
total loans............... 1.13% 1.18% 1.27% 1.24% 1.26% 1.15%
Allowance for loan losses to
non-performing loans...... 257.84% 247.40% 268.25% 176.46% 454.75% 382.34%
Non-performing loans to
total loans............... 0.44% 0.48% 0.47% 0.70% 0.27% 0.30%
Total loan accounts......... 4,764 4,404 4,606 4,671 4,654 4,661
Total deposit accounts...... 25.443 24,666 23,730 22,738 21,204 21,330
Total branches (all full service) 7 7 6 6 6 6
<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>
8
<PAGE> 10
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 19,744 $ 20,709 $ 20,042 $ 18,313
10,698 12,896 13,145 11,872
------------ ------------ ------------ ------------
9,046 7,813 6,897 6,441
665 238 130 188
------------ ------------ ------------ ------------
8,381 7,575 6,767 6,253
------------ ------------ ------------ ------------
726 757 622 854
4,795 4,625 4,357 4,057
------------ ------------ ------------ ------------
4,069 3,868 3,735 3,203
------------ ------------ ------------ ------------
1,849 1,505 992 1,024
- - - -
------------ ------------ ------------ ------------
$ 2,463 $ 2,202 $ 2,040 $ 2,026
============ ============ ============ ============
$1.85 $1.65 $1.54 $1.55
$1.75 $1.58 $1.47 $1.49
$0.68 $0.22 $0.15 $0.23
<CAPTION>
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$227,183 $ 220,053 $ 208,796 $ 192,269
183,366 177,421 173,244 156,925
28,910 25,160 24,983 24,885
202,823 196,880 188,621 174,729
609 799 604 -
20,667 18,972 16,955 14,986
<CAPTION>
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------- ------------ ------------
<S> <C> <C> <C>
9.20% 10.08% 10.28% 9.85%
5.39% 6.75% 7.25% 6.86%
------------ ------------ ------------ ------------
3.81% 3.33% 3.03% 2.99%
============ ============ ============ ============
4.04% 3.80% 3.42% 3.36%
1.10% 1.03% 1.01% 1.06%
12.38% 12.31% 12.82% 14.51%
----------------------------------------------------------
June 30, June 30, June 30, June 30,
1992 1991 1990 1989
------------ ------------- ------------ ------------
<S> <C> <C> <C>
14.7% 14.1% 13.1% N/A
15.9% 14.8% 13.7% N/A
9.1% 8.6% 8.1% 7.8%
0.88% 0.53% 0.42% 0.43%
231.51% 117.96% 155.93% 129.81%
0.38% 0.45% 0.27% 0.33%
4,755 4,793 4,428 4,907
20,834 21,200 21,492 20,932
6 6 6 5
</TABLE>
Business
NorthWest Indiana Bancorp (the Bancorp) is a bank holding company
registered with the Board of Governors of the Federal Reserve System. Peoples
Bank SB (the Bank), an Indiana savings bank, is a wholly owned subsidiary of the
Bancorp. The Bancorp has no other business activity other than being the holding
company for Peoples Bank SB.
The Bank conducts business from its main office in Munster and its other
six full-service offices located in East Chicago, Hammond, Merrillville, Dyer
and Schererville, Indiana. The Bank is primarily engaged in the business of
attracting deposits from the general public and the origination of loans secured
by single family residences and commercial real estate, as well as, construction
loans and various types of consumer loans and commercial business loans. In
addition, the Bank's trust department provides estate administration, estate
planning, guardianships, land trusts, retirement planning, self-directed IRA and
Keogh accounts, investment agency accounts, and serves as personal
representative of estates and acts as trustee for revocable and irrevocable
trusts.
The Bancorp's capital stock is traded in the over-the-counter market and
quoted in the National Quotation Bureau's "Pink Sheets". On February 28, 1998,
the Bancorp had 1,381,512 shares of common stock outstanding, excluding
fractional shares, and 592 stockholders of record. This does not reflect the
number of persons or entities who may hold their stock in nominee or "street"
name through brokerage firms.
[GRAPHIC OMITTED]
TOTAL ASSET COMPOSITION
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C>
Commercial Real Estate and
Multifamily $64.8(20.3%)
Commercial Business
and Other $23.6(7.4%)
Consumer $5.7(1.8%)
Other Assets $14.5(4.5%)
Investments and Interest Bearing
Liabilities $32.9(10.3%)
Construction and Land
Development $21.4(6.7%)
Residential Real Estate,
Including Home Equity - $156.7(49.0%)
</TABLE>
At December 31, 1997, the Bancorp had total assets of $319.6 million.
Interest-earning assets totaled $305.1 million and represented 95.5% of total
assets.
- --------------------------------------------------------------------------------
9
<PAGE> 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Bancorp's earnings are dependent upon the earnings of the Bank. The
Bank's earnings are primarily dependent upon net interest margin. The net
interest margin is the difference between interest income earned on loans and
investments and interest expense paid on deposits and borrowings stated as a
percentage of average total assets. The net interest margin is perhaps the
clearest indicator of a financial institution's ability to generate core
earnings. The Bank's profitability is also affected by fees and service charges,
trust department income, gains and losses from the sale of loans, provisions for
loan losses, income taxes and operating expenses.
At December 31, 1997, the Bancorp had total assets of $319.6 million and
total deposits of $272.1 million. The Bank's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund (SAIF) which is
administered by the Federal Deposit Insurance Corporation (FDIC), an agency of
the federal government. At December 31, 1997, stockholders' equity totaled $29.5
million or 9.2% of total assets, with book value per share at $21.34. Net income
for 1997 was $3.4 million, or $2.47 per common share and $2.45, assuming
dilution. The return on average assets (ROA) was 1.13%, while the return on
average stockholders' equity (ROE) was 11.87%.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
TOTAL ASSETS
(DOLLARS IN MILLIONS)
<S> <C>
1993 $251.5
1994 $266.3
1995 $280.9
1996 $299.4
1997 #319.6
</TABLE>
Total assets have increased from $251.5 million at December 31, 1993 to $319.6
million at December 31, 1997. Growth during 1997 totaled $20.2 million or 6.7%.
- --------------------------------------------------------------------------------
Asset/Liability Management
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities as well as to assure adequate liquidity. These strategies
determine the characteristics and mix of the balance sheet. They affect the
interest margins, maturity patterns, interest rate sensitivity and risk, as well
as resource allocation. For the Bank, the key components of asset/liability
management are loans, investments and deposits. Over the years, the Bank has
directed its lending efforts toward construction loans, adjustable rate
residential loans, equity lines of credit, adjustable rate commercial real
estate loans and commercial business loans tied to the prime rate of interest.
Consumer loans are generally made for terms of five years or less. Fixed rate
residential real estate loans are generally made for contractual terms of
fifteen years or less. The actual cash flows from these loans generally results
in a duration which is less than the contractual maturity, providing protection
against the possibility of rising interest rates.
The Bank is primarily a portfolio lender. Mortgage banking activities are
limited to the sale of fixed rate mortgage loans with contractual maturities of
thirty years. These loans are sold in the secondary market because of the
additional exposure to interest rate risk associated with this product. The Bank
retains the servicing on all loans sold in the secondary market.
The primary objective of the Bank's investment portfolio is to provide for
the liquidity needs of the Bank and to contribute to profitability by providing
a stable flow of dependable earnings. Funds are generally invested in federal
funds, interest-bearing balances in financial institutions, U.S. government
securities and federal agency obligations. Interest-bearing balances in
financial institutions include overnight deposits at the Federal Home Loan Bank
of Indianapolis (FHLBI). Investments are generally for terms ranging from one
day to five years.
The Bank's cost of funds reacts rapidly to changes in market interest rates
due to the relatively short-term nature of its deposit liabilities.
Consequently, the Bank's results of operations have been influenced by the
levels of short-term interest rates. In order to reduce exposure to
interest-rate risk, certificate accounts with maturities in excess of one year
have been aggressively marketed. In addition, product offerings are
competitively priced and maturities are carefully monitored in order to guard
against the outflow of funds. Borrowed money is used to compensate for
reductions in the availability of other sources of funds and is generally
accomplished through repurchase agreements, as well as, through a line of credit
and advances from the FHLBI. FHLBI advances with maturities ranging from one to
five years are used to fund securities and loans of comparable duration, as well
as, to reduce the impact that movements in short-term interest rates have on the
Bank's overall cost of funds. The Bank does not obtain funds through brokers.
Quantitative and Qualitative Disclosures about Market Risk
The Bank's primary market risk exposure is interest rate risk. Interest
rate risk (IRR) is the risk that the Bank's earnings and capital will be
adversely affected by changes in interest rates. The primary approach to IRR
management is one which focuses on adjustments to the Bank's asset/liability mix
in order to limit the magnitude of IRR. The board of directors has delegated the
responsibility for measuring, monitoring and controlling IRR to the Bank's
asset/liability management committee (ALCO). The ALCO is responsible for
developing and implementing IRR management strategies, establishing and
maintaining a system of limits and controls, and establishing and utilizing an
IRR measurement system. The ALCO, which is made up of members of senior
management, generally meets monthly, with board presentations occurring
quarterly.
The Bank's exposure to interest rate risk is due to repricing or mismatch
risk, basis risk, embedded option risk and
10
<PAGE> 12
yield curve risk. Repricing risk is the risk of adverse consequence from a
change in interest rates that arises because of differences in the timing of
when those interest rate changes affect the Bank's assets and liabilities.
Basis risk is the risk that the spread, or rate difference, between instruments
of similar maturities will change. Option risk arises whenever Bank products
give customers the right, but not the obligation, to alter the quantity or
timing of cash flows. Yield curve risk is the risk that changes in prevailing
interest rates will affect instruments of different maturities by different
amounts. Because the Bank is liability sensitive, i.e., it has more rate
sensitive liabilities than rate sensitive assets maturing or repricing within a
one year time period, asset/liability management strategies designed to control
IRR include a continued focus on construction lending, adjustable rate
residential loans, equity lines of credit, and adjustable rate commercial real
estate and commercial business loans. Consumer loans are generally made for
terms of five years or less. Fixed rate residential real estate loans are
generally made for terms of fifteen years or less. Thirty year fixed rate
residential loans are underwritten according to guidelines of the Federal Home
Loan Mortgage Corporation (FHLMC) and are generally sold to the FHLMC directly
for cash in the secondary market. Increasing the amount of interest-earning
assets that are rate sensitive, extending the maturities of customer deposits,
increasing the balances of checking/NOW accounts and utilizing cost effective
borrowings are all part of management's commitment toward reducing the Bank's
overall vulnerability to interest rate risk. While these steps may reduce the
overall vulnerability to interest rate risk, the Bank will still be adversely
affected by a rising or high interest rate environment, and is beneficially
affected by a falling or low interest rate environment because rate sensitive
liabilities exceed rate sensitive assets maturing or repricing within a one
year time period.
The table below provides forward-looking information about the Bancorp's
financial instruments that are sensitive to changes in interest rates as of
December 31, 1997. The Bancorp had no derivative financial instruments or
trading portfolio as of December 31, 1997. The table incorporates the Bank's
internal system generated data as related to the maturity and
repayment/withdrawal of interest-earning assets and interest-bearing
liabilities. For loans, securities, and liabilities with contractual maturities,
the table presents principal cash flows and related weighted-average interest
rates by contractual maturities as well as the Bank's historical experience of
the impact of interest-rate fluctuations on the prepayment of residential loans.
From a risk management
TABULAR PRESENTATION: QUANTITATIVE DISCLOSURES OF MARKET RISK
<TABLE>
<CAPTION>
(Dollars in thousands) PRINCIPAL AMOUNT MATURING IN:
------------------------------------------------------
1998 1999 2000 2001
------- ------- ------- -------
<S> <C> <C> <C>
Rate-sensitive assets:
Fixed-interest-rate loans $ 20.495 $ 10.1 9.431 $ 6.832
Average interest rate 8.35% 8.24% 8.21% 7.89%
Variable-interest-rate loans 34,541 14,682 7,273 10,581
Average interest rate 9.38% 9.04% 8.69% 8.68%
Total loans 55,036 24,829 16,704 17,413
Average interest rate 8.99% 8.71% 8.42% 8.37%
Securities 8,491 6,569 5,548 3,094
Average interest rate 5.52% 6.00% 6.03% 6.50%
Other interest-bearing assets 3,570 -- -- --
Average interest rate 5.70% 0.00% 0.00% 0.00%
Total rate-sensitive assets 67,097 31,398 22,252 20,507
Average interest rate 8.37% 8.15% 7.82% 8.09%
Rate-sensitive liabilities:
Checking and other non-interest
bearing deposits 834 417 417 --
Average interest rate 0.00% 0.00% 0.00% 0.00%
NOW accounts 1,183 592 591 --
Average interest rate 2.04% 2.04% 2.04% 0.00%
Savings and Money market accounts 7,742 10,521 10,521 --
Average interest rate 3.18% 3.20% 3.20% 0.00%
Certificates of Deposit 145,399 15,810 3,791 855
Average interest rate 5.54% 5.71% 5.82% 5.77%
Total Deposits 155,158 27,340 15,320 855
Average interest rate 5.37% 4.58% 3.72% 5.77%
Fixed-interest-rate borrowings 8,628 4,000 2,000 --
Average interest rate 5.43% 5.99% 5.71% 0.00%
Total rate-sensitive
liabilities 163,786 31,340 17,320 855
Average interest rate 5.37% 4.76% 3.95% 5.77%
<CAPTION>
PRINCIPAL AMOUNT MATURING IN:
----------------------------------- FAIR VALUE
2002 THEREAFTER TOTAL 12/31/97
------- --------- -------- ---------
<S> <C> <C> <C> <C>
Fixed-interest-rate loans $ 6,057 $ 37,100 90,062 $ 90,510
Average interest rate 7.77% 7.80% 8.02%
Variable-interest-rate loans 6,696 108,378 182,151 181,450
Average interest rate 8.53% 8.10% 8.49%
Total loans 12,753 145,478 272,213 271,960
Average interest rate 8.17% 8.05% 8.35%
Securities 504 5,156 29,362 29,498
Average interest rate 6.26% 7.73% 6.23%
Other interest-bearing assets -- -- 3,570 3,570
Average interest rate 0.00% 0.00% 5.70%
Total rate-sensitive assets 13,257 150,634 305,145 305,028
Average interest rate 8.10% 8.04% 8.11%
Rate-sensitive liabilities:
Checking and other non-interest
bearing deposits -- 15,017 16,685 16,685
Average interest rate 0.00% 0.00%
NOW accounts -- 21,290 23,656 23,656
Average interest rate 0.00% 2.04% 2.04%
Savings and Money market accounts -- 37,110 65,894 65,894
Average interest rate 0.00% 3.00% 3.08%
Certificates of Deposit -- -- 165,855 166,043
Average interest rate 0.00% 0.00% 5.56%
Total Deposits -- 73,417 272,090 272,278
Average interest rate 0.00% 2.11% 4.32%
Fixed-interest-rate borrowings -- -- 14,628 14,628
Average interest rate 0.00% 0.00% 5.62%
Total rate-sensitive
liabilities -- 73,417 286,718 286,906
Average interest rate 0.00% 2.11% 4.38%
</TABLE>
11
<PAGE> 13
perspective, however, the Bancorp believes that repricing dates, as opposed to
contractual maturity dates, may be more relevant in analyzing the value of
financial instruments. For core deposits (for example, checking, NOW, savings,
and money market deposit accounts) that have no contractual maturity, the table
presents principal cash flows and, as applicable, related weighted-average
interest rates based on the Bank's historical experience, management's judgment,
and statistical analysis, as applicable, concerning their most likely withdrawal
behaviors.
Financial Condition
During the year ended December 31, 1997, total assets increased by $20.2
million (6.7%), with interest-earning assets increasing by $19.4 million
(6.8%). At December 31, 1997, interest-earning assets totaled $305.1 million
and represented 95.5% of total assets. Loans totaled $272.2 million and
represented 89.2% of interest-earning assets, 85.2% of total assets and 100.0%
of total deposits. The loan portfolio includes $21.4 million (7.9%) in
construction and land development loans, $156.7 million (57.5%) in residential
real estate loans, $64.8 million (23.8%) in commercial and multifamily real
estate loans, $5.7 million (2.1%) in consumer loans, and $23.6 million (8.7%)
in commercial business and other loans. During 1997, loans increased by $27.5
million (11.2%). Loan demand was strong in all areas as evidenced by the
growth in the real estate loans (9.5%), consumer loans (15.8%) and commercial
business and other loans (31.6%). Adjustable rate loans comprised 67% of total
loans at year end. Loan growth was due to a strong local economy, an
aggressive customer calling program and an aggressive marketing program.
Assuming the continuation of the current strength of the local economy, the
current interest rate environment, and the Bank's aggressive marketing efforts,
management believes that loan growth should remain strong during 1998.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
LOAN COMPOSITION
(DOLLARS IN MILLIONS)
<S> <C>
Commercial Real Estate
And Multifamily - $64.8(23.8%)
Commercial Business
and Other - $23.6(8.7%)
Consumer - $5.7(2.1%)
Construction and Land
Development - $21.4(7.9%)
Residential Real Estate,
Including Home Equity - $156.7(57.5%)
</TABLE>
At December 31, 1997, the loan portfolio totaled $272.2 million and represented
89.2% of interest-earning assets.
- --------------------------------------------------------------------------------
During 1997, the Bank sold $1.7 million in fixed rate mortgages compared to
$699 thousand in 1996 and $1.3 million in 1995. The amounts include 23 loans for
1997, 10 loans for 1996 and 15 loans for 1995. All loans sold had contractual
maturities of thirty years. Net gains realized from the sales totaled $26
thousand, $1 thousand and $19 thousand for 1997, 1996 and 1995. Mortgage loan
servicing income totaled $21 thousand for 1997 and 1996, and $23 thousand for
1995. At December 31, 1997, the Bank had no loans classified as held for sale.
During 1998, the Bank will continue to sell thirty year fixed rate mortgage
loans on a case-by-case basis as part of its efforts to manage interest rate
risk.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
TOTAL LOANS
(DOLLARS IN MILLIONS)
<S> <C>
1993 $204.2
1994 $221.9
1995 $222.3
1996 $244.7
1997 $272.2
</TABLE>
During 1997, loans increased by $27.5 million or 11.2%. Loan growth was due to a
strong local economy, an aggressive customer calling program and an aggressive
marketing program.
- --------------------------------------------------------------------------------
At December 31, 1997, the Bank's investment portfolio totaled $29.4 million
and was invested as follows: 66.9% in U.S. government agency debt securities,
22.3% in U.S. government debt securities, 5.2% in U.S. government agency
mortgage-backed securities and 5.6% in FHLBI common stock. In addition, the Bank
had $3.6 million in interest-bearing balances at the FHLBI. During 1997,
investment securities decreased by $10.7 million (26.6%) as maturing securities
were used to provide funding for loan portfolio growth. During 1998, the Bank
expects to fund loan growth with a mix of deposits and borrowed funds.
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. At December 31, 1997, the Bank had $1.2 million in
non-performing loans. The December 31, 1997 balance includes $966 thousand in
loans accounted for on a non-accrual basis and $226 thousand in accruing loans
which were contractually past due 90 days or more. The total of these
non-performing loans represents 0.44% of the total loan portfolio and 0.37% of
total assets. The amount of non-accruing loans includes 15 residential real
estate loans, 1 commercial real estate loan, 1 commercial business loan and 3
consumer loans. The amount of accruing loans which are contractually past due 90
days or more includes 3 residential real estate loans and 2 consumer loans. At
December 31, 1997, $1.3 million of the Bank's loans were classified as
substandard. The total represents 10 residential real estate loans, 2 commercial
real estate loans, 5 commercial business loans and 6 consumer loans. There was 1
consumer loan for $5 thousand classified as doubtful. There were no loans
classified as loss.
12
<PAGE> 14
Management does not anticipate that any of the non-performing loans or
classified loans will materially impact future operations, liquidity or capital
resources. At December 31, 1997, there were no material credits which would
cause management to have serious doubts as to the ability of such borrowers to
comply with loan repayment terms.
At December 31, 1997, the Bank had $259 thousand in foreclosed real estate.
The total includes 5 residential properties and represents 0.08% of total
assets.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
NON-PERFORMING LOANS TO TOTAL LOANS
<S> <C>
1993 0.27%
1994 0.70%
1995 0.47%
1996 0.48%
1997 0.44%
</TABLE>
Management believes that the credit risk profile of the loan portfolio is
relatively low. At December 31, 1997, the Bank's ratio of non-performing loans
to total loans was 0.44% (forty-four hundredths of one percent) which was below
the industry norm.
- --------------------------------------------------------------------------------
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses (ALL) has been maintained. While
management may periodically allocate portions of the allowance for specific
problem loans, the entire allowance is available to absorb all credit losses
that arise from the loan portfolio and is not segregated for, or allocated to,
any particular loan or group of loans. During 1997, amounts provided to the ALL
account totaled $221 thousand compared to $85 thousand for 1996 and $80 thousand
for 1995. The amount provided during 1997 was based on loan activity, changes
within the loan portfolio mix, and resulting changes in management's assessment
of portfolio risk. Charge-offs net of recoveries totaled $34 thousand during
1997.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS
<S> <C>
1993 1.26%
1994 1.24%
1995 1.27%
1996 1.18%
1997 1.13%
</TABLE>
At December 31, 1997, the Bank had $3.1 million in the Allowance for Loan Losses
account. The amount represents 1.13% of loans outstanding and 257.9% of
non-performing loans.
- --------------------------------------------------------------------------------
At December 31, 1997, the balance in the ALL account totaled $3.1 million
which is considered adequate by management after evaluation of the loan
portfolio, past experience and current economic and market conditions. The
allocation of the ALL reflects consideration of the facts and circumstances that
affect the repayment of individual loans, as well as, loans which have been
evaluated on a pooled basis. At December 31, 1997, no portion of the ALL was
allocated to impaired loan balances as the Bank had no loans considered to be
impaired loans as of, or for the year ended December 31, 1997.
Deposits are the major source of funds for lending and other investment
purposes. At December 31, 1997, deposits totaled $272.1 million. During 1997,
deposit growth totaled $15.7 million (6.1%). Savings accounts increased $6
thousand (0.0%), money market deposit accounts (MMDAs) decreased $124 thousand
(0.6%), NOW accounts decreased $251 thousand (1.0%), checking accounts increased
$3.8 million (29.6%) and certificates of deposit increased by $12.2 million
(8.0%). At December 31, 1997, the deposit base was comprised of 16.0% savings
accounts, 8.2% MMDAs, 8.7% NOW accounts, 6.1% checking accounts and 61.0%
certificates of deposit. At December 31, 1997, repurchase agreements totaled
$4.5 million. Other short-term borrowings totaled $2.1 million. The Bancorp had
$8 million in FHLBI advances with a weighted average maturity of 3.3 years.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
TOTAL DEPOSITS
(DOLLARS IN MILLIONS)
<S> <C>
1993 $222.9
1994 $234.6
1995 $247.9
1996 $256.4
1997 $272.1
</TABLE>
Deposits are the major source of funds for lending and other investment
purposes. During 1997, deposits increased by $15.7 million or 6.1%.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals,
and pay dividends and operating expenses. The Bank's primary goal for liquidity
management is to ensure that at all times it can meet the cash demands of its
depositors and its loan customers. A secondary purpose of liquidity management
is profit management. Because profit and liquidity are often conflicting
objectives, management attempts to maximize the Bank's net interest margin by
making adequate, but not excessive, liquidity provisions. Finally, because the
Bank is
13
<PAGE> 15
subject to legal reserve requirements under Federal Reserve Regulation D,
liquidity is managed to ensure that the Bank maintains an adequate level of
legal reserves.
Changes in the liquidity position result from operating, investing and
financing activities. Cash flows from operating activities are generally the
cash effects of transactions and other events that enter into the determination
of net income. The primary investing activities include loan originations, loan
repayments, investments in interest bearing balances in financial institutions,
and the purchase and maturity of investment securities. Financing activities
focus almost entirely on the generation of customer deposits. In addition, the
Bank utilizes borrowings, i.e., repurchase agreements and advances from the
FHLBI as a source of funds.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
CAPITAL TO TOTAL ASSETS
<S> <C>
1993 9.5%
1994 9.6%
1995 9.7%
1996 9.3%
1997 9.2%
</TABLE>
Management firmly believes that the safety and soundness of the Bancorp
is enhanced by maintaining a high level of capital. At December 31, 1997, the
Bancorp's capital exceeded all regulatory capital requirements. The Bancorp is
categorized as "well capitalized". The ratio of Tier I capital to total assets
reflects the increase in capital over the periods presented as a result of
profitability and success in managing growth. In addition, Tier I capital to
risk-weighted assets was 13.8% and total capital to risk-weighted assets was
15.0%.
- --------------------------------------------------------------------------------
During 1997, cash and cash equivalents increased by $4.1 million compared
to a $8.4 million decrease for 1996 and a $9.2 million increase for 1995. During
1997, cash provided by operating activities totaled $5.2 million, compared to
$2.4 million for 1996 and $3.1 million for 1995. The increase during 1997 was
due to increased earnings and cash flows from loan sales. Cash flows from
investing activities reflect strong loan demand throughout 1997. Maturing
securities held-to-maturity were used to provide funding for loan growth. Loans
made net of payments received totaled $24.8 million during 1997, compared to
$22.6 million for 1996 and $711 thousand for 1995. Cash flows from financing
activities totaled $16.3 million during 1997, compared to $16.1 million for 1996
and $11.8 million for 1995. During 1997, the Bancorp paid dividends on common
stock of $1.8 million. In addition, the Bank used both deposits and borrowed
money to fund loan growth. Deposit growth during 1997 totaled $15.7 million,
compared to $8.5 million for 1996 and $13.3 million for 1995. The increase in
borrowed funds totaled $2.3 million during 1997, compared to $9.1 million for
1996 and a decrease of $12 thousand for 1995. The increase in borrowed funds as
a source of funds, provided a cost effective alternative to certificates of
deposit as price competition within the local market area became very
competitive during 1997.
At December 31, 1997, outstanding commitments to fund loans totaled $41.7
million. Approximately 85% of the commitments were at variable rates. Management
believes that the Bank has sufficient cash flow and borrowing capacity to fund
all outstanding commitments and to maintain proper levels of liquidity.
Management strongly believes that safety and soundness is enhanced by
maintaining a high level of capital. During 1997, stockholders' equity increased
by $1.7 million (6.0%). The increase resulted primarily from earnings of $3.4
million for 1997. In addition, $18 thousand represents proceeds from the
exercise of 1,877 stock options. The Bancorp paid $1.8 million in cash dividends
during 1997. At December 31, 1997, book value per share was $21.34 compared to
$20.16 at December 31, 1996.
The Bancorp is subject to risk-based capital guidelines adopted by the
Board of Governors of the Federal Reserve System (the FRB), and the Bank is
subject to risk-based capital guidelines adopted by the FDIC. As applied to the
Bancorp and the Bank, the FRB and FDIC capital requirements are substantially
identical. These regulations divide capital into two tiers. The first tier (Tier
I) includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets. Supplementary (Tier II) capital
includes, among other things, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan losses, subject
to certain limitations, less required deductions. The Bancorp and the Bank are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. In addition, the FRB and FDIC regulations provide for a minimum
Tier I leverage ratio (Tier I capital to adjusted assets) of 3% for financial
institutions that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other financial institutions are required to maintain a Tier I
leverage ratio of 3% plus an additional cushion of at least one to two percent.
The following table shows that, at December 31, 1997, the Bancorp's capital
exceeded all regulatory capital requirements. At December 31, 1997, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
The dollar amounts are in millions.
<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 capital to
risk-weighted assets.. $32.2 15.0% $17.1 8.0% $21.4 10.0%
Tier I capital to
risk-weighted assets.. $29.5 13.8% $ 8.6 4.0% $12.8 6.0%
Tier I capital to
adjusted assets....... $29.5 9.2% $ 9.6 3.0% $16.0 5.0%
</TABLE>
14
<PAGE> 16
RESULTS OF OPERATIONS - COMPARISON OF 1997 TO 1996.
Net income for 1997 was $3.4 million compared to $2.2 million for 1996, an
increase of $1.2 million (56.1%). The earnings represent a return on average
assets of 1.13% for 1997 compared to 0.75% for 1996. The return on average
equity was 11.87% for 1997 compared to 7.90% for 1996.
The net income for 1996 reflects the one-time special assessment required
by the Deposit Insurance Funds Act of 1996 on SAIF-assessable deposits to
capitalize SAIF. The SAIF assessment resulted in a pre-tax expense of $1.6
million for 1996. Excluding the SAIF assessment, adjusted net income for 1996
was $3.1 million, representing an adjusted ROA of 1.07% and an adjusted ROE of
11.27%.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
NET INTEREST MARGIN
<S> <C>
1993* 4.27%
1994 4.25%
1995 3.91%
1996 3.79%
1997 3.94%
</TABLE>
The net interest margin is total interest income minus total interest expense
stated as a percentage of average total assets. During 1997, the increase was
due to higher yields on interest-earning assets and a reduction in the Bank's
cost of funds.
* Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
Net interest income for 1997 was $11.9 million, up $898 thousand (8.1%)
from $11.1 million for 1996. The growth in net interest income was due to the
growth in average interest-earning assets, increased yields on interest-earning
assets and a lower cost of funds. Interest-earning assets averaged $290.1
million for 1997, up $10.2 million (3.6%) from $279.9 million for 1996. The
weighted average yield on interest-earning assets was 8.16% for 1997 compared to
7.98% for 1996. The weighted average cost of funds was 4.32% for 1997 compared
to 4.33% for 1996. The impact of the 8.16% return on interest-earning assets and
the 4.32% cost of funds resulted in an interest rate spread of 3.84% for 1997
compared to 3.65% for 1996. During 1997, total interest income increased by $1.3
million (6.0%) while total interest expense increased by $434 thousand (3.8%).
The net interest margin was 3.94% for 1997 compared to 3.79% for 1996.
During 1997, interest income from loans increased by $2.0 million (10.1%)
compared to 1996. The increase was due to an increase in yield and an increase
in average balances for the loan portfolio. The weighted average yield on loans
outstanding was 8.41% for 1997 compared to 8.35% for 1996. Higher average loan
balances have contributed to the increase in interest income as loans averaged
$254.2 million for 1997, up $21.7 million (9.3%) from $232.5 million for 1996.
During 1997, interest income on investments and other deposits decreased by $630
thousand (21.5%) compared to 1996. The decrease was due to lower average daily
balances as maturing securities and short-term investments were used to fund
loan growth. Securities and other deposits averaged $35.8 million for 1997, down
$11.6 million (24.5%) from $47.4 million for 1996, as maturing securities were
used to provide funding for loan growth. The weighted average yield on
investments and other deposits was 6.42% for 1997 compared to 6.18% for 1996.
Interest expense for deposits increased by $241 thousand (2.2%) during
1997. The increase was due to higher average balances as deposits averaged
$263.1 million for 1997, up $7.5 million (2.9%) from $255.6 million for 1996.
The weighted average rate paid on deposits for 1997 was 4.30% compared to 4.33%
for 1996. Interest expense on borrowed funds increased by $193 thousand (87.3%)
during 1997 due to the increased cost of borrowed funds and higher average
balances. The weighted average cost of borrowed funds was 5.13% for 1997
compared to 4.62% for 1996. The increase was due to lengthening the maturities
of borrowed funds. Borrowed funds averaged $8.1 million, up $3.3 million (68.8%)
from $4.8 million for 1996.
During 1997, management focused on initiatives designed to review and
enhance noninterest income. As a result, noninterest income for 1997 was $1.1
million, up $384 thousand (56.3%) from $682 thousand for 1996. During 1997,
income from fees and service charges increased $208 thousand (42.7%) due to an
increase in the number of customer account relationships and the implementation
of new fee and service charge pricing schedules and procedures. Income from
Trust operations increased by $66 thousand (34.7%) due to increased fees from
services provided and growth, as the market value of the trust department's
assets totaled $129.2 million at December 31, 1997 compared to $88.2 million at
December 31, 1996. In addition, gains from the sale of fixed rate loans,
foreclosed real estate and other real estate properties held by the Bank
contributed to the increase in noninterest income.
Noninterest expense for 1997 was $7.2 million, down $885 thousand (11.0%)
from $8.0 million for 1996. The decrease was due to the special SAIF assessment
of $1.6 million during 1996. Excluding the SAIF assessment of $1.6 million
during 1996. Excluding the SAIF assessment results in an increase of
noninterest expense of $674 thousand (10.4%) for 1997 compared to 1996. In
general, increases in noninterest expense have resulted from the operation of
the Merrillville, Indiana, Broadway branch facility which opened during
September 1996, and costs related to investments in new technologies. The
increase in compensation and benefits was due to additiona staffing for the
Merrillville facility and annual salary increases. Other expense changes were
due to standard increases in bank oeprations. The decrease in the federal
insurance premium reflects lower premiums for SAIF deposits due to the
recapitalization of SAIF during 1996. The Bancorp's efficiency ratio for 1997
was 55.0% compared to 55.2% for 1996. The 1996 efficienty ratio excludes the
special SAIF assessment. The ratio is determined by dividing total noninterest
expense by the sum of net interest income and total noninterest income for the
period.
15
<PAGE> 17
Income tax expenses for 1997 totaled $2.2 million compared to $1.4 million
for 1996, an increase of $804 thousand (56.7%). The increase was due to the
non-reoccurence of the 1996 SAIF assessment and an increase in pretax earnings
during 1997. The combined effective federal and state tax rates for the Bancorp
were 39% for 1997 and 1996.
RESULTS OF OPERATIONS - COMPARISON OF 1996 TO 1995
Net income for 1996 was $2.2 million compared to $3.1 million for 1995, a
decrease of $913 thousand (29.4%). The earnings represented a return on average
assets of 0.75% for 1996 compared to 1.14% for 1995. The return on average
equity was 7.90% for 1996 compared to 11.74% for 1995. The decrease in 1996
operating results was due to the one-time special assessment required by the
Deposit Insurance Funds Act of 1996 on SAIF-assessable deposits to capitalize
SAIF. The SAIF assessment resulted in a pre-tax expense of $1.6 million for
1996. Excluding the SAIF assessment, adjusted net income for 1996 was $3.1
million, representing an adjusted ROA of 1.07% and an adjusted ROE of 11.27%.
Net interest income for 1996 was $11.1 million, up $412 thousand (3.9%)
from $10.6 million for 1995. The growth in net interest income was due to the
growth in average interest-earning assets and a stable cost of funds.
Interest-earning assets averaged $279.9 million for 1996, up $17.8 million
(6.8%) from $262.1 million for 1995. The net interest margin was 3.79% for 1996
compared to 3.91% for 1995. The decrease was due to lower yields on
interest-earning assets as the Bank's cost of funds remained stable. During
1996, total interest income increased by $1.2 million (5.7%) while total
interest expense increased by $802 thousand (7.7%).
During 1996, interest income from loans increased by $685 thousand (3.7%)
compared to 1995. The weighted average yield on loans outstanding was 8.35% for
1996 compared to 8.46% for 1995. Higher average loan balances have contributed
to the increase in interest income as loans averaged $232.5 million for 1996, up
$11.1 million (5.0%) from $221.4 million for 1995. During 1996, interest income
on investments and other deposits increased by $530 thousand (22.1%) compared to
1995. The increase was due to higher yields and portfolio growth during 1996.
The weighted average yield on investments and other deposits was 6.17% for 1996
compared to 5.88% for 1995. The increase in yield was due to a reduction in the
average balances for federal funds sold and interest bearing balances in
financial institutions, and the investment of funds in securities with
contractual maturities ranging from three to seven years. In addition,
securities averaged $40.9 million for 1996, up $5.8 million (16.4%) from $35.1
million for 1995. The combined weighted average yield on total interest-earning
assets was 7.98% for 1996 compared to 8.06% for 1995.
Interest expense for deposits increased by $699 thousand (6.7%) during
1996. The increase was due to higher average balances as deposits averaged
$255.6 million for 1996, up $15.8 million (6.6%) from $239.8 million for 1995.
The weighted average rate paid on deposits for 1996 was 4.33% compared to 4.32%
for 1995. Interest expense on short-term borrowings increased by $104 thousand
during 1996 due to higher average balances as borrowed funds averaged $4.8
million, up $2.3 million (92.8%) from $2.5 million for 1995. The weighted
average cost of short-term borrowings was 4.62% for 1996 compared to 4.72% for
1995. The combined weighted average rate paid on deposits and borrowings for
1996 and 1995 was 4.33%. The impact of the 7.98% return on interest-earning
assets and the 4.33% cost of funds resulted in an interest rate spread of 3.65%
for 1996 compared to 3.73% for 1995.
Noninterest income for 1996 was $682 thousand, down $3 thousand (0.5%) from
$685 thousand for 1995. The decrease was due to reduced gains from the sale of
fixed rate loans and foreclosed real estate. During 1996, income from fees and
service charges increased $59 thousand (13.9%), while income from Trust
operations increased by $11 thousand (6.2%).
Noninterest expense for 1996 was $8.0 million, up $1.9 million (31.4%) from
$6.1 million for 1995. The increase was due primarily to the SAIF assessment of
$1.6 million. Excluding the SAIF assessment results in an increase of
noninterest expense of $364 thousand (6.0%) for 1996 compared to 1995. In
general, increases in noninterest expense have resulted from the expansion of
the Bank's operations and the investment in new technologies. The increase in
compensation and benefits was due to additional staffing and annual salary
increases. The increase in occupancy and equipment expense was due to the
operation of the new East Chicago, Indiana, branch facility which opened during
September 1995, the operation of the new Merrillville, Indiana, Broadway branch
facility which opened during September 1996, and depreciation related to
investments in technology. Other expense changes were due to standard increases
in bank operations. The Bancorp's efficiency ratio, excluding the SAIF
assessment, for 1996, was 55.2% compared to 54.0% for 1995. The ratio is
determined by dividing total noninterest expense minus the SAIF assessment by
the sum of net interest income and total noninterest income for the period.
Income tax expenses for 1996 totaled $1.4 million compared to $2.0 million
for 1995, a decrease of $607 thousand (30.0%). The decrease was due to a
decrease in pretax earnings during 1996. The combined effective federal and
state tax rates for the Bancorp were 39% for 1996 compared to 40% for 1995.
CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY
The laws and regulations affecting banks and bank holding companies are in
a state of flux. The laws, rules and the regulatory agencies in this area have
changed significantly over recent years, and there is reason to expect that
similar changes will continue in the future. It is difficult to predict the
outcome of these changes. Recent legislation has, for example, reduced the
regulatory burden on bank holding companies and may lead to consolidated
regulation of the banking industry. Other recent initiatives have removed
barriers to interstate mergers and acquisitions; encouraged lending for the
development of poor, rural, inner city and other communities; and provided
additional proposals to
16
<PAGE> 18
restructure regulation of the banking industry and its participants' powers,
particularly with respect to insurance and securities activities. Based on what
is presently known about these initiatives, management does not believe that the
Bancorp's operations will be materially adversely affected by those initiatives
that have been enacted or those pending initiatives that may be enacted in the
future.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with Generally Accepted Accounting Principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of the
Bank are monetary in nature. As a result, interest rates have a more significant
impact on the Bancorp's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
Year 2000
The year 2000 problem stems from computer programs that identify the year
with two digits instead of four. The problem with this code is that in the year
2000, `00' may be interpreted as 1900 or not processed at all. The year 2000
problem is not limited to one type of software or hardware. Machines and
programs affected include mainframes, personal computers, networks, ATMs, and
other items such as elevators, infrastructures, and telephone systems.
The Bancorp has implemented an action plan to address the century date
change issue so that service and business operations will not be interrupted in
the year 2000. A project leader, a team of employees and a consulting group have
analyzed daily operations, business forms, software, hardware and equipment for
year 2000 compliance. Due to the Bancorp's reliance upon external parties for
business operations, ongoing communication with third party vendors has been
established to monitor their year 2000 efforts. All systems and interfaces will
be tested internally to confirm reported compliance. The Bancorp does not expect
the cost of year 2000 compliance to have a material effect on its business,
financial position or results of operations.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
RETURN ON ASSETS
<S> <C>
1993* 1.45%
1994 1.24%
1995 1.14%
1996 0.75%
1997 1.13%
</TABLE>
Return on assets (ROA) indicates the overall operating efficiency of a company.
The ratio is determined by stating net income as a percentage of average total
assets. The increase in the ROA for 1997 was due to an increase in the Bancorp's
net interest margin, noninterest income, and the one-time special assessment on
SAIF-assessable deposits to recapitalize SAIF during 1996.
*Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
RETURN ON EQUITY
<S> <C>
1993* 15.5%
1994 11.04%
1995 1.14%
1996 7.90%
1997 11.87%
</TABLE>
Return on equity (ROE) is determined by stating net income as a percentage of
average stockholders' equity. The ratio is important to the Bancorp's
stockholders because it measures the return on their invested capital. The
increase in ROE for 1997 reflects record earnings due to increases in net
interest margin and noninterest income.
*Six month period due to change in fiscal year end.
- --------------------------------------------------------------------------------
17
<PAGE> 19
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
Board of Directors
NorthWest Indiana Bancorp
Munster, Indiana
We have audited the accompanying consolidated balance sheets of NorthWest
Indiana Bancorp (the Company) as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NorthWest Indiana
Bancorp as of December 31, 1997 and 1996 and the results of its operations and
its cash flows for the years ended December 31, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
January 9, 1998
18
<PAGE> 20
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31,
---------------------------------
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash and non-interest bearing balances in financial institutions............... $ 7,083 $ 5,509
Interest bearing balances in financial institutions............................ 3,570 1,000
------------- -------------
Total cash and cash equivalents.............................................. 10,653 6,509
Securities held-to-maturity (fair value: December 31, 1997 - $29,498;
December 31, 1996 - $39,909)................................................. 29,362 40,024
Loans receivable............................................................... 272,213 244,696
Less: allowance for loan losses................................................ (3,074) (2,887)
------------- -------------
Net loans receivable......................................................... 269,139 241,809
Accrued interest receivable.................................................... 2,195 2,153
Premises and equipment......................................................... 6,820 7,086
Foreclosed real estate......................................................... 259 189
Deferred income taxes.......................................................... 794 706
Other assets................................................................... 387 943
------------- -------------
Total assets................................................................. $319,609 $299,419
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing......................................................... $ 16,685 $ 12,879
Interest bearing............................................................. 255,405 243,541
------------- -------------
Total...................................................................... 272,090 256,420
Borrowed funds................................................................. 14,628 12,261
Accrued expenses and other liabilities......................................... 3,409 2,923
------------- -------------
Total liabilities............................................................ 290,127 271,604
Stockholders' Equity:
Preferred stock, no par or stated value;
10,000,000 shares authorized, none outstanding ............................ - -
Common stock, no par or stated value; 20,000,000 shares authorized;
issued and outstanding: December 31, 1997 - 1,381,472 shares;
December 31, 1996 - 1,379,595 shares......................................... 345 345
Additional paid in capital..................................................... 2,948 2,930
Retained earnings - substantially restricted................................... 26,189 24,540
------------- -------------
Total stockholders' equity................................................... 29,482 27,815
------------- -------------
Total liabilities and stockholders' equity................................... $319,609 $299,419
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable
Real estate loans.................................. $19,128 $17,523 $17,015
Commercial loans................................... 1,780 1,522 1,412
Consumer loans..................................... 462 363 297
------------ ----------- -----------
Total loan interest.............................. 21,370 19,408 18,724
Securities held-to-maturity.......................... 2,155 2,605 2,055
Other interest earning assets........................ 144 324 343
------------ ----------- -----------
Total interest income.............................. 23,669 22,337 21,122
------------ ----------- -----------
Interest expense:
Deposits............................................. 11,307 11,066 10,367
Borrowed funds....................................... 414 221 117
------------ ----------- -----------
Total interest expense............................. 11,721 11,287 10,484
------------ ----------- -----------
Net interest income....................................... 11,948 11,050 10,638
Provision for loan losses................................. 221 85 80
------------ ----------- -----------
Net interest income after provision for loan losses....... 11,727 10,965 10,558
------------ ----------- -----------
Noninterest income:
Gain on sale of loans, net........................... 26 1 19
Gain on sale of foreclosed real estate............... 28 4 51
Fees and service charges............................. 695 487 428
Trust operations..................................... 256 190 179
Other................................................ 61 - 8
------------ ----------- -----------
Total noninterest income........................... 1,066 682 685
------------ ----------- -----------
Noninterest expense:
Compensation and benefits............................ 3,645 3,213 3,049
Occupancy and equipment.............................. 1,350 1,050 842
Federal insurance premium............................ 163 1,979 536
Advertising.......................................... 145 159 157
Data processing...................................... 368 299 272
Other................................................ 1,483 1,339 1,260
------------ ----------- -----------
Total noninterest expense.......................... 7,154 8,039 6,116
------------ ----------- -----------
Income before income taxes................................ 5,639 3,608 5,127
Income tax expenses....................................... 2,223 1,419 2,026
------------ ----------- -----------
Net income................................................ $ 3,416 $ 2,189 $ 3,101
============ =========== ===========
Earnings per common share................................. $ 2.47 $ 1.59 $ 2.25
============ =========== ===========
Earnings per common share, assuming dilution.............. $ 2.45 $ 1.58 $ 2.24
============ =========== ===========
Dividend declared per common share........................ $ 1.28 $ 1.15 $ 1.10
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.................................... $ 345 $ 2,914 $ 22,347 $ 25,606
Issuance of 1,352 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 14 - 14
Cash dividends, $1.10 per share.......................... - - (1,517) (1,517)
Net income............................................... - - 3,101 3,101
------------ ------------ ------------ -------------
Balance at December 31, 1995.................................. 345 2,928 23,931 27,204
Issuance of 159 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 2 - 2
Cash dividends, $1.15 per share.......................... - - (1,580) (1,580)
Net income............................................... - - 2,189 2,189
------------ ------------ ------------ -------------
Balance at December 31, 1996.................................. 345 2,930 24,540 27,815
Issuance of 1,877 shares of common stock at
$8.57 - $21.25 per share, under stock option plan...... - 18 - 18
Cash dividends, $1.28 per share.......................... - - (1,767) (1,767)
Net income............................................... - - 3,416 3,416
------------ ------------ ------------ -------------
Balance at December 31, 1997.................................. $ 345 $ 2,948 $ 26,189 $ 29,482
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 3,416 $ 2,189 $ 3,101
----------- ----------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale...................... (1,732) (700) (1,247)
Sale of loans originated for sale.................. 1,758 699 1,312
Depreciation and amortization, net of accretion.... 710 553 393
Net gains on sale of loans......................... (26) (1) (19)
Net gains on sale of fixed assets.................. (41) - -
Net gains on sale of foreclosed real estate........ (28) (4) (51)
Provision for loan losses.......................... 221 85 80
Net change in unearned interest on loans........... (5) (1) (12)
Change in deferred taxes........................... (88) (61) 244
Change in deferred loan fees....................... (30) (1) (75)
Change in interest receivable...................... (42) (61) (272)
Change in other assets............................. 556 (520) (45)
Change in accrued expenses and other liabilities... 486 239 (322)
----------- ----------- ----------
Total adjustments................................ 1,739 227 (14)
----------- ----------- ----------
Net cash from operating activities............... 5,155 2,416 3,087
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in interest bearing time deposits in
other financial institutions....................... - - 493
Proceeds from maturities of securities held-to-maturity 10,748 12,671 8,000
Purchase of securities held-to-maturity.............. (549) (15,164) (12,772)
Principal collected on mortgage-backed securities.... 414 460 446
Loan participations purchased........................ (3,240) - (33)
Net change in loans receivable....................... (24,807) (22,587) (711)
Purchase of premises and equipment................... (454) (2,373) (1,647)
Sale of premises and equipment....................... 100 - -
Proceeds from sale of foreclosed real estate......... 489 61 547
----------- ----------- ----------
Net cash from investing activities................. (17,299) (26,932) (5,677)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits................................... 15,670 8,475 13,306
Proceeds from FHLB advances.......................... 23,000 7,000 -
Repayment of FHLB advances........................... (22,000) - -
Change in other borrowed funds....................... 1,367 2,121 (12)
Proceeds from issuance of capital stock.............. 18 2 14
Dividends paid....................................... (1,767) (1,517) (1,517)
----------- ----------- ----------
Net cash from financing activities................. 16,288 16,081 11,791
----------- ----------- ----------
Net change in cash and cash equivalents............ 4,144 (8,435) 9,201
Cash and cash equivalents at beginning of period..... 6,509 14,944 5,743
----------- ----------- ----------
Cash and cash equivalents at end of period........... $ 10,653 $ 6,509 $ 14,944
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................... $ 11,668 $ 11,314 $ 10,452
Income taxes....................................... $ 1,790 $ 2,045 $ 1,815
Transfers from loans to foreclosed real estate....... $ 531 $ 160 $ 423
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED
December 31, 1997, 1996 and 1995.
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of NorthWest Indiana Bancorp (the Bancorp), its wholly-owned
subsidiary, Peoples Bank SB (the Bank), and the Bank's wholly-owned
subsidiaries, Peoples Service Corporation and PSA Insurance Corporation.
Effective July 31, 1994, the Bancorp became a one-bank holding company for
Peoples Bank SB, an Indiana savings bank resulting from the conversion of
Peoples Bank from a federal stock savings bank to an Indiana stock savings bank.
The formation of the Bancorp and the acquisition of Peoples Bank SB by the
Bancorp was an internal reorganization accounted for at historical cost. The
Bancorp has no other business activity other than being a holding company for
the Bank. The Bancorp's earnings are dependent upon the earnings of the Bank.
Peoples Service Corporation is inactive. At December 31, 1997, the Bank had an
investment balance of $10,000 in Peoples Service Corporation. During 1997, PSA
Insurance Corporation was dissolved. All significant inter-company accounts and
transactions have been eliminated in consolidation. The parent only financial
statements for NorthWest Indiana Bancorp are presented in Note 18. Substantially
all operations are in the banking industry.
Use of Estimates - Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period, as well as the disclosures provided. Areas involving the use of
estimates and assumptions include the allowance for loan losses, fair values of
securities and other financial instruments, determination and carrying value of
impaired loans, the carrying value of loans held for sale, the accrued liability
for deferred compensation, the realization of deferred tax assets, and the
determination of depreciation of premises and equipment. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses and the fair values of securities and other financial instruments are
particularly susceptible to material change in the near term.
Concentrations of Credit Risk - The Bancorp grants residential, commercial
real estate, commercial business and installment loans to customers primarily of
Lake County, in north west Indiana. Substantially all loans are secured by
specific items of collateral including residences, business assets and consumer
assets.
Cash Flow Reporting - For purposes of the statement of cash flows, the
Bancorp considers cash on hand, non-interest bearing balances in financial
institutions, all interest-bearing balances in financial institutions with
original maturities of ninety days or less and federal funds sold to be cash and
cash equivalents. The Bancorp reports net cash flows for customer loan and
deposit transactions and short-term borrowings with maturities of 90 days or
less.
Securities - The Bancorp classifies securities into held-to-maturity,
available-for-sale, or trading categories. Held-to-maturity securities are those
which the Bancorp has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Bancorp may decide to sell if needed for liquidity, asset-liability management
or other reasons. Available-for-sale securities are reported at fair value, with
unrealized gains and losses included as a separate component of equity, net of
tax. Trading securities are bought principally for sale in the near term and are
reported at fair value with unrealized gains and losses included in earnings.
Other securities such as Federal Home Loan Bank stock are carried at cost.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of premium or discount, is included in earnings. Securities are
written down to fair value when a decline in fair value is not temporary.
Loans Held for Sale - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income.
Loans and Loan Income - Loans are stated net of loans in process, deferred
loan fees, and unearned income. Discounts on consumer loans are recognized over
the lives of the loans using the interest method. Interest income on other loans
is accrued over the term of the loans based upon the principal outstanding
except where serious doubt exists as to the collectibility of a loan, in which
case the accrual of interest is discontinued. Income is subsequently recognized
only to the extent that cash payments are received until, in management's
judgment, the borrower has the ability to make contractual interest and
principal payments, in which case the loan is returned to accrual status.
Foreclosed Real Estate - Real estate properties acquired through, or in
lieu of, loan foreclosure are recorded at fair value at the date of foreclosure.
Costs relating to improvement of property are capitalized, whereas holding costs
are expensed. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated fair value less selling costs.
Allowance for Loan Losses - Because some loans may not be repaid in full,
an allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate based on past loss experience, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to change
over time. While management may periodically allocate portions of the allowance
for specific problem loans, the whole allowance is available for any loan
charge-offs that
23
<PAGE> 25
occur. A loan is charged-off against the allowance by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur. Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require increase, such increase is
reported in the provision for loan losses. Smaller-balance homogeneous loans are
evaluated for impairment in total. Such loans include residential first mortgage
loans secured by one-to-four family residences, residential construction loans,
automobile, home equity and second mortgage loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition indicates
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Impaired
loans, or portions thereof, are charged off when deemed uncollectible.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Premises and related components are depreciated using
the straight-line method with useful lives ranging from 26 to 40 years.
Furniture and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to
expense and improvements are capitalized. The cost and accumulated depreciation
applicable to assets retired or otherwise disposed of are eliminated from the
accounts and the gain or loss on disposition is credited or charged to
operations.
Recognition of Gains or Losses on the Sale of Loans - Loans are sold on a
net yield basis, with servicing rights and obligations retained by the Bancorp,
resulting in the recognition of gains or losses at the time of sale. The Bancorp
uses the purchaser's normal servicing fee in computing these gains and losses.
The resulting premiums or discounts, if any, are amortized or accreted in income
over the estimated lives of these loans sold using the level yield method.
Loan Origination Fees - Loan fees are netted with certain direct loan
origination costs, and are deferred and amortized into interest income as yield
adjustments using the interest method over the term of the related loans.
Long-term Assets - These assets are reviewed for impairment when events
indicate their carrying amount may not be recovered from future undiscounted
cash flows. If impaired, the assets are recorded at discounted amounts.
Repurchase Agreements - Substantially all repurchase agreement liabilities
represent amounts advanced by various customers that are not covered by federal
deposit insurance and are secured by securities held-to-maturity owned by the
Bancorp.
Postretirement Benefits Other Than Pensions - The Bancorp sponsors a
defined benefit postretirement plan that provides comprehensive major medical
benefits to all eligible retirees. Postretirement benefits are accrued based on
the expected cost of providing postretirement benefits to employees during the
years the employees have rendered service to the Bancorp.
Income Taxes - The Bancorp records income tax expense based on the amount
of taxes due on its tax return, plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
Loss Contingencies - Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated.
Earnings per Share - Earnings per common share is based on weighted-average
common shares outstanding. Earnings per common share, assuming dilution
considers the issue of any potentially dilutive common shares. The accounting
standard for computing earnings per share was revised for 1997, and all earnings
per share previously reported are restated to follow the new standard. On each
of February 28, 1995 and December 2, 1996 , the Bancorp effected a two-for-one
common stock split as a share dividend. All references in the accompanying
financial statements to the number of shares and per share data have been
restated to reflect the stock splits.
Fair Value of Financial Instruments - Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassification - Certain amounts appearing in the consolidated financial
statements and notes thereto for the years ended December 31, 1996 and 1995,
have been reclassified to conform to the December 31, 1997 presentation.
NOTE 2 - Securities
The amortized cost and fair value of securities held-to-maturity are
summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ------- ------- -------
<S> <C> <C> <C> <C>
At December 31, 1997:
Debt securities:
U.S. government and
federal agencies ... $26,185 $ 131 $ (45) $26,271
Mortgage-backed
securities ......... 1,531 50 - 1,581
------- ------- ------- -------
Total debt securities 27,716 181 (45) 27,852
Other securities .... 1,646 - - 1,646
------- ------- ------- -------
Total ............. $29,362 $ 181 $ (45) $29,498
======= ======= ======= =======
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
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 .... $ 36,483 $ 92 $ (217) $ 36,358
Mortgage-backed
securities .......... 1,944 16 (6) 1,954
-------- -------- -------- --------
Total debt securities 38,427 108 (223) 38,312
Other securities ..... 1,597 -- -- 1,597
-------- -------- -------- --------
Total .............. $ 40,024 $ 108 $ (223) $ 39,909
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of debt securities held-to-maturity at
December 31, 1997, by contractual maturity, are shown on the following schedule.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less .......................... $ 8,491 $ 8,481
Due after one year through five years ............ 15,694 15,766
Due after five years through ten years ........... 2,000 2,024
Mortgage-backed securities ....................... 1,531 1,581
------- -------
Total ........................................... $27,716 $27,852
======= =======
</TABLE>
There were no sales of securities during the years ended December 31, 1997,
1996 and 1995. Securities with carrying values of $10,091,000 and $6,671,000
were pledged as of December 31, 1997 and 1996 as collateral for public funds,
repurchase agreements and for other purposes as permitted or required by law.
NOTE 3 - Loans Receivable
Loans are summarized below as of the dates indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
---------- ----------
<S> <C> <C>
Loans secured by real estate:
Construction and land development .............. $21,440 $13,248
Residential, including home equity ............. 156,651 151,343
Commercial real estate and other dwelling ...... 64,831 57,258
-------- --------
Total loans secured by real estate .......... 242,922 221,849
Consumer loans .................................. 5,661 4,890
Commercial business and other ................... 23,630 17,957
-------- --------
Loans receivable ............................ $272,213 $244,696
======== ========
</TABLE>
Activity in the allowance for loan losses is summarized below for the years
indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period ....... $ 2,887 $ 2,830 $ 2,751
Provision charged to income .......... 221 85 80
Loans charged off .................... (34) (28) (2)
Recoveries ........................... -- -- 1
------- ------- -------
Balance at end of period ............. $ 3,074 $ 2,887 $ 2,830
======= ======= =======
</TABLE>
At December 31, 1997 and 1996, no portion of the allowance for loan losses
was allocated to impaired loan balances as the Bancorp had no loans it
considered to be impaired loans as of or for the years ended December 31, 1997
and 1996.
NOTE 4 - Loan Servicing
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation
(FHLMC) are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans are summarized below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
<S> <C> <C>
Mortgage loan portfolios
serviced for FHLMC ........................ 7,976 $7,152
===== ======
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $125,000 and $128,000 at December 31, 1997 and
1996.
NOTE 5 - Premises and Equipment, Net Premises and equipment are summarized
below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
-------- --------
<S> <C> <C>
Cost:
Land ........................................ $ 1,663 $ 1,721
Buildings and improvements .................. 5,317 5,229
Furniture and equipment ..................... 3,470 3,104
-------- --------
Total cost ............................. 10,450 10,054
Less accumulated depreciation
and amortization ............................ (3,630) (2,968)
-------- --------
Premises and equipment, net ............ $ 6,820 $ 7,086
======== ========
</TABLE>
NOTE 6 - Income Taxes
Components of the income tax expenses consist of the following for the
years indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal:
Current ........................ $ 1,824 $ 1,071 $ 1,377
Deferred ....................... (71) 57 221
State:
Current ........................ 487 287 405
Deferred ....................... (17) 4 23
------- ------- -------
Income tax expenses .............. $ 2,223 $ 1,419 $ 2,026
======= ======= =======
</TABLE>
The differences between the income tax expenses shown on the statement of
income and amounts computed by applying the statutory federal income tax rate to
income before tax expenses consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate ................ 34% 34% 34%
Tax expense at statutory rate ......... $ 1,917 $ 1,227 $ 1,743
State tax, net of federal effect ...... 310 195 283
Other ................................. (4) (3) --
------- ------- -------
Total income tax expenses ............. $ 2,223 $ 1,419 $ 2,026
======= ======= =======
</TABLE>
25
<PAGE> 27
The components of the net deferred tax asset recorded in the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt ...................................... $ 363 $ 298
Deferred loan fees ............................ 169 174
Deferred compensation ......................... 463 430
Other ......................................... 73 76
------- -------
Total deferred tax assets .................... 1,068 978
Deferred tax liabilities:
Depreciation .................................. (249) (216)
Other ......................................... (25) (56)
------- -------
Total deferred tax liabilities ............... (274) (272)
Valuation allowance ............................ -- --
------- -------
Net deferred tax assets ...................... $ 794 $ 706
======= =======
</TABLE>
The Bancorp has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad debts in
excess of the provision for such losses charged to income in the financial
statements, if any. Accordingly, retained earnings at December 31, 1997 and 1996
includes approximately $5,982,000 for which no provision for federal income
taxes has been made. If, in the future, this portion of retained earnings is
used for any purpose other than to absorb bad debt losses, federal income taxes
would be imposed at the then applicable rates. The unrecorded deferred income
tax liability on the above amounts was approximately $2,034,000 at December 31,
1997. Tax legislation passed in August 1996 now requires the Bancorp to deduct a
provision for bad debts for tax purposes based on actual loss experience and to
recapture the excess bad debt reserve accumulated in tax years after 1986. The
related amount of deferred tax which must be recaptured is $855,000 and is
payable over a six year period beginning in 1998.
NOTE 7 - Deposits
The aggregate amount of certificates of deposit with a balance of $100,000
or more was $39,666,000 at December 31, 1997 and $26,100,000 at December 31,
1996.
At December 31, 1997, scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998........... $ 145,399
1999........... 15,810
2000........... 3,791
2001........... 855
------------
Total...... $ 165,855
============
</TABLE>
NOTE 8 - Borrowed Funds Borrowed funds is summarized below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
---------- ----------
<S> <C> <C>
Repurchase agreements .......................... $ 4,541 $ 3,993
Fixed rate advances from the FHLB .............. 4,000 7,000
Putable advances from the FHLB ................. 4,000 --
Other .......................................... 2,087 1,268
------- -------
Total ........................................ $14,628 $12,261
======= =======
</TABLE>
Repurchase agreements generally mature within one year and are secured by
FHLMC participation certificates or U.S. government securities, under the
Bancorp's control. Information concerning these retail repurchase agreements is
summarized below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
<S> <C> <C>
Ending balance ....................................... $4,541 $3,993
Average balance during the year ...................... 4,308 3,599
Maximum month-end balance during the year ............ 4,975 5,419
Securities underlying the agreements at year end:
Carrying value ...................................... 7,988 5,572
Fair value .......................................... 8,014 5,559
Average interest rate during the year ................ 5.43% 5.27%
</TABLE>
At December 31, 1997, the following Federal Home Loan Bank advances were
outstanding:
(DOLLARS IN THOUSANDS)
1997
--------
5.98% FHLB fixed advance, due October 12, 1999 $ 2,000
5.99% FHLB fixed advance, due October 28, 1999 2,000
5.71% FHLB putable advance, due December 16, 2002 2,000
5.35% FHLB putable advance, due December 30, 2002 2,000
--------
Total............................ $ 8,000
========
The putable advance which carries an interest rate of 5.71%, is fixed for
three years and may adjust quarterly to the three-month LIBOR two years
thereafter. The putable advance which carries an interest rate of 5.35%, is
fixed for one year and may adjust quarterly to the three-month LIBOR four years
thereafter. Once the advance interest rate adjusts, the Bancorp has the option
to prepay the putable advance on specified quarterly interest rate reset dates.
Pursuant to collateral agreements with the Federal Home Loan Bank, advances are
secured under a blanket lien arrangement by securities and mortgage loans with
carrying values of approximately $157,019,000 at December 31, 1997.
NOTE 9 - Employees' Benefit Plans
The Bancorp maintains a Profit Sharing Plan and Trust for all employees who
meet the plan qualifications. Employees are eligible to participate in the
Employees' Profit Sharing Plan and Trust if they are 21 years of age or older
and have completed one year of employment with more than 1,000 hours of service
to the Bancorp. The plan is noncontributory on the part of the employee.
Contributions to the Employees' Profit Sharing Plan and Trust are made at the
discretion of the Bancorp's Board of Directors. Contributions during the years
ended December 31, 1997, 1996 and 1995 were based on 9.0% of the participants'
total compensation excluding incentives. Participants in the plan become 100%
vested upon completion of five years of service. The benefit plan expense
amounted to $204,000, $185,000 and $203,000 for the years ended December 31,
1997, 1996 and 1995.
The Bancorp also maintains an Employee Stock Ownership Plan (ESOP).
Eligibility and vesting requirements for the ESOP are the same as those for the
Profit Sharing Plan and Trust. Contributions to the ESOP are made at the
discretion of the Bancorp's Board of Directors. Contributions during the year
ended December 31, 1997
26
<PAGE> 28
were based on 1.0% of the participants total compensation excluding incentives.
No contributions to the ESOP were made during the years ended December 31, 1996
and 1995. The ESOP held 1,094 shares of the Bancorp's common stock as of
December 31, 1997, all of which have been allocated to participants. The ESOP
expense amounted to $23,000, $0 and $0 for the years ended December 31, 1997,
1996 and 1995.
NOTE 10 - Defined Benefit Postretirement Plan
The Bancorp sponsors a defined benefit postretirement plan that provides
comprehensive major medical benefits to all eligible retirees. Eligible retirees
are those who have attained age 65, have completed at least 18 years of service
and are eligible for coverage under the employee group medical plan as of the
date of their retirement. Spouses of eligible retirees are covered if they were
covered as of the employee's date of retirement. Surviving spouses are covered
if they were covered at the time of the retiree's death. Dependent children of
eligible retirees are generally covered to the later of age 19 or until the
child ceases being a full-time student. Surviving dependent children are subject
to the same eligibility restrictions if they were covered at the time of the
retiree's death. The Bancorp pays 50% of any future premium increases for
retiree medical coverage. Retirees pay 100% of the premiums for all dependent
medical coverage.
The following table sets forth a reconciliation of the funded status of the
plan with the amount reported in the Bancorp's consolidated balance sheet:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
---------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligations (APBO):
Retirees................................................ $ 56 $ 58
Fully eligible active plan participants................. -- --
Other active plan participants.......................... 63 54
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets..................... 119 112
Unrecognized net gain................................... 64 70
---- ----
Net postretirement benefit liability.................... $183 $182
==== ====
</TABLE>
Net periodic postretirement benefit expense for the periods indicated
included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits attributed
to service during the period..................... $ 4 $ 4 $4
Interest cost on accumulated
postretirement benefit obligation................ 9 9 5
Amortization of unrecognized
net gain......................................... (6) (5) -
--- --- --
Net periodic postretirement
benefit expense.................................. $ 7 $ 8 $9
=== === ==
</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, 1997, dropping to an annual rate of 5.5% after 4 years. The
health care cost trend rate assumption has a significant effect on the amounts
reported. The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8%. A 1% increase in the health care cost
trend rate assumption would not have a material impact on the APBO or expense.
NOTE 11 - Regulatory Capital
The Bancorp and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements. The prompt corrective
action regulations provide five classifications, including well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition.
At year end, capital levels (in millions) for the Bancorp and the Bank
were substantially the same. Actual capital levels, minimum required levels
and levels needed to be classified as well capitalized for the Bancorp are
summarized below:
<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
-------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital
(to risk-weighted assets) $ 32.2 15.0% $ 17.1 8.0% $ 21.4 10.0%
Tier I capital (to
risk-weighted assets) .... $ 29.5 13.8% $ 8.6 4.0% $ 12.8 6 .0
Tier I capital (to
adjusted assets) ......... $ 29.5 9.2% $ 9.6 3.0% $ 16.0 5.0%
1996
Total capital
(to risk-weighted assets) $ 30.2 16.0% $ 15.1 8.0% $ 18.9 10.0%
Tier I capital
(to risk-weighted assets) $ 27.8 14.7% $ 7.6 4.0% $ 11.3 6.0%
Tier I capital
(to adjusted assets) $27.8 9.3% $ 9.0 3.0% $15.0 5.0%
</TABLE>
The Bancorp and the Bank were categorized as well capitalized at December 31,
1997 and 1996. There are no conditions or events since December 31, 1997 that
management believes have changed the Bancorp's or Bank's category.
The Bancorp's ability to pay dividends is entirely dependent upon the
Bank's ability to pay dividends to the Bancorp. Under Indiana law, the Bank may
pay dividends, no more often than quarterly, to the extent of its undivided
profits (generally, earnings less losses, bad debts, taxes and other operating
expenses). However, the Indiana Department of Financial Institutions approval is
required to pay dividends in any year in excess of the Bank's net profits for
the current year and retained net profits for the prior two years (approximately
$3,842,000 at December 31, 1997).
27
<PAGE> 29
Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of
dividends if it determines that the payment of dividends would constitute an
unsafe or unsound practice in the light of the financial condition of the Bank.
NOTE 12 - Stock Option Plan
The Board of Directors has adopted the 1994 Stock Option and Incentive Plan
(the "Incentive Plan"), which was approved by shareholders at the 1994 annual
meeting. Pursuant to the Incentive Plan, an aggregate of 120,000 shares of the
Bancorp's common stock were reserved for issuance in respect of incentive awards
granted to officers and other employees of the Bancorp and the Bank. Awards
granted under the Incentive Plan may be in the form of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code, or non-incentive
stock options or restricted stock. The purposes of the Plan are to attract and
retain the best available personnel, to provide additional incentives for all
employees and to encourage their continued employment by facilitating employees'
purchases of an equity interest in the Bancorp. Effective upon the July 31, 1994
holding company formation, all options then outstanding under the Bank's prior
stock option plan became options to purchase an equal number of shares of the
Bancorp's common stock under the Incentive Plan, on the same terms.
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the fair value method been used to measure compensation cost
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Net income as reported .................. $ 3,416 $ 2,189 $ 3,101
Pro forma net income .................... 3,405 2,182 3,096
Earnings per common share
as reported ......................... $ 2.47 $ 1.59 $ 2.25
Pro forma earnings
per common share .................... $ 2.47 $ 1.58 $ 2.25
Earnings per common share,
assuming dilution as reported ....... $ 2.45 $ 1.58 $ 2.24
Pro forma earnings per common
share, assuming dilution ............ $ 2.44 $ 1.57 $ 2.23
</TABLE>
The fair value of options granted during 1997, 1996 and 1995 is estimated
using the following weighted-average information: risk-free interest rate of
6.50%, 5.42% and 7.75%, expected life of 7 to 8 years, expected volatility of
stock price of 5.62% for 1997 and 5.45% for 1996 and 1995, and expected
dividends of 4.00%, 4.26% and 5.18% for 1997, 1996 and 1995. In future years,
the pro forma effect of not applying this standard is expected to increase as
additional options are granted.
Options granted prior to 1995 were immediately exerciseable. Options
granted since 1995 generally are exerciseable upon completion of five years of
service after the date of grant. Information about option grants is provided in
the following schedule:
<TABLE>
<CAPTION>
Weighted- Weighted-average
Number average fair value
of options exercise price of grants
------- ----------- ------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1995 9,224 $ 10.29 $
Granted................. 14,500 21.25 2.53
Exercised............... 1,352 10.30
Forfeited............... - -
Expired................. - -
-------
Outstanding, December 31, 1995 22,372 17.39
Granted................. 3,400 27.00 2.06
Exercised............... 158 12.88
Forfeited............... - -
Expired................. - -
-------
Outstanding, December 31, 1996 25,614 18.70
Granted................. 8,050 32.00 4.23
Exercised............... 1,877 9.85
Forfeited............... 50 32.00
Expired................. - -
-------
Outstanding, December 31, 1997 31,737 22.57
=======
</TABLE>
Options exerciseable at year-end are as follows:
Number Weighted-average
of options exercise price
------------- -----------------
1995 7,912 $10.35
1996 7,794 $10.35
1997 5,957 $10.58
At December 31, 1997, options outstanding were as follows:
Number of options 31,737
Range of exercise price $9.31 - $32.00
Weighted-average exercise price $22.57
Weighted-average remaining option life 5.1 years
NOTE 13 - Earnings Per Share
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations for
the years ended December 31, 1997, 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Earnings Per Common Share:
Net income available to
common stockholders ............... $3,416,000 $2,189,000 $3,101,000
========== ========== ==========
Weighted average common
shares outstanding ................ 1,381,151 1,379,519 1,378,808
========== ========== ==========
Earnings Per Common Share ....... $ 2.47 $ 1.59 $ 2.25
========== ========== ==========
Earnings Per Common Share,
Assuming Dilution:
Net income available to
common stockholders ............... $3,416,000 $2,189,000 $3,101,000
========== ========== ==========
Weighted average common
shares outstanding......1,381,151 . 1,379,519 1,378,808
Add: dilutive effect of assumed
stock option exercises ............. 14,633 9,728 7,000
---------- ---------- ----------
Weighted average common and
dilutive potential shares
outstanding........................ 1,395,784 1,389,247 1,385,808
========== ========== ==========
Earnings Per Common Share,
assuming dilution ............ $ 2.45 $ 1.58 $ 2.24
========== ========== ==========
</TABLE>
28
<PAGE> 30
NOTE 14 - Related Party Transactions
The Bank had aggregate loans outstanding to directors and executive
officers (with individual balances exceeding $60,000) of $3,138,000 at December
31, 1997 and $1,763,000 at December 31, 1996. For the year ended December 31,
1997, the following activity occurred on these loans:
(Dollars in thousands)
Aggregate balance - December 31, 1996.. $ 1,763
New loans ............................. 2,034
Repayments ............................ (659)
-----------
Aggregate balance - December 31, 1997.. $ 3,138
===========
NOTE 15 - Commitments and Contingencies
The Bancorp is a party to financial instruments in the normal course of
business to meet financing needs of its customers. These financial instruments
which include commitments to make loans and standby letters of credit are not
reflected in the accompanying consolidated financial statements.
The Bancorp's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to originate loans
and standby letters of credit is represented by the contractual amount of those
instruments. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. The Bancorp uses the
same credit policy to make such commitments as it uses for on-balance-sheet
items. Since commitments to make loans may expire without being used, the amount
does not necessarily represent future cash commitments.
The Bancorp had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Fixed Variable
Rate Rate Total
--------- ---------- ---------
<S> <C> <C> <C>
December 31, 1997:
Real estate............ $ 6,457 $ 16,848 $ 23,305
Consumer loans......... - 229 229
Commercial business.... - 18,120 18,120
--------- ---------- ---------
Total................. $ 6,457 $ 35,197 $ 41,654
========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Fixed Variable
Rate Rate Total
--------- ---------- ---------
<S> <C> <C> <C>
December 31, 1996:
Real estate............ $ 6,346 $ 12,606 $ 18,952
Consumer loans......... - 281 281
Commercial business.... - 14,879 14,879
--------- ---------- ---------
Total................. $ 6,346 $ 27,766 $ 34,112
========= ========== =========
</TABLE>
The $6,457,000 in fixed rate commitments outstanding at December 31, 1997
had interest rates ranging from 7.00% to 9.50%, for a period not to exceed
forty-five days.
Standby letters of credit are conditional commitments issued by the Bancorp
to guarantee the performance of a customer to a third party. At December 31,
1997 and 1996, the Bancorp had standby letters of credit totaling $501,000 and
$519,000. The Bancorp evaluates each customer's creditworthiness on a case by
case basis. The amount of collateral obtained, if deemed necessary by the
Bancorp upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral obtained may include accounts receivable, inventory,
property, land or other assets.
The Bancorp is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operations of the Bancorp.
NOTE 16 - Fair Values of Financial Instruments
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments"
prescribes that the Bancorp disclose the estimated fair value of its financial
instruments. The following table shows those values and the related carrying
values as of the dates indicated. Items which are not financial instruments are
not included.
(Dollars in thousands)
December 31, 1997
----------------------------
Carrying Estimated
Value Fair Value
------------- --------------
Cash and cash equivalents $ 10,653 $ 10,653
Securities held-to-maturity 29,362 29,498
Loans receivable, net.... 269,139 268,886
Demand and savings deposits (106,235) (106,235)
Certificates of deposit.. (165,855) (166,043)
Borrowed funds........... (14,628) (14,628)
(Dollars in thousands)
December 31, 1996
----------------------------
Carrying Estimated
Value Fair Value
------------- --------------
Cash and cash equivalents $ 6,509 $ 6,509
Securities held-to-maturity 40,024 39,909
Loans receivable, net.... 241,809 241,702
Demand and savings deposits (102,798) (102,798)
Certificates of deposit.. (153,622) (153,787)
Borrowed funds........... (12,261) (12,261)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1997 and 1996. The estimated
fair value for cash and cash equivalents is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or equivalent securities. The estimated fair value for
loans is based on estimates of the rate the Bancorp would charge for similar
such loans at December 31, 1997 and 1996, applied for the time period until
estimated repayment. The estimated fair value for demand and savings deposits is
based on their carrying value. The estimated fair value for certificates of
deposits is based on estimates of the rate the Bancorp would pay on such
deposits at December 31, 1997 and 1996, applied for the time period until
maturity. The estimated fair value for borrowed funds is considered to
approximate cost. The estimated fair value of other financial instruments,
including accrued interest receivable and payable, and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Bancorp to
have disposed of such items at December 31, 1997 and 1996, the estimated fair
values would necessarily have been achieved at that date,
29
<PAGE> 31
since market values may differ depending on various circumstances. The estimated
fair values at December 31, 1997 and 1996 should not necessarily be considered
to apply at subsequent dates.
In addition, other assets and liabilities of the Bancorp that are not
defined as financial instruments are not included in the above disclosures, such
as premises and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These included, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of the Bank's trust department,
the trained work force, customer goodwill and similar items.
NOTE 17 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are summarized below as follows:
Year ended December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Total interest income $ 5,669 $ 5,854 $ 5,978 $ 6,168
Total interest expense 2,790 2,898 2,963 3,070
--------- ------- -------- -------
Net interest income 2,879 2,956 3,015 3,098
Provision for loan losses 49 32 55 85
--------- ------- -------- -------
Net interest income after
provision for loan losses 2,830 2,924 2,960 3,013
Total noninterest income 340 216 246 264
Total noninterest expense 1,772 1,746 1,807 1,829
--------- ------- -------- -------
Income before
income taxes...... 1,398 1,394 1,399 1,448
Income tax expenses 559 550 559 555
--------- ------- -------- -------
Net income......... $ 839 $ 844 $ 840 $ 893
========= ======= ======== =======
Earnings per share. $ 0.61 $ 0.61 $ 0.61 $ 0.64
========= ======= ======== =======
Earnings per share,
assuming dilution. $ 0.60 $ 0.61 $ 0 .60 $ 0.64
========= ======= ======== =======
</TABLE>
Year ended December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income ............. $ 5,447 $ 5,532 $5,633 $ 5,725
Total interest expense ............ 2,809 2,777 2,817 2,884
------- ------- ------ -------
Net interest income ............... 2,638 2,755 2,816 2,841
Provision for loan losses ......... 15 18 23 29
------- ------- ------ -------
Net interest income after
provision for loan losses ........ 2,623 2,737 2,793 2,812
Total noninterest income .......... 178 165 167 172
Total noninterest expense ......... 1,629 1,632 3,200 1,578
------- ------- ------ -------
Income before
income taxes ..................... 1,172 1,270 (240) 1,406
Income tax expenses ............... 467 507 (92) 537
------- ------- ------ -------
Net income ........................ $ 705 $ 763 $ (148) $ 869
------- ------- ------ -------
Earnings per share ................ $ 0.51 $ 0.56 $ (0.11) $ 0.63
------- ------- ------ -------
Earnings per share,
assuming dilution ................ $ 0.51 $ 0.56 $ 0.12) $ 0.63
------- ------- ------ -------
</TABLE>
The net income for the quarter ended September 30, 1996, reflects the
one-time special assessment required by the Deposit Insurance Funds Act of 1996
on SAIF-assessable deposits to capitalize SAIF. The SAIF assessment resulted in
a pre-tax expense of $1.6 million during the third quarter.
NOTE 18 - Parent Company Only Statements
<TABLE>
<CAPTION>
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Balance Sheet
December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash on deposit with Peoples Bank .................. $ 13 $ 53
Investment in Peoples Bank ......................... 29,475 27,783
Dividends receivable from Peoples Bank ............. 455 445
Other assets ....................................... 5 4
------- -------
Total assets ...................................... $29,948 $28,285
======= =======
Liabilities and stockholders' equity
Dividends payable .................................. $ 442 $ 441
Other liabilities .................................. 24 29
------- -------
Total liabilities ................................. 466 470
Common stock ....................................... 345 345
Additional paid in capital ......................... 2,948 2,930
Retained earnings .................................. 26,189 24,540
------- -------
Total stockholders' equity ........................ 29,482 27,815
------- -------
Total liabilities and stockholders' equity ........ $ 29,948 $ 28,285
======= =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Statements of Income
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating income
Dividends from
Peoples Bank ..................... $ 1,770 $ 1,625 $ 1,552
Operating expenses ................ 76 59 109
------- ------- -------
Income before income taxes
and equity in undistributed
income of Peoples Bank ........... 1,694 1,566 1,443
Provision for income taxes ........ (30) (23) (44)
------- ------- -------
Income before equity
in undistributed
income of Peoples Bank ........... 1,724 1,589 1,487
Equity in undistributed
income of Peoples Bank ........... 1,692 600 1,614
------- ------- -------
Net Income ........................ $ 3,416 $ 2,189 $ 3,101
======= ======= =======
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
(Dollars in thousands)
NorthWest Indiana Bancorp
Condensed Statements of Cash Flows
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating
activities
Net income ........................... $ 3,416 $ 2,189 $ 3,101
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
net income of
Peoples Bank ..................... (1,692) (600) (1,614)
Change in other assets ............. (11) (54) 4
Change in other liabilities ........ (4) (7) 35
------- ------- -------
Total adjustments ................. (1,707) (661) (1,575)
------- ------- -------
Net cash from
operating activities .......... 1,709 1,528 1,526
Cash flows from
investing activities ................ -- -- --
Cash flows from
financing activities
Dividends paid ...................... (1,767) (1,517) (1,517)
Proceeds from issuance
of capital stock .................. 18 1 15
------- ------- -------
Net cash from
financing activities ............. (1,749) (1,516) (1,502)
------- ------- -------
Net change in cash ................... (40) 12 24
Cash at beginning of year ............ 53 41 17
------- ------- -------
Cash at end of year .................. $ 13 $ 53 $ 41
======= ======= =======
</TABLE>
NOTE 19 - Current Accounting Issues
Statement of Financial Accounting Standard (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
was issued by the Financial Accounting Standards Board in 1997. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It is effective for
some transactions in 1997 and others in 1998. Management does not believe the
Standard will have a significant impact on the financial statements.
The Financial Accounting Standards Board (FASB) issued SFAS 130, Reporting
Comprehensive Income, which is effective for fiscal years and interim periods
beginning after December 15, 1997. The Statement provides standards for
reporting and display of comprehensive income and its components. Comprehensive
income is defined as all changes in equity other than those resulting from
investments by owners or distributions by owners. Net income is, therefore, a
component of comprehensive income. The most common items of other comprehensive
income include unrealized gains or losses on securities available for sale,
gains and losses on certain foreign currency transactions, and minimum pension
liability adjustments. The Statement does not mandate a specific format for
reporting comprehensive income. Companies will generally choose between adding
the items of other comprehensive income to the income statement, adding them to
the statement of changes in shareholders' equity or displaying a new financial
statement, the Statement of Comprehensive Income. Adoption of this Statement
will have no impact on net income.
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS 131 provides new guidance for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. SFAS 131 supersedes the industry approach to segment disclosures
previously required by SFAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing it with a method of segment reporting which is based on
the structure of an enterprise's internal organization reporting. The Statement
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for financial
statement periods beginning after December 15, 1997. Management does not
anticipate that this statement will have a significant impact on reporting in
future periods.
31
<PAGE> 33
Market Information
The Bancorp's Common Stock is traded in the over-the-counter market and is
quoted in the National Quotation Bureau's "Pink Sheets". The Bancorp's stock is
not actively traded. As of February 28, 1998, the Bancorp had 1,381,512 shares
of common stock outstanding, excluding fractional shares, and 592 stockholders
of record. This does not reflect the number of persons or entities who may hold
their stock in nominee or "street" name through brokerage firms. Set forth below
are the high and low bid prices during each quarter for the fiscal years ended
December 31, 1997 and December 31, 1996. The bid prices reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Also set forth is information concerning the
dividends declared by the Bancorp during the periods reported. Note 11 to the
Financial Statements describes regulatory limits on the Bancorp's ability to pay
dividends. All references to the number of shares and per share data have been
restated to reflect the stock splits (see Note 1).
<TABLE>
<CAPTION>
Per Share Prices Dividends
Declared Per
High Low Common Share
--------- -------- -----------
Fiscal Year Ended
<S> <C> <C> <C>
December 31, 1997 1st Quarter $ 36.00 $ 30.00 $ .320
- ------------------------------------------------------------------------
2nd Quarter 37.00 36.00 .320
- ------------------------------------------------------------------------
3rd Quarter 41.88 36.50 .320
- ------------------------------------------------------------------------
4th Quarter 42.50 40.00 .320
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Fiscal Year Ended
December 31, 1996 1st Quarter $ 30.00 $ 25.50 $ .275
- ------------------------------------------------------------------------
2nd Quarter 31.13 30.00 .275
- ------------------------------------------------------------------------
3rd Quarter 31.13 30.00 .275
- ------------------------------------------------------------------------
4th Quarter 31.13 31.13 .320
- ------------------------------------------------------------------------
</TABLE>
===============================================================================
[THREE COMBINED GRAPHICS]
1993* 1994 1995 1996 1997
Market Price Per share (1) $15.88 $21.25 $27.00 $31.13 $42.13
Book Value Per Share (2) $17.37 $18.58 $19.72 $20.16 $21.34
Earnings Per Common Share (3) $ 1.33 $ 2.35 $ 2.25 $ 1.59 $ 2.47
(1) The market price per share represents the last sales price prior to the
close of the periods indicated. The Bancorp's stock is not actively traded.
At the present time the Bancorp's stock is traded in the over-the-counter
market and is quoted in the National Quotation Bureau's "Pink Sheets".
(2) The Bank's earnings have increased the book value of the Bancorp's stock
from $17.37 at December 31,1993 to $21.34 per share at December 31, 1997.
(3) Earnings for 1997 totaled $3.4 million resulting in an earnings per share
(EPS) of $2.47.
*Six month period due to change in fiscal year end.
===============================================================================
[GRAPHIC OMITTED]
5 YEAR TOTAL RETURN
CRSP Market Index $240
CRSP Bank Index $377
Bancorp $367
===============================================================================
The management of Northwest Indiana Bancorp is committed to maximizing
shareholder value. The Bancorp's stock performance on a total return basis
compares favorably with the total returns of the CRSP (Center for Research in
Securities Prices at the University of Chicago) Index for the Nasdaq Stock
Market (CRSP Market Index) and for Nasdaq Bank Stocks (CRSP Bank Index). The
total return is measured using both stock price appreciation and the effect of
the continuous reinvestment of dividend payments. The graph shows that an
initial $100 investment in the Bancorp stock on December 31, 1992, would be
worth $367 on December 31, 1997.
===============================================================================
32
<PAGE> 34
1997
Annual
Report
Leadership
Group
Board of Directors
Corporate Information
Meeting the
Challenge
of Community Banking
"Customers... want to do business with people they know, trust, and who are
empowered to make decisions at the local level."
NORTHWEST INDIANA
===================
BANCORP
<PAGE> 35
Leadership
Group
[PHOTO OF LEADERSHIP TEAM]
Standing left to right: Robert T. Lowry, Vice President, Controller, David W.
Homrich, Assistant Vice President, Munster Branch Manager, Mary D. Mulroe,
Assistant Vice President, Manager of Loan Administration, Joel Gorelick, Vice
President, Chief Lending Officer, Terry R. Gadberry, Assistant Vice President,
Commercial Loan Officer, Rodney L. Grove, Vice President Retail Banking, David
A. Bochnowski, Chairman and Chief Executive Officer, Daniel W. Moser, Vice
President for Housing Finance, Frank J. Bochnowski, Senior Vice President,
General Counsel, Trust Officer and Corporate Secretary, Edward J. Furticella,
Vice President, Chief Financial Officer, Marilyn K. Repp, Assistant Vice
President, Merrillville/Taft Branch Manager, Jill M. Knight, Assistant Vice
President, Merrillville/Broadway Branch Manager, Robert J. Soohey, Assistant
Vice President, Manager of Housing Finance, and Stephan A. Ziemba, Assistant
Vice President, Trust Officer
Seated left to right: Barbara J. Zura, Assistant Vice President, Woodmar Branch
Manager, Arlene M. Wohadlo, Assistant Vice President, Manager of Accounting, and
Linda L. Kollada, Assistant Vice President, Human Resource Manager.
34
<PAGE> 36
BOARD OF DIRECTORS
The Board of Directors brings 211 years of combined
community banking experience to our shareholders.
<TABLE>
<S> <C> <C>
photo of
chairman of the photo of photo of
board board member chairman emeritus
DAVID A. BOCHNOWSKI - 21 Years LEROY F. CATALDI - 21 Years BENJAMIN A. BOCHNOWSKI
Chairman and Chief Executive Officer Manager of Cataldi Prescription Shop, Chairman Emeritus, Advisory Director
Dyer, Indiana 45 years Community Banking Experience
photo of photo of photo of
board member board member director emeritus
GLORIA GRAY - 15 Years LOURDES M. DENNISON - 14 Years HAROLD G. REUTH
Retired Vice President and Treasurer Administrative Director, Dennison Director Emeritus
of Career Development Consultants, Surgical Corp. 30 Years Community Banking Experience
Munster, Indiana Merrillville, Indiana
photo of photo of
board member board member
JOHN J. WADAS, JR. - 13 Years JEROME F. VRABEL - 13 Years
Dentist practicing in Munster Vice President, ED&F Man
and East Chicago, Indiana International Inc.
Chicago, Illinois
photo of photo of
board member board member
JAMES J. CRANDALL - 40 Years STANLEY E. MIZE - 1 Year
Retired Attorney President of Towne &
Countree Auto Sales and
Co-owner of Lake Shore Ford
</TABLE>
35
<PAGE> 37
Corporate Information
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS PEOPLES BANK SB OFFICERS PEOPLES BANK SB
9204 COLUMBIA AVENUE David A. Bochnowski MANAGEMENT PERSONNEL
MUNSTER, INDIANA 46321 Chairman and Chief Executive Officer* Accounting
Joel Gorelick Arlene M. Wohadlo,
TELEPHONE Vice President, Chief Lending Officer* Assistant Vice President
219/836-9690 Edward J. Furticella
Vice President, Chief Financial Officer* Branches
Frank J. Bochnowski Shannon E. Franko, Schererville
Senior Vice President, General Counsel, Catherine L. Gonzalez, East Chicago
Trust Officer and Corporate Secretary* Christopher A. Grencik, Dyer
Daniel W. Moser David W. Homrich,
Vice President for Housing Finance Assistant Vice President, Munster
Rodney L. Grove Jill M. Knight, Assistant Vice President,
Vice President, Retail Banking Merrillville (Broadway)
Robert T. Lowry Marilyn K. Repp, Assistant Vice President,
Vice President, Controller Merrillville (Taft Street)
*Holds similar office with NorthWest Indiana Barbara J. Zura, Assistant Vice President,
Bancorp Woodmar
DIRECTORS OF NORTHWEST INDIANA BANCORP Commercial Lending
AND PEOPLES BANK SB Terry R. Gadberry, Assistant Vice President
David A. Bochnowski Todd M. Scheub
Chairman and Chief Executive
STOCK TRANSFER AGENT Officer of the Bancorp Consumer Lending
The Bank acts as the Munster, Indiana James P. Lehr
transfer agent for the Clovese R. Robinson
Bancorp's common stock. Leroy R. Cataldi Sharon V. Vacendak
Manager of Cataldi Prescription Shop,
INDEPENDENT AUDITORS Dyer, Indiana Housing Finance
Crowe, Chizek and Robert J. Soohey, Assistant Vice President
Company LLP Gloria C. Gray Sylvia Magallanez
330 East Jefferson Boulevard Retired Vice President and Treasurer Marvin O. Tucker
P.O. Box 7 of Career Development Consultants,
South Bend, Indiana 46624 Munster, Indiana Human Resource
Linda L. Kollada, Assistant Vice President
SPECIAL LEGAL COUNSEL Lourdes M. Dennison
Baker & Daniels Administrative Director,
300 North Meridian Street Kumpol Dennison Surgical Corporation, Information Services
Suite 2700 Merrillville, Indiana Tanya A. Mathews
Indianapolis, Indiana 46204
John J. Wadas, Jr. Loan Administration
ANNUAL SHAREHOLDERS MEETING Dentist practicing in Munster and Mary D. Mulroe, Assistant Vice President
The Annual Meeting of East Chicago, Indiana
Shareholders of NorthWest Management Development
Indiana Bancorp will be held Jerome F. Vrabel Meredith L. Rolewski
at the Wicker Park Social Vice President, ED&F Man Michael J. Shimala
Center, Rts. 41 & 6, Highland, International Inc., Chicago, Illinois,
Indiana, on Wednesday, April a commodities brokerage firm on the Staff Internal Auditor
22, 1998 at 8:30 a.m. Chicago Board of Trade Stacy A. Januszewski
James J. Crandall Trust
Retired Attorney Stephan A. Ziemba, Assistant
A copy of the Bancorp's Form Vice President
10-K, including financial Stanley E. Mize
statement schedules as filed President of Towne & Countree Auto
with the Securities and Sales and Co-owner of Lake Shore Ford
Exchange Commission, will be
furnished without charge to Chairman Emeritus, Advisory Director
shareholders as of the Benjamin A. Bochnowski
record date upon written
request to the Corporate Directors Emeriti
Secretary, NorthWest Harold G. Rueth
Indiana Bancorp, 9204 Albert J. Lesniak
Columbia Avenue, Munster
Indiana 46321.
</TABLE>
36
<PAGE> 38
NorthWest Indiana
_________________
BANCORP
CORPORATE HEADQUARTERS,
9204 Columbia Avenue
Munster, Indiana 46321
219/836-9690
Peoples Bank
SINCE 1910
EAST CHICAGO, 4901 Indianapolis Blvd., 397-5010
HAMMOND, 7120 Indianapolis Blvd., 844-7210
DYER, 1300 Sheffield Avenue, 322-2530
MUNSTER, 9204 Columbia Avenue, 836-9690
SCHERERVILLE, 141 W. Lincoln Highway, 865-4300
MERRILLVILLE, 7915 Taft Street, 769-8452
8600 Broadway, 685-8600
FDIC Insured
<PAGE> 1
EXHIBIT 21
Subsidiary of the Bancorp
State of Incorporation
----------------------
Peoples Bank SB* Indiana
* Peoples Bank SB is wholly-owned by the Bancorp and the operations of the Bank
are included in the Consolidated Financial Statements.
41
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,083
<INT-BEARING-DEPOSITS> 3,570
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 29,362
<INVESTMENTS-MARKET> 29,498
<LOANS> 272,213
<ALLOWANCE> 3,074
<TOTAL-ASSETS> 319,609
<DEPOSITS> 272,090
<SHORT-TERM> 14,628
<LIABILITIES-OTHER> 3,409
<LONG-TERM> 0
0
0
<COMMON> 345
<OTHER-SE> 29,137
<TOTAL-LIABILITIES-AND-EQUITY> 319,609
<INTEREST-LOAN> 21,370
<INTEREST-INVEST> 2,155
<INTEREST-OTHER> 144
<INTEREST-TOTAL> 23,669
<INTEREST-DEPOSIT> 11,307
<INTEREST-EXPENSE> 11,721
<INTEREST-INCOME-NET> 11,948
<LOAN-LOSSES> 221
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,154
<INCOME-PRETAX> 5,639
<INCOME-PRE-EXTRAORDINARY> 5,639
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,416
<EPS-PRIMARY> 2.47
<EPS-DILUTED> 2.45
<YIELD-ACTUAL> 4.12
<LOANS-NON> 966
<LOANS-PAST> 226
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,887
<CHARGE-OFFS> 34
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,074
<ALLOWANCE-DOMESTIC> 2,305
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 769
</TABLE>
