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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, 1998
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 Identification No.)
incorporation or organization)
9204 COLUMBIA AVENUE 46321
MUNSTER, INDIANA (Zip Code)
(Address of principal executive offices)
(219) 836-9690
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the average bid and ask prices for the registrant's Common Stock at
February 28, 1999, 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 $41,109,054.
There were 2,763,156 shares of the registrant's Common Stock, without par value,
outstanding at February 28, 1999 (as adjusted to reflect a two-for-one stock
split effected as a share dividend to shareholders of record as of that date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
1. 1998 Annual Report to Shareholders. (Parts II and IV)
2. Definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders. (Part III)
<PAGE> 2
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
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resulting from changes in the local economy. A dramatic drop in local real
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 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 within a one
year time period. Further discussion of interest rate risk can be found under
the caption "Asset/Liability Management and Market Risk" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
of the Bancorp's 1998 Annual Report to Shareholders.
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. The Bancorp's product offerings include residential mortgage
loans, construction loans, commercial real estate loans, consumer loans and
commercial business loans. Over the years, the Bancorp 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 Bancorp 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, on a case-by-case basis, in
the secondary market as part of the Bancorp's efforts to manage interest rate
risk. 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
Bancorp. 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 unimpaired capital and unimpaired surplus
(plus up to an additional 10% of unimpaired 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, 1998, under the 15% of capital and surplus limitation was
approximately $5,167,000. At December 31, 1998, the Bank had no loans that
exceeded the regulatory limitations.
At December 31, 1998, there were no concentrations of loans in any type
of industry that 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 Bancorp'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>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Type of loan:
Conventional real estate loans:
Construction and
development loans $ 19,211 $ 21,440 $ 13,248 $ 8,913 $ 8,451
Loans on existing
properties (1) 220,755 221,482 208,601 194,779 196,468
Consumer loans 10,187 5,661 4,890 3,527 3,172
Commercial business, other(2) 23,280 23,630 17,957 15,074 13,839
-------- -------- -------- -------- --------
Loans receivable(3) $273,433 $272,213 $244,696 $222,293 $221,930
======== ======== ======== ======== ========
Type of collateral:
Real estate:
1-to-4 family $172,949 $178,091 $164,590 $152,485 $152,208
Other dwelling units, land
and commercial real estate 67,018 64,831 57,259 51,207 52,711
Consumer loans 9,887 5,410 4,619 3,335 2,960
Commercial business, other(2) 21,433 21,712 16,306 13,893 13,288
-------- -------- -------- -------- --------
Loans receivable (4) $271,287 $270,044 $242,774 $220,920 $221,167
======== ======== ======== ======== ========
Average loans outstanding
during the period (3) $271,406 $254,219 $232,465 $221,352 $213,349
======== ======== ======== ======== ========
<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, purchase and sale activity for each of the last three
years.
The amounts are in thousands (000's).
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction and development loans $ 9,683 $ 13,168 $ 16,244
Loans on existing property 29,448 23,461 26,811
Loans refinanced 10,961 14,824 10,253
-------- -------- --------
Total conventional real estate
loans originated 50,092 51,453 53,308
Commercial business loans 59,646 60,944 53,580
Consumer loans 6,519 4,591 7,290
-------- -------- --------
Total loans originated $116,257 $116,988 $114,178
======== ======== ========
Loan participations purchased $ 5,238 $ 3,240 $ --
======== ======== ========
Whole loans and participations sold $ 3,785 $ 1,820 $ 2,011
======== ======== ========
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1998, regarding the dollar amount of loans in the
Bancorp'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 Bancorp 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 $ 39,110 $ 57,587 $143,270 $239,967
Consumer loans 6,986 2,997 204 10,187
Commercial business loans 13,879 7,620 1,780 23,279
-------- -------- -------- --------
Total loans receivable $ 59,975 $ 68,204 $145,254 $273,433
======== ======== ======== ========
</TABLE>
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The table below sets forth the dollar amount of all loans due after one
year from December 31, 1998, which have predetermined interest rates or have
floating or adjustable interest rates. The amounts are stated in thousands
(000's).
<TABLE>
<CAPTION>
Floating or
Predetermined adjustable
rates rates Total
------------- ----------- --------
<S> <C> <C> <C>
Real estate loans $ 92,868 $107,990 $200,858
Consumer loans 3,192 8 3,200
Commercial business loans 5,015 4,385 9,400
-------- -------- --------
Total $101,075 $112,383 $213,458
======== ======== ========
</TABLE>
LENDING AREA. The primary lending area of the Bancorp encompasses all
of Lake County in northwest Indiana, where a majority of loan activity is
concentrated. The Bancorp 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, 1998, the housing vacancy rate in the Bancorp's
primary lending area was below 5%.
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 commercial customers, real estate brokers and builders,
solicitations by the Bancorp's lending staff, and advertising of loan programs
and rates. The Bancorp employs no staff appraisers. All appraisals are performed
by fee appraisers that have been approved by the Board of Directors and who meet
all federal guidelines and state licensing and certification requirements.
Designated officers have authorities, established by the 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. (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 Board of Directors. Loans to
directors and principal shareholders must be approved by a disinterested
majority of the Board of Directors when the extension of credit exceeds $50,000
or, when the aggregated amount of all extensions of credit exceeds $500,000.
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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 Bancorp
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 Bancorp'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 97% of value. During
1998, 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.
Fixed-rate loans currently being originated, generally 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 15 year mortgage loan program has gained wide acceptance in the
Bancorp'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.
The Bancorp has offered Adjustable Rate Mortgage Loans ("ARMs") since
1984. The "Mini-Fixed ARM" has been very popular with Bancorp customers. The
"Mini-Fixed" mortgage reprices annually after a three, five or seven year
period. ARM originations totaled $16.9 million for 1998, $23.6 million for 1997,
and $26.1 million during 1996. During 1998, ARMs represented 34% of total
mortgage loan originations. The ability of the Bancorp 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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CONSTRUCTION LOANS. Construction loans on residential properties are
made primarily to individuals and contractors who are under contract with
individual purchasers. 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 end-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 with an amortizing term exceeding twenty years
normally 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 Bancorp 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 Bancorp
has endeavored to reduce this risk in several ways. In originating commercial
real estate loans, the Bancorp 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 Bancorp's primary lending area generally involve borrowers and
guarantors who are or were previous customers of the Bancorp.
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CONSUMER LOANS. The Bancorp 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 Bancorp purchases indirect dealer paper from various
well established businesses in its immediate banking area.
HOME EQUITY LINE OF CREDIT. The Bancorp 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 Bancorp'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 Bancorp seeks commercial loan relationships from the local
business community and from its present customers. Conservative lending policies
based upon sound credit analysis governs the extension of commercial credit. The
following loans, although not inclusive, are considered preferable for the
Bancorp'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.
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
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reserve, or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
The Bancorp'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
Bancorp 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 Bancorp 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 Bancorp. 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. At foreclosure, any write-down of
the property is charged to the allowance for loan losses. Subsequent gains or
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 Bancorp may grant a payment deferral. If a loan continues
delinquent after 90 days and all collection efforts have been exhausted, the
Bancorp 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
Bancorp may grant a payment deferral or restructure the loan. Once it has been
determined that collection efforts are unsuccessful, the Bancorp will initiate
legal proceedings.
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The table that follows sets forth information with respect to the
Bancorp's non-performing assets at December 31, for the periods indicated.
During the periods shown, the Bancorp had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than market rates. The amounts are stated in
thousands (000's).
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $636 $715 $583 $361 $786
Commercial 131 44 45 -- 82
Commercial business 69 56 111 -- --
Consumer 18 151 49 11 6
---- ---- ---- ---- ----
Total $854 $966 $788 $372 $874
==== ==== ==== ==== ====
Accruing loans which are contractually past due 90 days or more:
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 429 $ 220 $ 373 $ 637 $ 575
Commercial -- -- -- -- --
Commercial business 188 -- 5 -- 104
Consumer -- 6 1 46 6
------ ------ ------ ------ ------
Total $ 617 $ 226 $ 379 $ 683 $ 685
====== ====== ====== ====== ======
Total of non-accrual
and 90 days past due $1,471 $1,192 $1,167 $1,055 $1,559
====== ====== ====== ====== ======
Ratio of non-performing
loans to total assets 0.43% 0.37% 0.39% 0.38% 0.59%
Ratio of non-performing
loans to total loans 0.54% 0.44% 0.48% 0.47% 0.70%
Foreclosed real estate $ 32 $ 259 $ 189 $ 86 $ 160
====== ====== ====== ====== ======
Ratio of foreclosed real
estate to total assets 0.01% 0.08% 0.06% 0.03% 0.06%
</TABLE>
During 1998, gross interest income of $109,888 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 $69,068.
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
12
<PAGE> 14
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
Bancorp's total risk-based capital requirement (to the extent that the amount
does not exceed 1.25% of total risk-based assets), but are not included in
tier-one leverage ratio calculations, tier-one risk-based capital requirements,
or in capital under Generally Accepted Accounting Principles ("GAAP"). Amounts
reserved for by a specific allowance are not counted toward capital for purposes
of any of the regulatory capital requirements. At December 31, 1998, $1.2
million of the Bancorp's loans were classified as substandard. The total
represents 26 loans. There was 1 loan for $4 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
the ALL 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, 1998, 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, 1998, 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.
13
<PAGE> 15
The table that 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>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,074 $ 2,887 $ 2,830 $ 2,751 $ 2,583
Loans charged-off:
Real estate - residential (38) (9) (28) -- --
Commercial business (20) (19) -- -- (7)
Consumer (10) (6) -- (2) (3)
------- ------- ------- ------- -------
Total charge-offs (68) (34) (28) (2) (10)
Recoveries:
Commercial business 9 -- -- -- 1
Consumer 7 -- -- 1 33
------- ------- ------- ------- -------
Total recoveries 16 -- -- 1 34
Net (charge-offs)/recoveries (52) (34) (28) (1) 24
------- ------- ------- ------- -------
Provision for loan losses 110 221 85 80 144
------- ------- ------- ------- -------
Balance at end of period $ 3,132 $ 3,074 $ 2,887 $ 2,830 $ 2,751
======= ======= ======= ======= =======
ALL to loans outstanding 1.14% 1.13% 1.18% 1.27% 1.24%
ALL to nonperforming loans 212.9% 257.8% 247.4% 268.3% 160.0%
Net charge-offs/recoveries
to average loans out-
standing during the period 0.02% 0.01% 0.01% 0.00% 0.01%
</TABLE>
The table below shows the allocation of the allowance for loan losses
at December 31, for 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>
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 302 56.7 322 57.5 372 61.8 372 64.6 387 64.8
Commercial and
other dwelling 953 24.0 932 23.8 880 23.4 860 23.0 834 23.8
Construction and
development 268 7.1 268 7.9 153 5.4 130 4.0 105 3.8
Consumer loans 196 3.7 153 2.1 110 2.0 110 1.6 111 1.4
Commercial business
and other 630 8.5 630 8.7 650 7.4 650 6.8 626 6.2
Unallocated 783 769 722 708 688
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 3,132 100.0 3,074 100.0 2,887 100.0 2,830 100.0 2,751 100.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
14
<PAGE> 16
INVESTMENT ACTIVITIES
The primary objective of the investment portfolio is to provide for the
liquidity needs of the Bancorp and to contribute to profitability by providing a
stable flow of dependable earnings. Securities are classified as either
held-to-maturity (HTM) or available-for-sale (AFS) at the time of purchase. No
securities are classified as trading investments. At December 31, 1998, AFS
securities totaled $20.5 million or 56.3% of total securities. The AFS portfolio
permits the active management of the Bancorp's liquidity position. On October 1,
1998, the Bancorp adopted Statement of Financial Accounting Standard (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities, and as
permitted transferred $12.2 million from the HTM portfolio to the AFS portfolio.
During 1998, the Bancorp did not have derivative instruments and was not
involved in hedging activities as defined by SFAS No. 133. It has been the
policy of the Bancorp 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, 1998, the Bancorp's investment portfolio totaled $36.4
million. In addition, the Bancorp had $10.1 million in interest-bearing balances
at the FHLB and $4.5 million in federal funds sold.
The table below shows the carrying values of the components of the
investment securities portfolio at December 31, on the dates indicated. The
amounts are in thousands (000's).
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
U.S. government securities:
Available-for-sale $ 7,669 $ -- $ --
Held-to-maturity -- 6,537 11,549
U.S. government agencies:
Available-for-sale 12,853 -- --
Held-to-maturity 13,074 19,648 24,934
Mortgage-backed securities (1) 1,059 1,531 1,944
FHLB stock 1,695 1,646 1,597
------- ------- -------
Totals $36,350 $29,362 $40,024
======= ======= =======
<FN>
(1) Mortgage-backed securities are classified as held-to-maturity.
</TABLE>
15
<PAGE> 17
The contractual maturities and weighted average yields for the U.S.
government securities, agency securities and mortgaged-backed securities at
December 31, 1998, are summarized as follows. The carrying values 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:
AFS $ 3,037 6.03% $ 4,632 5.54% $ -- -% $ -- -%
U.S. government
Agencies:
AFS 3,532 5.86 9,321 5.69 -- -- -- --
HTM -- -- 13,074 6.18 -- -- -- --
Mortgaged-backed
securities -- -- 3 7.04 888 7.98 168 10.52
------- ------ ------- ------ ----- ---- ----- -----
Totals $ 6,569 5.94% $27,030 5.90% $ 888 7.98% $ 168 10.52%
======= ====== ======= ====== ===== ==== ===== =====
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bancorp's funds for
lending and other investment purposes. In addition to deposits, the Bancorp
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
(FHLB) 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 Bancorp uses repurchase agreements and advances from the
FHLB for borrowings. At December 31, 1998, the Bancorp had $3.9 million in
repurchase agreements. Other borrowings totaled $13.4 million, of which $12.0
million represents FHLB advances.
DEPOSITS. Retail and commercial deposits are attracted principally from
within the Bancorp's primary market area through the offering of a broad
selection of deposit instruments including savings accounts, 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 Bancorp to be more competitive in obtaining funds and to be flexible
in meeting the threat of net deposit outflows. The Bancorp does not obtain funds
through brokers.
16
<PAGE> 18
The following table presents the average daily amount of deposits and
average rates paid on such for the years indicated. The amounts are in thousands
(000's).
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- -------------------
Amount rate % Amount rate % Amount rate %
------ ------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 18,957 -- $ 14,836 -- $ 13,122 --
NOW accounts 26,290 1.96 23,451 2.13 23,034 2.29
MMDA accounts 26,898 3.49 23,115 3.30 22,495 3.27
Savings accounts 46,179 2.86 43,673 3.01 43,521 3.02
Certificates of deposit 160,805 5.37 158,041 5.52 153,433 5.53
-------- ---- -------- ---- -------- ----
Total deposits $279,129 4.09 $263,116 4.30 $255,605 4.33
======== ==== ======== ==== ======== ====
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1998 are summarized as follows. The amounts are
in thousands (000's).
<TABLE>
<CAPTION>
<S> <C>
3 months or less $16,795
Over 3 months through 6 months 9,944
Over 6 months through 12 months 6,784
Over 12 months 2,791
-------
Total $36,314
=======
</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 FHLB. Repurchase agreements generally mature within one
year and are generally secured by U.S. government securities or U.S. agency
securities, under the Bancorp's control. FHLB advances with maturities ranging
from one year to ten 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 Bancorp's overall cost of funds. Fixed rate advances are
payable at maturity, with a prepayment penalty. Putable advances are fixed for a
period of one to three years and then may adjust quarterly to the three-month
London Interbank Offered Rate (LIBOR) until maturity. Once the putable advance
interest rate adjusts, the Bancorp has the option to prepay the advance on
specified quarterly interest rate reset dates without prepayment penalty.
17
<PAGE> 19
The following table sets forth the balances in borrowed funds at
December 31, on the dates indicated. The amounts are stated in thousands
(000's).
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Repurchase agreements $ 3,937 $ 4,541 $ 3,993
FHLB line of credit -- -- 7,000
Fixed rate advances from the FHLB 4,000 4,000 --
Putable advances from the FHLB 8,000 4,000 --
Limited partnership obligation 500 -- --
Other borrowings 883 2,087 1,268
------- ------- -------
Total borrowings $17,320 $14,628 $12,261
======= ======= =======
</TABLE>
The limited partnership obligation represents an investment interest in
a partnership formed for the construction, ownership and management of
affordable housing projects. The amount of the note is $500,000 with funding to
begin during 1999 and to continue over a nine year period. Payments are required
within ten days of written demand. The obligation to make payment is absolute
and unconditional. The note requires no payment of interest.
The following table sets forth certain information regarding repurchase
agreements by the Bancorp at the end of and during the periods indicated. The
amounts are stated in thousands (000's).
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance $3,937 $4,541 $3,993
Securities underlying the agreements:
Ending book value 6,460 7,988 5,572
Ending market value 6,483 8,014 5,559
Weighted average rate paid (1) 5.13% 5.54% 5.19%
<CAPTION>
For year ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Highest month-end balance $6,154 $4,975 $5,419
Approximate average outstanding balance 4,693 4,308 3,599
Approximate weighted average rate
paid on securities sold under
agreements to repurchase (2) 5.62% 5.43% 5.27%
<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 for the period.
</TABLE>
18
<PAGE> 20
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, 1998, the market value of the
trust department's assets totaled $111.4 million.
ANALYSIS OF PROFITABILITY AND KEY OPERATING RATIOS
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL.
The net earnings of the Bancorp 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, 1998.
<TABLE>
<S> <C>
Weighted average yield:
Interest-bearing balances in financial institutions 4.64%
Securities 6.22
Net loans receivable 8.31
Total interest-earning assets 7.91
Weighted average cost:
Interest bearing deposits 3.76
Borrowed funds 5.38
Total interest-bearing liabilities 3.85
Interest rate spread:
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing funds 4.06
</TABLE>
19
<PAGE> 21
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,
----------------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Return on average assets 1.14% 1.13% 0.75%
Return on average equity 12.35 11.87 7.90
Average equity-to-average
assets ratio 9.23 9.49 9.51
Dividend payout ratio 54.33 51.76 72.17
<CAPTION>
At December 31,
----------------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Total stockholders' equity to
total assets 9.07% 9.22% 9.29%
</TABLE>
20
<PAGE> 22
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, 1998 Year ended December 31, 1997
--------------------------------------------- ------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
--------------------------------------------- -----------------------------------------
Assets:
Interest bearing balances
<S> <C> <C> <C> <C> <C> <C>
in financial institutions $ 7,867 $ 505 6.42% $ 2,282 $ 139 6.09%
Federal funds sold 3,844 206 5.36 102 5 5.32
Securities 32,199 1,981 6.15 33,454 2,155 6.44
------------ ----------- ------------- -----------
Total investments 43,910 2,692 6.13 35,838 2,299 6.42
------------ ----------- ------------- -----------
Loans:*
Real estate mortgage loans 240,670 19,747 8.21 230,420 19,128 8.30
Commercial business loans 22,350 2,071 9.27 18,380 1,780 9.68
Consumer loans 8,386 725 8.65 5,419 462 8.52
------------ ----------- ------------- -----------
Total loans 271,406 22,543 8.31 254,219 21,370 8.41
------------ ----------- ------------- -----------
Total interest-earning assets 315,316 25,235 8.00 290,057 23,669 8.16
----------- -----------
Allowance for loan losses (3,101) (2,959)
Cash and due from banks 7,616 6,005
Premises and equipment 6,722 6,992
Other assets 3,603 3,220
------------ -------------
Total assets $ 330,156 $ 303,315
============ =============
Liabilities:
Demand deposit $ 18,957 - 0.00% $ 14,836 - 0.00%
NOW accounts 26,290 515 1.96 23,451 500 2.13
Money market demand accounts 26,898 940 3.49 23,115 762 3.30
Savings accounts 46,179 1,321 2.86 43,673 1,315 3.01
Certificates of deposit 160,805 8,629 5.37 158,041 8,730 5.52
------------ ----------- ------------- -----------
Total interest-bearing deposits 279,129 11,405 4.09 263,116 11,307 4.30
Borrowed funds 16,736 905 5.41 8,082 414 5.13
------------ ----------- ------------- -----------
Total interest-bearing liabilities 295,865 12,310 4.16 271,198 11,721 4.32
Other liabilities 3,807 3,343
------------ -------------
Total liabilities 299,672 274,541
Stockholders' equity 30,484 28,774
------------ -------------
Total liabilities and
stockholders' equity $ 330,156 $ 303,315
============ ----------- ============= -----------
Net interest income $ 12,925 $ 11,948
=========== ===========
Net interest spread 3.84% 3.84%
Net interest margin** 3.91% 3.94%
<CAPTION>
-----------------------------------------------
Year ended December 31, 1996
-----------------------------------------------
Interest
Average Income/ Average
Balance Expense Rate
-----------------------------------------------
Assets:
<S> <C> <C> <C>
Interest bearing balances
in financial institutions $ 3,846 $ 266 6.92%
Federal funds sold 1,068 58 5.43
Securities 42,513 2,605 6.13
-------------- -------------
Total investments 47,427 2,929 6.18
-------------- -------------
Loans:*
Real estate mortgage loans 212,161 17,523 8.26
Commercial business loans 16,014 1,522 9.50
Consumer loans 4,290 363 8.46
-------------- -------------
Total loans 232,465 19,408 8.35
-------------- -------------
Total interest-earning assets 279,892 22,337 7.98
-------------
Allowance for loan losses (2,854)
Cash and due from banks 4,994
Premises and equipment 6,153
Other assets 3,098
--------------
Total assets $ 291,283
==============
Liabilities:
Demand deposit $ 13,122 - 0.00%
NOW accounts 23,034 528 2.29
Money market demand accounts 22,495 736 3.27
Savings accounts 43,521 1,315 3.02
Certificates of deposit 153,433 8,487 5.53
-------------- -------------
Total interest-bearing deposits 255,605 11,066 4.33
Borrowed funds 4,780 221 4.62
-------------- -------------
Total interest-bearing liabilities 260,385 11,287 4.32
Other liabilities 3,191
--------------
Total liabilities 263,576
Stockholders' equity 27,707
--------------
Total liabilities and
stockholders' equity $ 291,283
============== -------------
Net interest income $ 11,050
=============
Net interest spread 3.66%
Net interest margin** 3.79%
- ----------------------------------------------------------------------------------------------
<FN>
* Non-accruing loans have been included in the average balances.
** Net interest income divided by average total assets.
</TABLE>
21
<PAGE> 23
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,
-------------------------------------------- -----------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------------------- -----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due To Due To
-------------------------------------------- -----------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ -------------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,430 $ (257) $ 1,173 $ 1,840 $ 122 $ 1,962
Securities (79) (95) (174) (578) 128 (450)
Other interest-earning assets 566 1 567 (146) (34) (180)
------------ ------------ ------------ ------------ --------- --------------
Total interest-earning assets 1,917 (351) 1,566 1,116 216 1,332
------------ ------------ ------------ ------------ --------- --------------
Interest Expense:
Deposits 669 (571) 98 289 (48) 241
Federal Home Loan Bank Advances
and other borrowings 467 24 491 167 26 193
------------ ------------ ------------ ------------ --------- --------------
Total interest-bearing
liabilities 1,136 (547) 589 456 (22) 434
------------ ------------ ------------ ------------ --------- --------------
Net change in net interest
income/(expense) $ 781 $ 196 $ 977 $ 660 $ 238 $ 898
============ ============ ============ ============ ========= ==============
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 vs. 1995
------------------------------------------------
Increase/(Decrease)
Due To
------------------------------------------------
Volume Rate Total
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 930 $ (245) $ 685
Securities 448 102 550
Other interest-earning assets (48) 27 (21)
-------------- -------------- --------------
Total interest-earning assets 1,330 (116) 1,214
-------------- -------------- --------------
Interest Expense:
Deposits 651 47 698
Federal Home Loan Bank Advances
and other borrowings 106 (2) 104
-------------- -------------- --------------
Total interest-bearing
liabilities 757 45 802
-------------- -------------- --------------
Net change in net interest
income/(expense) $ 573 $ (161) $ 412
============== ============== ==============
</TABLE>
INSERT TABLE
22
<PAGE> 24
BANK SUBSIDIARY ACTIVITIES
The Bank's wholly owned subsidiary Peoples Service Corporation which is
incorporated under the laws of the State of Indiana, is inactive. At December
31, 1998, the Bank had an investment balance of $10,000 in Peoples Service
Corporation. During 1997, the Bank dissolved its wholly owned subsidiary PSA
Insurance Corporation, which had been inactive.
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 Bancorp'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 Bancorp's business activities are within
this area.
The Bancorp faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The
Bancorp's most direct competition for deposits has historically come from
commercial banks and from savings associations located in its primary market
area. Particularly in times of high interest rates, the Bancorp has had
significant competition from mutual funds and other firms offering financial
services. The Bancorp's competition for loans comes principally from savings
associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other institutional lenders.
The Bancorp 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 homebuilders. 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,
electronic banking and other miscellaneous services.
The Bancorp believes that it has a minority share of the deposits and
residential mortgage loan market within its primary market area.
23
<PAGE> 25
PERSONNEL
As of December 31, 1998, the Bank had 98 full-time and 23 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"), 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 provide limited
guarantee of the compliance by 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.
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
24
<PAGE> 26
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 disclosures, 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 Bancorp
is subject to approval of the DFI and FDIC and geographic limits established by
state laws. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal 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, subject to the right of individual states to "opt out" of this
authority, and (iii) banks to establish new branches on an
25
<PAGE> 27
interstate basis provided that such action is specifically authorized by the law
of the host state. The effect of this law may be to increase competition in the
Bancorp'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% or greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
26
<PAGE> 28
The following table shows that, at December 31, 1998, the Bancorp's
capital exceeded all regulatory capital requirements. At December 31, 1998, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
At December 31, 1998, 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 to
risk-weighted assets $ 34.1 15.3% $ 17.8 8.0% $ 22.3 10.0%
Tier I capital
to risk-weighted assets $ 31.3 14.1% $ 8.9 4.0% $ 13.4 6.0%
Tier I capital to
adjusted average assets $ 31.3 9.2% $ 10.2 3.0% $ 17.0 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 of so much of its undivided profits (generally, earnings less losses,
bad debts, taxes and other operating expenses) as is considered expedient by the
Bank's Board of Directors. However, the Bank must obtain the approval of the
Indiana Department of Financial Institutions for the payment of a dividend if
the total of all dividends declared by the Bank during the current year,
including the proposed dividend, would exceed the sum of retained net income for
the year to date plus its retained net income for the previous two years
(approximately $3,863,000 at December 31, 1998). For this purpose, "retained net
income" means net income as calculated for call report purposes, less all
dividends declared for the applicable period. 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
27
<PAGE> 29
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC in connection with its
examination of the Bank, to assess its record of meeting the credit needs of its
community and to take that record into account in its evaluation of certain
applications by the Bank. For example, the regulations 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. As of the date of its most recent regulatory examination, the Bank
was rated "satisfactory" with respect to its CRA compliance.
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, this method has not been
available for the Bancorp 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
28
<PAGE> 30
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 Bancorp.
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 Bancorp, the base-year reserves are the balances as of
December 31, 1987. Recapture of the excess reserves will occur over a six-year
period that began for the Bancorp for its tax year ending December 31, 1998.
Commencement of the recapture period was delayed for two years because the
Bancorp met certain residential lending requirements. The Bancorp 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 Bancorp'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 Bancorp 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 Bancorp 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 environmental tax equal to 0.12% of the excess
alternative minimum taxable income for the taxable year (determined 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
29
<PAGE> 31
of management, any examinations of open returns would not result in a deficiency
that 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 1998 Annual Report to
Stockholders attached hereto as Exhibit 13.
The Bancorp is subject to Indiana's Financial Institutions Franchise
Tax ("FIT"), that 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, 1998, the Bancorp's consolidated total deferred tax
assets were $1,240 thousand and the consolidated total deferred tax liabilities
were $363 thousand, resulting in a consolidated net deferred tax asset of $877
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 Bancorp owns all of its office properties.
30
<PAGE> 32
The table below sets forth additional information with respect to the
Bank's offices as of December 31, 1998. 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 $1,204,175 11,640 $2,342,776
141 W. Lincoln Highway
Schererville, In 46375 1990 1,275,079 9,444 1,942,781
7120 Indianapolis Blvd.
Hammond, In 46324 1978 308,675 2,600 738,136
1300 Sheffield
Dyer, In 46311 1976 185,733 2,100 575,730
7915 Taft
Merrillville, In 46410 1968 133,921 2,750 485,792
8600 Broadway
Merrillville, In 46410 1996 2,058,808 8,800 2,526,030
4901 Indianapolis Blvd.
East Chicago, In 46312 1995 1,098,703 4,300 1,429,280
</TABLE>
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, 1998, 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 lines 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 $6.7 million at December 31, 1998.
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.
31
<PAGE> 33
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 1998.
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 1999 Annual Meeting of
Shareholders:
The executive officers of the Bancorp are as follows:
<TABLE>
<CAPTION>
AGE AT
DECEMBER 31,
1998 POSITION
----------- --------
<S> <C> <C>
David A. Bochnowski 53 Chairman and Chief Executive
Officer
Joel Gorelick 51 Vice President and Chief Lending Officer
Edward J. Furticella 51 Vice President, Chief Financial Officer
and Treasurer
Frank J. Bochnowski 60 Senior Vice President and Secretary
</TABLE>
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 the Second Vice-Chairman of America's Community Bankers
(ACB) and a director of ACB Partners, Inc., the operating subsidiaries of
America's Community Banker. He is 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 recently served as
president of the Northwest Indiana Boys & Girls Club and chairman of
32
<PAGE> 34
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 and
member of the School of Management's Advisory Group 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 Chairman and Chief Executive Officer.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained under the captions "Business" and "Market
Information" in the 1998 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 1998 Annual Report to Shareholders is incorporated herein
by reference.
33
<PAGE> 35
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
1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Asset/Liability
Management and Market Risk" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of the 1998 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1998 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 under the section captioned "Security Ownership by Certain
Beneficial Owners and Management -- Section 16(a) Beneficial Ownership Reporting
Compliance" in the Bancorp's definitive Proxy Statement for the 1999 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 1999 Annual Meeting of Shareholders is incorporated herein by
reference.
34
<PAGE> 36
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 1999 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Bancorp's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders, and in the footnote
captioned "Related Party Transactions" in the 1998 Annual Report to
Shareholders, is incorporated herein by reference.
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 1998 Annual Report to Shareholders, filed as Exhibit
13 to this report:
(a) Report of Independent Auditors
(b) Consolidated Balance Sheets, December 31, 1998 and
1997
(c) Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998, 1997
and 1996
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
(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.
35
<PAGE> 37
(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).
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).
3.iv. Amendment of By-Laws adopted January 21, 1999.
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. 1998 Annual Report to Shareholders.
36
<PAGE> 38
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 1998.
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 19, 1999
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 23, 1999:
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/James L. Wieser Director
- ----------------------------
James L. Wieser
39
<PAGE> 41
EXHIBIT INDEX
Exhibit Description Page
3.iv. Amendment of By-Laws adopted January 21, 1999
13. 1998 Annual Report to Shareholders
21. Subsidiaries of the Bancorp
27. Financial Data Schedule
40
<PAGE> 1
EXHIBIT 3.iv
Amendment of By-Laws Adopted January 21, 1999
---------------------------------------------
The first sentence of Section 2.1 of the By-Laws is hereby amended to
read in its entirety as follows:
"The business and affairs of the Corporation shall be managed
under the direction of a Board of Directors consisting of nine
Directors."
<PAGE> 1
EXHIBIT 13
1998
Annual
Report
photo of bank customer
photo of bank customer with Peoples employee at computer
photo of bank
customer with Peoples employee
photo of
bank
customer
What your financial
resource should be.
[Peoples Bank LOGO]
NorthWest Indiana
-----------------
BANCORP
<PAGE> 2
1998
ANNUAL
REPORT
What your financial resource should be
DEAR SHAREHOLDERS:
1998 was a record year for the NorthWest Indiana Bancorp and our
subsidiary, Peoples Bank. Our results occurred in an increasingly competitive
environment, especially from regional banks determined to gain market share
often at the cost of market value.
The rapid pace of change provides opportunity for all sectors of the
local financial services industry. The NorthWest Indiana Bancorp has taken a
proactive approach to these events resulting in increased value for our
shareholders.
The Bancorp's earnings of $3.8 million were our highest ever and a
10.2% increase over the prior year. Our financial statistics were equally strong
with our return on assets at 1.14% and return on equity at 12.35%.
The fundamentals of banking drove this year's results with core income
and high asset quality leading the way. During 1998 the Bancorp's net interest
income, the difference between interest income from earning assets and interest
expense paid to depositors, rose 8.2% to $12.9 million. The ratio of
non-performing loans to total loans was .54%
[photo of bank customer]
["Peoples Bank has provided quality financial services both personally and for
my business for over 10 years. I consider them a valuable financial resource."]
Aleksandar Desancic
Progress Pump and Machine Services, Inc.
1998 Entrepreneurial Excellence Award
Small Business Person
of The Year
<PAGE> 3
[photo of bank customer with bank employee]
["As a financial advisor I've worked with Peoples Bank for over 15 years. Their
experienced trust officers emphasize personal service and we have developed a
great relationship. I use them for all my trust services including land trusts,
probate, investments, and more."]
Dennis Churilla
Financial Advisor
[PHOTO]
Left to right:
Dennis Churilla,
and Frank Bochnowski,
Senior Vice President and
Trust Officer
(fifty-four hundredths of 1%) a figure well below industry norms and indicative
of high asset quality.
Also fueling our success was an asset growth rate of 8.1% and a 26.4%
increase in non-interest income from banking operations. At the end of 1998 our
assets were $345.4 million with a capital ratio of 9.2%.
The Bancorp's consistent performance has permitted our directors to
reward shareholders for their investment in a locally-owned community bank.
Dividends in 1998 were up 15.6% over 1997 and in February of 1999 the Board
approved a 13.5% dividends increase as well as a two-for-one stock split. Our
stock previously split two-for-one in 1995 and again in 1996. The Bancorp now
has 2.8 million shares outstanding providing greater liquidity in the market and
affordability to our investors.
Banking mergers in 1998 created bigger and bigger competitors, but also
reduced the number of locally-owned banks in our community. Our challenge as a
community bank centers on meeting the competition by providing a financial
resource for our customers along with filling the vacuum created by the takeover
of our former local competitors.
2
<PAGE> 4
[photo of bank customer with bank employee]
["When I needed a loan for another truck for my business, other banks wouldn't
give me the time of day. But when I brought my paperwork into Peoples, they took
care of me right away. I won't go to another bank but Peoples."]
Stanley Bell
S & S Sales Inc.
Left to right:
Stanley Bell,
and Jim Lehr,
Assistant Vice President,
Manager, Consumer
Loan Department
To attract and maintain customers, local banks must do more than tout
their local ownership and community orientation. Our philosophy links community
awareness and responsive local decision making to competitive pricing that meets
customer demand for high quality products and services. Rather than build market
share, the Bancorp focuses on creating relationships with customers who add
value to our presence as a financial resource in our community.
Lending has become a battle ground of banking with fierce competition
for high quality credits. In addition to traditional consumer loans, the Bank
has sought to attract small business customers with a package that meets asset
management and lending needs while providing high quality, responsive service.
Because our decision makers are locally based, the Bank can make timely
determinations on loan requests and efficiently close transactions.
We have responded to the highly competitive banking environment with a
customer-friendly approach to both traditional and electronic banking services.
The Bank welcomes, without charge, customers who want to transact business with
our tellers.
[photo of bank customer]
"We do business with Peoples because it is a locally-owned community bank. I
value the fact that their banking family and our family-owned business have long
standing community roots in Northwest Indiana. This fosters a commonality and a
basis for trust."
Joseph "Bud" Newell
American Medical Oxygen Sales
3
<PAGE> 5
[photo of bank customer with bank employee]
["I know why I bank with Peoples -- the people are the reason! They are always
friendly and extremely helpful. No matter what question or concern I have they
are always available to help me."]
Jackie Larson
PC Checking Customer
Left to right:
Jackie Larson,
and Jill M. Knight,
Assistant Vice President, Merrillville (Broadway)
The Bank also recognizes that for some customers, service means
transacting business without coming to the bank. We have invested in
technologies which permit consumers to bank by phone and personal computer as
well as access their accounts by ATM and debit cards. To meet the need for both
convenience and safety, the Bank offers a variety of electronic delivery systems
including wire transfers, electronic tax payments, direct deposits, electronic
data interchange (EDI) and other electronic funds transfer services.
The Bancorp cannot be a financial resource for our community if
operations are disrupted by technology issues associated by the year 2000 date
change. Since 1997 the Board of Directors and management have been committed to
readiness for the year 2000 through involvement with the Year 2000 project. The
Bancorp believes it has made, and is positioned to continue to make, timely
decisions to avoid disruptions to customer services at the turn of the century.
Left to right:
Tanya Mathews and Donna Germek,
Information Services Department
[photo of bank employees at computer]
["Preparing for Y2K is a top priority at Peoples Bank. We are testing,
monitoring and modifying our computer systems to ensure a smooth transition
into the year 2000."]
Tanya Mathews
Peoples Bank, Assistant Vice President,
Manager Information Services
4
<PAGE> 6
Left to right:
Scott E. Hicko,
and Stephan A. Ziemba,
Assistant Vice President,
Trust Officer
[photo of bank customer with bank employee]
["Planning for the financial security of my clients is serious business. That's
why I use Peoples Bank's Trust Department. They meet my customers needs with the
professionalism and expertise you would expect from only the best."]
Scott E. Hicko, CPA
The Hicko CPA and
Financial Consulting Group
The Bancorp recognizes that customer financial investments extend
beyond traditional banking products to equities, annuities, mutual funds and
government obligations. Our trust department provides asset management services
by experienced professionals who emphasize personal service and customized
portfolios. The department was relocated to Schererville in 1998 to improve our
market presence and we are pleased to report that the book value of assets under
management grew 11% during the year to $83.4 million.
As a financial resource the Bank offers more than products and services
to our community. During 1998 our directors and management were involved in the
leadership of fourteen major organizations in our community. In addition, over
one hundred forty groups benefited from our human and financial resources during
the year.
The excitement of the year's activity was marred by the untimely
passing of Dr. John J. Wadas, Jr. The Wadas family has been associated with
Peoples Bank since 1910 with John joining our Board in 1984. Dr. John was a
strong proponent of shareholder value and his voice, while leaving a lasting
impression, will be missed by his friends and colleagues at Peoples Bank. In his
honor and memory, the Board has determined to leave John's board seat vacant at
this time.
5
<PAGE> 7
Left to right:
Edward Malloy,
and Barbara J. Zura,
Assistant Vice President,
Senior Branch Manager, Woodmar
[photo of bank customer with bank employee]
"I've been a customer of Peoples Bank for over 30 years and they have always
treated me fairly. It's great to have a neighborhood bank that's so convenient
with such wonderful people."
Edward Malloy
Savings Customer
In early 1999, we learned that a twenty eight year employee, Barbara J.
Zura, would retire in March. During her years with the Bank, Barb worked in all
departments and rose from part-time teller to assistant vice president and
senior branch manager. Known for her caring personality, Barb endeared herself
to her customers and all of us who were privileged to work with her. We thank
her for making a substantial difference in our effort.
Also during February 1999 the Board created a ninth director's position
and we welcome our newest director, Jim Wieser to the NorthWest Indiana Bancorp
and Peoples Bank.
The competitive banking forces which emerged in 1998 will intensify
this year and into the new millennium. As a financial resource, the Bancorp will
meet these challenges by assisting our shareholders, consumer and business
customers in attaining their financial goals.
Sincerely,
/s/ David A. Bochnowski
David A. Bochnowski
Chairman & CEO
6
<PAGE> 8
1998
ANNUAL
REPORT
FINANCIAL
INFORMATION
Our philosophy links community awareness and responsive local decision
making to competitive pricing that meets customer demand for high quality
products and services. Rather than build market share, the Bancorp focuses on
creating relationships with customers who add value to our presence as a
financial resource in our community.
[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, December 31,
1998 1997 1996 1995 1994 1993 (1)
------------ ------------ ------------ ------------ ------------ ------------
Statement of Income:
<S> <C> <C> <C> <C> <C> <C>
Total interest income ............... $25,235 $23,669 $22,337 $21,123 $19,122 $ 9,360
Total interest expense .............. 12,310 11,721 11,287 10,484 8,079 4,015
------- ------- ------- ------- ------- -------
Net interest income ................. 12,925 11,948 11,050 10,639 11,043 5,345
Provision for loan losses ........... 110 221 85 80 145 319
------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ......... 12,815 11,727 10,965 10,559 10,898 5,026
------- ------- ------- ------- ------- -------
Noninterest income .................. 1,347 1,066 682 685 493 253
Noninterest expense ................. 7,938 7,154 8,039 6,117 6,031 3,011
------- ------- ------- ------- ------- -------
Net noninterest expense ............. 6,591 6,088 7,357 5,432 5,538 2,758
------- ------- ------- ------- ------- -------
Income tax expenses ................. 2,461 2,223 1,419 2,026 2,132 902
Cumulative effect of changes
in accounting ..................... -- -- -- -- -- 450
------- ------- ------- ------- ------- -------
Net income .......................... $ 3,763 $ 3,416 $ 2,189 $ 3,101 $ 3,228 $ 1,816
======= ======= ======= ======= ======= =======
Basic earnings
per common share (3) .............. $ 1.36 $ 1.24 $ 0.80 $ 1.13 $ 1.18 $ 0.67
Diluted earnings
per common share (3) .............. $ 1.35 $ 1.23 $ 0.79 $ 1.12 $ 1.17 $ 0.66
Cash dividends declared
per common share (3) .............. $ 0.74 $ 0.64 $ 0.58 $ 0.55 $ 0.55 $ 0.25
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
Balance Sheet:
<S> <C> <C> <C> <C> <C> <C>
Total assets.................. $ 345,417 $ 319,609 $ 299,419 $ 280,911 $ 266,343 $ 251,481
Loans receivable.............. 273,433 272,213 244,696 222,293 221,930 204,205
Investment securities......... 36,350 29,362 40,024 38,001 33,678 33,639
Deposits...................... 293,222 272,090 256,420 247,945 234,639 222,945
Borrowed funds................ 17,320 14,628 12,261 3,139 3,151 2,087
Total stockholders' equity.... 31,316 29,482 27,815 27,204 25,606 23,874
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1993 (1) (2)
------------- ------------ ------------ ------------ ------------ ------------
Interest Rate Spread During Period:
<S> <C> <C> <C> <C> <C> <C>
Average effective yield on loans
and investment securities ............ 8.00% 8.16% 7.98% 8.06% 7.66% 7.75%
Average effective cost of deposits
and borrowings ....................... 4.16% 4.32% 4.32% 4.33% 3.48% 3.63%
-------- ----- ---- ----- ----- -----
Interest rate spread ................... 3.84% 3.84% 3.66% 3.73% 4.18% 4.12%
======== ===== ==== ===== ===== =====
Net interest margin ....................... 3.91% 3.94% 3.79% 3.91% 4.25% 4.27%
Return on average assets .................. 1.14% 1.13% 0.75% 1.14% 1.24% 1.45%
Return on average equity .................. 12.35 11.87% 7.90% 11.74% 13.04% 15.51%
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to
risk-weighted assets........ 14.1% 13.8% 14.7% 15.8% 15.9% 15.5%
Total capital to
risk-weighted assets........ 15.3% 15.0% 16.0% 17.1% 17.2% 16.8%
Tier I capital leverage ratio 9.2% 9.2% 9.3% 9.7% 9.6% 9.5%
Allowance for loan losses to
total loans................. 1.14% 1.13% 1.18% 1.27% 1.24% 1.26%
Allowance for loan losses to
non-performing loans........ 212.88% 257.84% 247.40% 268.25% 176.46% 454.75%
Non-performing loans to
total loans................. 0.54% 0.44% 0.48% 0.47% 0.70% 0.27%
Total loan accounts........... 4,625 4,764 4,404 4,606 4,671 4,654
Total deposit accounts........ 26,172 25.443 24,666 23,730 22,738 21,204
Total branches (all full service) 7 7 7 6 6 6
</TABLE>
(1) Six month period due to change in fiscal year end.
(2) Data for six months ended December 31, 1993 has been annualized.
(3) Adjusted for a two-for-one stock split effected as a share dividend to
shareholders of record as of February 28, 1999.
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands of Dollars, except Per Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, June 30, June 30, June 30,
1993 1992 1991 1990
--------- --------- -------- ----------
Statement of Income:
<S> <C> <C> <C> <C>
Total interest income ................. $19,035 $19,744 $20,709 $20,042
Total interest expense ................ 8,485 10,698 12,896 13,145
------- ------- ------- -------
Net interest income ................... 10,550 9,046 7,813 6,897
Provision for loan losses ............. 711 665 238 130
------- ------- ------- -------
Net interest income after
provision for loan losses ........... 9,839 8,381 7,575 6,767
------- ------- ------- -------
Noninterest income .................... 749 726 757 622
Noninterest expense ................... 5,378 4,795 4,625 4,357
------- ------- ------- -------
Net noninterest expense ............... 4,629 4,069 3,868 3,735
------- ------- ------- -------
Income tax expenses ................... 2,158 1,849 1,505 992
Cumulative effect of changes
in accounting ....................... -- -- -- --
------- ------- ------- -------
Net income ............................ $ 3,052 $ 2,463 $ 2,202 $ 2,040
======= ======= ======= =======
Basic earnings
per common share (3) ................ $ 1.13 $ 0.93 $ 0.83 $ 0.77
Diluted earnings
per common share (3) ................ $ 1.10 $ 0.88 $ 0.79 $ 0.74
Cash dividends declared
per common share (3) ................ $ 0.40 $ 0.34 $ 0.11 $ 0.08
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1993 1992 1991 1990
------------ ------------ ------------ ------------
Balance Sheet:
<S> <C> <C> <C> <C>
Total assets................ $ 246,180 $ 227,183 $ 220,053 $ 208,796
Loans receivable............ 202,083 183,366 177,421 173,244
Investment securities....... 28,910 28,910 25,160 24,983
Deposits.................... 219,133 202,823 196,880 188,621
Borrowed funds.............. 993 609 799 604
Total stockholders' equity.. 22,691 20,667 18,972 16,955
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30, June 30, June 30, June 30,
1993 1992 1991 1990
----------- ------------ ------------ ------------
Interest Rate Spread During Period:
<S> <C> <C> <C> <C>
Average effective yield on loans
and investment securities ......... 8.24% 9.20% 10.08% 10.28%
Average effective cost of deposits
and borrowings..................... 4.04% 5.39% 6.75% 7.25%
---------- ------------ ------------ ------------
Interest rate spread................. 4.20% 3.81% 3.33% 3.03%
=========== ============ ============ ============
Net interest margin...................... 4.44% 4.04% 3.80% 3.42%
Return on average assets................. 1.28% 1.10% 1.03% 1.01%
Return on average equity................. 14.00% 12.38% 12.31% 12.82%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1993 1992 1991 1990
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tier I capital to
risk-weighted assets.............. 14.9% 14.7% 14.1% 13.1%
Total capital to
risk-weighted assets............. 16.1% 15.9% 14.8% 13.7%
Tier I capital leverage ratio ...... 9.2% 9.1% 8.6% 8.1%
Allowance for loan losses to
total loans...................... 1.15% 0.88% 0.53% 0.42%
Allowance for loan losses to
non-performing loans.............. 382.34% 231.51% 117.96% 155.93%
Non-performing loans to
total loans....................... 0.30% 0.38% 0.45% 0.27%
Total loan accounts................. 4,661 4,755 4,793 4,428
Total deposit accounts.............. 21,330 20,834 21,200 21,492
Total branches (all full service) .. 6 6 6 6
</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 Bancorp 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 Bancorp 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 Bancorp'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 common stock is traded in the over-the-counter market and
quoted in the National Quotation Bureau's "Pink Sheets". On December 2, 1996 and
again on February 28, 1999, the Bancorp effected a two-for-one common stock
split as a share dividend. Earnings and dividends per share and other share
related information is restated for all stock splits and dividends through the
date of issue of the financial statements. On February 28, 1999, the Bancorp had
2,763,156 shares of common stock outstanding and 484 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]
<TABLE>
<CAPTION>
TOTAL ASSETS (DOLLARS IN MILLIONS)
1994 1995 1996 1997 1998
- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
$266.3 $280.9 $299.4 $319.6 $345.4
</TABLE>
Total assets have increased from $266.3 million at December 31, 1994 to $345.4
million at December 31, 1998. Growth during 1998 totaled $25.8 million or 8.1%.
- --------------------------------------------------------------------------------
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, 1998, the Bancorp had total assets of $345.4 million
and total deposits of $293.2 million. The Bancorp'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, 1998, stockholders' equity totaled
$31.3 million, with book value per share at $11.34. Net income for 1998 was $3.8
million, or $1.36 per common share and $1.35, assuming dilution. The return on
average assets (ROA) was 1.14%, while the return on average stockholders' equity
(ROE) was 12.35%.
[GRAPHIC]
TOTAL ASSET COMPOSITION (DOLLARS IN MILLIONS)
Commercial Real Estate and Multifamily - $67.0 (19.4%)
Commercial Business and Other - $23.3 (6.7%)
Consumer - $10.2 (2.9%)
Other Assets - $22.7 (6.6%)
Investments and Interest Bearing Liabilities - $49.3 (14.3%)
Construction and Land Development - $19.2 (5.6%)
Residential Real Estate, including Home Equity - $153.7 (44.5%)
At December 31, 1998, the Bancorp had total assets of $345.4 million.
Interest-earning assets totaled $325.0 million and represented 94.1% of total
assets.
- --------------------------------------------------------------------------------
Asset/Liability Management and Market Risk
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 Bancorp, the key components of
asset/liability management are loans, investments, deposits and borrowed funds.
Over the years, the Bancorp 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 result in a duration which is less than the contractual
maturity, providing protection against the possibility of rising interest rates.
The Bancorp 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, on a case-by-case basis, in
the secondary market as part of the Bancorp's efforts to manage interest rate
risk. The Bancorp retains the servicing on all loans sold in the secondary
market.
The primary objective of the Bancorp's investment portfolio is to
provide for the liquidity needs of the Bancorp 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 (FHLB). Investments are generally
for terms ranging from one day to five years.
The Bancorp'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 levels of short-term interest rates have
influenced the Bancorp's results of operations. In order to reduce exposure to
interest rate risk, core deposits (checking, savings and money market accounts)
have been aggressively marketed and certificate accounts have been competitively
priced. Account activity 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 FHLB. FHLB advances with maturities ranging from one to
ten 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
Bancorp's overall cost of funds. The Bancorp does not obtain funds through
brokers.
The Bancorp's primary market risk exposure is interest rate risk.
Interest rate risk (IRR) is the risk that the Bancorp's earnings and capital
will be adversely affected by changes in interest rates. The primary approach to
IRR management is one that focuses on adjustments to the Bancorp'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 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.
Because the Bancorp 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 focus on investments and loans of short duration, adjustable rate
10
<PAGE> 12
loans, core deposit growth, and a cost-effective mix of deposits and borrowed
funds. Increasing the amount of interest-earning assets that are rate sensitive,
extending the maturities of customer deposits, increasing the balances of core
deposit accounts and utilizing cost effective borrowings are all part of
management's commitment toward reducing the Bancorp's overall vulnerability to
interest rate risk. While these steps may reduce the overall vulnerability to
interest rate risk, the Bancorp 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 that follows provides forward-looking information about the
Bancorp's financial instruments that are sensitive to changes in interest rates
as of December 31, 1998. The Bancorp had no derivative financial instruments or
trading portfolio as of December 31, 1998. The table that follows incorporates
the Bancorp'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. From a risk management perspective, however,
the Bancorp believes that adjusting cash flows to reflect the impact that
interest rate fluctuations have on the prepayment of loans, and using repricing
dates, as opposed to contractual maturity dates, may be more relevant in
analyzing the value of financial instruments. The table does not include demand
deposits, and for other core deposits (NOWs, savings, and money market deposit
accounts) that have no contractual maturity, the table presents principal
balances and related weighted-average interest rates in the column dated 1999.
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 Bancorp believes that such adjustments may be more relevant in
analyzing the impact of changing interest rates on the value of these financial
instruments.
Tabular Presentation: Quantitative Disclosures of Market Risk
<TABLE>
<CAPTION>
(Dollars in thousands) Principal Amount Maturing in:
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
---------- --------- ---------- ---------- ---------- -----------
Rate-sensitive assets:
<S> <C> <C> <C> <C> <C> <C>
Fixed-interest-rate loans (1) ...... $ 19,200 $ 10,863 $ 13,633 $ 7,747 $ 7,204 $ 51,107
Average interest rate .............. 8.50% 7.90% 7.95% 7.73% 7.64% 7.45%
Variable-interest-rate loans ....... 40,775 9,087 6,342 6,300 7,028 94,745
Average interest rate .............. 8.58% 8.35% 8.22% 8.18% 8.19% 7.86%
Total loans ........................ 59,975 19,950 19,975 14,047 14,232 145,852
Average interest rate .............. 8.54% 8.10% 8.04% 7.93% 7.91% 7.74%
Securities available-for-sale ...... 6,569 5,623 4,757 2,068 1,505 --
Average interest rate .............. 5.94% 5.96% 5.55% 5.08% 5.36% 0.00%
Securities held-to-maturity ........ -- 497 3,584 2,502 6,494 1,056
Average interest rate .............. 0.00% 5.75% 6.15% 5.95% 6.37% 8.38%
Federal Home Loan Bank stock ....... -- -- -- -- -- 1,695
Average interest rate .............. 0.00% 0.00% 0.00% 0.00% 0.00% 8.00%
Other interest-bearing assets ...... 14,611 -- -- -- -- --
Average interest rate .............. 4.64% 0.00% 0.00% 0.00% 0.00% 0.00%
Total rate-sensitive assets .... 81,155 26,070 28,316 18,617 22,231 148,603
Average interest rate .......... 7.63% 7.60% 7.38% 7.35% 7.29% 7.75%
Rate-sensitive liabilities:
NOW accounts ....................... 28,246 -- -- -- -- --
Average interest rate .............. 1.29% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings and money market accounts .. 82,302 -- -- -- -- --
Average interest rate .............. 2.76% 0.00% 0.00% 0.00% 0.00% 0.00%
Certificates of deposit ............ 137,327 19,410 2,567 1,024 -- --
Average interest rate .............. 5.07% 5.28% 5.49% 5.36% 0.00% 0.00%
Total interest bearing deposits 247,875 19,410 2,567 1,024 -- --
Average interest rate .......... 3.87% 5.28% 5.49% 5.36% 0.00% 0.00%
Fixed-interest-rate borrowings ..... 8,432 490 76 4,061 2,061 2,200
Average interest rate .............. 5.43% 4.51% 0.00% 5.45% 5.19% 4.80%
Total rate-sensitive liabilities 256,307 19,900 2,643 5,085 2,061 2,200
Average interest rate .......... 3.92% 5.26% 5.33% 5.43% 5.19% 4.80%
<CAPTION>
(Dollars in thousands) Principal Amount Maturing in:
----------------------------
Fair Value
Total 12/31/98
-------- ---------
Rate-sensitive assets:
<S> <C> <C>
Fixed-interest-rate loans (1) ............... $ 109,754 $102,449
Average interest rate ....................... 7.77%
Variable-interest-rate loans ................ 164,277 174,440
Average interest rate ....................... 8.10%
Total loans ................................. 274,031 276,889
Average interest rate ....................... 7.98%
Securities available-for-sale ............... 20,522 20,522
Average interest rate ....................... 5.72%
Securities held-to-maturity ................. 14,133 14,236
Average interest rate ....................... 6.37%
Federal Home Loan Bank stock ................ 1,695 1,695
Average interest rate ....................... 8.00%
Other interest-bearing assets ............... 14,611 14,611
Average interest rate ....................... 4.64%
Total rate-sensitive assets ............. 324,992 327,953
Average interest rate ................... 7.62%
Rate-sensitive liabilities:
NOW accounts ................................ 28,246 28,246
Average interest rate ....................... 1.29%
Savings and money market accounts ........... 82,302 82,302
Average interest rate ....................... 2.76%
Certificates of deposit ..................... 160,328 160,688
Average interest rate ....................... 5.10%
Total interest bearing deposits ......... 270,876 271,236
Average interest rate ................... 3.99%
Fixed-interest-rate borrowings .............. 17,320 17,373
Average interest rate ....................... 5.27%
Total rate-sensitive liabilities ........ 288,196 288,609
Average interest rate ................... 4.07%
</TABLE>
(1) Includes loans held for sale of $598 thousand.
11
<PAGE> 13
Financial Condition
During the year ended December 31, 1998, total assets increased by
$25.8 million (8.1%), with interest-earning assets increasing by $19.8 million
(6.5%). At December 31, 1998, interest-earning assets totaled $325.0 million and
represented 94.1% of total assets. Loans (comprised of loans receivable and
loans held for sale) totaled $274.0 million and represented 84.3% of
interest-earning assets, 79.3% of total assets and 93.5% of total deposits. The
loan portfolio includes $19.2 million (7.0%) in construction and land
development loans, $154.3 (56.4%) in residential real estate loans, $67.0
million (24.4%) in commercial and multifamily real estate loans, $10.2 million
(3.7%) in consumer loans and $23.3 million (8.5%) in commercial business and
other loans. During 1998, loans increased by $1.8 million (0.7%). Adjustable
rate loans comprised 67% of total loans at year-end. While the local economy
remained strong throughout the year, the low interest rate environment resulted
in increased refinance activity and some large loan payoffs. In addition,
increased price competition within the Bancorp's market area has made loan
growth more difficult. Assuming the continuation of the current strength of the
local economy, the current interest rate environment, and an aggressive
marketing and call program effort, management anticipates loan growth to
increase during 1999. Management expects to fund loan growth with a mix of
deposits and borrowed funds.
[GRAPHIC]
<TABLE>
<CAPTION>
TOTAL LOANS (DOLLARS IN MILLIONS)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
$221.9 $222.3 $244.7 $272.2 $273.4
</TABLE>
Total loans have increased from $221.9 million at December 31, 1994 to $273.4
million at December 31, 1998.
- --------------------------------------------------------------------------------
During 1998, the Bancorp sold $3.7 million in fixed rate mortgages compared
to $1.7 million in 1997 and $699 thousand in 1996. The amounts include 41 loans
for 1998, 23 loans for 1997 and 10 loans for 1996. All loans sold had
contractual maturities of thirty years. Net gains realized from the sales
totaled $111 thousand, $26 thousand and $1 thousand for 1998, 1997 and 1996. Net
mortgage loan servicing income totaled $16 thousand for 1998 and $21 thousand
for 1997 and 1996. At December 31, 1998, the Bancorp had four loans totaling
$598 thousand classified as held for sale. During 1999, the Bancorp expects to
continue to sell future originations of thirty year fixed rate mortgage loans on
a case-by-case basis as part of its efforts to manage interest rate risk.
[GRAPHIC]
LOAN COMPOSITION (DOLLARS IN MILLIONS)
Commercial Real Estate and Multifamily - $67.0 (24.4%)
Commercial Business and Other - $23.3 (8.5%)
Consumer - $10.2 (3.7%)
Construction and Land Development - $19.2 (7.0%)
Residential Real Estate, including Home Equity - $154.3 (56.4%)
At December 31, 1998, loans receivable and loans held for sale totaled $274.0
million and represented 84.3% of interest-earning assets.
- --------------------------------------------------------------------------------
At December 31, 1998, the Bancorp's investment portfolio totaled $36.4
million and was invested as follows: 71.3% in U.S. government agency debt
securities, 21.1% in U.S. government debt securities, 2.9% in U.S. government
agency mortgage-backed securities and 4.7% in FHLB common stock. At December 31,
1998, securities available-for-sale totaled $20.5 million or 56.3% of total
securities. The available-for-sale portfolio permits the active management of
the Bancorp's liquidity position. On October 1, 1998, the Bancorp adopted
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, and as permitted transferred
$12.2 million from the held-to-maturity portfolio to the available-for-sale
portfolio. During 1998, the Bancorp did not have derivative instruments and was
not involved in hedging activities as defined by SFAS No. 133. During 1998,
investment securities increased by $7.0 million (23.8%) due to deposit growth
and the slowdown in lending. In addition, the Bancorp had $10.1 million in
interest-bearing balances at the FHLB and $4.5 million in federal funds sold.
[GRAPHIC]
NON-PERFORMING LOANS TO TOTAL LOANS
1994 1995 1996 1997 1998
0.70% 0.47% 0.48% 0.44% 0.54%
Management believes that the credit risk profile of the loan portfolio is
relatively low. At December 31, 1998, the Bancorp's ratio of non-performing
loans to total loans was 0.54% (fifty-four hundredths of one percent) which was
below the industry norm.
- --------------------------------------------------------------------------------
12
<PAGE> 14
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. At December 31, 1998, the Bancorp had $1.5 million
in non-performing loans. The December 31, 1998 balance includes $854 thousand in
loans accounted for on a nonaccrual basis and $617 thousand in accruing loans
which were contractually past due 90 days or more. The total of these
nonperforming loans represents 0.54% of the total loan portfolio and 0.43% of
total assets. The amount of non-accruing loans includes 19 loans. The amount of
accruing loans, which are contractually past due 90 days or more includes 12
loans. At December 31, 1998, $1.2 million of the Bancorp's loans were classified
as substandard. The total represents 26 loans. There was 1 loan for $4 thousand
classified as doubtful. There were no loans classified as loss. Management does
not anticipate that any of the non-performing loans or classified loans will
materially impact future operations, liquidity or capital resources. At December
31, 1998, there were no material credits that would cause management to have
serious doubts as to the ability of such borrowers to comply with loan repayment
terms.
At December 31, 1998, the Bancorp had $32 thousand in foreclosed real
estate. The total includes 1 residential property and represents 0.01% of total
assets.
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses (ALL) is 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 1998, amounts provided to the ALL account totaled
$110 thousand compared to $221 thousand for 1997 and $85 thousand for 1996. The
amount provided during 1998 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 $52 thousand during 1998.
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS
[GRAPH]
<TABLE>
<S> <C>
1994 1.24%
1995 1.27%
1996 1.18%
1997 1.13%
1998 1.14%
</TABLE>
At December 31, 1998, the Bancorp had $3.1 million in the Allowance for Loan
Losses account. The amount represents 1.14% of loans outstanding and 212.9% of
non-performing loans.
- --------------------------------------------------------------------------------
At December 31, 1998, 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 performance and growth trends within the various
loan categories, as well as, 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. During 1998, additions to the ALL were allocated to
the commercial real estate loans and consumer loans due to the growth in these
portfolios and the additional risk related to these products. At December 31,
1998, no portion of the ALL was allocated to impaired loan balances as the
Bancorp had no individual loans considered to be impaired loans as of, or for
the year ended December 31, 1998.
[GRAPH]
TOTAL DEPOSITS
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C>
1994 $234.6
1995 $247.9
1996 $256.4
1997 $272.1
1998 $293.2
</TABLE>
Deposits are the major source of funds for lending and other investment
purposes. During 1998, deposits increased by $21.1 million or 7.8%.
- --------------------------------------------------------------------------------
Deposits are the major source of funds for lending and other investment
purposes. At December 31, 1998, deposits totaled $293.2 million. During 1998,
deposit growth totaled $21.1 million (7.8%). Savings accounts increased $5.4
million (12.5%), money market deposit accounts (MMDAs) increased $11.0 million
(49.3%), NOW accounts increased $4.6 million (19.4%), checking accounts
increased $5.6 million (33.9%) and certificates of deposit decreased by $5.5
million (3.3%). The growth in core deposits was a result of competitive product
offerings and an aggressive marketing program. At December 31, 1998, the deposit
base was comprised of 16.7% savings accounts, 11.3% MMDAs, 9.6% NOW accounts,
7.6% checking accounts and 54.8% certificates of deposit. The decrease in
certificates of deposit was caused by management's decision to replace municipal
funds with FHLB advances having more favorable rates and longer terms to
maturity. At December 31, 1998, repurchase agreements totaled $3.9 million.
Other short-term borrowings totaled $1.4 million. The Bancorp had $12 million in
FHLB advances with a weighted-average maturity of 3.9 years.
13
<PAGE> 15
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 Bancorp'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 Bancorp's net
interest margin by making adequate, but not excessive, liquidity provisions.
Finally, because the Bank is 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
Bancorp utilizes borrowings (i.e., repurchase agreements and advances from the
FHLB) as a source of funds.
[GRAPH]
CAPITAL TO TOTAL ASSETS
<TABLE>
<S> <C>
1994 9.6%
1995 9.7%
1996 9.3%
1997 9.2%
1998 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, 1998, the
Bancorp's capital exceeded all regulatory requirements. The Bancorp is
categorized as "well capitalized". The ratio of Tier I capital to adjusted
average assets reflects the change in capital over the periods presented as a
result of profitability and success in managing growth. In addition, Tier I
capital to risk-weighted assets was 14.1% and total capital to risk-weighted
assets was 15.3%.
- --------------------------------------------------------------------------------
During 1998, cash and cash equivalents increased by $16.7 million compared
to a $4.1 million increase for 1997 and a $8.4 million decrease for 1996. During
1998, cash provided by operating activities totaled $4.0 million, compared to
$5.2 million for 1997 and $2.4 million for 1996. The decrease during 1998 was
due to cash flows from loan sales and the increase in other assets. Cash flows
from investing activities reflect a slowdown in loan production during 1998. The
net change in loans receivable and loans held for sale totaled $1.8 million
during 1998, compared to $24.8 million for 1997 and $22.6 million for 1995. Cash
flows from financing activities totaled $21.3 million during 1998, compared to
$16.3 million for 1997 and $16.1 million for 1996. During 1998, the Bancorp paid
dividends on common stock of $2.0 million. Deposit growth during 1998 totaled
$21.1 million, compared to $15.7 million for 1997 and $8.5 million for 1996. The
increase in borrowed funds totaled $2.2 million during 1998, compared to $2.3
million for 1997 and $9.1 million for 1996. The increased use of borrowed funds
was due to favorable interest rates.
At December 31, 1998, outstanding commitments to fund loans totaled $40.0
million. Approximately 87% of the commitments were at variable rates. Management
believes that the Bancorp 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 1998, stockholders' equity increased
by $1.8 million (6.2%). The increase resulted primarily from earnings of $3.8
million for 1998. In addition, $2 thousand represents proceeds from the exercise
of 214 stock options. The Bancorp paid $2.0 million in cash dividends during
1998. The net unrealized gain on available-for-sale securities was $114
thousand. At December 31, 1998, book value per share was $11.34 compared to
$10.67 at December 31, 1997.
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 average 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.
14
<PAGE> 16
The following table shows that, at December 31, 1998, the Bancorp's capital
exceeded all regulatory capital requirements. At December 31, 1998, 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 .... $34.1 15.3% $17.8 8.0% $22.3 10.0%
Tier I capital to
risk-weighted assets .... $31.3 14.1% $ 8.9 4.0% $13.4 6.0%
Tier I capital to
adjusted average assets . $31.3 9.2% $10.2 3.0% $17.0 5.0%
</TABLE>
Results of Operations - Comparison of 1998 to 1997
Net income for 1998 was $3.8 million, compared to $3.4 million for 1997, an
increase of $347 thousand (10.2%). The earnings represent a return on average
assets of 1.14% for 1998 compared to 1.13% for 1997. The return on average
equity was 12.35% for 1998 compared to 11.87% for 1997.
Net interest income for 1998 was $12.9 million, up $977 thousand (8.2%)
from $11.9 million for 1997. The increase in net interest income was due to the
growth in average interest-earning assets and a decrease in the cost of funds.
Interest-earning assets averaged $315.3 million for 1998, up $25.3 million
(8.7%) from $290.1 million for 1997. The weighted-average yield on
interest-earning assets was 8.00% for 1998 compared to 8.16% for 1997. The
weighted-average cost of funds was 4.16% for 1998 compared to 4.32% for 1997.
The impact of the 8.00% return on interest-earning assets and the 4.16% cost of
funds resulted in an interest rate spread of 3.84% for 1998, which equaled the
1997 interest rate spread. During 1998, total interest income increased by $1.6
million (6.6%) while total interest expense increased by $589 thousand (5.0%).
The net interest margin was 3.91% for 1998 compared to 3.94% for 1997.
[GRAPH]
NET INTEREST MARGIN
<TABLE>
<S> <C>
1994 4.25%
1995 3.91%
1996 3.79%
1997 3.94%
1998 3.91%
</TABLE>
The net interest margin is total interest income minus total interest expense
stated as a percentage of average total assets. During 1998, the decrease was
due to the impact that lower market interest rates had on interest-earning
assets.
- --------------------------------------------------------------------------------
During 1998, interest income from loans increased by $1.2 million (5.5%)
compared to 1997. The weighted-average yield on loans outstanding was 8.31% for
1998 compared to 8.41% for 1997. Higher average loan balances have contributed
to the increase in interest income as loans averaged $271.4 million for 1998, up
$17.2 million (6.8%) from $254.2 million for 1997. During 1998, interest income
on investments and other deposits increased by $393 thousand (17.1%) compared to
1997. The increase was due to higher average daily balances. The
weighted-average yield on investments and other deposits was 6.13% for 1998
compared to 6.42% for 1997. Securities and other deposits averaged $43.9 million
for 1998, up $8.1 million (22.6%) from $35.8 million for 1997.
Interest expense for deposits increased by $98 thousand (0.9%) during 1998
compared to 1997. The increase was due to an increase in average daily balances.
The weighted-average rate paid on deposits for 1998 was 4.09% compared to 4.30%
for 1997. Deposit balances averaged $279.1 million for 1998, up $16.0 million
(6.1%) from $263.1 million for 1997. Interest expense on borrowed funds
increased by $491 thousand (118.6%) during 1998 due to the increased cost of
borrowed funds and higher average daily balances. The weighted-average cost of
borrowed funds was 5.41% for 1998 compared to 5.13% for 1997. The increase was
due to lengthening the average maturities of borrowed funds. Borrowed funds
averaged $16.7 million during 1998, up $8.6 million (107.1%) from $8.1 million
for 1997. Borrowed funds have provided a cost-effective supplement to
certificates of deposit, as deposit pricing within the Bancorp's local market
area has been very competitive.
Noninterest income was $1.3 million for 1998, up $281 thousand (26.4%) from
$1.1 million during 1997. During 1998, management focused on initiatives
designed to review and enhance noninterest income. During 1998, income from fees
and service charges increased $176 thousand (25.3%) and income from Trust
operations increased by $40 thousand (15.6%) due to increased fees from services
provided and growth. In addition, increased gains from the sale of fixed rate
loans ($85 thousand) and foreclosed real estate ($37 thousand) contributed to
the increase in noninterest income.
Noninterest expense for 1998 was $7.9 million, up $784 thousand (11.0%)
from $7.2 million for 1997. The increase in compensation and benefits was due to
additional staffing, annual salary increases and the increased cost of employee
benefits. Other expense changes were due to standard increases in bank
operations. The Bancorp's efficiency ratio for 1998 was 55.6% compared to 55.0%
for 1997. The ratio is calculated by dividing total noninterest expense by the
sum of net interest income and total noninterest income for the period.
Income tax expenses for 1998 totaled $2.5 million compared to $2.2 million
for 1997, an increase of $238 thousand (10.7%). The increase was due to an
increase in pretax earnings during 1998. The combined effective federal and
state tax rates for the Bancorp were 39.5% for 1998 and 39.4% for 1997.
15
<PAGE> 17
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 represented 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 reflected 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 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 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 average
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 Bancorp
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, the increase in
noninterest expense for 1997 was $674 thousand (10.4%) compared to 1996. In
general, increases in non-interest expense 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 additional staffing for the Merrillville
facility and annual salary increases. Other expense changes were due to standard
increases in bank operations. 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 efficiency ratio excludes the special SAIF assessment.
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-reoccurrence 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.
16
<PAGE> 18
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
Bancorp 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
GENERAL. 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.
STATE OF READINESS AND PROJECTED COSTS. The Federal Financial Institutions
Examination Council (FFIEC) has outlined five phases for institutions to
effectively manage the Year 2000 challenge.
Awareness - Gain executive support and commit resources to the Year 2000
challenge.
Assessment - Identify all critical business processes and elements of
information technology (IT) and non-IT systems that must be modified.
Renovation - Convert, replace or eliminate software and databases as
necessary, according to the risk-based priorities established during
assessment.
Validation - Test and verify systems, databases and utilities by simulating
data conditions for the Year 2000. Implementation - Put renovated systems,
databases and utilities into production.
In April 1997, the Bancorp 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. Management believes this plan meets all FFIEC
guidelines and the Bancorp is on schedule to meet all plan deadlines. A project
leader and a team of employees have analyzed daily operations, business forms,
software, hardware and equipment for Year 2000 compliance.
At December 31, 1998 the awareness and assessment phases have been
completed. The renovation, validation and implementation phases for mission
critical systems are in process and will be completed within the FFIEC
guidelines. In addition, management has assessed its credit and liquidity risk
by evaluating the Year 2000 preparedness of significant customers. At this time,
management believes that the overall risk rating for deposit and loan customers
is low. Management has identified customers of moderate or high risk and is
monitoring their efforts to be Year 2000 ready.
The current estimate of total Year 2000 program costs is approximately $300
thousand. Management expects to invest approximately $225 thousand in new
computers and software that will provide significantly enhanced functionality
over the systems that are currently being used. The remaining $75 thousand
represents customer communications concerning Year 2000, as well as,
modifications and upgrades to existing systems and equipment. Purchased hardware
and software will be capitalized in accordance with Bancorp policy while other
remediation costs will be expensed as incurred. At December 31, 1998, the
investment in new computers and software totaled approximately $142,000, while
costs for customer communications, and system modifications and upgrades totaled
$21 thousand. 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.
RISKS. The Bancorp relies heavily on computer technology and third party
vendors for computer processing and its business activities. The Year 2000 issue
has created risk for the Bancorp from unforeseen problems that could arise
internally, as well as, from third parties whom the Bancorp uses to process
information. If not adequately addressed, the failure of the Bancorp's computer
systems and/or third party's computer systems could have a material impact on
the Bancorp's ability to conduct its business. To mitigate this risk, the Board
of Directors and management have made a total commitment to resolving all Year
2000 issues. Ongoing communication with third party vendors has been established
to monitor their Year 2000 efforts. The Bancorp's primary third party processors
have stated that they have completed the renovation and testing of their systems
for Year 2000 readiness. All systems and interfaces are being tested internally
to confirm reported compliance.
CONTINGENCY PLANS. The Bancorp has designed its contingency plan to
mitigate risks associated with the failure of systems, equipment and forms. The
plan identifies and prioritizes systems, equipment and forms needed for Bancorp
operations and customer service; lists individuals responsible for monitoring
Year 2000 efforts for each operational area of the Bancorp; lists alternative
actions available for systems failing to achieve Year 2000 readiness; provides
for target dates for implementation of contingency strategies; assesses the risk
of various components of the plan; and provides for independent review of the
plan. The Board of Directors and management understand in a recovery situation,
the Bancorp may not be able to continue operations at the same level that it
currently maintains. However, because the Board of Directors and management have
been proactive in their involvement with the Year 2000 project, the Bancorp
believes it is well positioned to make timely decisions related to the need to
invoke the contingency plan and avoid disruptions to customer service and
business operations.
17
<PAGE> 19
FORWARD-LOOKING STATEMENTS. When used in this report and in future filings
by the Bancorp with the Securities and Exchange Commission, in the Bancorp's
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to risks and uncertainties, including but not limited to
changes in economic conditions in the Bancorp's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Bancorp's market area and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
The Bancorp wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Bancorp's financial performance and could cause the
Bancorp's actual results for future periods to differ materially from those
anticipated or projected.
The Bancorp does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
RETURN ON ASSETS
[GRAPH]
<TABLE>
<S> <C>
1994 1.24%
1995 1.14%
1996 0.75%
1997 1.13%
1998 1.14%
</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 1998 was due to increases in net interest
income, noninterest income and high asset quality. The 1996 results include the
one-time special assessment on SAIF-assessable deposits to recapitalize SAIF.
- --------------------------------------------------------------------------------
RETURN ON EQUITY
[GRAPH]
<TABLE>
<S> <C>
1994 13.04%
1995 11.74%
1996 7.90%
1997 11.87%
1998 12.35%
</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 1998 reflects record earnings. The 1996 results include the
one-time special assessment on SAIF-assessable deposits to recapitalize SAIF.
- --------------------------------------------------------------------------------
18
<PAGE> 20
[CROWE CHIZEK LOGO]
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 Bancorp) as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Bancorp'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, 1998 and 1997 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
January 8, 1999, except for Note 1, Earnings
Per Share, which is dated February 28, 1999
19
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and non-interest bearing balances in financial institutions............... $ 12,729 $ 7,083
Interest bearing balances in financial institutions............................ 10,111 3,570
Federal funds sold............................................................. 4,500 -
----------- -----------
Total cash and cash equivalents.............................................. 27,340 10,653
Securities available-for-sale.................................................. 20,522 -
Securities held-to-maturity (fair value: 1998 - $14,236, 1997 - $27,852)....... 14,133 27,716
Loans held for sale............................................................ 598 -
Loans receivable............................................................... 273,433 272,213
Less: allowance for loan losses................................................ (3,132) (3,074)
----------- -----------
Net loans receivable......................................................... 270,301 269,139
Federal Home Loan Bank stock................................................... 1,695 1,646
Accrued interest receivable.................................................... 2,298 2,195
Premises and equipment......................................................... 6,715 6,820
Foreclosed real estate......................................................... 32 259
Deferred income taxes.......................................................... 877 794
Other assets................................................................... 906 387
----------- -----------
Total assets................................................................. $ 345,417 $ 319,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing......................................................... $ 22,346 $ 16,685
Interest bearing............................................................. 270,876 255,405
----------- -----------
Total...................................................................... 293,222 272,090
Borrowed funds................................................................. 17,320 14,628
Accrued expenses and other liabilities......................................... 3,559 3,409
----------- -----------
Total liabilities............................................................ 314,101 290,127
Commitments and contingencies - -
Stockholders' Equity:
Preferred stock, no par or stated value;
10,000,000 shares authorized, none outstanding ............................ - -
Common stock, no par or stated value; 10,000,000 shares authorized;
issued and outstanding: 1998 - 1,381,578 shares, 1997 - 1,381,472 shares..... 345 345
Additional paid in capital..................................................... 2,950 2,948
Accumulated other comprehensive income......................................... 114 -
Retained earnings - substantially restricted................................... 27,907 26,189
----------- -----------
Total stockholders' equity................................................... 31,316 29,482
----------- -----------
Total liabilities and stockholders' equity................................... $ 345,417 $ 319,609
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Year Ended December 31,
---------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans receivable
Real estate loans .......................... $19,747 $19,128 $17,523
Commercial loans ........................... 2,071 1,780 1,522
Consumer loans ............................. 725 462 363
------- ------- -------
Total loan interest ...................... 22,543 21,370 19,408
Securities held-to-maturity ....................... 1,981 2,155 2,605
Other interest earning assets ..................... 711 144 324
------- ------- -------
Total interest income ...................... 25,235 23,669 22,337
------- ------- -------
Interest expense:
Deposits ..................................... 11,405 11,307 11,066
Borrowed funds ............................... 905 414 221
------- ------- -------
Total interest expense ..................... 12,310 11,721 11,287
------- ------- -------
Net interest income ............................... 12,925 11,948 11,050
Provision for loan losses ......................... 110 221 85
------- ------- -------
Net interest income after provision for loan losses 12,815 11,727 10,965
------- ------- -------
Noninterest income:
Fees and service charges ..................... 871 695 487
Trust operations ............................. 296 256 190
Gain on sale of loans, net ................... 111 26 1
Gain on sale of foreclosed real estate ....... 65 28 4
Other ........................................ 4 61 -
------- ------- -------
Total noninterest income ................... 1,347 1,066 682
------- ------- -------
Noninterest expense:
Compensation and benefits .................... 4,130 3,645 3,213
Occupancy and equipment ...................... 1,454 1,350 1,050
Federal insurance premium .................... 164 163 1,979
Advertising .................................. 128 145 159
Data processing .............................. 428 368 299
Other ........................................ 1,634 1,483 1,339
------- ------- -------
Total noninterest expense .................. 7,938 7,154 8,039
------- ------- -------
Income before income taxes ........................ 6,224 5,639 3,608
Income tax expenses ............................... 2,461 2,223 1,419
------- ------- -------
Net income ........................................ $ 3,763 $ 3,416 $ 2,189
======= ======= =======
Earnings per common share:
Basic ........................................ $ 1.36 $ 1.24 $ 0.80
Diluted ...................................... $ 1.35 $ 1.23 $ 0.79
Dividends declared per common share ............... $ 0.74 $ 0.64 $ 0.58
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Accumulated
Additional Other
Common Paid-in Comprehensive Retained Total
Stock Capital Income Earnings Equity
----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ............................. $ 345 $ 2,928 $ - $ 23,931 $ 27,204
Net income and comprehensive income ............... - - - 2,189 2,189
Issuance of 318 shares of common stock at
$4.29 - $10.63 per share, under stock option plan - 2 - - 2
Cash dividends, $0.58 per share ................... - - - (1,580) (1,580)
-------- -------- -------- -------- --------
Balance at December 31, 1996 ........................... 345 2,930 - 24,540 27,815
Net income and comprehensive income ............... - - - 3,416 3,416
Issuance of 3,754 shares of common stock at
$4.29 - $10.63 per share, under stock option plan - 18 - - 18
Cash dividends, $0.64 per share ................... - - - (1,767) (1,767)
-------- -------- -------- -------- --------
Balance at December 31, 1997 ........................... 345 2,948 - 26,189 29,482
Comprehensive income:
Net income ........................................ - - - 3,763 3,763
Net unrealized gain/(loss) on securities
available-for-sale, net of tax effects .......... - - (3) - (3)
--------
Comprehensive income before cumulative effect
of change in accounting policy .................. - - - - 3,760
Cumulative effect of change in
adopting SFAS No. 133 ........................... - - 117 - 117
--------
Comprehensive income ........................ - - - - 3,877
Issuance of 214 shares of common stock at
$5.75 - $10.63 per share, under stock option plan - 2 - - 2
Cash dividends, $0.74 per share ................... - - - (2,045) (2,045)
-------- -------- -------- -------- --------
Balance at December 31, 1998 ........................... $ 345 $ 2,950 $ 114 $ 27,907 $ 31,316
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 3,763 $ 3,416 $ 2,189
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale ................................ (4,259) (1,732) (700)
Sale of loans originated for sale ............................ 3,691 1,758 699
Depreciation and amortization, net of accretion .............. 901 710 553
Amortization of mortgage servicing rights .................... 6 - -
Net gains on sale of loans ................................... (111) (26) (1)
Net gains on sale of fixed assets ............................ - (41) -
Net gains on sale of foreclosed real estate .................. (65) (28) (4)
Provision for loan losses .................................... 110 221 85
Net change in:
Deferred taxes ............................................. (159) (88) (61)
Interest receivable ........................................ (103) (42) (61)
Other assets ............................................... 56 556 (520)
Accrued expenses and other liabilities ..................... 150 486 239
-------- -------- --------
Total adjustments .......................................... 217 1,774 229
-------- -------- --------
Net cash from operating activities ......................... 3,980 5,190 2,418
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale ...................... (8,175) - -
Proceeds from maturities of securities held-to-maturity ........ 11,000 10,748 12,671
Purchase of securities held-to-maturity ........................ (10,110) (500) (15,164)
Principal collected on mortgage-backed securities .............. 472 414 460
Purchase of Federal Home Loan Bank Stock ....................... (49) (49) -
Loan participations purchased .................................. (5,238) (3,240) -
Net change in loans receivable ................................. 3,506 (24,842) (22,589)
Purchase of premises and equipment, net ........................ (732) (354) (2,373)
Proceeds from sale of foreclosed real estate ................... 752 489 61
-------- -------- --------
Net cash from investing activities ......................... (8,574) (17,334) (26,934)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits ............................................. 21,132 15,670 8,475
Proceeds from FHLB advances .................................... 4,000 23,000 7,000
Repayment of FHLB advances ..................................... - (22,000) -
Change in other borrowed funds ................................. (1,808) 1,367 2,121
Proceeds from issuance of capital stock ........................ 2 18 2
Dividends paid ................................................. (2,045) (1,767) (1,517)
-------- -------- --------
Net cash from financing activities ......................... 21,281 16,288 16,081
-------- -------- --------
Net change in cash and cash equivalents .................... 16,687 4,144 (8,435)
Cash and cash equivalents at beginning of period ............... 10,653 6,509 14,944
-------- -------- --------
Cash and cash equivalents at end of period ..................... $ 27,340 $ 10,653 $ 6,509
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................... $ 12,371 $ 11,668 $ 11,314
Income taxes ............................................... $ 2,526 $ 1,790 $ 2,045
Transfers from securities held-to-maturity to available-for-sale $ 12,241 $ - $ -
Transfers from loans to foreclosed real estate ................. $ 460 $ 531 $ 160
Investment in limited partnership .............................. $ 500 $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996.
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
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. 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. During 1997, PSA Insurance Corporation was dissolved. All significant
inter-company accounts and transactions have been eliminated in consolidation.
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, fair values of financial instruments and status of contingencies 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 northwest 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. The Bancorp does not have a trading portfolio. 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.
During June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. On October 1, 1998, the Bancorp adopted SFAS
No. 133 and as permitted transferred securities from the held-to-maturity
portfolio to the available-for-sale portfolio. At the date of transfer, these
securities had an amortized cost of $12,241,000, and the transfer increased the
unrealized appreciation on securities available-for-sale by $194,000 and
increased stockholders equity by $117,000, net of tax of $77,000.
During 1998, the Bancorp did not have derivative instruments and was not
involved in hedging activities as defined by SFAS No. 133.
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 costs, 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. Net deferred loan fees and costs are amortized on the
interest method over the loan term.
Allowance for Loan Losses - Because some loans may not be repaid in full,
an allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate based on past loss experience, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to change
over time. While management may periodically allocate portions of the allowance
for specific problem loans, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
24
<PAGE> 26
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.
Federal Home Loan Bank Stock - The Bank is a member of the Federal Home
Loan Bank system and is required to invest in capital stock of the Federal Home
Loan Bank (FHLB). The amount of the required investment is based upon the
balance of the Bank's outstanding home mortgage loans and advances from the FHLB
and is carried at cost.
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.
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.
Mortgage Servicing Rights - Mortgage servicing rights are recognized as
assets for the allocated value of retained servicing rights on loans sold.
Mortgage servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondly as to prepayment characteristics. Any impairment of a
grouping is reported as a valuation allowance.
Long-term Assets - These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable 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 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. A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
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. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Earnings Per Share - Basic earnings per common share is net income divided
by the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share, includes the dilutive effect of additional
potential common shares issuable under stock options.
On December 2, 1996 and again on February 28, 1999, the Bancorp effected a
two-for-one common stock split as a share dividend. Earnings and dividends per
share and other share related information (other than the number of shares
outstanding as set forth in the accompanying consolidated balance sheets) is
restated for all stock splits and dividends through the date of issue of the
financial statements.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income for the Bancorp includes
unrealized gains and losses on securities available-for-sale, which are also
recognized as separate components of equity. The accounting standard that
requires reporting comprehensive income first applies for 1998, with prior
information restated to be comparable.
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.
25
<PAGE> 27
Reclassification - Certain amounts appearing in the consolidated financial
statements and notes thereto for the years ended December 31, 1997 and 1996,
have been reclassified to conform to the December 31, 1998 presentation.
NOTE 2 - Securities
Year end securities available-for-sale were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1998
- ----
U.S. government and
federal agencies ....... $20,332 $202 $ (12) $20,522
======= ==== ======= =======
</TABLE>
For the year ended December 31, 1997 no securities were classified as
available-for-sale.
Year end securities held-to-maturity were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1998
- ----
U.S. government and
federal agencies ....... $13,074 $68 $ (5) $13,137
Mortgage-backed
securities ............. $ 1,059 $40 $ - $ 1,099
------- ---- ------- -------
Total debt securities ... $14,133 $108 $ (5) $14,236
======= ==== ======= =======
1997
- ----
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
======= ==== ======= =======
</TABLE>
The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1998, are shown below. 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. Securities not
due at a single maturity date are shown separately.
<TABLE>
<CAPTION>
(Dollars in thousands)
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,526 $ 6,569 $ - $ -
Due from one
to five years.......... 13,806 13,953 13,074 13,137
Motgage-backed
securities............. - - 1,059 1,099
-------- -------- -------- --------
Total.................... $20,332 $20,522 $14,133 $14,236
======== ======== ======== ========
</TABLE>
There were no sales of securities during the years ended December 31, 1998,
1997 and 1996. Securities with carrying values of $34,716,000 and $27,715,000
were pledged as of December 31, 1998 and 1997 as collateral for borrowings from
the FHLB, repurchase agreements and public funds 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)
1998 1997
--------- ---------
<S> <C> <C>
Loans secured by real estate:
Construction and land development ....... $ 19,211 $ 21,440
Residential, including home equity ...... 154,076 157,019
Commercial real estate and other dwelling 67,018 64,831
--------- ---------
Total loans secured by real estate ... 240,305 243,290
Consumer loans ............................ 10,187 5,661
Commercial business and other ............. 23,374 23,737
--------- ---------
273,866 272,688
Less:
Net deferred loan origination fees ...... (374) (410)
Undisbursed loan funds .................. (59) (65)
--------- ---------
Loans receivable ..................... $ 273,433 $ 272,213
========= =========
</TABLE>
Activity in the allowance for loan losses is summarized below for the years
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period .... $ 3,074 $ 2,887 $ 2,830
Provision charged to income ....... 110 221 85
Loans charged off ................. (68) (34) (28)
Recoveries ........................ 16 - -
------- ------- -------
Balance at end of period .......... $ 3,132 $ 3,074 $ 2,887
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, no portion of the allowance for loan losses
was allocated to impaired loan balances as the Bancorp had no loans individually
it considered to be impaired as of or for the years ended December 31, 1998 and
1997.
NOTE 4 - Secondary Market Mortgage Activities
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)
1998 1997
------ ------
<S> <C> <C>
Mortgage loan portfolios
serviced for FHLMC ........................ $8,889 $7,976
====== ======
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $169,000 and $125,000 at December 31, 1998 and
1997.
Activity for capitalized mortgage servicing rights was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
<S> <C> <C>
Servicing rights:
Beginning of year ........................ $ - $ -
Additions ................................ 81 -
Amortized to expense ..................... (6) -
---- ----
End of year ............................ $ 75 $ -
==== ====
</TABLE>
26
<PAGE> 28
NOTE 5 - Premises and Equipment, Net
Premises and equipment are summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
-------- --------
<S> <C> <C>
Cost:
Land ...................................... $ 1,663 $ 1,663
Buildings and improvements ................ 5,482 5,317
Furniture and equipment ................... 3,497 3,470
-------- --------
Total cost ........................... 10,642 10,450
Less accumulated depreciation
and amortization ........................ (3,927) (3,630)
-------- --------
Premises and equipment, net .......... $ 6,715 $ 6,820
======== ========
</TABLE>
NOTE 6 - Income Taxes
Components of the income tax expenses consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Federal:
Current ..................... $ 2,092 $ 1,824 $1,071
Deferred .................... (153) (71) 57
State:
Current ..................... 528 487 287
Deferred .................... (6) (17) 4
------- ------- ------
Income tax expenses ...... $ 2,461 $ 2,223 $1,419
------- ------- ------
</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)
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Federal statutory rate .............. 34% 34% 34%
Tax expense at statutory rate ....... $2,116 $ 1,917 $ 1,227
State tax, net of federal effect .... 344 310 195
Other ............................... 1 (4) (3)
------ ------- -------
Total income tax expenses ...... $2,461 $ 2,223 $ 1,419
------ ------- -------
</TABLE>
The components of the net deferred tax asset recorded in the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt ...................................... $ 528 $ 363
Deferred loan fees ............................ 143 169
Deferred compensation ......................... 506 463
Other ......................................... 63 73
------- -------
Total deferred tax assets .................... 1,240 1,068
Deferred tax liabilities:
Unrealized appreciation on securities
available for sale .......................... (76) -
Depreciation .................................. (241) (249)
Other ......................................... (46) (25)
------- -------
Total deferred tax liabilities ............... (363) (274)
Valuation allowance ............................ - -
------- -------
Net deferred tax assets ...................... $ 877 $ 794
======= =======
</TABLE>
The deferred tax asset will be realized, therefore no allowance is
necessary.
The Bancorp had qualified under provisions of the Internal Revenue Code 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, 1998 and 1997 includes
approximately $6,000,000 for which no provision for federal income taxes has
been made. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad 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 $2,000,000 at December 31,
1998. 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 $36,314,000 at December 31, 1998 and $39,666,000 at December 31,
1997.
At December 31, 1998, scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1999........... $ 137,327
2000........... 19,410
2001........... 2,567
2002........... 1,024
------------
Total...... $ 160,328
==========
</TABLE>
NOTE 8 - Borrowed Funds
Borrowed funds are summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
------- -------
<S> <C> <C>
Repurchase agreements ........................ $ 3,937 $ 4,541
Fixed rate advances from the FHLB ............ 4,000 4,000
Putable advances from the FHLB ............... 8,000 4,000
Limited partnership obligation ............... 500 -
Other ........................................ 883 2,087
------- -------
Total ...................................... $17,320 $14,628
======= =======
</TABLE>
Repurchase agreements generally mature within one year and are secured by
U.S. government and U.S agency securities, under the Bancorp's control.
Information concerning these retail repurchase agreements is summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
------ ------
<S> <C> <C>
Ending balance ....................................... $3,937 $4,541
Average balance during the year ...................... 4,693 4,308
Maximum month-end balance during the year ............ 6,154 4,975
Securities underlying the agreements at year end:
Carrying value ...................................... 6,460 7,988
Fair value .......................................... 6,483 8,014
Average interest rate during the year ................ 5.62% 5.43%
</TABLE>
27
<PAGE> 29
Advances from the Federal Home Loan Bank were as follows
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
------ ------
<S> <C> <C>
Fixed advances, maturing October 1999,
at rates of 5.98% and 5.99% .................... $4,000 $4,000
Putable advances, maturing December 2002,
through July 2008, at rates from 5.28%
to 5.71%, average rate:
1998 - 5.42%; 1997 - 5.53% ..................... $8,000 $4,000
</TABLE>
Fixed rate advances are payable at maturity, with a prepayment penalty.
Putable advances are fixed for a period of one to three years and then may
adjust quarterly to the three-month London Interbank Offered Rate until
maturity. Once the putable advance interest rate adjusts, the Bancorp has the
option to prepay the advance on specified quarterly interest rate reset dates.
The advances were collateralized by $159,915,000 and $157,019,000 of securities
and mortgage loans under a blanket lien arrangement at December 31, 1998 and
1997.
The limited partnership obligation represents an investment interest in a
partnership formed for the construction, ownership and management of affordable
housing projects. The amount of the note is $500,000 with funding to begin
during 1999 and to continue over a nine year period. Payments are required
within ten days of written demand. The obligation to make payment is absolute
and unconditional. The note requires no payment of interest.
At December 31, 1998, scheduled maturities of borrowed funds were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1999........... $ 8,432
2000........... 490
2001........... 76
2002........... 4,061
2003........... 2,061
Thereafter..... 2,200
---------
Total...... $ 17,320
=========
</TABLE>
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 year
ended December 31, 1998 were based on 10% of the participants' total
compensation excluding incentives. Contributions during the years ended December
31, 1997 and 1996 were based on 9% 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
$274,000, $204,000 and $185,000 for the years ended December 31, 1998, 1997 and
1996.
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. No contributions were made to
the ESOP during the years ended December 31, 1998 and 1996. Contributions during
the year ended December 31, 1997 were based on 1% of the participants total
compensation excluding incentives. The ESOP held 2,188 shares of the Bancorp's
common stock as of December 31, 1998, all of which have been allocated to
participants. The ESOP expense amounted to $0, $23,000 and $0 for the years
ended December 31, 1998, 1997 and 1996. During 1999, the ESOP will be terminated
as directed by the Bancorp's Board of Directors.
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.
28
<PAGE> 30
The following tables set forth a reconciliation of the Bancorp's
postretirement benefit plan funding status and expense for the periods
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
----- -----
<S> <C> <C>
Change in postretirement benefit obligation:
Beginning postretirement
benefit obligation ............................... $ 119 $ 112
Unrecognized net actuarial gain .................. - -
Service cost ....................................... 5 4
Interest cost ...................................... 9 9
Benefits paid ...................................... (7) (6)
----- -----
Ending postretirement
benefit obligation ............................. 126 119
Change in plan assets .............................. - -
Funded status ...................................... 126 119
Unrecognized net actuarial gain .................... 58 64
----- -----
Prepaid benefit cost ............................... $ 184 $ 183
===== =====
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Assumptions used:
Discount rate ......................... 8.0% 8.0% 8.0%
Annual increase in health care
cost trend rate:
Years one through three ............. 11.5% 11.5% 11.5%
Thereafter .......................... 5.5% 5.5% 5.5%
Components of net periodic
postretirement benefit cost:
Service cost .......................... $ 5 $ 4 $ 4
Interest cost ......................... 9 9 9
Unrecognized net actuarial gain ....... (6) (6) (5)
--- --- ---
Net periodic postretirement
benefit cost .......................... $ 8 $ 7 $ 8
=== === ===
</TABLE>
A 1% increase or decrease in the health care cost trend rate assumptions
would not have a material impact on the postretirement benefit obligation 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>
1998
Total capital
(to risk-weighted assets) $34.1 15.3% $17.8 8.0% $22.3 10.0%
Tier I capital
(to risk-weighted assets) $31.3 14.1% $ 8.9 4.0% $13.4 6.0%
Tier I capital
(to adjusted average assets) $31.3 9.2% $10.2 3.0% $17.0 5.0%
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 average assets) $29.5 9.2% $ 9.6 3.0% $16.0 5.0%
</TABLE>
The Bancorp and the Bank were categorized as well capitalized at December
31, 1998 and 1997. There are no conditions or events since December 31, 1998
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 of so much of its undivided profits (generally,
earnings less losses, bad debts, taxes and other operating expenses) as is
considered expedient by the Bank's Board of Directors. However, the Bank must
obtain the approval of the Indiana Department of Financial Institutions for the
payment of a dividend if the total of all dividends declared by the Bank during
the current year, including the proposed dividend, would exceed the sum of
retained net income for the year to date plus its retained net income for the
previous two years (approximately $3,863,000 at December 31, 1998). For this
purpose, "retained net income" means net income as calculated for call report
purposes, less all dividends declared for the applicable period. 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
Pursuant to a stock option plan (the "Plan"), an aggregate of 240,000
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 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.
29
<PAGE> 31
Financial Accounting Standard No. 123 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 for stock option plans. No compensation cost was recognized
for stock options during 1998, 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income as reported ............ $3,763 $3,416 $2,189
Pro forma net income .............. $3,747 $3,405 $2,182
Earnings per common share
as reported ................... $ 1.36 $ 1.24 $ 0.80
Pro forma earnings
per common share .............. $ 1.36 $ 1.23 $ 0.79
Earnings per common share,
assuming dilution as reported . $ 1.35 $ 1.23 $ 0.79
Pro forma earnings per common
share, assuming dilution ...... $ 1.34 $ 1.22 $ 0.79
</TABLE>
The fair value of options granted during 1998, 1997 and 1996 is estimated
using the following weighted-average information: risk free interest rate of
5.73%, 6.50%, and 5.42%; expected life of 7 to 8 years; expected volatility of
stock price of 5.57% for 1998, 5.62% for 1997 and 5.45% for 1996; and expected
dividends of 3.61%, 4.00%, and 4.26% for 1998, 1997 and 1996. 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 exercisable. Options granted
since 1995 generally are exercisable 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-average
Number Weighted-average fair value
of options exercise price of grants
---------- -------------- ---------
<S> <C> <C> <C>
Outstanding, January 1, 1996 .......... 44,744 $ 8.70
Granted ............................... 6,800 13.50 $ 1.03
Exercised ............................. 316 6.44
Forfeited ............................. - -
Expired ............................... - -
------
Outstanding, December 31, 1996 ........ 51,228 9.35
Granted ............................... 16,100 16.00 2.12
Exercised ............................. 3,754 4.93
Forfeited ............................. 100 16.00
Expired ............................... - -
------
Outstanding, December 31, 1997 ........ 63,474 11.29
Granted ............................... 17,300 20.50 2.42
Exercised ............................. 214 7.57
Forfeited ............................. 400 18.25
Expired ............................... - -
------
Outstanding, December 31, 1998 ........ 80,160 13.25
======
</TABLE>
Options exerciseable at year-end are as follows:
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
------------- -----------------
<S> <C> <C>
1996 15,588 $5.18
1997 11,914 $5.29
1998 11,780 $5.29
</TABLE>
At December 31, 1998, options outstanding were as follows:
<TABLE>
<S> <C>
Number of options 80,160
Range of exercise price $4.66 - $20.50
Weighted-average exercise price $13.25
Weighted-average remaining option life 7.2 years
</TABLE>
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, 1998, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Net income available to
common stockholders ........... $3,763,000 $3,416,000 $2,189,000
========== ========== ==========
Weighted-average common
shares outstanding ............ 2,763,066 2,762,302 2,759,038
========== ========== ==========
Basic Earnings
Per Common Share .......... $ 1.36 $ 1.24 $ 0.80
========== ========== ==========
Diluted Earnings Per Common Share:
Net income available to
common stockholders ........... $3,763,000 $3,416,000 $2,189,000
========== ========== ==========
Weighted-average common
shares outstanding ............ 2,763,066 2,762,302 2,759,038
Add: dilutive effect of assumed
stock option exercises ......... 29,092 29,266 19,456
---------- ---------- ----------
Weighted-average common and
dilutive potential shares
outstanding ................... 2,792,158 2,791,568 2,778,494
========== ========== ==========
Diluted Earnings
Per Common Share .......... $ 1.35 $ 1.23 $ 0.79
========== ========== ==========
</TABLE>
NOTE 14 - Related Party Transactions
The Bank had aggregate loans outstanding to directors and executive
officers (with individual balances exceeding $60,000) of $4,169,000 at December
31, 1998 and $3,138,000 at December 31, 1997. For the year ended December 31,
1998, the following activity occurred on these loans:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Aggregate balance - December 31, 1997.. $ 3,138
New loans ............................. 2,755
Repayments ............................ (362)
Other changes ......................... (1,362)
-----------
Aggregate balance - December 31, 1997.. $ 4,169
===========
</TABLE>
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.
30
<PAGE> 32
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, 1998:
Real estate ..................... $5,193 $15,361 $20,554
Consumer loans .................. - 468 468
Commercial business ............. - 18,946 18,946
------ ------- -------
Total .......................... $5,193 $34,775 $39,968
====== ======= =======
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>
The $5,193,000 in fixed rate commitments outstanding at December 31, 1998
had interest rates ranging from 7.50% to 8.75%, 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,
1998 and 1997, the Bancorp had standby letters of credit totaling $1,945,000 and
$501,000. 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.
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.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1998
-----------------------------
Carrying Estimated
Value Fair Value
--------- ---------
<S> <C> <C>
Cash and cash equivalents .............. $ 27,340 $ 27,340
Securities available-for-sale .......... 20,522 20,522
Securities held-to-maturity ............ 14,133 14,236
Federal Home Loan Bank stock ........... 1,695 1,695
Loans held for sale .................... 598 600
Loans receivable, net .................. 270,301 273,157
Demand and savings deposits ............ (132,895) (132,895)
Certificates of deposit ................ (160,328) (160,688)
Borrowed funds ......................... (17,320) (17,373)
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1997
-----------------------------
Carrying Estimated
Value Fair Value
--------- ---------
<S> <C> <C>
Cash and cash equivalents .............. $ 10,653 $ 10,653
Securities held-to-maturity ............ 27,716 27,852
Federal Home Loan Bank stock ........... 1,646 1,646
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)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1998 and 1997. The estimated
fair value for cash and cash equivalents and Federal Home Loan Bank stock 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, 1998 and 1997, 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, 1998 and 1997, applied for the time period
until maturity. The estimated fair value for borrowed funds is based on current
rates for similar financing. 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, 1998 and 1997, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values at
December 31, 1998 and 1997 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 include, 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.
31
<PAGE> 33
NOTE 17 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are summarized as follows:
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Total interest income .......... $6,264 $6,322 $6,340 $6,309
Total interest expense ......... 3,105 3,118 3,098 2,989
------ ------ ------- ------
Net interest income ............ 3,159 3,204 3,242 3,320
Provision for loan losses ...... 25 15 25 45
------ ------ ------- ------
Net interest income after
provision for loan losses ..... 3,134 3,189 3,217 3,275
Total noninterest income ....... 320 356 300 371
Total noninterest expense ...... 1,967 2,002 1,946 2,023
------ ------ ------- ------
Income before
income taxes .................. 1,487 1,543 1,571 1,623
Income tax expenses ............ 593 612 626 630
------ ------ ------- ------
Net income ..................... $ 894 $ 931 $ 945 $ 993
====== ====== ====== ======
Basic earnings per share ....... $ 0.33 $ 0.34 $ 0.34 $ 0.35
====== ====== ====== ======
Diluted earnings per share ..... $ 0.32 $ 0.34 $ 0.34 $ 0.35
====== ====== ======= ======
</TABLE>
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
====== ====== ====== ======
Basic earnings per share ....... $ 0.31 $ 0.31 $ 0.31 $ 0.31
====== ====== ====== ======
Diluted earnings per share ..... $ 0.30 $ 0.31 $ 0.31 $ 0.31
====== ====== ====== ======
</TABLE>
NOTE 18 - Parent Company Only Statements
<TABLE>
<CAPTION>
(Dollars in thousands)
NORTHWEST INDIANA BANCORP
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Assets
Cash on deposit with Peoples Bank ................ $ 43 $ 13
Investment in Peoples Bank ....................... 31,275 29,475
Dividends receivable from Peoples Bank ........... 535 455
Other assets ..................................... 2 5
------- -------
Total assets ................................... $31,855 $29,948
======= =======
Liabilities and stockholders' equity
Dividends payable ................................ $ 511 $ 442
Other liabilities ................................ 28 24
------- -------
Total liabilities .............................. 539 466
Common stock ..................................... 345 345
Additional paid in capital ....................... 2,950 2,948
Accumulated other comprehensive income ........... 114
Retained earnings ................................ 27,907 26,189
------- -------
Total stockholders' equity ..................... 31,316 29,482
------- -------
Total liabilities and stockholders' equity .... $31,855 $29,948
======= =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
NORTHWEST INDIANA BANCORP
CONDENSED STATEMENTS OF INCOME
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Dividends from
Peoples Bank ..................... $ 2,129 $ 1,770 $ 1,625
Operating expenses ................ 86 76 59
------- ------- -------
Income before income taxes
and equity in undistributed
income of Peoples Bank ........... 2,043 1,694 1,566
Provision for income taxes ........ (34) (30) (23)
------- ------- -------
Income before equity
in undistributed
income of Peoples Bank ........... 2,077 1,724 1,589
Equity in undistributed
income of Peoples Bank ........... 1,686 1,692 600
------- ------- -------
Net Income ........................ $ 3,763 $ 3,416 $ 2,189
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
NORTHWEST INDIANA BANCORP
CONDENSED STATEMENTS OF CASH FLOWS
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................... $ 3,763 $ 3,416 $ 2,189
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
net income of
Peoples Bank ..................... (1,686) (1,692) (600)
Change in other assets ............. (77) (11) (54)
Change in other liabilities ........ 73 (4) (7)
------- ------- -------
Total adjustments ................. (1,690) (1,707) (661)
------- ------- -------
Net cash from
operating activities ........ 2,073 1,709 1,528
Cash flows from
investing activities ................ - - -
Cash flows from financing activities:
Dividends paid ...................... (2,045) (1,767) (1,517)
Proceeds from issuance
of capital stock .................. 2 18 1
------- ------- -------
Net cash from
financing activities ............. (2,043) (1,749) (1,516)
------- ------- -------
Net change in cash ................... 30 (40) 12
Cash at beginning of year ............ 13 53 41
------- ------- -------
Cash at end of year .................. $ 43 $ 13 $ 53
======= ======= =======
</TABLE>
32
<PAGE> 34
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, 1999, the Bancorp had 2,763,156 shares
of common stock outstanding and 484 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, 1998 and
December 31, 1997. 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
--------- -------- -----------
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998 1st Quarter $21.07 $19.50 $.185
- --------------------------------------------------------------------------------
2nd Quarter 21.25 20.50 .185
- --------------------------------------------------------------------------------
3rd Quarter 21.25 20.63 .185
- --------------------------------------------------------------------------------
4th Quarter 21.00 20.00 .185
- --------------------------------------------------------------------------------
Fiscal Year Ended
December 31, 1997 1st Quarter $18.00 $15.00 $.16
- --------------------------------------------------------------------------------
2nd Quarter 18.50 18.00 .16
- --------------------------------------------------------------------------------
3rd Quarter 20.94 18.25 .16
- --------------------------------------------------------------------------------
4th Quarter 21.25 20.00 .16
- --------------------------------------------------------------------------------
</TABLE>
[Graph]
MARKET PRICE PER SHARE
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$10.63 $13.50 $15.57 $21.07 $21.00
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". ON FEBRUARY 28, 1999,
THE BANCORP EFFECTED A TWO-FOR-ONE STOCK SPLIT AS A SHARE DIVIDEND. MARKET PRICE
PER SHARE HAS BEEN RESTATED FOR ALL PERIODS PRESENTED TO REFLECT THE SPLIT.
- --------------------------------------------------------------------------------
[Graph]
BOOK VALUE PER SHARE
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$9.29 $9.86 $10.08 $10.67 $11.34
</TABLE>
THE BANK'S EARNINGS HAVE INCREASED THE BOOK VALUE OF THE BANCORP'S STOCK FROM
$9.29 AT DECEMBER 31, 1994 TO $11.34 PER SHARE AT DECEMBER 31, 1998. ON FEBRUARY
28, 1999, THE BANCORP EFFECTED A TWO-FOR-ONE STOCK SPLIT AS A SHARE DIVIDEND.
BOOK VALUE PER SHARE HAS BEEN RESTATED FOR ALL PERIODS PRESENTED TO REFLECT THE
SPLIT.
- --------------------------------------------------------------------------------
[Graph]
BASIC EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$1.18 $1.13 $0.80 $1.24 $1.36
</TABLE>
EARNINGS FOR 1998 TOTALED $3.8 MILLION RESULTING IN BASIC EARNINGS PER COMMON
SHARE OF $1.36. ON FEBRUARY 28, 1999, THE BANCORP EFFECTED A TWO-FOR-ONE STOCK
SPLIT AS A SHARE DIVIDEND. BASIC EARNINGS PER COMMON SHARE HAS BEEN RESTATED FOR
ALL PERIODS PRESENTED TO REFLECT THE SPLIT.
- --------------------------------------------------------------------------------
[Graph]
5 YEAR TOTAL RETURN
<TABLE>
<S> <C>
SNL Market Index $293
SNL Bank Asset-Size Index $293
Bancorp $325
</TABLE>
MANAGEMENT OF THE BANCORP IS COMMITTED TO MAXIMIZING STOCKHOLDER VALUE. THE
BANCORP'S STOCK PERFORMANCE ON A TOTAL RETURN BASIS IS COMPARED WITH THE TOTAL
RETURNS OF THE SNL SECURITIES INDEX FOR THE NASDAQ COMPOSITE (SNL MARKET INDEX)
AND FOR BANK STOCKS WITH ASSETS RANGING FROM $250 MILLION TO $500 MILLION (SNL
BANK ASSET-SIZE 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, 1993, WOULD BE WORTH $325 ON DECEMBER 31, 1998.
- --------------------------------------------------------------------------------
33
<PAGE> 35
1998
BOARD OF
DIRECTORS
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
DAVID A. BOCHNOWSKI
22 Years
Chairman and Chief Executive Officer
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
GLORIA GRAY
16 Years
Retired Vice President and Treasurer of Career Development Consultants,
Munster, Indiana
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
LEROY F. CATALDI
22 Years
Pharmacist,
Dyer, Indiana
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
STANLEY E. MIZE
2 Years
President of Towne & Countree
Auto Sales and Co-owner
of Lake Shore Ford
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
JAMES J. CRANDALL
41 Years
Retired Attorney
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
JEROME F. VRABEL
14 Years
Vice President, ED&F Man
International Inc.
Chicago, Illinois
34
<PAGE> 36
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
LOURDES M. DENNISON
15 Years
Administrative Director, Dennison Surgical Corp.
Merrillville, Indiana
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
JAMES L.WIESER
February 1999
Attorney, Wieser and Sterba
Attorneys at Law
Schererville, Indiana
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
BENJAMIN A. BOCHNOWSKI
Chairman Emeritus,
Advisory Director
43 years Community Banking Experience
- ----------------
PHOTO OF
BOARD MEMBER
- ----------------
HAROLD G. REUTH
Director Emeritus
30 Years Community Banking Experience
35
<PAGE> 37
CORPORATE
INFORMATION
Corporate Headquarters
9204 Columbia Avenue
Munster, Indiana 46321
Telephone
219/836-9690
STOCK TRANSFER AGENT
The Bank acts as the transfer agent
for the Bancorp's common stock.
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
330 East Jefferson Boulevard
P. O. Box 7
South Bend, Indiana 46624
SPECIAL LEGAL COUNSEL
Baker & Daniels
300 North Meridian Street
Suite 2700
Indianapolis, Indiana 46204
ANNUAL SHAREHOLDERS MEETING
The Annual Meeting of Stockholders
of NorthWest Indiana Bancorp will be
held at the Center for Visual &
Performing Arts at 1040 Ridge Road, Munster,
Indiana, on Wednesday, April 21, 1999 at 8:30 a.m.
A copy of the Bancorp's Form 10-K, including financial
statement schedules as filed with the Securities and
Exchange Commission, will be furnished without charge to
stockholders as of the record date upon written request to
the Corporate Secretary, NorthWest Indiana Bancorp, 9204
Columbia Avenue, Munster, Indiana 46321.
Directors of NorthWest Indiana Bancorp
and Peoples Bank SB
David A. Bochnowski
Chairman and Chief Executive
Officer of the Bancorp
Munster, Indiana
Leroy F. Cataldi
Pharmacist
Dyer, Indiana
Gloria C. Gray
Retired Vice President and Treasurer of Career
Development Consultants, Munster, Indiana
Lourdes M. Dennison
Administrative Director,
Kumpol Dennison Surgical Corporation
Merrillville, Indiana
Jerome F. Vrabel
Vice President, ED&F Man International Inc.,
Chicago, Illinois, a commodities brokerage
firm on the Chicago Board of Trade
James J. Crandall
Retired Attorney
Stanley E. Mize
President of Towne & Countree Auto Sales
and Co-owner of Lake Shore Ford
Schererville, Indiana
James L. Wieser
Attorney with Wieser & Sterba
Schererville, Indiana
Chairman Emeritus, Advisory Director
Benjamin A. Bochnowski
Directors Emeriti
Harold G. Rueth
Albert J. Lesniak
PEOPLES BANK SB OFFICERS
David A. Bochnowski
Chairman and Chief Executive Officer*
Joel Gorelick
Vice President, Chief Lending Officer*
Edward J. Furticella
Vice President, Chief Financial Officer*
Frank J. Bochnowski
Senior Vice President, General Counsel,
Trust Officer and Corporate Secretary*
Daniel W. Moser
Vice President for Housing Finance
Rodney L. Grove
Vice President, Retail Banking
Robert T. Lowry
Vice President, Controller
* Holds similar office with NorthWest Indiana Bancorp
PEOPLES BANK SB
MANAGEMENT PERSONNEL
Accounting
Arlene M. Wohadlo,
Assistant Vice President
Branches
Catherine L. Gonzalez, East Chicago
Christopher A. Grencik, Dyer
David W. Homrich,
Assistant Vice President, Munster
Jill M. Knight, Assistant Vice President,
Merrillville (Broadway)
Marilyn K. Repp, Assistant Vice President,
Merrillville (Taft Street)
Meredith L. Rolewski, Schererville
Barbara J. Zura, Assistant Vice President,
Senior Branch Manager, Woodmar
Commercial Lending
Terry R. Gadberry, Assistant Vice President
Todd M. Scheub, Assistant Vice President
Consumer Lending
James P. Lehr, Assistant Vice President
Clovese R. Robinson
Sharon V. Vacendak
Credit Administration
Christine M. Friel
Housing Finance
Sylvia Magallanez
Marvin O. Tucker
Human Resource
Linda L. Kollada, Assistant Vice President
Information Services
Tanya A. Mathews, Assistant Vice President
Loan Administration
Mary D. Mulroe, Assistant Vice President
Management Development
Michael J. Shimala
Marketing Project Manager
Shannon E. Franko
Staff Internal Auditor
Stacy A. Januszewski
Trust
Stephan A. Ziemba,
Assistant Vice President
36
<PAGE> 38
-----------------------------------
DEDICATED TO
THE MEMORY OF
photo of past
board member
John J. Wadas, Jr.
1939 - 1998
-----------------------------------
<PAGE> 39
[NorthWest Indiana Bancorp Logo]
CORPORATE HEADQUARTERS,
9204 Columbia Avenue
Munster, Indiana 46321
219/836-9690
[Peoples Bank Logo]
EAST CHICAGO, 4901 Indianapolis Blvd., 397-5010
HAMMOND, 7120 Indianapolis Blvd., 844-7210
DYER, 1300 Sheffield Avenue, 322-2530
MUNSTER, 9204 Columbia Avenue, 836-9690
SCHERERVILLE, 141 W. Lincoln Highway, 865-4300
MERRILLVILLE, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,729
<INT-BEARING-DEPOSITS> 10,111
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,522
<INVESTMENTS-CARRYING> 14,133
<INVESTMENTS-MARKET> 14,236
<LOANS> 273,433
<ALLOWANCE> 3,132
<TOTAL-ASSETS> 345,417
<DEPOSITS> 293,222
<SHORT-TERM> 17,320
<LIABILITIES-OTHER> 3,559
<LONG-TERM> 0
0
0
<COMMON> 345
<OTHER-SE> 31,316
<TOTAL-LIABILITIES-AND-EQUITY> 345,417
<INTEREST-LOAN> 22,543
<INTEREST-INVEST> 1,981
<INTEREST-OTHER> 711
<INTEREST-TOTAL> 25,235
<INTEREST-DEPOSIT> 11,405
<INTEREST-EXPENSE> 12,310
<INTEREST-INCOME-NET> 12,925
<LOAN-LOSSES> 110
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,938
<INCOME-PRETAX> 6,224
<INCOME-PRE-EXTRAORDINARY> 3,763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,763
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.10
<LOANS-NON> 854
<LOANS-PAST> 617
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,074
<CHARGE-OFFS> 68
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 3,132
<ALLOWANCE-DOMESTIC> 2,349
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 783
</TABLE>
