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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, 1999
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 29, 2000, 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 $40,887,259.
There were 2,727,403 shares of the registrant's Common Stock, without par value,
outstanding at February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
1. 1999 Annual Report to Shareholders. (Parts II and IV)
2. Definitive Proxy Statement for the 2000 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 commercial real estate, as well as, construction
loans and 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 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 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 of 1995. 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
also intended to identify "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 to, among other things, 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, 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
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all of its offices are located. Ninety-five percent of the
Bank's business activities are within this area. This concentration exposes the
Bank to risks resulting from changes in the local economy. A dramatic drop in
local real estate values would, for example, adversely affect the quality of the
Bank's loan portfolio.
INTEREST RATE RISK. The Bancorp'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. Interest rate risk (IRR) is the risk that the earnings and
capital will be adversely affected by changes in interest rates. While the
Bancorp attempts to adjust its asset/liability mix in order to limit the
magnitude of interest rate risk, IRR 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 Bancorp 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 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 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 1999 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 twenty-five years or longer. 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, 1999, under the 15% of capital and surplus limitation was
approximately $5,367,000. At December 31, 1999, the Bank had no loans that
exceeded the regulatory limitations.
At December 31, 1999, 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 stated in
thousands (000's).
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Type of loan:
Conventional real estate loans:
Construction and
development loans $ 14,847 $ 19,211 $ 21,440 $ 13,248 $ 8,913
Loans on existing
properties (1) 240,862 220,755 221,482 208,601 194,779
Consumer loans 10,449 10,187 5,661 4,890 3,527
Commercial business, other(2) 29,655 23,280 23,630 17,957 15,074
--------- --------- --------- --------- ---------
Loans receivable(3) $ 295,813 $ 273,433 $ 272,213 $ 244,696 $ 222,293
========= ========= ========= ========= =========
Type of collateral:
Real estate:
1-to-4 family $ 175,963 $ 172,949 $ 178,091 $ 164,590 $ 152,485
Other dwelling units, land
and commercial real estate 79,746 67,018 64,831 57,259 51,207
Consumer loans 10,177 9,887 5,410 4,619 3,335
Commercial business, other(2) 27,374 21,433 21,712 16,306 13,893
--------- --------- --------- --------- ---------
Loans receivable (4) $ 293,260 $ 271,287 $ 270,044 $ 242,774 $ 220,920
========= ========= ========= ========= =========
Average loans outstanding
during the period (3) $ 286,580 $ 271,406 $ 254,219 $ 232,465 $ 221,352
========= ========= ========= ========= =========
<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 stated in thousands (000's).
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction and development loans $ 13,128 $ 9,683 $ 13,168
Loans on existing property 43,335 29,448 23,461
Loans refinanced 7,981 10,961 14,824
-------- -------- --------
Total conventional real estate
loans originated 64,444 50,092 51,453
Commercial business loans 84,854 59,646 60,944
Consumer loans 5,829 6,519 4,591
-------- -------- --------
Total loans originated $155,127 $116,257 $116,988
======== ======== ========
Loan participations purchased $ 300 $ 5,238 $ 3,240
======== ======== ========
Whole loans and participations sold $ 3,214 $ 3,785 $ 1,820
======== ======== ========
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1999 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. 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 $ 40,124 $ 67,608 $147,977 $255,709
Consumer loans 6,537 3,642 270 10,449
Commercial business loans 18,582 8,006 3,067 29,655
-------- -------- -------- --------
Total loans receivable $ 65,243 $ 79,256 $151,314 $295,813
======== ======== ======== ========
</TABLE>
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The table below sets forth the dollar amount of all loans due after one
year from December 31, 1999 which have predetermined interest rates or have
floating or adjustable interest rates. The amounts are stated in thousands
(000's).
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- --------
Real estate loans $103,234 $112,351 $215,585
Consumer loans 3,910 2 3,912
Commercial business loans 4,963 6,110 11,073
-------- -------- --------
Total $112,107 $118,463 $230,570
======== ======== ========
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, 1999 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 $2,000,000 are
approved by the senior officers loan committee. All loans in excess of
$2,000,000, 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.) Peoples Bank will not
extend credit to any of its executive officers, directors, or principal
shareholders or to any related interest of that person in an amount that, when
aggregated with all other extensions of credit to that person, exceeds $500,000
unless: (1) the extension of credit has been approved in advance by a majority
of the entire Board of Directors of the Bank, and (2) the interested party has
abstained from participating directly or indirectly in the voting.
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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, refinance 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 purchase price or
appraised value, whichever is less. 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 1999 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 one-to-four family program. Loan
interest rates are determined based on secondary market yield requirements and
local market conditions. Fixed rate mortgage loans with contractual maturities
of twenty-five years or longer 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 $24.9 million for 1999, $16.9 million for 1998,
and $23.6 million for 1997. During 1999, ARMs represented 48% of total mortgage
loan originations. The ability of the Bancorp to successfully market ARM's
depends upon loan demand, prevailing interest rates, volatility of
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interest rates, public acceptance of such loans, and terms offered by
competitors.
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 not to exceed two
years or date of occupancy, whichever is less.
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 20 years
normally have a balloon feature calling for a full repayment within seven to ten
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 properties are generally
located within an area permitting physical inspection and regular review of
business records. Projects financed outside of the Bancorp's primary lending
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area generally involve borrowers and guarantors who are or were previous
customers of the Bancorp.
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.
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NON-PERFORMING ASSETS, ASSET CLASSIFICATION AND PROVISION FOR LOAN LOSSES
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when, in the opinion of management, serious doubt exists as
to the collectibility of a loan. Loans are generally placed on non-accrual
status when either principal or interest is 90 days or more past due. Consumer
loans are generally charged off when the loan becomes over 120 days delinquent.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance, tax and insurance reserve, or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.
The 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 fair value at the date of
foreclosure. At foreclosure, any write-down of the property is charged to the
allowance for loan losses. 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. 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 ten 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 ten 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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 565 $ 636 $ 715 $ 583 $ 361
Commercial -- 131 44 45 --
Commercial business -- 69 56 111 --
Consumer -- 18 151 49 11
------ ------ ------ ------ ------
Total $ 565 $ 854 $ 966 $ 788 $ 372
====== ====== ====== ====== ======
Accruing loans which are contractually past due 90 days or more:
Real estate:
Residential $ 235 $ 429 $ 220 $ 373 $ 637
Commercial 3 -- -- -- --
Commercial business -- 188 -- 5 --
Consumer -- -- 6 1 46
------ ------ ------ ------ ------
Total $ 238 $ 617 $ 226 $ 379 $ 683
====== ====== ====== ====== ======
Total of non-accrual
and 90 days past due $ 803 $1,471 $1,192 $1,167 $1,055
====== ====== ====== ====== ======
Ratio of non-performing
loans to total assets 0.22% 0.43% 0.37% 0.39% 0.38%
Ratio of non-performing
loans to total loans 0.27% 0.54% 0.44% 0.48% 0.47%
Foreclosed real estate $ -- $ 32 $ 259 $ 189 $ 86
====== ====== ====== ====== ======
Ratio of foreclosed real
estate to total assets 0.00% 0.01% 0.08% 0.06% 0.03%
</TABLE>
During 1999, gross interest income of $69,687 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 $27,981.
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, 1999, $689
thousand of the Bancorp's loans were classified as substandard. The total
represents 18 loans. No loans were classified as doubtful or loss.
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses ("ALL") is maintained. Because
estimating the risk of loss and the amount of loss on any loan is necessarily
subjective, the ALL is maintained by management at a level considered adequate
to cover losses based on loan portfolio growth, past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. Although management believes that it uses
the best information available to make such estimations, future adjustments to
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, 1999, 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, 1999, 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.
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 stated in thousands (000's).
13
<PAGE> 15
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,132 $ 3,074 $ 2,887 $ 2,830 $ 2,751
Loans charged-off:
Real estate - residential (16) (38) (9) (28) --
Commercial business -- (20) (19) -- --
Consumer (17) (10) (6) -- (2)
------- ------- ------- ------- -------
Total charge-offs (33) (68) (34) (28) (2)
Recoveries:
Commercial business 10 9 -- -- --
Consumer -- 7 -- -- 1
------- ------- ------- ------- -------
Total recoveries 10 16 -- -- 1
Net (charge-offs)/recoveries (23) (52) (34) (28) (1)
------- ------- ------- ------- -------
Provision for loan losses 200 110 221 85 80
------- ------- ------- ------- -------
Balance at end of period $ 3,309 $ 3,132 $ 3,074 $ 2,887 $ 2,830
======= ======= ======= ======= =======
ALL to loans outstanding 1.12% 1.14% 1.13% 1.18% 1.27%
ALL to nonperforming loans 412.1% 212.9% 257.8% 247.4% 268.3%
Net charge-offs/recoveries
to average loans out-
standing during the period 0.01% 0.02% 0.01% 0.01% 0.00%
</TABLE>
The table below shows the allocation of the allowance for loan losses
at December 31, for the dates indicated. The dollar amounts are stated in
thousands (000's). The percent columns represent the percentage of loans in each
category to total loans.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------- -------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 302 54.5 302 56.7 322 57.5 372 61.8 372 64.6
Commercial and
other dwelling 1,106 27.0 953 24.0 932 23.8 880 23.4 860 23.0
Construction and
development 275 5.0 268 7.1 268 7.9 153 5.4 130 4.0
Consumer loans 200 3.5 196 3.7 153 2.1 110 2.0 110 1.6
Commercial business
and other 932 10.0 630 8.5 630 8.7 650 7.4 650 6.8
Unallocated 494 783 769 722 708
----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total 3,309 100.0 3,132 100.0 3,074 100.0 2,887 100.0 2,830 100.0
===== ======= ===== ======= ===== ======= ===== ======= ===== =======
</TABLE>
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.
14
<PAGE> 16
No securities are classified as trading investments. At December 31, 1999, AFS
securities totaled $24.2 million or 60.2% 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. During 1999,
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, 1999, the Bancorp's investment portfolio totaled $40.2 million. In
addition, the Bancorp had $1.8 million in FHLB stock.
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 stated in thousands (000's).
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
U.S. government securities:
Available-for-sale $ 4,993 $ 7,669 $ --
Held-to-maturity -- -- 6,537
U.S. government agencies:
Available-for-sale 19,178 12,853 --
Held-to-maturity 15,228 13,074 19,648
Mortgage-backed securities(1) 755 1,059 1,531
------- ------- -------
Totals $40,154 $34,655 $27,716
======= ======= =======
(1) Mortgage-backed securities are classified as held-to-maturity.
</TABLE>
The contractual maturities and weighted average yields for the U.S.
government securities, agency securities and mortgaged-backed securities at
December 31, 1999, are summarized as follows. The carrying values are stated 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 $ 2,504 6.11% $ 2,489 5.35% $ -- -- % $ -- -- %
U.S. government
Agencies:
AFS 2,509 6.17 16,669 5.75 -- -- -- --
HTM 499 5.74 14,729 6.09 -- -- -- --
Mortgaged-backed
securities -- -- 19 8.10 735 8.39 1 15.50
------- ---- ------- ---- ------- ---- ------- -----
Totals $ 5,512 5.94% $33,906 5.90% $ 735 8.39% $ 1 15.50%
======= ==== ======= ==== ======= ==== ======= =====
</TABLE>
15
<PAGE> 17
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 Loan 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, 1999, the Bancorp had $3.1 million in
repurchase agreements. Other borrowings totaled $18.6 million, of which $14.0
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 checking accounts, NOW accounts,
savings accounts, money market deposit 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.
The following table presents the average daily amount of deposits and
average rates paid on such for the years indicated. The amounts are stated in
thousands (000's).
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Amount Rate % Amount Rate % Amount Rate %
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 23,577 -- $ 18,957 -- $ 14,836 --
NOW accounts 29,649 1.18 26,290 1.96 23,451 2.13
MMDA accounts 39,511 3.39 26,898 3.49 23,115 3.30
Savings accounts 48,704 2.10 46,179 2.86 43,673 3.01
Certificates of deposit 158,937 4.81 160,805 5.37 158,041 5.52
-------- ------- -------- ------- -------- -------
Total deposits $300,378 3.45 $279,129 4.09 $263,116 4.30
======== ======= ======== ======= ======== =======
</TABLE>
16
<PAGE> 18
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1999 are summarized as follows. The amounts are
stated in thousands (000's).
3 months or less $24,769
Over 3 months through 6 months 8,491
Over 6 months through 12 months 5,856
Over 12 months 3,961
-------
Total $43,077
=======
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.
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Repurchase agreements $ 3,051 $ 3,937 $ 4,541
Variable rate advances from the FHLB 1,000 -- --
Fixed rate advances from the FHLB -- 4,000 4,000
Putable advances from the FHLB 13,000 8,000 4,000
Limited partnership obligation 500 500 --
Other borrowings 1,056 883 2,087
------- ------- -------
Total borrowings $18,607 $17,320 $14,628
======= ======= =======
</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. Funding is
expected to begin during 2000 and will continue over a seven 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.
17
<PAGE> 19
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,
------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance $3,051 $3,937 $4,541
Securities underlying the agreements:
Ending book value 4,998 6,460 7,988
Ending market value 4,895 6,483 8,014
Weighted average rate paid (1) 5.30% 5.13% 5.54%
<CAPTION>
For year ended December 31,
------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Highest month-end balance $3,927 $6,154 $4,975
Approximate average outstanding balance 3,369 4,693 4,308
Approximate weighted average rate
paid on securities sold under
agreements to repurchase (2) 5.01% 5.62% 5.43%
<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>
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, 1999, the market value of the
trust department's assets totaled $120.0 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, 1999.
18
<PAGE> 20
Weighted average yield:
Securities 6.00%
Loans receivable 7.86
Loans held for sale 7.32
Federal Home Loan Bank stock 8.00
Total interest-earning assets 7.64
Weighted average cost:
Interest bearing deposits 3.56
Borrowed funds 5.45
Total interest-bearing liabilities 3.67
Interest rate spread:
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing funds 3.97
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,
---------------------------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Return on average assets 1.20% 1.14% 1.13%
Return on average equity 13.17 12.35 11.87
Average equity-to-average assets ratio 9.08 9.23 9.49
Dividend payout ratio 54.75 54.33 51.76
<CAPTION>
At December 31,
---------------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total stockholders' equity to
total assets 8.98% 9.07% 9.22%
</TABLE>
19
<PAGE> 21
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, 1999 Year ended December 31, 1998
-------------------------------------- ---------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------------------------------------- ---------------------------------------------
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest bearing balances
in financial institutions $ 7,950 $ 477 6.00 % $ 7,867 $ 505 6.42 %
Federal funds sold 2,504 121 4.83 3,844 206 5.36
Securities 39,495 2,358 5.97 32,199 1,981 6.15
------------ ----------- ------------ ----------
Total investments 49,949 2,956 5.92 43,910 2,692 6.13
------------ ----------- ------------ ----------
Loans:*
Real estate mortgage loans 250,734 19,541 7.79 240,670 19,747 8.21
Commercial business loans 25,422 2,248 8.84 22,350 2,071 9.27
Consumer loans 10,424 862 8.27 8,386 725 8.65
------------ ----------- ------------ ----------
Total loans 286,580 22,651 7.90 271,406 22,543 8.31
------------ ----------- ------------ ----------
Total interest-earning assets 336,529 25,607 7.61 315,316 25,235 8.00
----------- ----------
Allowance for loan losses (3,225) (3,101)
Cash and due from banks 10,342 7,616
Premises and equipment 6,625 6,722
Other assets 3,889 3,603
------------ ------------
Total assets $ 354,160 $ 330,156
============ ============
Liabilities:
Demand deposit $ 23,577 -- 0.00 % $ 18,957 -- 0.00 %
NOW accounts 29,649 350 1.18 26,290 515 1.96
Money market demand accounts 39,511 1,338 3.39 26,898 940 3.49
Savings accounts 48,704 1,024 2.10 46,179 1,321 2.86
Certificates of deposit 158,937 7,646 4.81 160,805 8,629 5.37
------------ ----------- ------------ ----------
Total interest-bearing deposits 300,378 10,358 3.45 279,129 11,405 4.09
Borrowed funds 18,049 923 5.11 16,736 905 5.41
------------ ----------- ------------ ----------
Total interest-bearing liabilities 318,427 11,281 3.54 295,865 12,310 4.16
Other liabilities 3,569 3,807
------------ ------------
Total liabilities 321,996 299,672
Stockholders' equity 32,164 30,484
------------ ------------
Total liabilities and
stockholders' equity $ 354,160 $ 330,156
============ ---------- =========== ----------
Net interest income $ 14,326 $ 12,925
=========== ==========
Net interest spread 4.07 % 3.84 %
Net interest margin** 4.04 % 3.91 %
<CAPTION>
---------------------------------------
Year ended December 31, 1997
---------------------------------------
Interest
Average Income/ Average
Balance Expense Rate
---------------------------------------
Assets:
<S> <C> <C> <C>
Interest bearing balances
in financial institutions $ 2,282 $ 139 6.09 %
Federal funds sold 102 5 5.32
Securities 33,454 2,155 6.44
------------ -----------
Total investments 35,838 2,299 6.42
------------ -----------
Loans:*
Real estate mortgage loans 230,420 19,128 8.30
Commercial business loans 18,380 1,780 9.68
Consumer loans 5,419 462 8.52
------------ -----------
Total loans 254,219 21,370 8.41
------------ -----------
Total interest-earning assets 290,057 23,669 8.16
------------ -----------
Allowance for loan losses (2,959)
Cash and due from banks 6,005
Premises and equipment 6,992
Other assets 3,220
------------
Total assets $ 303,315
============
Liabilities:
Demand deposit $ 14,836 -- 0.00 %
NOW accounts 23,451 500 2.13
Money market demand accounts 23,115 762 3.30
Savings accounts 43,673 1,315 3.01
Certificates of deposit 158,041 8,730 5.52
------------ ----------
Total interest-bearing deposits 263,116 11,307 4.30
Borrowed funds 8,082 414 5.13
------------ ----------
Total interest-bearing liabilities 271,198 11,721 4.32
Other liabilities 3,343
------------
Total liabilities 274,541
Stockholders' equity 28,774
------------
Total liabilities and
stockholders' equity $ 303,315
============= -----------
Net interest income $ 11,948
============
Net interest spread 3.84 %
Net interest margin** 3.94 %
<FN>
- ---------------------------------------------------------------------------------------------------------------------------------
* Non-accruing loans have been included in the average balances.
** Net interest income divided by average total assets.
</TABLE>
20
<PAGE> 22
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bancorp for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (1) changes in volume
(change in volume multiplied by old rate) and (2) changes in rate (change in
rate multiplied by old volume). Changes attributable to both rate and volume
which cannot be segregated have been allocated proportionately to the change
due to volume and the change due to rate. The amounts are stated in
thousands (000's).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ---------------------------- -----------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
----------------------------- ---------------------------- -----------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due To Due To Due To
----------------------------- ----------------------------- ------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,228 $(1,120) $ 108 $ 1,430 $ (257) $ 1,173 $ 1,840 $ 122 $ 1,962
Securities 437 (60) 377 (79) (95) (174) (578) 128 (450)
Other interest-earning assets (74) (39) (113) 566 1 567 (146) (34) (180)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,591 (1,219) 372 1,917 (351) 1,566 1,116 216 1,332
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Deposits 824 (1,871) (1,047) 669 (571) 98 289 (48) 241
Federal Home Loan Bank Advances
and other borrowings 69 (51) 18 467 24 491 167 26 193
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 893 (1,922) (1,029) 1,136 (547) 589 456 (22) 434
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income/(expense) $ 698 $ 703 $ 1,401 $ 781 $ 196 $ 977 $ 660 $ 238 $ 898
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 23
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, 1999, 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 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.
The Bancorp believes that it has a minority share of the deposits and
residential mortgage loan market within its primary market area.
22
<PAGE> 24
PERSONNEL
As of December 31, 1999, the Bank had 105 full-time and 26 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
23
<PAGE> 25
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.
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 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.
24
<PAGE> 26
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 adjusted average 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.
The following table shows that, at December 31, 1999, the Bancorp's
capital exceeded all regulatory capital requirements. At December 31, 1999, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
At December 31, 1999, the Bancorp and the Bank were categorized as well
capitalized. The dollar amounts are stated in millions.
25
<PAGE> 27
<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 $ 35.7 14.8% $ 19.3 8.0% $ 24.2 10.0%
Tier I capital
to risk-weighted assets $ 32.7 13.5% $ 9.7 4.0% $ 14.5 6.0%
Tier I capital to
adjusted average assets $ 32.7 9.0% $ 10.9 3.0% $ 18.2 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 $4,778,000 at December 31, 1999). 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
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
26
<PAGE> 28
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.
RECENT LEGISLATION. The Gramm-Leach-Bliley Act ("Gramm-Leach") was
signed into law on November 12, 1999 and enables combinations among banks,
securities firms and insurance companies beginning March 12, 2000. Under
Gramm-Leach, bank holding companies are permitted to offer their customers
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking.
In order to engage in these new financial activities, a bank holding
company must qualify and register with the FRB as a "financial holding company"
by demonstrating that each of its bank subsidiaries is well capitalized, well
managed, and has at least a satisfactory rating under the CRA.
Gramm-Leach establishes a system of functional regulation, under which
the federal banking agencies will regulate the banking activities of financial
holding companies, the U.S. Securities and Exchange Commission will regulate
their securities activities and state insurance regulators will regulate their
insurance activities. Gramm-Leach also provides new protections against the
transfer and use by financial institutions of consumers' nonpublic, personal
information.
Gramm-Leach does not significantly alter the regulatory regime under
which the Bancorp and the Bank currently operate, as described above. While
certain business combinations not currently permissible will be possible after
March 11, 2000, the Bancorp cannot predict at this time resulting changes in the
competitive environment. The Bancorp has no current intention to elect to become
a financial holding company under Gramm-Leach.
Various legislation, including proposals to substantially change the
financial institution regulatory system and to expand or contract the powers of
banking institutions and bank holding companies, is from time to time
introduced. This legislation may change banking statutes and the operating
environment of the Bancorp and the Bank in substantial and unpredictable ways.
If enacted, such legislation could increase or decrease the cost of doing
business, limit or expand permissible activities or affect the competitive
balance among banks, savings associations, credit unions and other financial
institutions. The Bancorp cannot accurately predict whether any of this
potential legislation will ultimately be enacted, and, if enacted, the ultimate
effect that it, or implementing regulations, would have upon the financial
condition or results of operations of the Bancorp or the Bank.
27
<PAGE> 29
FEDERAL TAXATION
Historically, savings institutions, such as the Bank, had been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, In August, 1996,
legislation was enacted that repealed the reserve method of accounting for
federal income tax purposes. As a result, the Bank must recapture that portion
of the reserve that exceeds the amount that could have been taken under the
experience method for post-1987 tax years. The recapture is occurring over a
six-year period, the commencement of which began with the Bank's taxable year
ending December 31, 1998, since the Bank met certain residential lending
requirements. In addition, the pre-1988 reserve, for which no deferred taxes
have been recorded, will not have to be recaptured into income unless (i)the
Bank no longer qualifies as a bank under the Code, or (ii) excess dividends or
distributions are paid out by the Bank. The total amount of bad debt to be
recaptured is approximately $2,500,000.
Depending on the composition of its items of income and expense, a
savings bank may be subject to the alternative minimum tax. A savings bank must
pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before any alternative tax net operating loss). AMTI
may be reduced only up to 90% by net operating loss carryovers, but alternative
minimum tax paid can be credited against regular tax due in later years.
For federal income tax purposes, the Bank reports its income and
expenses on the accrual method of accounting. The Bancorp and the Bank file a
consolidated federal income tax return for each fiscal year ending December 31.
The federal income tax returns filed by the Bank have not been audited in the
last five years.
STATE TAXATION
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
28
<PAGE> 30
include generally applicable sales and use taxes plus real and personal property
taxes.
The Bank's state income tax returns have not been audited in the last
five years.
ACCOUNTING FOR INCOME TAXES
At December 31, 1999, the Bancorp's consolidated total deferred tax
assets were $1,673 thousand and the consolidated total deferred tax liabilities
were $306 thousand, resulting in a consolidated net deferred tax asset of $1,367
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.
The table below sets forth additional information with respect to the
Bank's offices as of December 31, 1999. Net book value and total investment
figures are for land, buildings, furniture and fixtures.
Year Approximate
facility Net book square Total
Office location opened value footage investment
- --------------- -------- ---------- ----------- ----------
9204 Columbia Avenue
Munster, In 46307 1985 $1,332,368 11,640 $2,583,542
141 W. Lincoln Highway
Schererville, In 46375 1990 1,196,620 9,444 2,117,554
7120 Indianapolis Blvd.
Hammond, In 46324 1978 269,413 2,600 706,066
1300 Sheffield
Dyer, In 46311 1976 244,692 2,100 604,425
7915 Taft
Merrillville, In 46410 1968 124,009 2,750 481,673
8600 Broadway
Merrillville, In 46410 1996 1,894,781 4,400 2,399,392
4901 Indianapolis Blvd.
East Chicago, In 46312 1995 1,009,956 4,300 1,543,849
At December 31, 1999, the Bank had investments totaling $450 thousand
in land which has been acquired for a state-of-the-art branch facility in
Hobart, Indiana. The Hobart facility will open during 2000 and will cost
approximately $1.8 million. The new facility provides opportunities to expand
29
<PAGE> 31
market share for products and services in Hobart and the surrounding areas. 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 $6.5 million at December 31, 1999.
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.
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 1999.
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 2000 Annual Meeting of
Shareholders:
The executive officers of the Bancorp are as follows:
<TABLE>
<CAPTION>
AGE AT
DECEMBER 31,
1999 POSITION
------------ --------
<S> <C> <C>
David A. Bochnowski 54 Chairman and Chief Executive
Officer
Joel Gorelick 52 Vice President and Chief Lending Officer
Edward J. Furticella 52 Vice President, Chief Financial Officer
and Treasurer
Frank J. Bochnowski 61 Executive 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:
30
<PAGE> 32
David A. Bochnowski is Chairman and Chief Executive Officer of the
Bancorp and the Bank. He has been the Chief Executive Officer since 1981 and
became the Chairman in 1995. He has been a director since 1977 and was the
Bank's legal counsel from 1977 to 1981. Mr. Bochnowski is the Vice-Chairman of
America's Community Bankers (ACB) and Chairman of ACB's Strategic Planning
Committee. He is a director of the Northwest Indiana Local Initiative Support
Corporation (LISC), a trustee of the Munster Community Hospital, and a
Commissioner of the Chicago-Gary Airport Authority. He is a former chairman of
the Indiana League of Savings Institutions, a former director of the Federal
Home Loan Bank of Indianapolis and a former member of 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 the board
of the Northwest Indiana Regional Development Corporation. Mr. Gorelick received
recognition as the Small Business advocate for 1999 at the Northwest Indiana
Entrepreneurial Excellence awards program. 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 Executive Vice President and Secretary for the
Bancorp and Executive 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. He was elected as a director in 1999. Mr. Bochnowski is a
member and past president of the Munster, Indiana Rotary Club and a former
31
<PAGE> 33
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 1999 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 1999 Annual Report to Shareholders is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1999 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 1999 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1999 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.
32
<PAGE> 34
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 2000 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 2000 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the section captioned "Security Ownership by
Certain Beneficial Owners and Management" in the Bancorp's definitive Proxy
Statement for the 2000 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 2000 Annual Meeting of Shareholders, and in the footnote
captioned "Related Party Transactions" in the 1999 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 1999 Annual Report to Shareholders, filed as Exhibit
13 to this report:
(a) Report of Independent Auditors
33
<PAGE> 35
(b) Consolidated Balance Sheets, December 31, 1999 and
1998
(c) Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 1998
and 1997
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
(f) Notes to Consolidated Financial Statements
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not present
or not present in amounts sufficient to require submission.
(3) EXHIBITS:
---------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2. Plan of Conversion of Peoples Bank, A Federal Savings Bank,
dated December 18, 1993 (incorporated herein by reference to
Exhibit A to the Bancorp's Definitive Proxy Statement/Prospectus
dated March 23, 1994, as filed pursuant to Rule 424(b) under the
1933 Act on March 28, 1994).
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 (incorporated
herein by reference to Exhibit 3.iv. to the Bancorp's Annual
Report on Form 10-K for the year ended December 31, 1998).
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).
34
<PAGE> 36
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).
10.6 Supplemental Executive Retirement Plan of Peoples Bank.
13. 1999 Annual Report to Shareholders.
21. Subsidiaries of the Bancorp.
27. Financial Data Schedule.
(4) REPORTS ON FORM 8-K:
--------------------
No reports on Form 8-K were filed during the fourth quarter of 1999.
35
<PAGE> 37
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 15, 2000
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 15, 2000:
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/Frank J. Bochnowski Director
- -------------------------------
Frank J. Bochnowski
/s/Leroy F. Cataldi Director
- -------------------------------
Leroy F. Cataldi
36
<PAGE> 38
/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
37
<PAGE> 39
EXHIBIT INDEX
Exhibit Description Page
10.6. Supplemental Executive Retirement Plan of Peoples Bank
13. 1999 Annual Report to Shareholders
21. Subsidiaries of the Bancorp
27. Financial Data Schedule
38
<PAGE> 1
Exhibit 10.6
PEOPLES BANK SB
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
ARTICLE I
---------
NATURE AND PURPOSE OF PLAN
--------------------------
SECTION 1.1. TYPE OF PLAN. The Peoples Bank SB (the "Bank"),
Supplemental Executive Retirement Plan ("Plan") is established by the Bank as an
unfunded, non-qualified deferred- compensation plan for a select group of the
Bank's management and highly-compensated employees.
SECTION 1.2. PURPOSE OF PLAN. The purpose of the Plan is to provide a
means for the payment of supplemental retirement benefits to a select group of
key senior management employees of the Bank, in recognition of their substantial
contributions to the operation of the Bank, and to provide those individuals
with additional financial security.
ARTICLE II
----------
DEFINITIONS AND RULES OF CONSTRUCTION
-------------------------------------
SECTION 2.1. DEFINITIONS. As used in the Plan, the following words and
phrases, when capitalized, have the following meanings except when used in a
context that plainly requires a different meaning:
(a) "Account" means, with respect to a Participant, the
bookkeeping account that serves as a record of the amounts credited to
the Participant under the terms of this Plan.
(b) "Bank" means Peoples Bank SB.
(c) "Beneficiary" means, with respect to a Participant, the
person or persons designated pursuant to Section 6.2 to receive
benefits under the Plan in the event of the Participant's death.
(d) "Board of Directors" means the Board of Directors of the
Bank.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and interpretive rules and regulations.
(f) "Committee" means the Committee appointed by the Bank to
administer the Plan.
(g) "Effective Date" means December 1, 1999.
<PAGE> 2
(h) "Eligible Employee" means a key management Employee who
has the opportunity to impact significantly the annual operating
success of the Bank.
(i) "Employee" means any person employed by the Bank on a
full- time salaried basis, including officers of the Bank.
(j) "Participant" means an Eligible Employee who becomes a
participant in the Plan pursuant to Section 3.1.
(k) "Plan" means the Peoples Bank SB Supplemental Executive
Retirement Plan, as amended from time to time.
(l) "Plan Year" means, initially, a short plan year beginning
December 1, 1999, and ending December 31, 1999 and, thereafter, the
calendar year.
(m) "Termination of Employment" means, with respect to a
Participant, the cessation of the relationship of employer and employee
between the Participant and the Bank for any reason, including the
Participant's death.
SECTION 2.2. RULES OF CONSTRUCTION. The following rules of construction
shall govern in interpreting the Plan:
(a) The provisions of this Plan shall be construed and
governed in all respects under and by the internal laws of the State of
Indiana, to the extent not preempted by federal law.
(b) Words used in the masculine gender shall be construed to
include the feminine gender, where appropriate, and vice versa.
(c) Words used in the singular shall be construed to include
the plural, where appropriate, and vice versa.
(d) The headings and subheadings in the Plan are inserted for
convenience of reference only and are not to be considered in the
construction of any provision of the Plan.
(e) If any provision of the Plan shall be held to be illegal
or invalid for any reason, that provision shall be deemed to be null
and void, but the invalidation of that provision shall not otherwise
impair or affect the Plan.
-2-
<PAGE> 3
ARTICLE III
-----------
ELIGIBILITY AND PARTICIPATION
-----------------------------
SECTION 3.1. ELIGIBILITY. Only Eligible Employees selected by the Board
of Directors to participate in the Plan shall become Participants. Those
Eligible Employees whom the Board of Directors selects to participate in the
Plan shall be identified on the attached Appendix.
SECTION 3.2. DATE OF PARTICIPATION. An Eligible Employee shall become a
Participant on the date specified by the Board of Directors.
SECTION 3.3. CESSATION OF PARTICIPATION. Any Participant who ceases to
be an Eligible Employee, but continues to be an Employee, shall cease to be
eligible to be credited with contributions determined under Article V but shall
continue to have an Account and to be credited with interest on his Account as
provided in Section 5.2 until that Account is fully distributed.
ARTICLE IV
----------
PARTICIPANTS' ACCOUNTS
----------------------
SECTION 4.1. ESTABLISHMENT OF ACCOUNTS. The Committee shall create and
maintain adequate records to disclose the interest in the Plan of each
Participant and Beneficiary. Records shall be in the form of individual
bookkeeping accounts, which shall be credited with the contributions and
interest determined pursuant to Article V. Each Participant shall have a
separate Account. The Participant's interest in his Account shall be fully
vested at all times.
SECTION 4.2. ACCOUNTS UNFUNDED. Accounts shall be accounting accruals,
in the names of Participants, on the Bank's books. Accounts shall be unfunded,
so that the Bank's obligation to pay benefits under the Plan is merely a
contractual duty to make payments when due under the Plan. The Bank's promise to
pay benefits under the Plan shall not be secured in any way, and the Bank shall
not set aside or segregate assets for the purpose of paying contributions and
interest credited to Participants' Accounts.
SECTION 4.3. VALUATION OF ACCOUNTS. The value of a Participant's
Account as of any date shall equal the contributions credited to the Account
pursuant to Section 5.1, increased by interest earnings deemed to be credited to
the Account in accordance with Section 5.2.
SECTION 4.4. ANNUAL REPORT. Within 120 days following the end of each
Plan Year, the Committee shall provide to each Participant a written statement
of the amount standing to his credit in his Account as of the end of that Plan
Year.
-3-
<PAGE> 4
ARTICLE V
---------
CONTRIBUTIONS AND INTEREST
--------------------------
SECTION 5.1. BASIC CONTRIBUTIONS. For each Plan Year, the Bank shall
credit to the Account of each Participant the amount, if any, determined by the
Board of Directors in its sole discretion. Any such amount shall be specified in
a written notice to the Participant.
SECTION 5.2. INTEREST ON ACCOUNTS. Amounts credited to a Participant's
Account shall be deemed to earn interest at the same rate as the interest rate
paid on the Bank's certificates of deposit offered as investments under the
Bank's Profit Sharing Plan and Trust from the date the Account is established to
the date the entire Account is distributed pursuant to Article VI. Interest
shall be credited at the end of each Plan Year.
ARTICLE VI
----------
BENEFITS
--------
SECTION 6.1. TERMINATION OF EMPLOYMENT. If the Participant incurs a
Termination of Employment, the Participant's Account shall be distributed to the
Participant (or, in the event of his death, to his Beneficiary) in a lump sum
cash payment as soon as administratively feasible after the Participant's
Termination of Employment.
SECTION 6.2. DESIGNATION OF BENEFICIARY. A Participant's Beneficiary
shall be the person or persons, including a trustee, designated by the
Participant in writing pursuant to the practices of, or rules prescribed by, the
Committee, as the recipient of any benefits payable under the Plan following the
Participant's death. To be effective, a Beneficiary designation must be filed
with the Committee during the Participant's life on a form prescribed by the
Committee. If no person has been designated as the Participant's Beneficiary or
if no person designated as Beneficiary survives the Participant, the
Participant's estate shall be his Beneficiary.
ARTICLE VII
-----------
ADMINISTRATION
--------------
SECTION 7.1. ADMINISTRATOR. The Committee shall be the Administrator of
the Plan. All decisions of the Committee shall be by a vote of a majority of its
members and shall be final and binding.
-4-
<PAGE> 5
SECTION 7.2. POWERS AND DUTIES OF THE COMMITTEE. Subject to the
specific limitations stated in this Plan, the Committee shall have the following
powers, duties, and responsibilities:
(a) To carry out the general administration of the Plan;
(b) To cause to be prepared all forms necessary or appropriate
for the administration of the Plan;
(c) To keep appropriate books and records;
(d) To determine amounts to be distributed to Participants and
Beneficiaries under the provisions of the Plan;
(e) To determine, consistent with the provisions of this
instrument, all questions of eligibility, rights, and status of
Participants and Beneficiaries under the Plan;
(f) To issue, amend, and rescind rules relating to the
administration of the Plan, to the extent those rules are consistent
with the provisions of this instrument;
(g) To exercise all other powers and duties specifically
conferred upon the Committee elsewhere in this instrument; and
(h) To interpret, with discretionary authority, the provisions
of this Plan and to resolve, with discretionary authority, all disputed
questions of Plan interpretation and benefit eligibility.
ARTICLE VIII
------------
AMENDMENT AND TERMINATION
-------------------------
SECTION 8.1. AMENDMENT. The Bank reserves the right to amend the Plan
at any time by action of the Board of Directors, with written notice given to
each Participant in the Plan. The Bank, however, may not make any amendment that
reduces a Participant's benefits accrued as of the date of the amendment unless
the Participant consents in writing to the amendment.
SECTION 8.2. TERMINATION. The Bank reserves the right to terminate the
Plan, by action of the Board of Directors, at any time it deems appropriate.
Upon termination of the Plan, no further contribution shall be made to the Plan.
Following termination of the Plan, distribution shall be made at the time and
under the terms and conditions as the Bank, in its sole discretion, shall
determine, which shall commence no later than the Participant's Termination of
Employment.
-5-
<PAGE> 6
ARTICLE IX
----------
MISCELLANEOUS
-------------
SECTION 9.1. RELATIONSHIP. Notwithstanding any other provision of this
Plan, this Plan and action taken pursuant to it shall not be deemed or construed
to establish a trust or fiduciary relationship of any kind between or among the
Bank, Participants, Beneficiaries or any other persons. The Plan is intended to
be unfunded for purposes of the Code and the Employee Retirement Income Security
Act of 1974, as amended. The rights of Participants and Beneficiaries to receive
payment of benefits under the Plan is strictly a contractual right of payment,
and this Plan does not grant, nor shall it be deemed to grant Participants,
Beneficiaries, or any other person any interest or right to any of the funds,
property, or assets of the Bank other than as an unsecured general creditor of
the Bank.
SECTION 9.2. OTHER BENEFITS AND PLANS. Nothing in this Plan shall be
deemed to prevent Participants from receiving, in addition to the benefits
provided for under this Plan, any funds that may be distributable to them at any
time under any other present or future retirement or incentive plan maintained
by the Bank.
SECTION 9.3. ANTICIPATION OF BENEFITS. Neither Participants nor
Beneficiaries shall have the power to transfer, assign, anticipate, pledge,
alienate, or otherwise encumber in advance any of the payments that may become
due under this Plan, and any attempt to do so shall be void. Any payments that
may become due under this Plan shall not be subject to attachment, garnishment,
execution, or be transferrable by operation of law in the event of bankruptcy,
insolvency, or otherwise.
SECTION 9.4. NO GUARANTEE OF CONTINUED EMPLOYMENT. Nothing contained in
this Plan or any action taken under the Plan shall be construed as a contract of
employment or as giving any participant any right to be retained in employment
with the Bank. The Bank specifically reserves the right to terminate any
Participant's employment at any time with or without cause, and with or without
notice or assigning a reason, subject to the terms of any written employment
agreement between the Participant and the Bank.
SECTION 9.5. WAIVER OF BREACH. The Bank's or the Committee's waiver of
any Plan provision shall not operate or be construed as a waiver of any
subsequent breach by the Participant.
SECTION 9.6. BENEFIT. This Plan shall be binding upon and inure to the
benefit of the Bank and its successors and assigns.
SECTION 9.7. RESPONSIBILITY FOR LEGAL EFFECT. Neither the Committee nor
the Bank makes any recommendations or warranties, express or implied, or assumes
any responsibility concerning the legal context, or other implications or
effects of this Plan.
-6-
<PAGE> 7
SECTION 9.8. TAX WITHHOLDING. The Bank shall withhold from any payment
made under the Plan such amount or amounts as may be required by applicable
federal, state, or local laws.
Peoples Bank, SB has caused this Plan to be executed by its duly
authorized officers, as of the 15th day of December, 1999.
PEOPLES BANK SB
By: /s/ David A. Bochnowski
-------------------------
David A. Bochnowski
Chief Executive Officer
ATTEST:
By: /s/ Linda L. Kollada
-----------------------
Linda L. Kollada
Assistant Secretary
-7-
<PAGE> 8
APPENDIX
--------
PLAN PARTICIPANT DATE PARTICIPATION BEGINS
---------------- -------------------------
Frank J. Bochnowski December 15, 1999
<PAGE> 1
Exhibit 13
1999
ANNUAL REPORT
TODAY'S COMMUNITY BANKING...
STRIP OF FOUR PHOTOS BLENDING TOGETHER SHOWING LENDING
OFFICER WITH SMALL BUSINESS CUSTOMER, TRUST OFFICER WITH TRUST
CUSTOMER, CHECKING CUSTOMER WITH BRANCH MANAGER
AND CHIEF FINANCIAL OFFICER WITH COMPUTER.
BLENDING QUALITY SERVICE, PRODUCTS AND TECHNOLOGY
NORTHWEST INDIANA
-----------------
BANCORP
<PAGE> 2
<PAGE> 3
1999
ANNUAL REPORT
TODAY'S COMMUNITY BANKING...
BLENDING QUALITY SERVICE, PRODUCTS AND TECHNOLOGY
"PEOPLES BANK IS COMMITTED TO
INVESTING IN TECHNOLOGIES THAT
MEET OUR CUSTOMERS NEEDS, THAT
ARE USER FRIENDLY AND ENABLE
US TO DELIVER PRODUCTS AND
SERVICES EFFICIENTLY."
EDWARD J. FURTICELLA
PEOPLES BANK
CHIEF FINANCIAL OFFICER
DEAR SHAREHOLDERS:
It is my pleasure to report that 1999 was not only a successful year
for your Bancorp, but an exciting one as well. Exciting in particular because we
began to see the emerging results of our efforts to blend quality service with
products and technology. These results included a growth of our core accounts,
recognition for supporting small businesses, increased loan volume, and improved
noninterest income.
As a community bank, we face new challenges caused by competition,
technology, and the evolving preferences of consumers. The comfortable way
things used to be has been transformed profoundly by the new economy where
technology and international markets have replaced the old order.
Today, what is happening on Wall Street is of more than a passing
interest to those of us in Northwest Indiana. While we can do little more than
watch the dramatic fluctuations in the stock market, we do have a great deal of
control over the quality of your Bancorp investment. We believe that the market
ultimately rewards strong management and consistent results.
-----------------------------------
Photo of chief financial officer
Edward Furticella, with computer in
front of presentation screen.
-----------------------------------
1
<PAGE> 4
- ---------------------------------
Peoples Bank branch manager with
young mother and children opening
a checking account.
- ---------------------------------
The quality of our performance drives the quality of your investment.
At the same time, what really counts are the Main Streets of our
communities. What happens locally determines the Bancorp's policies as we
respond to the changing financial services landscape. Forging and holding
customer relationships requires us to respond to their changing needs by
providing a value-added relationship.
For 1999 the Bancorp's Board of Directors and management implemented
community banking strategies which resulted in record earnings. Income for the
year was $4.2 million up 12.6% over 1998 with earnings per share at $1.53. Our
return on assets was 1.20% and our return on equity was 13.17%.
As a community bank we have listened to our customers, recognized
their needs, and delivered products with a high standard of quality service.
Quality service means more than convenience. It means being there to meet our
customer needs and answer their questions. It means being flexible and able to
make timely decisions. And it means responding to opportunities to enhance the
delivery of our service.
"PEOPLES BANK HAD JUST THE
RIGHT CHECKING PROGRAM FOR
MY HUSBAND JAY AND I. AS A
YOUNG FAMILY FREE CHECKING
IS PERFECT FOR US AND I LOVE
GOING INTO THE SCHERERVILLE
BRANCH! ALL THE TELLERS AND
CUSTOMER SERVICE PEOPLE ARE
WONDERFUL."
KATHY WENZEL (RIGHT)
(WITH CAMERON AND CORINNE)
CHECKING CUSTOMER
MEREDITH L. BIELAK (LEFT)
PEOPLES BANK
SCHERERVILLE BRANCH MANAGER
<PAGE> 5
During 2000 the Bancorp will open a state-of-the-art branch facility
in Hobart, Indiana. Our 8th location will provide new opportunities to extend
the Bancorp's products and services in a growing market. During 2000 we will
also roll-out an Internet banking product that provides both our retail
customers and our business customers with another avenue for meeting their
banking needs.
Quality service and competitively priced products combined this year
to add value to our presence as a financial resource in the community. Our
average daily balances for core accounts -- driven by a free checking product
featuring free checks, a free ATM and debit card, and telephone access to
account information -- grew $23.1 million.
More than market share, core account growth increased our market value
by fueling $22.4 million of loan growth. Our balance sheet was strengthened by
the Bancorp's ability to meet the competition of large regional money-center
banks.
Commercial business loan balances were up 28%, commercial real estate
loans were up 24% and consumer related loans were up 10%. Asset quality remained
high with loan delinquencies at .27% of total loans and our allowance for loan
losses at 1.12% of total loans or 412% of non-performing loans.
"OUR PHILOSOPHY OF QUALITY
CUSTOMER SERVICE IS REINFORCED
THROUGH OUR INTENSIVE EMPLOYEE
TRAINING AND IMPROVEMENT
PROGRAMS."
LINDA L. KOLLADA
PEOPLES BANK
VICE PRESIDENT
HUMAN RESOURCES
- -------------------------------------
Photo showing Linda Kollada,
Vice President of human
resources instructing
training class.
- -------------------------------------
3
<PAGE> 6
- ------------------------------------
Photo of chief lending officer Joel
Gorelick with small business
customer.
- ------------------------------------
"AS A SMALL BUSINESS OWNER IT'S
IMPORTANT FOR ME TO HAVE A
BANK THAT WILL TAKE THE TIME TO
LEARN ABOUT OUR OFFICE FURNITURE
AND REFURBISHING OPERATION.
WE FOUND THAT AT PEOPLES BANK
YOU'RE NOT JUST A NUMBER. AFTER
MEETING WITH US PEOPLES LIKED
WHAT THEY SAW AND ENABLED US TO
EXPAND AND BECOME THE BUSINESS
WE KNEW WAS POSSIBLE."
DOREEN GABOYAN
OFFICE FURNITURE SPECIALISTS
1999 FINALIST MINORITY SMALL
BUSINESS PERSON OF THE YEAR,
NORTHWEST INDIANA ENTREPRENEURIAL
EXCELLENCE AWARDS PROGRAM
JOEL GORELICK
PEOPLES BANK
CHIEF LENDING OFFICER
1999 SMALL BUSINESS ADVOCATE
OF THE YEAR, NORTHWEST INDIANA
ENTREPRENEURIAL EXCELLENCE
AWARDS PROGRAM
A key element of the Bancorp's community banking strategy has been to
react to the needs of small business for competitive, responsive services. Our
effort has been acknowledged by the Northwest Indiana Entrepreneurial Excellence
Awards Program who named Joel Gorelick, Chief Lending Officer, the 1999 Small
Business Advocate of the Year. Another recognition came from the Northwest
Indiana Regional Development Corporation (RDC) which designated Peoples Bank as
the Small Business Lender of the Year based upon the volume of our RDC loans.
The increasing demand for financial services has been met by our trust
department's ability to fashion individual investment and asset management plans
for our customers. We continue to expand our trust and investment services.
During the year, Jon DeGuilio, former U.S. Attorney and a well-respected lawyer,
joined our ranks as Senior Vice President and Trust Officer.
The book value of trust assets under management stood at $87 million
at year end. The trust activities along with income from banking operations
resulted in a 23.2% increase in the Bancorp's noninterest income.
<PAGE> 7
Technology had a major impact on the Bancorp this year. Thanks to the
strong direction provided by Ed Furticella, our Chief Financial Officer, and the
day to day efforts of Tanya Buerger, Vice President for Information Systems, the
Bancorp made a seamless transition through the century change date, or Y2K. Our
readiness efforts had the ancillary effect of upgrading systems which measurably
impact operating efficiencies.
The Bancorp will continue to emphasize quality personal service which
has been the hallmark of our operation since 1910. We cannot ignore, however,
the opportunity technology presents to add value to our market presence.
Investing in technology provides the tools to help us better understand our own
customers, determine the shape of new products, and measure the value of our
relationships with our customers. At the same time, we recognize that people
will always be the driving force in creating growth and market value.
In April of 1999 Jim Crandall, a director of the Bancorp with over
forty years of combined service to the cause of community banking, retired from
our board. Jim's knowledge of the community, leadership, and steadfast advice
helped build our solid record of achievement. He is both a consummate
professional and good friend. We thank him for his continued service as a
Director Emeritus and wish him well in his retirement.
DAVID A. BOCHNOWSKI
CONGRATULATES JIM CRANDALL
ON HIS YEARS OF DEDICATION
AND OUTSTANDING SERVICE TO
THE BOARD OF DIRECTORS OF
NORTHWEST INDIANA BANCORP
AND PEOPLES BANK.
JAMES J. CRANDALL (LEFT)
DIRECTOR EMERITUS
DAVID A. BOCHNOWSKI (RIGHT)
PEOPLES BANK
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
- ---------------------------------
Photo showing bank President
David Bochnowski presenting
James Crandall with award of
distinction.
- ---------------------------------
5
<PAGE> 8
- ----------------------
Photo of trust officer
Frank Bochnowski
with trust customer.
- ----------------------
"AS A LONG-TIME CUSTOMER,
I HAVE HAD THE OPPORTUNITY TO
ENJOY A FINANCIALLY BENEFICIAL
AND POSITIVE RELATIONSHIP
WITH THE EXPERIENCED TRUST
OFFICERS AT PEOPLES BANK."
LUPE MORALES
TRUST CUSTOMER
FRANK J. BOCHNOWSKI
PEOPLES BANK
EXECUTIVE VICE PRESIDENT
TRUST OFFICER
Shareholders elected Frank J. Bochnowski, Executive Vice President,
to the Board of Directors upon Jim Crandall's retirement. We welcome Frank and
thank him for his dedication and insight into our strategic direction. His
experience and wise counsel are a worthy addition to our working Board of
Directors.
Competition, technology, and the convergence of the financial services
industry will continue to challenge community banking. In January of 2000, we
celebrated our ninety year tradition of community banking. We are confident
that by blending quality service, products and technology the Bancorp will add
value to our community, our customers, and our shareholders.
Sincerely,
/s/David A. Bochnowski
DAVID A. BOCHNOWSKI
Chairman & CEO
<PAGE> 9
1999
ANNUAL REPORT
FINANCIAL INFORMATION
Strip of four photos blending together showing lending officer with
small business customer, trust officer with trust customer, checking customer
with branch manager and chief financial officer with computer.
TODAY'S COMMUNITY BANKING...
BLENDING QUALITY SERVICE, PRODUCTS AND TECHNOLOGY
<PAGE> 10
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,
1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income:
Total interest income ...... $ 25,607 $ 25,235 $ 23,669 $ 22,337 $ 21,123 $ 19,122
Total interest expense ..... 11,281 12,310 11,721 11,287 10,484 8,079
----------- ---------- ---------- ---------- ---------- -----------
Net interest income ........ 14,326 12,925 11,948 11,050 10,639 11,043
Provision for loan losses .. 200 110 221 85 80 145
----------- ---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses . 14,126 12,815 11,727 10,965 10,559 10,898
----------- ---------- ---------- ---------- ---------- -----------
Noninterest income ......... 1,659 1,347 1,066 682 685 493
Noninterest expense ........ 8,774 7,938 7,154 8,039 6,117 6,031
----------- ---------- ---------- ---------- ---------- -----------
Net noninterest expense .... 7,115 6,591 6,088 7,357 5,432 5,538
----------- ---------- ---------- ---------- ---------- -----------
Income tax expenses ........ 2,775 2,461 2,223 1,419 2,026 2,132
Cumulative effect of changes
in accounting ............. - - - - - -
----------- ---------- ---------- ---------- ---------- -----------
Net income ................. $ 4,236 $ 3,763 $ 3,416 $ 2,189 $ 3,101 $ 3,228
=========== ========== ========== ========== ========== ===========
Basic earnings
per common share .......... $1.53 $1.36 $1.24 $0.80 $1.13 $1.18
Diluted earnings
per common share .......... $1.52 $1.35 $1.23 $0.79 $1.12 $1.17
Cash dividends declared
per common share .......... $0.84 $0.74 $0.64 $0.58 $0.55 $0.55
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Total assets ............. $ 361,719 $ 345,417 $ 319,609 $ 299,419 $ 280,911 $ 266,343
Loans receivable ......... 295,813 273,433 272,213 244,696 222,293 221,930
Investment securities .... 41,931 36,350 29,362 40,024 38,001 33,678
Deposits ................. 306,647 293,222 272,090 256,420 247,945 234,639
Borrowed funds ........... 18,607 17,320 14,628 12,261 3,139 3,151
Total stockholders' equity 32,471 31,316 29,482 27,815 27,204 25,606
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Spread During Period:
Average effective yield on loans
and investment securities ....... 7.61% 8.00% 8.16% 7.98% 8.06% 7.66%
Average effective cost of deposits
and borrowings .................. 3.54% 4.16% 4.32% 4.32% 4.33% 3.48%
---------- --------- -------- -------- --------- ---------
Interest rate spread ............. 4.07% 3.84% 3.84% 3.66% 3.73% 4.18%
========== ========= ======== ======== ========= =========
Net interest margin ................... 4.04% 3.91% 3.94% 3.79% 3.91% 4.25%
Return on average assets .............. 1.20% 1.14% 1.13% 0.75% 1.14% 1.24%
Return on average equity .............. 13.17% 12.35% 11.87% 7.90% 11.74% 13.04%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to
risk-weighted assets ........... 13.5% 14.1% 13.8% 14.7% 15.8% 15.9%
Total capital to
risk-weighted assets ........... 14.8% 15.3% 15.0% 16.0% 17.1% 17.2%
Tier I capital leverage ratio ... 9.0% 9.2% 9.2% 9.3% 9.7% 9.6%
Allowance for loan losses to
total loans .................... 1.12% 1.14% 1.13% 1.18% 1.27% 1.24%
Allowance for loan losses to
non-performing loans ........... 412.08% 213.06% 257.84% 247.40% 268.25% 176.46%
Non-performing loans to
total loans .................... 0.27% 0.54% 0.44% 0.48% 0.47% 0.70%
Total loan accounts ............. 4,676 4,625 4,764 4,404 4,606 4,671
Total deposit accounts .......... 27,712 26,172 25.443 24,666 23,730 22,738
Total branches (all full service) 7 7 7 7 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.
8
<PAGE> 11
December 31, June 30, June 30, June 30,
1993 (1) 1993 1992 1991
- ------------ -------- -------- -------
$ 9,360 $19,035 $19,744 $20,709
4,015 8,485 10,698 12,896
- ------- ------- ------- -------
5,345 10,550 9,046 7,813
319 711 665 238
- ------- ------- ------- -------
5,026 9,839 8,381 7,575
- ------- ------- ------- -------
253 749 726 757
3,011 5,378 4,795 4,625
- ------- ------- ------- -------
2,758 4,629 4,069 3,868
- ------- ------- ------- -------
902 2,158 1,849 1,505
450 - - -
- ------- ------- ------- -------
$ 1,816 $ 3,052 $ 2,463 $ 2,202
======= ======= ======= =======
$ 0.67 $ 1.13 $ 0.93 $ 0.83
$ 0.66 $ 1.10 $ 0.88 $ 0.79
$ 0.25 $ 0.40 $ 0.34 $ 0.11
- ---------------------------------------------------------
December 31, June 30, June 30, June 30,
1993 1993 1992 1991
- ------------ -------- -------- ---------
$251,481 $246,180 $227,183 $220,053
204,205 202,083 183,366 177,421
33,639 28,910 28,910 25,160
222,945 219,133 202,823 196,880
2,087 993 609 799
23,874 22,691 20,667 18,972
- ---------------------------------------------------------
December 31, June 30, June 30, June 30,
1993 (1) (2) 1993 1992 1991
- ------------ -------- -------- --------
7.75% 8.24% 9.20% 10.08%
3.63% 4.04% 5.39% 6.75%
- --------- ------ ------ ------
4.12% 4.20% 3.81% 3.33%
========= ====== ====== ======
4.27% 4.44% 4.04% 3.80%
1.45% 1.28% 1.10% 1.03%
15.51% 14.00% 12.38% 12.31%
- ---------------------------------------------------------
December 31, June 30, June 30, June 30,
1993 1993 1992 1991
- ------------ --------- ---------- -----------
15.5% 14.9% 14.7% 14.1%
16.8% 16.1% 15.9% 14.8%
9.5% 9.2% 9.1% 8.6%
1.26% 1.15% 0.88% 0.53%
454.75% 382.34% 231.51% 117.96%
0.27% 0.30% 0.38% 0.45%
4,654 4,661 4,755 4,793
21,204 21,330 20,834 21,200
6 6 6 6
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, selfdirected 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 February 29, 2000,
the Bancorp had 2,727,403 shares of common stock outstanding and 506
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.
TOTAL ASSETS
(DOLLARS IN MILLIONS)
[BAR GRAPH]
1995 1996 1997 1998 1999
$280.9 $299.4 $319.6 $345.4 $361.7
TOTAL ASSETS HAVE INCREASED FROM $280.9 MILLION AT DECEMBER 31, 1995 TO $361.7
MILLION AT DECEMBER 31, 1999. GROWTH DURING 1999 TOTALED $16.3 MILLION OR 4.7%.
- -------------------------------------------------------------------------------
9
<PAGE> 12
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 Bancorp'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, 1999, the Bancorp had total assets of $361.7 million and
total deposits of $306.6 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, 1999, stockholders' equity totaled $32.5
million, with book value per share at $11.82. Net income for 1999 was $4.2
million, or $1.53 per common share and $1.52, assuming dilution. The return on
average assets (ROA) was 1.20%, while the return on average stockholders' equity
(ROE) was 13.17%.
TOTAL ASSET COMPOSITION
(DOLLARS IN MILLIONS)
[PIE GRAPH]
COMMERCIAL BUSINESS AND OTHER $29.8(8.2%)
COMMERCIAL REAL ESTATE AND
MULTIFAMILY $79.7(22.0%)
RESIDENTIAL REAL ESTATE,
INCLUDING HOME EQUITY $161.1(44.6%)
CONSUMER $10.4(2.9%)
OTHER ASSETS $23.4(6.4%)
INVESTMENTS AND OTHER $42.5(11.8%)
CONSTRUCTION AND LAND
DEVELOPMENT $14.8(4.1%)
AT DECEMBER 31, 1999, THE BANCORP HAD TOTAL AS SETS OF $361.7 MILLION.
INTEREST-EARNING ASSETS TOTALED $338.3 MILLION AND REPRESENTED 93.5% 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 10 for
contractual terms of fifteen years or less. The actual cash flows from these
loans generally results in a duration which is less than the contractual
maturity, providing protection against the possibility of rising interest rates.
The Bancorp is primarily a portfolio lender. Mortgage banking activities
are limited to the sale of fixed rate mortgage loans with contractual maturities
of twenty-five years or longer. 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, NOW accounts, savings and money market accounts)
have been aggressively marketed and certificate accounts have been competitively
priced. Account activity and maturities are 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 is the risk that the Bancorp's earnings and capital will be adversely
affected by changes in interest rates. The primary approach to interest rate
risk management is one which focuses on adjustments to the Bancorp's
asset/liability mix in order to limit the magnitude of interest rate risk. The
Board of Directors has delegated the responsibility for measuring, monitoring
and controlling interest rate risk to the Bancorp's asset/liability management
committee (ALCO). The ALCO is responsible for developing and implementing
interest rate risk management strategies, establishing and maintaining a
system of limits and controls, and establishing and utilizing an interest rate
risk measurement system. The ALCO, which is made up of members of senior
management, generally meets monthly with board presentations occurring
quarterly.
10
<PAGE> 13
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
interest rate risk focus on investments and loans of short duration, adjustable
rate 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.
Performance from an interest rate risk perspective can be measured in many
ways. Methodologies used by the Bancorp focus on net interest income and the net
economic value of equity. Net interest income is defined as interest income less
interest expense. Variability in net interest income arises because its
components - interest income and interest expense - do not change equally as
rates vary. This mismatch occurs because individual assets and liabilities
reprice differently as rates change. Factors which affect net interest income
include changes in the level of interest rates, changes in the relationship
between Bancorp yield rates and interest costs, changes in the volume of assets
and liabilities outstanding, and changes in the composition or mix of assets and
liabilities. Management uses rate shock (i.e., instantaneous and sustained
parallel shifts in the yield curve in 1% increments up and down 2%) for stress
testing the net interest income under several rate change levels. In order to
simulate activity, maturing balances are replaced with new balances at the new
rate level and repricing balances are adjusted to the new rate shock level. The
results are compared to limits set by the Board of Directors and are monitored
to identify unfavorable trends. Net economic value of equity is the net present
value of the Bancorp's portfolio of assets and liabilities. By marking-to-market
the components of the balance sheet, management can compute the net economic
value of equity. As rates change over time, the market values of Bancorp assets
and liabilities will change, with longer-term products fluctuating more than
short-term products. In most cases, rate-sensitive assets and liabilities will
not have the same maturity characteristics. Therefore, as rates vary, the market
value of the rate-sensitive assets will not change equally with the market value
of rate-sensitive liabilities. This will cause the net economic value of equity
to vary. The focus of the net economic value of equity is to determine the
percentage decline in the net economic value of equity caused by a 2% increase
or decrease in interest rates, whichever produces the larger decline. A large
value indicates a large percentage decline in the net economic value of equity
due to changes in interest rates and, thus, high interest rate sensitivity. A
low value indicates a small percentage decline in the net economic value of
equity due to changes in interest rates and, thus, low interest rate
sensitivity. As with net interest income, the results are compared to limits set
by the Board of Directors and are monitored to identify unfavorable trends.
Presented in the following tables is forward-looking information about the
Bancorp's sensitivity to changes in interest rates as of December 31,1999 and
1998. The tables incorporate the Bancorp's internal system generated data as
related to the maturity, repricing and repayment/withdrawal of interest earning
assets and interest bearing liabilities. Prepayment assumptions are based on
published data. Present value calculations use current published market
interest rates. For core deposits that have no contractual maturity, the table
presents principal cash flows and, as applicable, related weighted-average
interest rates based on the Bancorp's historical experience, management's
judgment, and statistical analysis, as applicable, concerning their most likely
withdrawal behaviors.
INTEREST RATE RISK AT DECEMBER 31, 1999
Net Interest Income Net Economic Value of Equity
- --------------------------------- -------------------------------
Change Amount % Chg. Policy Amount % Chg. Policy
in rates Limit % Limit %
2% $ 12,238 - 8.9 - 20 $ 40,596 - 18.0 - 30
1% $ 12,879 - 4.1 - 10 $ 44,971 - 9.2 - 15
0% $ 13,430 0.0 $ 49,510 0.0
-1% $ 13,800 2.8 - 10 $ 53,412 7.9 - 15
-2% $ 13,885 3.4 - 20 $ 56,525 14.2 - 30
INTEREST RATE RISK AT DECEMBER 31, 1998
Net Interest Income Net Economic Value of Equity
- ------------------------------------ -------------------------------
Change Amount % Chg. Policy Amount % Chg. Policy
in rates Limit % Limit %
2% $ 12,400 - 2.9 - 20 $ 44,223 - 12.2 - 30
1% $ 12,613 - 1.3 - 10 $ 47,348 - 6.0 - 15
0% $ 12,773 0.0 $ 50,376 0.0
-1% $ 12,701 - 0.6 - 10 $ 52,470 4.2 - 15
-2% $ 12,528 - 1.9 - 20 $ 54,555 8.3 - 30
The tables show that the Bancorp has managed interest rate risk within the
policy limits set by the Board of Directors. At December 31, 1999, an increase
in interest rates of 2% would have resulted in an 8.9% decrease in net interest
income and an 18.0% decrease in the net economic value of equity compared to
decreases of 2.9% and 12.2%, at December 31, 1998. The increase in interest rate
risk during 1999 was due to the large increase in loan volume during 1999 funded
in part by reducing lower yielding interest bearing balances in financial
institutions and federal funds.
11
<PAGE> 14
Financial Condition
During the year ended December 31, 1999, total assets increased by $16.3
million (4.7%), with interest-earning assets increasing by $13.3 million (4.1%).
At December 31, 1999, interest earning assets totaled $338.3 million and
represented 93.5% of total assets. Loans totaled $295.8 million and represented
87.4% of interest-earning assets, 81.8% of total assets and 96.5% of total
deposits. The loan portfolio includes $14.8 million (5.0%) in construction and
land development loans, $161.1 (54.5%) in residential real estate loans, $79.7
million (26.9%) in commercial and multifamily real estate loans, $10.4 million
(3.5%) in consumer loans and $29.8 million (10.1%) in commercial business and
other loans. During 1999, loans increased by $22.4 million (8.2%). Adjustable
rate loans comprised 53% of total loans at year-end. Growth during 1999 was a
result of a strong local economy, favorable interest rates and aggressive
marketing and call programs. Assuming the continuation of the current strength
of the local economy and an aggressive marketing and call program effort,
management believes that loan growth should remain strong during 2000 despite a
rising interest rate environment and increased price competition within the
Bancorp's market area. Management expects to fund loan growth with a mix of
deposits and borrowed funds.
[BAR GRAPH]
TOTAL LOANS
(DOLLARS IN MILLIONS)
1995 1996 1997 1998 1999
$222.3 $224.7 $272.2 $273.4 $295.8
TOTAL LOANS HAVE INCREASED FROM $222.3 MILLION AT DECEMBER 31, 1995 TO $295.8
MILLION AT DECEMBER 31, 1999. DURING 1999, LOANS INCREASED BY $22.4 MILLION.
- --------------------------------------------------------------------------------
During 1999, the Bancorp sold $2.5 million in fixed rate mortgages compared
to $3.7 million in 1998 and $1.8 million in 1997. All loans sold had contractual
maturities of thirty years. Net gains realized from the sales totaled $30
thousand, $111 thousand and $26 thousand for 1999, 1998 and 1997. Net mortgage
loan servicing income totaled $16 thousand for 1999 and 1998, and $21 thousand
for 1997. At December 31, 1999, the Bancorp had $597 thousand classified as
loans held for sale. During 2000, the Bancorp expects to sell fixed rate
mortgage loans, with contractual maturities of twenty-five years or longer, on a
case-by-case basis as part of its efforts to manage interest rate risk.
[PIE GRAPH]
LOAN COMPOSITION
(DOLLARS IN MILLIONS)
COMMERCIAL REAL ESTATE
AND MULTIFAMILY $79.7(26.9%)
RESIDENTIAL REAL ESTATE
INCLUDING HOME EQUITY $161.1(54.5%)
COMMERCIAL BUSINESS
AND OTHER $29.8(10.1%)
CONSUMER $10.4(3.5%)
CONSTRUCTION AND LAND
DEVELOPMENT $14.8(5.0%)
AT DECEMBER 31, 1999, LOANS RECEIVABLE TOTALED $295.8 MILLION AND REPRESENTED
87.4% OF INTEREST-EARNING ASSETS.
- --------------------------------------------------------------------------------
At December 31, 1999, the Bancorp's investment portfolio totaled $40.2
million and was invested as follows: 85.7% in U.S. government agency debt
securities, 12.4% in U.S. government debt securities, and 1.9% in U.S.
government agency mortgage-backed securities. At December 31, 1999, securities
available-for-sale totaled $24.2 million or 60.2% of total securities. The
available- for-sale portfolio permits the active management of the Bancorp's
liquidity position. During 1999, the Bancorp did not have derivative instruments
and was not involved in hedging activities as defined by SFAS 133. The Bancorp
does not have a trading portfolio. In addition, at December 31, 1999, the
Bancorp had $1.8 million in FHLB stock. During 1999, investment securities
increased by $5.6 million (15.4%).
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. At December 31, 1999, the Bancorp had $803 thousand
in non-performing loans. The December 31, 1999 balance includes $565 thousand in
loans accounted for on a nonaccrual basis and $238 thousand in accruing loans
which were contractually past due 90 days or more. The total of these
nonperforming loans represents 0.27% of the total loan portfolio and 0.22% of
total assets. At December 31, 1999, $689 thousand of the Bancorp's loans were
internally classified as substandard. There were no loans classified as doubtful
or loss. Management does not anticipate that any of the non-performing loans or
classified loans will materially impact future operations, liquidity or capital
resources. At December 31, 1999, except as described above, 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, 1999, the Bancorp had no foreclosed real estate.
12
<PAGE> 15
[BAR GRAPH]
NON-PERFORMING LOANS TO TOTAL LOANS
1995 1996 1997 1998 1999
0.47% 0.48% 0.44% 0.54% 0.27%
MANAGEMENT BELIEVES THAT THE CREDIT RISK PROFILE OF THE LOAN PORTFOLIO IS
RELATIVELY LOW. AT DECEMBER 31, 1999, THE BANCORP'S RATIO OF NON-PERFORMING
LOANS TO TOTAL LOANS WAS 0.27% (TWENTY-SEVEN HUNDREDTHS OF ONE PERCENT) WHICH
WAS BELOW THE INDUSTRY NORM.
- --------------------------------------------------------------------------------
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses (ALL) has been maintained. While
management may periodically allocate portions of the allowance for specific
problem loans, the entire allowance is available to absorb all credit losses
that arise from the loan portfolio and is not segregated for, or allocated to,
any particular loan or group of loans. During 1999, additions to the ALL account
totaled $200 thousand compared to $110 thousand for 1998 and $221 thousand for
1997. The amount provided during 1999 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 $23 thousand during
1999.
[BAR GRAPH]
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOSSES
1995 1996 1997 1998 1999
1.27% 1.18% 1.13% 1.14% 1.12%
AT DECEMBER 31, 1999, THE BANCORP HAD $3.3 MILLION IN THE ALLOWANCE FOR LOAN
LOSSES ACCOUNT. THE AMOUNT REPRESENTS 1.12% OF LOANS OUTSTANDING AND 412.08% OF
NON-PERFORMING LOANS.
- --------------------------------------------------------------------------------
At December 31, 1999, the balance in the ALL account totaled $3.3 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 1999, additions to the ALL were allocated to
the commercial real estate loans and commercial business loans due to the growth
in these portfolios and the additional risk related to these products. At
December 31, 1999, 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, 1999.
Deposits are the major source of funds for lending and other investment
purposes. At December 31, 1999, deposits totaled $306.6 million. During 1999,
deposit growth totaled $13.4 million (4.6%). Money market deposit accounts
(MMDA's) increased $9.0 million (27.1%), NOW accounts increased $1.2 million
(4.4%), checking accounts increased $363 thousand (1.6%) and certificates of
deposit increased by $5.2 million (3.2%). Savings accounts decreased $2.4
million (4.9%). The growth in core deposits was a result of competitive product
offerings and an aggressive marketing program. At December 31, 1999, the deposit
base was comprised of 15.2% savings accounts, 13.8% MMDAs, 9.6% NOW accounts,
7.4% checking accounts and 54.0% certificates of deposit. Deposit growth has not
kept pace with asset growth principally due to a low rate of personal savings by
households and competition for depositor funds from higher-yielding investment
alternatives. At December 31, 1999, repurchase agreements totaled $3.1 million.
Other short-term borrowings totaled $1.5 million. The Bancorp had $14 million in
FHLB advances with a weighted-average maturity of 4.0 years.
[BAR GRAPH]
TOTAL DEPOSITS
(DOLLARS IN MILLIONS)
1995 1996 1997 1998 1999
$247.9 $256.4 $272.1 $293.2 $306.6
DEPOSITS ARE THE MAJOR SOURCE OF FUNDS FOR LENDING AND OTHER INVESTMENT
PURPOSES. DURING 1999, DEPOSITS INCREASED BY $13.4 MILLION OR 4.6%.
- --------------------------------------------------------------------------------
13
<PAGE> 16
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 Bancorp is subject to legal reserve requirements under
Federal Reserve Regulation D, liquidity is managed to ensure that the Bancorp
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.
[BAR GRAPH]
CAPITAL TO AVERAGE ASSETS
1995 1996 1997 1998 1999
9.7% 9.3% 9.2% 9.2% 9.0%
MANAGEMENT FIRMLY BELIEVES THAT THE SAFETY AND SOUNDNESS OF THE BANCORP
IS ENHANCED BY MAINTAINING A HIGH LEVEL OF CAPITAL. AT DECEMBER 31, 1999, 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 13.5% AND TOTAL CAPITAL TO RISK-WEIGHTED
ASSETS WAS 14.8%.
- --------------------------------------------------------------------------------
During 1999, cash and cash equivalents decreased by $12.7 million compared
to increases of $16.7 million for 1998 and $4.1 million for 1997. The decrease
reflects the reduction of interest bearing balances in financial institutions
and federal funds sold, as these funds were used for the Year 2000 cash
build-up, security investments and loan originations. During 1999, cash provided
by operating activities totaled $5.1 million, compared to $4.0 million for 1998
and $5.2 million for 1997. The increase during 1999 was due to an increase in
net income and a reduction in cash flows from loan sales. Cash flows from
investing activities reflect an increase in loan production during 1999. The net
change in loans receivable and loan participations purchased totaled $22.6
million during 1999, compared to $1.8 million for 1998 and $28.1 million for
1997. Cash flows from financing activities totaled $12.0 million during 1999,
compared to $21.3 million for 1998 and $16.3 million for 1997. The Bancorp paid
dividends on common stock of $2.3 million during 1999, compared to $2.0 million
for 1998 and $1.8 million for 1997. Deposit growth during 1999 totaled $13.4
million, compared to $21.1 million for 1998 and $15.7 million for 1997. The
increase in FHLB advances and other borrowed funds totaled $1.3 million during
1999, compared to $2.2 million for 1998 and $2.4 million for 1997.
On August 18, 1999, the Board of Directors authorized a stock repurchase
program for 50,000 shares of the Bancorp's Common Stock, representing
approximately 1.8% of the total common shares outstanding. As of December 31,
1999, the Bancorp purchased 21,100 shares of treasury stock at $21.00-$21.50 per
share for $447 thousand.
During 2000, the Bancorp will open a state-of-the-art branch facility in
Hobart, Indiana. The cost of the new facility will be approximately $2.1
million. The facility will not have a material impact on noninterest expense
during 2000. The new facility provides opportunities to expand market share for
the Bancorp's products and services in Hobart and the surrounding areas.
At December 31, 1999, outstanding commitments to fund loans totaled $61.3
million. Approximately 82% 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 1999, stockholders' equity increased
by $1.2 million (3.7%). The increase resulted primarily from earnings of $4.2
million for 1999. In addition, $21 thousand represents proceeds from the
exercise of 4,347 stock options. The Bancorp paid $2.3 million in cash dividends
and $447 thousand for the purchase of treasury stock during 1999. The net
unrealized loss on available-for-sale securities was $336 thousand. At December
31, 1999, book value per share was $11.82 compared to $11.34 at December 31,
1998.
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
14
<PAGE> 17
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.
The following table shows that, at December 31, 1999, the Bancorp's capital
exceeded all regulatory capital requirements. At December 31, 1999, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
The dollar amounts are in millions.
Required for To be well
Actual adequate capital capitalized
------------ ---------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ----- ----- ------ -----
Total capital to
risk-weighted assets $35.7 14.8% $19.3 8.0% $24.2 10.0%
Tier I capital to
risk-weighted assets $32.7 13.5% $ 9.7 4.0% $14.5 6.0%
Tier I capital to
adjusted average assets $32.7 9.0% $10.9 3.0% $18.2 5.0%
Results of Operations - Comparison of 1999 to 1998
Net income for 1999 was $4.2 million, compared to $3.8 million for 1998, an
increase of $473 thousand (12.6%). The earnings represent a return on average
assets of 1.20% for 1999 compared to 1.14% for 1998. The return on average
equity was 13.17% for 1999 compared to 12.35% for 1998.
Net interest income for 1999 was $14.3 million, up $1.4 million (10.8%)
from $12.9 million for 1998. The increase in net interest income was primarily
due to a lower cost of funds. The weighted-average yield on interest-earning
assets was 7.61% for 1999 compared to 8.00% for 1998. The weighted-average cost
of funds was 3.54% for 1999 compared to 4.16% for 1998. The impact of the 7.61%
return on interest earning assets and the 3.54% cost of funds resulted in a net
interest spread of 4.07% for 1999 compared to 3.84% for 1998. During 1999, total
interest income increased by $372 thousand (1.5%) while total interest expense
decreased by $1.0 million (8.4%). The net interest margin was 4.04% for 1999
compared to 3.91% for 1998.
[BAR GRAPH]
NET INTEREST MARGIN
1995 1996 1997 1998 1999
3.91% 3.79% 3.94% 3.91% 4.04%
THE NET INTEREST MARGIN IS TOTAL INTEREST INCOME MINUS TOTAL INTEREST
EXPENSE STATED AS A PERCENTAGE OF AVERAGE TOTAL ASSETS. DURING 1999, THE
INCREASE WAS PRIMARILY DUE TO BOTH GROWTH IN THE BANCORP'S LOAN PORTFOLIO AND
CORE DEPOSITS.
- --------------------------------------------------------------------------------
During 1999, interest income from loans increased by $108 thousand (0.5%)
compared to 1998. The increase was due to an increase in average daily balances
for the loan portfolio. The weighted-average yield on loans outstanding was
7.90% for 1999 compared to 8.31% for 1998. Higher average loan balances have
contributed to the increase in interest income as loans averaged $286.6 million
for 1999, up $15.2 million (5.6%) from $271.4 million for 1998. During 1999,
interest income on investments and other deposits increased by $264 thousand
(9.8%) compared to 1998. The increase was due to higher average daily balances.
The weighted- average yield on investments and other deposits was 5.92% for 1999
compared to 6.13% for 1998. Securities and other deposits averaged $49.9 million
for 1999, up $6.0 million (13.7%) from $43.9 million for 1998.
Interest expense for deposits decreased by $1.0 million (9.2%) during 1999
compared to 1998. The decrease was due to a lower cost of funds. The
weighted-average rate paid on deposits for 1999 was 3.45% compared to 4.09% for
1998. The lower cost of funds was due to growth in core deposits. Core deposits
averaged $141.4 million during 1999, up $23.1 million (19.5%) from $118.3
million for 1998. Total deposit balances averaged $300.4 million for 1999, up
$21.3 million (7.6%) from $279.1 million for 1998. Interest expense on borrowed
funds increased by $18 thousand (2.0%) during 1999 due to higher average daily
balances. The weighted-average cost of borrowed funds was 5.11% for 1999
compared to 5.41% for 1998. Borrowed funds averaged $18.1 million during 1999,
up $1.4 million (8.4%) from $16.7 million for 1998. 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 $1.7 million for 1999, up
$312 thousand (23.2%) from $1.4 million during 1998. During 1999, management
continued to implement initiatives focused on improving noninterest income from
Bancorp operations. As a result, fees and service charges increased $389
thousand (44.7%) and income from Trust operations increased $42 thousand
(14.2%).
15
<PAGE> 18
Noninterest expense for 1999 was $8.8 million, up $836 thousand (10.5%)
from $7.9 million for 1998. The increase in compensation and benefits was due to
additional staffing, annual salary increases and the increased cost of employee
benefits. The increases in occupancy and equipment, and data processing reflect
investments in technology and new products and services. Other expense changes
were due to costs related to the century date change and standard increases in
operations. The Bancorp's efficiency ratio for 1999 was 54.9% compared to 55.6%
for 1998. The ratio is determined by dividing total noninterest expense by the
sum of net interest income and total noninterest income for the period.
Income tax expenses for 1999 totaled $2.8 million
compared to $2.5 million for 1998, an increase of $314 thousand (12.8%). The
increase was due to an increase in pretax earnings during 1999. The combined
effective federal and state tax rates for the Bancorp were 39.6% for 1999 and
39.5% for 1998.
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 both 1998 and
1997. 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.
During 1998, interest income from loans increased by $1.2 million (5.5%)
compared to 1997. The increase was due to an increase in average daily balances
for the loan portfolio. The weighted-average yield on loans outstanding was
8.31% for 1998 compared to 8.41% for 1997. Higher average loan balances
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 maturities of borrowed funds. Borrowed funds averaged
$16.7 million during 1998, up $8.6 million (107.1%) from $8.1 million for 1997.
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 operations.
The Bancorp's efficiency ratio for 1998 was 55.6% compared to 55.0% for 1997.
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.
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.
16
<PAGE> 19
Year 2000
The transition into the year 2000 was a success for the Bancorp, its
service providers and customers. Management will continue to monitor its systems
and equipment throughout 2000 to avoid the risk of disruptions to customer
service or Bancorp operations caused by specific future dates. Informal
discussions on year 2000 issues and dates will continue with vendors and major
customers. Costs related to year 2000 readiness totaled approximately $140
thousand during 1999. The total cost for the year 2000 initiative was
approximately $300 thousand of which approximately $200 thousand was invested in
new computers and software providing enhanced functionality over the systems
that were replaced.
Forward-Looking Statements
When used in this report and in other 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.
[BAR GRAPH]
RETURN ON ASSETS
1995 1996 1997 1998 1999
1.14% 0.75% 1.13% 1.14% 1.20%
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 1999 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.
- --------------------------------------------------------------------------------
[BAR GRAPH]
RETURN ON EQUITY
1995 1996 1997 1998 1999
11.74% 7.90% 11.87% 12.35% 13.17%
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 1999 REFLECTS RECORD EARNINGS. THE 1996 RESULTS INCLUDE
THE ONE-TIME SPECIAL ASSESSMENT ON SAIF-ASSESSABLE DEPOSITS TO RECAPITALIZE
SAIF.
- --------------------------------------------------------------------------------
17
<PAGE> 20
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
NorthWest Indiana Bancorp
Munster, Indiana
We have audited the accompanying consolidated balance sheets of NorthWest
Indiana Bancorp (the Bancorp) as of December 31, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
January 7, 2000
18
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) DECEMBER 31,
-----------------------
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Cash and non-interest bearing balances in financial institutions .......................... $ 14,633 $ 12,729
Interest bearing balances in financial institutions ....................................... -- 10,111
Federal funds sold ........................................................................ -- 4,500
--------- ---------
Total cash and cash equivalents ......................................................... 14,633 27,340
Securities available-for-sale ............................................................. 24,171 20,522
Securities held-to-maturity (fair value: 1999 - $15,718, 1998 - $14,236) .................. 15,983 14,133
Loans held for sale ....................................................................... 597 598
Loans receivable .......................................................................... 295,813 273,433
Less: allowance for loan losses ........................................................... (3,309) (3,132)
--------- ---------
Net loans receivable .................................................................... 292,504 270,301
Federal Home Loan Bank stock .............................................................. 1,777 1,695
Accrued interest receivable ............................................................... 2,408 2,298
Premises and equipment .................................................................... 6,522 6,715
Foreclosed real estate .................................................................... -- 32
Investment in real estate limited partnerships ............................................ 1,117 499
Deferred income taxes ..................................................................... 1,367 877
Other assets .............................................................................. 640 407
--------- ---------
Total assets ............................................................................ $ 361,719 $ 345,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing .................................................................... $ 22,709 $ 22,346
Interest bearing ........................................................................ 283,938 270,876
--------- ---------
Total ................................................................................ 306,647 293,222
Borrowed funds ............................................................................ 18,607 17,320
Accrued expenses and other liabilities .................................................... 3,994 3,559
--------- ---------
Total liabilities ....................................................................... 329,248 314,101
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;
shares issued: December 31, 1999 - 2,767,503,
December 31, 1998 - 1,381,578,
shares outstanding: December 31, 1999 - 2,746,403,
December 31, 1998 - 2,763,156 ........................................ 346 345
Additional paid in capital ................................................................ 2,970 2,950
Accumulated other comprehensive income .................................................... (222) 114
Retained earnings - substantially restricted .............................................. 29,824 27,907
Treasury stock: December 31, 1999 - 21,100 common shares at cost .......................... (447) --
--------- ---------
Total stockholders' equity .............................................................. 32,471 31,316
--------- ---------
Total liabilities and stockholders' equity .............................................. $ 361,719 $ 345,417
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans receivable
Real estate loans .................................................. $19,541 $19,747 $19,128
Commercial loans ................................................... 2,248 2,071 1,780
Consumer loans ..................................................... 862 725 462
------- ------- -------
Total loan interest ............................................. 22,651 22,543 21,370
Securities ........................................................... 2,358 1,981 2,155
Other interest earning assets ........................................ 598 711 144
------- ------- -------
Total interest income .............................................. 25,607 25,235 23,669
------- ------- -------
Interest expense:
Deposits ............................................................. 10,358 11,405 11,307
Borrowed funds ....................................................... 923 905 414
------- ------- -------
Total interest expense ............................................. 11,281 12,310 11,721
------- ------- -------
Net interest income ....................................................... 14,326 12,925 11,948
Provision for loan losses ................................................. 200 110 221
------- ------- -------
Net interest income after provision for loan losses ....................... 14,126 12,815 11,727
------- ------- -------
Noninterest income:
Fees and service charges ............................................. 1,260 871 695
Trust operations ..................................................... 338 296 256
Gain on sale of loans, net ........................................... 30 111 26
Gain on securities, net .............................................. 12 -- --
Gain on sale of foreclosed real estate ............................... 15 65 28
Other ................................................................ 4 4 61
------- ------- -------
Total noninterest income ........................................... 1,659 1,347 1,066
------- ------- -------
Noninterest expense:
Compensation and benefits ............................................ 4,656 4,130 3,645
Occupancy and equipment .............................................. 1,524 1,454 1,350
Data processing ...................................................... 511 428 368
Federal insurance premium ............................................ 169 164 163
Advertising .......................................................... 150 128 145
Other ................................................................ 1,764 1,634 1,483
------- ------- -------
Total noninterest expense .......................................... 8,774 7,938 7,154
------- ------- -------
Income before income tax expenses ......................................... 7,011 6,224 5,639
Income tax expenses ....................................................... 2,775 2,461 2,223
------- ------- -------
Net income ................................................................ $ 4,236 $ 3,763 $ 3,416
======= ======= =======
Earnings per common share:
Basic ................................................................ $ 1.53 $ 1.36 $ 1.24
Diluted .............................................................. $ 1.52 $ 1.35 $ 1.23
Dividends declared per common share ....................................... $ 0.84 $ 0.74 $ 0.64
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE> 23
<TABLE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
(Dollars in thousands, except per share data) Accumulated
Additional Other
Common Paid-in Comprehensive Retained Treasury Total
Stock Capital Income Earnings Stock Equity
----- ------- ------------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ...................................... $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
Comprehensive income:
Net income .................................................. -- -- -- 4,236 -- 4,236
Net unrealized gain/(loss) on securities
available-for-sale, net of reclassification tax effects ... -- -- (336) -- -- (336)
------
Comprehensive income ........................................ -- -- -- -- -- 3,900
Issuance of 4,347 shares of common stock at
$4.66 - $10.63 per share, under stock option plan ......... 1 20 -- -- -- 21
Cash dividends, $0.84 per share ............................. -- -- -- (2,319) -- (2,319)
Purchase of 21,100 shares of treasury stock at
$21,00 - $21.50 per share ................................. -- -- -- -- (447) (447)
---- ----- ------ ------ ----- ------
Balance at December 31, 1999 ..................................... $346 $2,970 $(222) $ 29,824 $(447) $ 32,471
==== ====== ===== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .................................................................... $ 4,236 $ 3,763 $ 3,416
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale ............................................... (2,512) (4,259) (1,732)
Sale of loans originated for sale ........................................... 2,495 3,691 1,758
Depreciation and amortization, net of accretion ............................. 921 901 710
Amortization of mortgage servicing rights ................................... 11 6 --
Amortization of investment in real estate
limited partnerships ..................................................... 12 1 --
Net gains on securities ..................................................... (12) -- --
Net gains on sale of loans .................................................. (30) (111) (26)
Net gains on sale of fixed assets ........................................... -- -- (41)
Net gains on sale of foreclosed real estate ................................. (15) (65) (28)
Provision for loan losses ................................................... 200 110 221
Net change in:
Deferred taxes ........................................................... (266) (159) (88)
Interest receivable ...................................................... (110) (103) (42)
Other assets ............................................................. (197) 555 556
Accrued expenses and other liabilities ................................... 435 150 486
-------- -------- --------
Total adjustments ........................................................ 932 717 1,774
-------- -------- --------
Net cash from operating activities ....................................... 5,168 4,480 5,190
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale ..................... 7,660 -- --
Purchase of securities available-for-sale ..................................... (11,960) (8,175) --
Proceeds from maturities of securities held-to-maturity ....................... 5,595 11,000 10,748
Purchase of securities held-to-maturity ....................................... (7,729) (10,110) (500)
Principal collected on mortgage-backed securities ............................. 304 472 414
Purchase of investment in real estate limited partnerships .................... (632) (500) --
Purchase of Federal Home Loan Bank Stock ...................................... (82) (49) (49)
Loan participations purchased ................................................. (300) (5,238) (3,240)
Net change in loans receivable ................................................ (22,253) 3,506 (24,842)
Purchase of premises and equipment, net ....................................... (645) (732) (354)
Proceeds from sale of foreclosed real estate .................................. 200 752 489
-------- -------- --------
Net cash from investing activities .......................................... (29,842) (9,074) (17,334)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits ............................................................ 13,425 21,132 15,670
Proceeds from FHLB advances ................................................... 8,000 4,000 23,000
Repayment of FHLB advances .................................................... (6,000) -- (22,000)
Change in other borrowed funds ................................................ (713) (1,808) 1,367
Proceeds from issuance of common stock ........................................ 21 2 18
Dividends paid ................................................................ (2,319) (2,045) (1,767)
Treasury stock purchased ...................................................... (447) -- --
-------- -------- --------
Net cash from financing activities .......................................... 11,967 21,281 16,288
-------- -------- --------
Net change in cash and cash equivalents ..................................... (12,707) 16,687 4,144
Cash and cash equivalents at beginning of period .............................. 27,340 10,653 6,509
-------- -------- --------
Cash and cash equivalents at end of period .................................... $ 14,633 $ 27,340 $ 10,653
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................................... $ 11,331 $ 12,371 $ 11,668
Income taxes ................................................................ $ 3,203 $ 2,526 $ 1,790
SUPPLEMENTAL NONCASH INFORMATION:
Transfers from securities held-to-maturity to available-for-sale .............. $ -- $ 12,241 $ --
Transfers from loans to foreclosed real estate ................................ $ 153 $ 460 $ 531
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
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.
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. 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, noninterest 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 reported in other comprehensive income. 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 1999 and 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.
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.
23
<PAGE> 26
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 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.
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 is also
recognized as a separate component of equity.
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.
Industry Segments - Internal financial information is primarily reported
and aggregated in the line of business of banking.
Reclassification - Certain amounts appearing in the consolidated financial
statements and notes thereto for the years ended December 31, 1998 and 1997,
have been reclassified to conform to the December 31, 1999 presentation.
24
<PAGE> 27
NOTE 2 - Securities
Year end securities available-for-sale were as follows:
(Dollars in thousands)
Fair
Value Gains Losses
----------- ----------- ------------
1999
U.S. government and federal agencies $ 24,171 $ 15 $ (385)
=========== =========== ============
1998
U.S. government and federal agencies $ 20,522 $ 202 $ (12)
=========== ========== =============
Year end securities held-to-maturity were as follows:
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---- ------- -------
1999
U.S. government and
federal agencies............ $15,228 $-- $(278) $14,950
Mortgage-backed
securities.................. 755 13 -- 768
------- ---- ----- -------
Total debt securities........ $15,983 $ 13 $(278) $15,718
======= ==== ===== =======
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
======= ==== ===== =======
The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1999, 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.
(Dollars in thousands)
Available-for-sale Held-to-maturity
Fair Amortized Fair
Value Cost Value
------- ------- -------
Due in one year or less...... $ 5,013 $ 499 $ 496
Due from one
to five years............... 19,158 14,729 14,454
Mortgage-backed
securities.................. -- 755 768
------- ------- -------
Total....................... $24,171 $15,983 $15,718
======= ======= =======
There were no sales of securities during the years ended December 31, 1999,
1998 and 1997. In 1999, certain securities held-to-maturity were called and
resulted in $12,000 of securities gains. Securities with carrying values of
$40,154,000 and $34,716,000 were pledged as of December 31, 1999 and 1998 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:
(Dollars in thousands)
1999 1998
--------- ---------
Loans secured by real estate:
Construction and land development ............... $ 14,847 $ 19,211
Residential, including home equity .............. 161,467 154,076
Commercial real estate and other dwelling ....... 79,746 67,018
--------- ---------
Total loans secured by real estate .......... 256,060 240,305
Consumer loans ................................... 10,449 10,187
Commercial business and other .................... 29,779 23,374
--------- ---------
Subtotal .................................... 296,288 273,866
Less:
Net deferred loan origination fees .............. (369) (374)
Undisbursed loan funds .......................... (106) (59)
--------- ---------
Loans receivable ............................ $ 295,813 $ 273,433
========= =========
Activity in the allowance for loan losses is summarized below for the years
indicated:
(Dollars in thousands)
1999 1998 1997
------- ------- -------
Balance at beginning of period ....... $ 3,132 $ 3,074 $ 2,887
Provision charged to income .......... 200 110 221
Loans charged off .................... (33) (68) (34)
Recoveries ........................... 10 16 --
------- ------- -------
Balance at end of period ............. $ 3,309 $ 3,132 $ 3,074
======= ======= =======
At December 31, 1999 and 1998, 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, 1999 and
1998.
Nonperforming loans consist of smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment.
Nonperforming loans at year end were as follows.
(Dollars in thousands)
1999 1998
------ -----
Loans past due over 90 days still on accrual .......... $238 $617
Nonaccrual loans ...................................... 565 854
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 at year end are summarized below:
(Dollars in thousands)
1999 1998
------- ------
Mortgage loan portfolios
serviced for FHLMC ............................. $10,258 $8,889
======= ======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $106,000 and $169,000 at December 31, 1999 and
1998.
25
<PAGE> 28
Activity for capitalized mortgage servicing rights was as follows:
(Dollars in thousands)
1999 1998
----- ----
Servicing rights:
Beginning of year ........................... $ 75 $--
Additions ................................... 45 81
Amortized to expense ........................ (11) (6)
----- ----
End of year .............................. $ 109 $ 75
===== ====
At year end 1999 and 1998, there was no valuation allowance required.
NOTE 5 - Premises and Equipment, Net
At year end, premises and equipment are summarized below:
(Dollars in thousands)
1999 1998
-------- --------
Cost:
Land ....................................... $ 1,663 $ 1,663
Buildings and improvements ................. 5,480 5,482
Furniture and equipment .................... 3,743 3,497
-------- --------
Total cost ............................... 10,886 10,642
Less accumulated depreciation
and amortization .......................... (4,364) (3,927)
-------- --------
Premises and equipment, net .............. $ 6,522 $ 6,715
======== ========
NOTE 6 - Income Taxes
Components of the income tax expenses consist of the following:
(Dollars in thousands)
1999 1998 1997
------- ------- -------
Federal:
Current .......................... $ 2,423 $ 2,092 $ 1,824
Deferred ......................... (243) (153) (71)
State:
Current .......................... 618 528 487
Deferred ......................... (23) (6) (17)
------- ------- -------
Income tax expenses ............ $ 2,775 $ 2,461 $ 2,223
======= ======= =======
The differences between the income tax expenses shown on the statement of
income and amounts computed by applying the statutory federal income tax rate to
income before tax expenses consists of the following:
(Dollars in thousands)
1999 1998 1997
------- ------ -------
Federal statutory rate ................. 34% 34% 34%
Tax expense at statutory rate .......... $ 2,384 $2,116 $ 1,917
State tax, net of federal effect ....... 393 344 310
Other .................................. (2) 1 (4)
------- ------ -------
Total income tax expenses ........... $ 2,775 $2,461 $ 2,223
======= ====== =======
The components of the net deferred tax asset recorded in the consolidated
balance sheet are as follows:
(Dollars in thousands)
1999 1998
------- -------
Deferred tax assets:
Bad debt ........................................ $ 740 $ 528
Deferred loan fees .............................. 146 143
Deferred compensation ........................... 534 506
Unrealized depreciation on
securities available-for-sale .................. 148 --
Other ........................................... 105 63
------- -------
Total deferred tax assets ...................... 1,673 1,240
Deferred tax liabilities:
Unrealized appreciation on securities
available-for-sale ............................. -- (76)
Depreciation .................................... (250) (241)
Other ........................................... (56) (46)
------- -------
Total deferred tax liabilities .................. (306) (363)
Valuation allowance .............................. -- --
------- -------
Net deferred tax assets ......................... $ 1,367 $ 877
======= =======
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, 1999 and 1998 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,
1999. 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 $43,077,000 at December 31, 1999 and $36,314,000 at December 31,
1998.
At December 31, 1999, scheduled maturities of certificates of deposit were
as follows:
(Dollars in thousands)
2000 .............. $133,743
2001 .............. 28,833
2002 .............. 2,119
2003 .............. 843
--------
Total $165,538
========
26
<PAGE> 29
NOTE 8 - Borrowed Funds
At year end, borrowed funds are summarized below:
(Dollars in thousands)
1999 1998
------- -------
Repurchase agreements .......................... $ 3,051 $ 3,937
Variable rate advances from the FHLB ........... 1,000 --
Fixed rate advances from the FHLB .............. -- 4,000
Putable advances from the FHLB ................. 13,000 8,000
Limited partnership obligation ................. 500 500
Other .......................................... 1,056 883
------- -------
Total ......................................... $18,607 $17,320
======= =======
Repurchase agreements generally mature within one year and are secured by
U.S. government and U.S agency securities, under the Bancorp's control. At year
end, information concerning these retail repurchase agreements is summarized
below:
(Dollars in thousands)
1999 1998
------- -------
Ending balance ....................................... $3,051 $3,937
Average balance during the year ...................... 3,369 4,693
Maximum month-end balance during the year ............ 3,927 6,154
Securities underlying the agreements at year end:
Carrying value ...................................... 4,998 6,460
Fair value .......................................... 4,895 6,483
Average interest rate during the year ................ 5.01% 5.62%
At year end, advances from the Federal Home Loan Bank were as follows:
(Dollars in thousands)
1999 1998
------- -------
Variable advances, maturing February 2000,
at a rate of 6.07% ................................. $ 1,000 $ --
Fixed advances, maturing October 1999,
at rates of 5.98% and 5.99% ........................ $ -- $4,000
Putable advances, maturing December 2002,
through July 2008, at rates from
5.28% to 5.85%, average rate:
1999 - 5.56%; 1998 - 5.42% ......................... $13,000 $8,000
Variable and 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 $174,813,000 and $159,915,000 of securities
and mortgage loans under a blanket lien arrangement at December 31, 1999 and
1998.
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 2000 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, 1999, scheduled maturities of borrowed funds were as
follows:
(Dollars in thousands)
2000 ............... $ 5,170
2001 ............... 73
2002 ............... 2,059
2003 ............... 2,059
2004 ............... 7,059
Thereafter ......... 2,187
-------
Total ......... $18,607
=======
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, 1999 were based on 12% of the participants' total
compensation excluding incentives. Contributions during the years ended December
31, 1998 and 1997 were based on 10% and 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
$354,000, $274,000 and $204,000 for the years ended December 31, 1999, 1998 and
1997.
The Bancorp maintains an Unqualified Deferred Compensation Plan (the Plan).
The purpose of the Plan is to provide deferred compensation to key senior
management employees of the bancorp in order to recognize their substantial
contributions to the Bank and provide them with additional financial security
as inducement to remain with the Bank. The Compensation Committee selects which
persons shall be participants in the Plan. Participants' accounts are credited
each year with an amount based on a formula involving the participant's employer
funded contributions under all qualified plans and the limitations imposed by
Internal Revenue Code subsection 401(a)(17) and Code section 415.
On December 1, 1999, the Bancorp established a supplemental executive
Retirement Plan (the Plan). The Plan is established as an unfunded,
non-qualified deferred compensation plan. The Plan provides a means for the
payment of supplemental retirement benefits to a select group of key senior
management employees, in recognition of their substantial contribution to the
operation of the Bancorp, and to provide those individuals with additional
financial security. The Board of Directors determines plan participants and
contributions. The Plan expense amounted to $55,000 for the year ended December
31, 1999.
During 1999, the Bancorp terminated its Employee Stock Ownership Plan
(ESOP) as directed by the Board of Directors and approved by the Internal
Revenue Service. All shares of the Bancorp's common stock held by the ESOP were
distributed to its participants. No contributions were made to the ESOP during
the years ended December 31, 1999 and 1998. Contributions during the year ended
27
<PAGE> 30
December 31, 1997 were based on 1% of the participants total compensation
excluding incentives. The ESOP expense amounted to $0, $0 and $23,000 for the
years ended December 31, 1999, 1998 and 1997.
NOTE 10 - Defined Benefit Postretirement Plan
The Bancorp sponsors a defined benefit postretirement plan that provides
comprehensive major medical benefits to all eligible retirees. Eligible retirees
are those who have attained age 65, have completed at least 18 years of service
and are eligible for coverage under the employee group medical plan as of the
date of their retirement. Spouses of eligible retirees are covered if they
were covered as of the employee's date of retirement. Surviving spouses are
covered if they were covered at the time of the retiree's death. Dependent
children of eligible retirees are generally covered to the later of age 19 or
until the child ceases being a full-time student. Surviving dependent children
are subject to the same eligibility restrictions if they were covered at the
time of the retiree's death. The Bancorp pays 50% of any future premium
increases for retiree medical coverage. Retirees pay 100% of the premiums for
all dependent medical coverage.
The following tables sets forth a reconciliation of the Bancorp's
postretirement benefit plan funding status and expense for the periods
indicated:
(Dollars in thousands)
1999 1998
----- -----
Change in postretirement benefit obligation:
Beginning postretirement
benefit obligation .............................. $ 126 $ 119
Unrecognized net actuarial gain ................. (15) --
Service cost ..................................... 5 5
Interest cost .................................... 10 9
Plan participants' contributions ................. 7 --
Benefits paid .................................... (15) (7)
----- -----
Ending postretirement
benefit obligation ............................. 118 126
Change in plan assets ............................ -- --
Funded status .................................... (118) (126)
Unrecognized net actuarial gain .................. (69) (58)
----- -----
Accrued benefit cost ............................. $(187) $(184)
===== =====
(Dollars in thousands)
1999 1998 1997
------- ------ ------
Assumptions used:
Discount rate ................. 8.0% 8.0% 8.0%
Annual increase in health care
cost trend rate:
Year one ..................... 7.0% 11.5% 11.5%
Year two ..................... 7.0% 11.5% 11.5%
Year three ................... 5.0% 11.5% 11.5%
Thereafter ................... 5.0% 5.5% 5.5%
Components of net periodic
postretirement benefit cost:
Service cost ............... $ 5 $ 5 $ 4
Interest cost ................. 10 9 9
Unrecognized net actuarial gain (4) (6) (6)
------- ------ ------
Net periodic postretirement
benefit cost ............... $ 11 $ 8 $ 7
======= ====== ======
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>
1999
Total capital
(to risk-weighted assets) .. $35.7 14.8% $19.3 8.0% $24.2 10.0%
Tier I capital
(to risk-weighted assets) .. $32.7 13.5% $ 9.7 4.0% $14.5 6.0%
Tier I capital
(to adjusted average assets) $32.7 9.0% $10.9 3.0% $18.2 5.0%
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%
</TABLE>
The Bancorp and the Bank were categorized as well capitalized at December
31, 1999 and 1998. There are no conditions or events since December 31, 1999
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
28
<PAGE> 31
(approximately $4,778,000 at December 31, 1999). 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.
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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Net income as reported ............... $ 4,236 $ 3,763 $ 3,416
Pro forma net income ................. $ 4,210 $ 3,747 $ 3,405
Earnings per common share
as reported ........................ $ 1.53 $ 1.36 $ 1.24
Pro forma earnings
per common share ................... $ 1.52 $ 1.36 $ 1.23
Earnings per common share,
assuming dilution as reported ...... $ 1.52 $ 1.35 $ 1.23
Pro forma earnings per common
share, assuming dilution ........... $ 1.51 $ 1.34 $ 1.22
</TABLE>
The fair value of options granted during 1999, 1998 and 1997 is estimated
using the following weighted-average information:
1999 1998 1997
------ ------ -------
Risk free interest rate .............. 6.78% 5.73% 6.50%
Stock price volatility ............... 6.49% 5.57% 5.62%
Expected dividend rate ............... 4.02% 3.61% 4.00%
The expected life for the options for 1999, 1998 and 1997 is 7 to 8 years.
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, 1997 .............. 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
Granted ................................... 23,100 20.58 2.96
Exercised ................................. 4,347 4.83
Forfeited ................................. 200 20.50
Expired ................................... -- --
-------
Outstanding, December 31, 1999 ............ 98,713 15.32
=======
</TABLE>
Options exerciseable at year-end are as follows:
Number Weighted-average
of options exercise price
---------- --------------
1997 11,914 $5.29
1998 11,780 $5.29
1999 7,513 $5.60
At December 31, 1999, options outstanding were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Number Life (Years) Number Price
- ------------------------ ------- ------------ ------ --------
<S> <C> <C> <C> <C>
$4.66 - $9.99 ....................... 7,513 2.5 7,513 $5.60
$10.00 - $15.99 ..................... 35,400 5.2 -- --
$16.00 - $21.00 ..................... 55,800 8.2 -- --
------ ----- ----- -----
Outstanding at year end ............. 98,713 6.7 7,513 $5.60
====== ===== ===== =====
</TABLE>
29
<PAGE> 32
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, 1999, 1998 and 1997 is presented below.
1999 1998 1997
---------- ---------- ----------
Basic earnings per common share:
Net income available to
common stockholders ................... $4,236,000 $3,763,000 $3,416,000
========== ========== ==========
Weighted-average common
shares outstanding .................... 2,762,594 2,763,066 2,762,302
========== ========== ==========
Basic earnings
per common share .................. $ 1.56 $ 1.36 $ 1.24
========== ========== ==========
Diluted earnings per common share:
Net income available to
common stockholders ................... $4,236,000 $3,763,000 $3,416,000
========== ========== ==========
Weighted-average common
shares outstanding .................... 2,762,594 2,763,066 2,762,302
Add: dilutive effect of assumed
stock option exercises ................. 29,703 29,092 29,266
---------- ---------- ----------
Weighted-average common and
dilutive potential shares
outstanding ........................... 2,792,297 2,792,158 2,791,568
========== ========== ==========
Diluted earnings
per common share .................. $ 1.52 $ 1.35 $ 1.23
========== ========== ==========
Stock options for 3,500 shares of common stock were not considered in
computing diluted earnings per common share for 1999 because they were
antidilutive.
NOTE 14 - Related Party Transactions
The Bancorp had aggregate loans outstanding to directors and executive
officers (with individual balances exceeding $60,000) of $5,223,000 at December
31, 1999 and $4,169,000 at December 31, 1998. For the year ended December 31,
1999, the following activity occurred on these loans:
(Dollars in thousands)
Aggregate balance - January 1, 1999 ................... $ 4,169
New loans ............................................. 657
Repayments ............................................ (332)
Other changes ......................................... 729
-------
Aggregate balance - December 31, 1999 ................. $ 5,223
=======
NOTE 15 - Commitments and Contingencies
The Bancorp is a party to financial instruments in the normal course of
business to meet financing needs of its customers. These financial instruments
which include commitments to make loans and standby letters of credit are not
reflected in the accompanying consolidated financial statements.
The Bancorp's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to originate loans
and standby letters of credit is represented by the contractual amount of those
instruments. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. The Bancorp uses the
same credit policy to make such commitments as it uses for on-balance-sheet
items. Since commitments to make loans may expire without being used, the amount
does not necessarily represent future cash commitments.
The Bancorp had outstanding commitments to originate loans as follows:
(Dollars in thousands)
Fixed Variable
Rate Rate Total
------- ------- -------
December 31, 1999:
Real estate ....................... $10,791 $19,411 $30,202
Consumer loans .................... -- 526 526
Commercial business ............... -- 30,620 30,620
------- ------- -------
Total ............................ $10,791 $50,557 $61,348
======= ======= =======
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
======= ======= =======
The $10,791,000 in fixed rate commitments outstanding at December 31,
1999 had interest rates ranging from 6.75% to 9.00%, 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,
1999 and 1998, the Bancorp had standby letters of credit totaling $1,120,000 and
$1,945,000. 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
The following table shows fair values and the related carrying values of
financial instruments as of the dates indicated. Items which are not financial
instruments are not included.
(Dollars in thousands)
DECEMBER 31, 1999
---------------------------
Carrying Estimated
Value Fair Value
--------- ----------
FINANCIAL ASSETS
Cash and cash equivalents .................. $ 14,633 $ 14,633
Securities available-for-sale .............. 24,171 24,171
Securities held-to-maturity ................ 15,983 15,718
Federal Home Loan Bank stock ............... 1,777 1,777
Loans held for sale ........................ 597 597
Loans receivable ........................... 292,504 292,617
Investment in real estate
limited partnerships ...................... 1,117 1,117
Accrued interest receivable ................ 2,408 2,408
FINANCIAL LIABILITIES
Demand and savings deposits ................ (141,109) (141,109)
Certificates of deposit .................... (165,538) (165,387)
Borrowed funds ............................. (18,607) (18,512)
Accrued interest payable ................... (188) (188)
30
<PAGE> 33
(Dollars in thousands)
DECEMBER 31, 1998
-----------------------------
Carrying Estimated
Value Fair Value
--------- ----------
FINANCIAL ASSETS
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 ........................... 270,301 273,157
Investment in real estate
limited partnerships ...................... 499 499
Accrued interest receivable ................ 2,298 2,298
FINANCIAL LIABILITIES
Demand and savings deposits ................ (132,895) (132,895)
Certificates of deposit .................... (160,328) (160,688)
Borrowed funds ............................. (17,320) (17,373)
Accrued interest payable ................... (1,098) (1,098)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1999 and 1998. The estimated
fair value for cash and cash equivalents, Federal Home Loan Bank stock and
investments in real estate limited partnerships are 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, 1999 and 1998, 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, 1999 and 1998, 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 mortgage servicing rights, 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, 1999 and 1998, 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, 1999 and 1998 should not necessarily be considered to apply at
subsequent dates.
NOTE 17 - Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes were as
follows:
1999 1998
----- ----
Net change in net unrealized gains and losses
on securities available for sale
Unrealized gains (losses)
arising during the year ............................. $(548) $190
Reclassification adjustment for gains
included in net income .............................. (12) --
----- ----
Net change in net unrealized gains and
losses on securities available for sale ........... (560) 190
Tax effects ............................................ (224) 76
----- ----
Total other comprehensive income (loss) .............. $(336) $114
===== ====
NOTE 18 - Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are summarized as follows:
YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total interest income .............. $6,168 $6,403 $6,470 $6,566
Total interest expense ............. 2,790 2,786 2,774 2,931
------ ------ ------ ------
Net interest income ................ 3,378 3,617 3,696 3,635
Provision for loan losses .......... 49 51 75 25
------ ------ ------ ------
Net interest income after
provision for loan losses ......... 3,329 3,566 3,621 3,610
Total noninterest income ........... 338 416 446 459
Total noninterest expense .......... 2,077 2,208 2,238 2,251
------ ------ ------ ------
Income before
income taxes ...................... 1,590 1,744 1,829 1,818
Income tax expenses ................ 633 706 726 710
------ ------ ------ ------
Net income ......................... $ 957 $1,068 $1,103 $1,108
====== ====== ====== ======
Basic earnings per share ........... $ 0.35 $ 0.38 $ 0.40 $ 0.40
====== ====== ====== ======
Diluted earnings per share ......... $ 0.34 $ 0.38 $ 0.40 $ 0.40
====== ====== ====== ======
<CAPTION>
YEAR ENDED DECEMBER 31, 1998:
(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>
31
<PAGE> 34
NOTE 19 - Parent Company Only Statements
<TABLE>
<CAPTION>
(Dollars in thousands)
NORTHWEST INDIANA BANCORP
CONDENSED BALANCE SHEETS
DECEMBER 31,
1999 1998
-------- -------
<S> <C> <C>
Assets
Cash on deposit with Peoples Bank .................... $ 403 $ 43
Investment in Peoples Bank ........................... 32,448 31,275
Dividends receivable from Peoples Bank ............... 600 535
Other assets ......................................... -- 2
Total assets ........................................ $ 33,451 $31,855
======== =======
Liabilities and stockholders' equity
Dividends payable .................................... $ 577 $ 511
Other liabilities .................................... 403 28
-------- -------
Total liabilities ................................... 980 539
Common stock ......................................... 346 345
Additional paid in capital ........................... 2,970 2,950
Accumulated other comprehensive income ............... (222) 114
Retained earnings .................................... 29,824 27,907
Treasury stock ....................................... (447) --
-------- -------
Total stockholders' equity .......................... 32,471 31,316
-------- -------
Total liabilities and stockholders' equity ......... $ 33,451 $31,855
======== =======
<CAPTION>
(Dollars in thousands)
NORTHWEST INDIANA BANCORP
CONDENSED STATEMENTS OF INCOME
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Dividends from
Peoples Bank ........................ $ 2,791 $ 2,129 $ 1,770
Operating expenses ................... 106 86 76
------- ------- -------
Income before income taxes
and equity in undistributed
income of Peoples Bank .............. 2,685 2,043 1,694
Provision for income taxes ........... (42) (34) (30)
------- ------- -------
Income before equity
in undistributed
income of Peoples Bank .............. 2,727 2,077 1,724
Equity in undistributed
income of Peoples Bank .............. 1,509 1,686 1,692
------- ------- -------
Net Income ........................... $ 4,236 $ 3,763 $ 3,416
======= ======= =======
<CAPTION>
(Dollars in thousands)
NORTHWEST INDIANA BANCORP
CONDENSED STATEMENTS OF CASH FLOWS
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................. $ 4,236 $ 3,763 $ 3,416
Adjustments to reconcile net
income to net cash from
operating activities
Equity in undistributed
net income of
Peoples Bank ............................. (1,509) (1,686) (1,692)
Change in other assets .................... (63) (77) (11)
Change in other liabilities ............... 441 73 (4)
------- ------- -------
Total adjustments ........................ (1,131) (1,690) (1,707)
------- ------- -------
Net cash from
operating activities ................. 3,105 2,073 1,709
CASH FLOWS FROM
INVESTING ACTIVITIES ....................... -- -- --
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ............................. (2,319) (2,045) (1,767)
Treasury stock purchased ................... (447) -- --
Proceeds from issuance
of capital stock ......................... 21 2 18
------- ------- -------
Net cash from
financing activities ..................... (2,745) (2,043) (1,749)
------- ------- -------
Net change in cash ......................... 360 30 (40)
Cash at beginning of year .................. 43 13 53
------- ------- -------
CASH AT END OF YEAR ........................ $ 403 $ 43 $ 13
======= ======= =======
</TABLE>
32
<PAGE> 35
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 29, 2000, the Bancorp had 2,727,403 shares
of common stock outstanding and 506 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 years ended December 31, 1999 and December
31, 1998. 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 all stock
splits (see Note 1).
DIVIDENDS
PER SHARE PRICES DECLARED PER
HIGH LOW COMMON SHARE
---- --- ------------
Year Ended
December 31, 1999 1st Quarter $21.25 $20.00 $.210
- --------------------------------------------------------------------------------
2nd Quarter 23.00 20.00 .210
- --------------------------------------------------------------------------------
3rd Quarter 21.50 20.00 .210
- --------------------------------------------------------------------------------
4th Quarter 21.50 20.75 .210
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
[GRAPH INSERTED HERE]
MARKET PRICE PER SHARE
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$13.50 $15.57 $21.07 $21.00 $21.50
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".
[GRAPH INSERTED HERE]
BOOK VALUE PER SHARE
1995 1996 1997 1998 1999
----- ------ ------ ------ ------
$9.86 $10.08 $10.67 $11.34 $11.82
THE BANK'S EARNINGS HAVE INCREASED THE BOOK VALUE OF THE BANCORP'S STOCK FROM
$9.86 AT DECEMBER 31, 1995 TO $11.82 PER SHARE AT DECEMBER 31, 1999.
[GRAPH INSERTED HERE]
BASIC EARNINGS PER COMMON SHARE
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
$1.13 $0.80 $1.24 $1.36 $1.53
EARNINGS FOR 1999 TOTALED $4.2 MILLION RESULTING IN BASIC EARNINGS PER COMMON
SHARE OF $1.53.
[GRAPH INSERTED HERE]
5 YEAR TOTAL RETURN
SNL Bank
S&P 500 Asset-Size
Index Index Bancorp
------- ---------- -------
$351 $253 $245
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 S&P 500 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, 1994, WOULD BE WORTH $245 ON
DECEMBER 31, 1999.
33
<PAGE> 36
Photo of 1999 Board of Directors
<PAGE> 37
1999
ANNUAL REPORT
1999 BOARD OF DIRECTORS
FRONT ROW:
GLORIA GRAY
Retired Vice President and Treasurer of
Career Development Consultants,
Munster, Indiana
SECOND ROW:
LOURDES M. DENNISON
Administrative Director,
Dennison Surgical Corp.
Merrillville, Indiana
FRANK BOCHNOWSKI
Executive Vice President,
General Counsel, Trust Officer and
Corporate Secretary of the Bancorp
Munster, Indiana
THIRD ROW:
LEROY CATALDI
Pharmacist, Dyer, Indiana
DAVID A. BOCHNOWSKI
Chairman and Chief Executive Officer
STANLEY E. MIZE
President of Towne & Countree Auto
Sales and Co-owner of Lake Shore Ford
JAMES J. CRANDALL
Director Emeritus
JEROME F. VRABEL
Vice President,
ED&F Man International Inc.
Chicago, Illinois
BACK ROW:
JAMES L. WIESER
Attorney, Wieser and Sterba
Attorneys at Law
Schererville, Indiana
photo of
Benjamin
Bochnowski
BENJAMIN A. BOCHNOWSKI
Chairman Emeritus, Advisory Director
photo of
James
Crandall
JAMES J. CRANDALL
Director Emeritus
photo of
Harold
Reuth
HAROLD G. REUTH
Director Emeritus
35
<PAGE> 38
1999
ANNUAL REPORT
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 TUESDAY, APRIL 18, 2000 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
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
Frank J. Bochnowski
Executive Vice President, General Counsel,
Trust Officer and Corporate Secretary
of the Bancorp, Munster, Indiana
Chairman Emeritus, Advisory Director
Benjamin A. Bochnowski
Directors Emeriti
James J. Crandall
Harold G. Rueth
Albert J. Lesniak
OFFICERS OF NORTHWEST INDIANA BANCORP
AND PEOPLES BANK SB
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
Executive Vice President, General Counsel,
Trust Officer and Corporate Secretary
OFFICERS OF PEOPLES BANK SB
Jon DeGuilio
Senior Vice President, Trust Officer
Daniel W. Moser
Senior Vice President for Housing Finance
Rodney L. Grove
Senior Vice President, Retail Banking
Robert T. Lowry
Senior Vice President, Controller
MANAGEMENT PERSONNEL OF PEOPLES BANK SB
Branches
Catherine L. Gonzalez,
Assistant Vice President, East Chicago
David W. Homrich,
Assistant Vice President, Munster
Jill M. Knight, Assistant Vice President,
Merrillville (Broadway)
Michael J. McIntyre, Assistant Vice President,
Merrillville (Taft)
Marilyn K. Repp, Assistant Vice President,
Woodmar
Meredith L. Bielak, Schererville
Michael J. Shimala, Dyer
Karen M. Laude, Woodmar
Commercial Lending
Terry R. Gadberry, Vice President
Todd M. Scheub, Vice President
Jason J. Stengel
Consumer Lending
James P. Lehr, Assistant Vice President
Christopher A. Grencik,
Assistant Vice President
Clovese R. Robinson
Sharon V. Vacendak
Credit Administration
Christine M. Friel, Assistant Vice President
Housing Finance
Leslie J. Bernacki
Sylvia Magallanez, Assistant Vice President
Marvin O. Tucker, Assistant Vice President
Human Resource
Linda L. Kollada, Vice President
Information Services
Tanya A. Buerger, Vice President
Internal Auditor
Stacy A. Januszewski, Assistant Vice President
Loan Administration
Mary D. Mulroe, Vice President
Management Development
Ronald P. Knestrict
Marketing Project Manager
Shannon E. Franko, Assistant Vice President
Operations
Arlene M. Wohadlo,
Vice President
Trust
Stephan A. Ziemba, Vice President
36
<PAGE> 39
cover page
<PAGE> 40
[NorthWest Indiana Logo]
-----------------------
BANCORP
CORPORATE HEADQUARTERS,
9204 Columbia Avenue
Munster, Indiana 46321
219/836-9690
[PEOPLES BANK LOGO]
SB
SINCE 1910
SUBSIDIARY OF NORTHWEST INDIANA BANCORP
EAST CHICAGO, 4901 Indianapolis Blvd., 397-5010
HAMMOND, 7120 Indianapolis Blvd., 844-7210
DYER, 1300 Sheffield Avenue, 322-2530
MUNSTER, 9204 Columbia Avenue, 836-9690
SCHERERVILLE, 141 W. Lincoln Highway, 865-4300
MERRILLVILLE, 7915 Taft Street, 769-8452
8600 Broadway, 685-8600
FDIC Insured
<PAGE> 1
EXHIBIT 21
Subsidiary of the Bancorp
State of Incorporation
----------------------
Peoples Bank SB* Indiana
* Peoples Bank SB is wholly-owned by the Bancorp and the operations of the
Bank are included in the Consolidated Financial Statements.
39
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,171
<INVESTMENTS-CARRYING> 15,983
<INVESTMENTS-MARKET> 15,718
<LOANS> 295,813
<ALLOWANCE> 3,309
<TOTAL-ASSETS> 361,719
<DEPOSITS> 306,647
<SHORT-TERM> 18,607
<LIABILITIES-OTHER> 3,994
<LONG-TERM> 0
0
0
<COMMON> 346
<OTHER-SE> 32,125
<TOTAL-LIABILITIES-AND-EQUITY> 32,471
<INTEREST-LOAN> 22,651
<INTEREST-INVEST> 2,358
<INTEREST-OTHER> 598
<INTEREST-TOTAL> 25,607
<INTEREST-DEPOSIT> 10,358
<INTEREST-EXPENSE> 11,281
<INTEREST-INCOME-NET> 14,326
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 8,774
<INCOME-PRETAX> 7,011
<INCOME-PRE-EXTRAORDINARY> 4,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,236
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 4.26
<LOANS-NON> 565
<LOANS-PAST> 238
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,132
<CHARGE-OFFS> 33
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 3,309
<ALLOWANCE-DOMESTIC> 2,815
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 494
</TABLE>
