UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-26012
NORTHEAST INDIANA BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 35-1948594
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
648 North Jefferson Street, Huntington, Indiana 46750
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 356-3311
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ X ]
State the issuer's revenues for its most recent fiscal year: $12.2
million.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and ask price
of such stock as of March 17, 1997, was $26.9 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
registrant.)
As of March 17, 1997, there were 1,762,727 shares issued and
outstanding of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended December 31, 1996. Part III of Form 10-KSB - Proxy Statement
for Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
The Company. Northeast Indiana Bancorp (the "Company") a Delaware
corporation, was formed in March, 1995 to act as the holding company for First
Federal Savings Bank (the "Bank" or "First Federal") upon the completion of the
Bank's conversion from the mutual to the stock form (the "Conversion"). The
Company received approval from the Office of Thrift Supervision (the "OTS") to
acquire all of the common stock of the Bank to be outstanding upon completion of
the Conversion. The Conversion was completed on June 27, 1995. All references to
the Company prior to June 27, 1995, except where otherwise indicated, are to the
Bank.
At December 31, 1996, the Company had $169.5 million of assets and
stockholders' equity of $26.5 million (or 15.63% of total assets).
The executive offices of the Company are located at 648 North Jefferson
Street, Huntington, Indiana 46750, and its telephone number at that address is
(219) 356-3311.
The activities of the Corporation itself have been limited to its
investment in the Bank, investments in a one-year renewable note receivable from
the Bank, interest-bearing deposits at financial institutions and a note
receivable from the Bank's Employee Stock Ownership Plan. Unless otherwise
indicated, all activities discussed below are of the Bank.
The Bank. The Bank is a federally chartered stock savings association
headquartered in Huntington, Indiana. Its deposits are insured up to applicable
limits, by the Federal Deposit Insurance Corporation (the "FDIC"), which is
backed by the full faith and credit of the United States. The Bank's primary
market area is Huntington County, Indiana, which is serviced through its three
full-service offices in Huntington, Indiana.
The principal business of the Bank has historically consisted of
attracting retail deposits from the general public and investing those funds
primarily in first mortgage loans on owner-occupied, single-family residential
real estate. The Bank also originates commercial real estate, construction,
consumer and commercial business loans. The Bank has in the past purchased a
limited number of multi-family loans. At December 31, 1996, substantially all of
the Bank's real estate mortgage loans, including commercial and multi-family,
were secured by properties located in the Bank's market area. The Bank also
invests in obligations of states and political subdivisions, mutual funds and
other permissible investments.
The Company's revenues are derived principally from interest on
mortgage loans, interest on investment and other securities and service fee
income. The Company does not originate loans to fund leveraged buyouts, and has
no loans to foreign corporations or governments. While the Company generally
solicits deposits only in its primary market area, at December 31, 1996, the
Company had $2.1 million in brokered deposits.
Lending Activities
Market Area. The Company's office is located at 648 North Jefferson
Street in Huntington, Indiana. The City of Huntington is located in Huntington
<PAGE>
County, Indiana, 25 miles southwest of Fort Wayne, Indiana. The City of
Huntington is the County Seat of Huntington County and has a population of
approximately 17,000. Along with an agricultural base, the major employers in
Huntington County are engaged in light industry and include Wabash Magnetics,
United Technologies Electronic Controls, Hayes Wheels International, Majestic
Products, Preferred Technical Group, Pyle Industries, Eagle Picher/Plastics
Division, Allied Signal Automotive and Wayne Metal Products.
General. The Bank's loan portfolio consists primarily of conventional,
first mortgage loans secured by one- to four-family residences and, to a lesser
extent, commercial real estate loans, construction or development loans and
consumer loans, and commercial business loans. At December 31, 1996, the Bank's
gross loans outstanding totalled $152.6 million, of which $99.3 million or
65.10% were one-to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 36.0% were fixed-rate
loans, and 64.0% were adjustable-rate loans. At that same date, commercial real
estate and multi-family loans totalled $15.3 million, of which 54.2% were
fixed-rate loans and 45.8% were adjustable-rate loans. Also at that date, the
Bank's construction or development loans totalled $10.7 million or 7.0% of the
Bank's total loan portfolio, 86.8% of which were adjustable-rate loans. At
December 31, 1996, commercial business loans totalled $9.6 million or 6.3% of
the Bank's total loan portfolio, of which 46.0% were fixed-rate loans and 54.0%
were adjustable-rate loans.
At December 31, 1996, the balance of the Bank's consumer loans
consisted of $17.6 million of loans, which represented 11.6% of the Bank's gross
loan portfolio. Of the consumer loans outstanding, 71.5% were fixed-rate loans
and 28.5% were adjustable-rate loans.
The Bank and the Company also invests in mutual funds, obligations of
states and political subdivisions, and other debt securities and mortgage-backed
securities. At December 31, 1996, mutual funds totalled $697,000 or 0.4% of
total assets and obligations of states and political subdivisions totalled
$703,000, or 0.4% of total assets. See "Investment Activities."
The Bank's loans-to-one borrower limit is generally limited to the
greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation -
Federal Regulation of Savings Associations." At December 31, 1996, the maximum
which the Bank could have lent under this limit to any one borrower and the
borrower's related entities was approximately $3.0 million. At December 31,
1996, the Bank had no loans or groups of loans to related borrowers with
outstanding balances in excess of this amount. The Bank's largest lending
relationship at December 31, 1996 was $1.5 million in loans to one borrower
secured by a fleet of automobiles registered in the State of Indiana. The next
largest lending relationship at December 31, 1996 was $1.2 million in loans to
one borrower secured by various rental properties mostly located in Huntington
County, Indiana. The next largest lending relationship at December 31, 1996 was
$970,000 secured by real estate in Allen County, Indiana. The next largest
lending relationship at that date was $899,000 in loans secured by parcels of
real estate located in Allen County, Indiana. Finally, the next largest lending
relationship at December 31, 1996 was a $895,000 in loans secured by a golf
course located in Huntington County, Indiana.
<PAGE>
Loan Portfolio Composition. The following is information concerning the
composition of the Company's loan portfolios in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................$ 99,325 65.10% $ 85,533 67.88% $ 76,082 70.04% $ 64,874 71.93%
Multi-family............................... 2,993 1.96 2,029 1.61 1,621 1.49 1,610 1.79
Commercial................................. 12,301 8.06 11,742 9.32 8,835 8.13 5,431 6.02
Construction or development................ 10,749 7.04 6,359 5.05 7,033 6.47 4,366 4.84
-------- -------- ------- ------ -------- ------ -------- ------
Total real estate loans................ 125,368 82.16 105,663 83.86
Other Loans:
Consumer Loans:
Deposit account........................... 157 .10 170 .13 264 .24 212 .24
Student................................... --- --- --- --- --- --- --- ---
Automobile................................ 8,820 5.78 7,756 6.16 6,719 6.19 6,947 7.70
Home equity............................... 4,176 2.74 3,121 2.48 2,895 2.66 2,259 2.50
Home improvement.......................... 291 .19 258 .20 202 .19 184 .20
Other..................................... 4,204 2.76 3,245 2.58 2,238 2.06 1,633 1.81
-------- ------- ------- ----- ------ ------ ------ -----
Total consumer loans................... 17,648 11.57 14,550 11.55 12,318 11.34 11,235 12.45
-------- ------- ------- ----- ------ ------ ------ ------
Commercial business loans.................. 9,568 6.27 5,783 4.59 2,745 2.53 2,676 2.97
Total loans............................ 152,584 100.00% 125,996 100.00% 108,634 100.00% 90,192 100.00%
====== ====== ====== ======
Less:
Undisbursed portion of construction loans.. 4,380 2,210 3,333 1,546
Loans in process........................... 208 169 124 451
Deferred fees and discounts................ 114 95 81 13
Allowance for loan losses.................. 1,027 881 694 457
-------- -------- ------- -------
Total loans receivable, net................$146,855 $122,641 $104,402 $87,725
======== ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1992
------------
Amount Percent
------ -------
<S> <C> <C>
Real Estate Loans:
One- to four-family ............................... $55,591 74.86%
Multi-family ...................................... 1,886 2.54
Commercial ........................................ 4,044 5.45
Construction or development ....................... 2,299 3.09
------- ------
Total real estate loans
Other Loans:
Consumer Loans:
Deposit account .................................. 272 .37
Student .......................................... 93 .13
Automobile ....................................... 5,461 7.35
Home equity ...................................... 1,445 1.95
Home improvement ................................. 42 .05
Other ............................................ 1,378 1.85
------- ------
Total consumer loans .......................... 8,691 11.70
------- ------
Commercial business loans ......................... 1,751 2.36
Total loans ................................... 74,262 100.00%
======
Less:
Undisbursed portion of construction loans ......... 431
Loans in process .................................. 138
Deferred fees and discounts ....................... 105
Allowance for loan losses ......................... 270
-------
Total loans receivable, net ....................... $73,318
=======
</TABLE>
<PAGE>
The following table shows the composition of the Company's loan
portfolios by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........................... $ 35,764 23.44% $ 30,539 24.24% $ 30,897 28.44%
Multi-family.................................. 2,397 1.57 2,029 1.61 1,621 1.49
Commercial.................................... 5,922 3.88 4,409 3.50 4,770 4.39
Construction or development................... 1,421 .94 2,881 2.28 387 .36
-------- ------ -------- ------ -------- --------
Total real estate loans.................... 45,504 29.83 39,858 31.63 37,675 34.68
-------- ------ -------- ------ ------- -------
Consumer....................................... 12,619 8.27 11,379 9.03 8,460 7.79
Commercial business............................ 4,399 2.88 1,460 1.16 1,496 1.38
-------- ------ -------- ------ -------- -------
Total fixed-rate loans..................... 62,522 40.98 52,697 41.82 47,631 43.85
Adjustable-Rate Loans:
Real estate:
One- to four-family........................... 63,561 41.66 54,994 43.65 45,185 41.59
Multi-family.................................. 595 .39 --- --- --- --
Commercial.................................... 6,380 4.17 7,333 5.82 4,065 3.74
Construction or development................... 9,328 6.11 3,478 2.76 6,646 6.12
-------- ------ -------- ------ -------- --------
Total real estate loans.................... 79,864 52.33 65,805 52.23 55,896 51.45
--------- ------ -------- ------ -------- --------
Consumer....................................... 5,029 3.30 3,171 2.52 3,858 3.55
Commercial business............................ 5,169 3.39 4,323 3.43 1,249 1.15
-------- ------ ------- ------ -------- -------
Total adjustable-rate loans................ 90,062 59.02 73,297 58.18 61,003 56.15
-------- ------ ------- ------ -------- -------
Total loans................................ 152,584 100.00% 125,996 100.00% 108,634 100.00%
====== ====== ======
Less:
Undisbursed portion of construction loans...... 4,380 2,210 3,333
Loans in process............................... 208 169 124
Deferred fees and discounts.................... 114 95 81
Allowance for loan losses...................... 1,027 881 694
--------- -------- ---------
Total loans receivable, net................. $146,855 $122,641 $104,402
======== ======== ========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1996. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
Multi-family and Construction
One- to Four-Family Commercial or Development Consumer
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Due During
Years Ending
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1)................ $ 90 8.84% $ 100 7.66% $ 6,500 9.47% $4,022 10.32%
1998 and 1999.......... 270 8.37 194 8.68 --- --- 3,689 9.38
2000 and 2001.......... 1,199 8.60 427 8.14 --- --- 5,888 9.13
2002 to 2006........... 14,934 8.15 7,106 8.79 --- --- 3,935 8.76
2007 to 2021........... 82,832 7.58 7,467 8.67 4,249 7.46 114 8.75
<CAPTION>
Commercial
Business Total
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ------ -------- -----
Due During
Years Ending
December 31,
<S> <C>
1997(1)................ $3,981 9.59% $14,693 9.72%
1998 and 1999.......... 2,280 9.40 6,434 9.32
2000 and 2001.......... 2,132 9.07 9,646 9.00
2002 to 2006........... 519 10.72 26,494 8.46
2007 to 2021........... 656 9.47 95,317 7.67
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
The total amount of loans due after December 31, 1996 which have
predetermined interest rates is $62.5 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $90.1
million.
<PAGE>
All of the Company's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations. Properties
securing real estate loans made by First Federal are generally appraised by
Board-approved independent appraisers. In the loan approval process, First
Federal assesses the borrower's ability to repay the loan, the adequacy of the
proposed security, the employment stability of the borrower and the
credit-worthiness of the borrower.
The Bank requires evidence of marketable title and lien position or
appropriate title insurance on all loans secured by real property. The Bank also
requires fire and extended coverage casualty insurance in amounts at least equal
to the lesser of the principal amount of the loan or the value of improvements
on the property, depending on the type of loan. As required by federal
regulations, the Bank also requires flood insurance to protect the property
securing its interest if such property is located in a designated flood area.
Management reserves the right to change the amount or type of lending
in which it engages to adjust to market or other factors.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers, referrals from real estate brokers and a loan
originator. The Bank has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. At December 31, 1996, the Bank's one- to
four-family residential mortgage loans totalled $99.3 million, or 65.1%, of the
Bank's gross loan portfolio.
The Bank currently offers fixed-rate and adjustable-rate mortgage
loans. For the year ended December 31, 1996, the Bank originated $13.7 million
of fixed-rate loans and $27.8 million of adjustable-rate real estate loans, all
of which were secured by one- to four-family residential real estate.
Substantially all of the Bank's one- to four-family residential mortgage
originations are secured by properties located in its market area.
The Bank offers adjustable-rate mortgage loans at rates and on terms
determined in accordance with market and competitive factors. The Bank currently
originates adjustable-rate mortgage loans with a term of up to 25 years. The
Bank currently offers one-year, three-year and five-year adjustable-rate
mortgage loans (where the terms are fixed for the first one-year, three-years
and five-years, respectively, and thereafter adjust annually) with a stated
interest rate margin over the National Monthly Median Cost of Funds Index.
Increases or decreases in the interest rate of the Bank's adjustable-rate loans
are generally limited to 1.0% at any adjustment date and, for example the one
year ARM product has limits of 6.0% over the life of a 25 year loan and 5.0%
over the life of a 20 year loan. As a consequence of using caps, the interest
rates on these loans may not be as rate sensitive as is the Bank's cost of
funds. Currently, all adjustable-rate mortgage loans originated do not provide
for a minimum interest rate. The Bank qualifies borrowers for adjustable-rate
loans based on a fully-indexed interest rate. At December 31, 1996, the total
balance of one-to four-family adjustable-rate loans was $63.6 million or 41.7%
of the Bank's gross loan portfolio.
The Bank also offers fixed-rate mortgage loans with maturities of up to
20 years. At December 31, 1996, the total balance of one- to four-family
fixed-rate loans was $35.8 million or 23.4% of the Bank's gross loan portfolio.
<PAGE>
Currently, with one exception for qualified first time home buyers,
First Federal will lend up to 95% of the lesser of the sales price or appraised
value of the security property on owner occupied one- to four-family loans,
provided that private mortgage insurance ("PMI") is obtained in an amount
sufficient to reduce the Bank's exposure to not more than 80% of the appraised
value or sales price, as applicable. Residential loans do not include prepayment
penalties, are non-assumable (other than government-insured or guaranteed
loans), and do not produce negative amortization. Real estate loans originated
by the Bank contain a "due on sale" clause allowing the Bank to declare the
unpaid principal balance due and payable upon the sale of the security property.
First Federal has implemented a first time home buyers loan program.
This program provides an additional opportunity for first time home buyers who
qualify by allowing them to borrow 98% of the appraised value of an owner
occupied residence up to $75,000. These loans do not require PMI insurance.
First Federal developed this program in an effort to help meet a credit need of
our community.
The loans currently originated by the Bank are not typically
underwritten and documented pursuant to the guidelines of the FHLMC. Under
current policy, the Bank originates these loans for portfolio.
Commercial and Multi-Family Real Estate Lending. The Bank has also
engaged in commercial and multi-family real estate lending in its market area.
At December 31, 1996, the Bank had $12.3 million and $3.0 million of commercial
and multi-family real estate loans, respectively, which represented 8.1% and
2.0%, respectively, of the Bank's gross loan portfolio.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by retail properties, apartments, churches and real estate
located in Huntington and Allen Counties, Indiana. Commercial and multi-family
real estate loans generally have terms that do not exceed 15 years and a variety
of rate adjustment features and other terms. Generally, the loans are made in
amounts up to 75% of the lesser of the appraised value or sales price of the
security property. The Bank currently offers one-year, three-year and five-year
adjustable-rate commercial and multi-family real estate loans (where the terms
are fixed for the first one-year, three-years and five-years, respectively, and
thereafter adjust annually) with a margin over a designated index. In
underwriting these loans, the Bank currently analyzes the financial condition of
the borrower, the borrower's credit history, and the reliability and
predictability of the cash flow generated by the property securing the loan. The
Bank generally requires personal guaranties of the borrowers. Appraisals on
properties securing commercial real estate loans originated by the Bank are to
the extent required by federal regulations performed by independent appraisers.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
<PAGE>
Construction or Development Lending. At December 31, 1996, the Bank had
$10.7 million of construction or development loans. First Federal offers loans
to both builders and borrowers for the construction of one- to four-family
residences, and to a lesser extent, commercial real estate and multi-family
properties. Currently, such loans are offered with fixed or adjustable rates of
interest. At December 31, 1996, the Bank had $1.4 million and $9.3 million of
fixed-rate and adjustable-rate construction or development loans, respectively,
which represented 0.9% and 6.1%, respectively, of the Bank's gross loan
portfolio. Following the construction period, these loans may become permanent
loans, with terms for up to 25 years for adjustable-rate loans and 20 years for
fixed-rate loans.
Construction lending is generally considered to involve a higher level
of credit risk than one- to four-family residential lending since the risk of
loss on construction loans is dependent largely upon the accuracy of the initial
estimate of the individual property's value upon completion of the project and
the estimated cost (including interest) of the project. If the cost estimate
proves to be inaccurate, the Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project.
Consumer Lending. First Federal offers a variety of secured consumer
loans, including automobile, home equity lines of credit, second mortgage, home
improvement, and loans secured by savings deposits. The Bank also offers
unsecured consumer loans. The Bank currently originates substantially all of its
consumer loans in its primary market area. The Bank originates consumer loans on
a direct basis, where the Bank extends credit directly to the borrower, and on
an indirect basis through the acquisition of installment payment contracts from
dealers who extend credit to their customers for the purchase of an automobile,
both new and used.
A significant component of the Bank's consumer loan portfolio consists
of automobile loans. These loans generally have terms that do not exceed five
years and carry a variety of rate adjustment features and other terms.
Generally, loans on new vehicles are made in amounts up to 100% of dealer cost
and loans on used vehicles are made in amounts up to its published value, less
certain adjustments. At December 31, 1996, the Bank's automobile loans totalled
$8.8 million or 5.8% of the Bank's gross loan portfolio. Of this amount
approximately $2.3 million or 26.1% and $6.5 million or 73.9% were originated on
a direct and indirect basis, respectively.
First Federal also originates home improvement and home equity line of
credit loans. Home equity and home improvement loans secured by second
mortgages, together with loans secured by all prior liens, are generally limited
to 100% or less of the appraised value (where First Federal has the first
mortgage) of the property securing the loan or 80% or less of appraised value
(where First Federal does not have the first mortgage or where the collateral
property is non-owner occupied). Generally, such loans have a maximum term of up
to 10 years. As of December 31, 1996, home equity and home improvement loans,
most of which are secured by second mortgages, amounted to $4.2 million and
$291,000, respectively, which represented 2.7% and 0.2%, respectively, of the
Bank's gross loan portfolio.
At December 31, 1996, the Bank's consumer loan portfolio totalled $17.6
million, or 11.6% of its gross loan portfolio. At December 31, 1996,
approximately 71.5% of consumer loans were short- and intermediate-term,
fixed-rate consumer loans and 28.5% were adjustable rate consumer loans.
<PAGE>
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At December 31, 1996, $71,000 of the Bank's consumer loans were
non-performing representing .05% of the gross loan portfolio. There can be no
assurances, however, that additional delinquencies will not occur in the future.
Commercial Business Lending. The Bank also originates commercial
business loans. At December 31, 1996 approximately $9.6 million, or 6.3% of the
Bank's gross loan portfolio was commercial business lending. The largest
commercial business loan is a line of credit of $1.5 million to an automobile
leasing company, of which $1.5 million was outstanding at December 31, 1996.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are usually, but not always,
secured by business assets. However, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
First Federal's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of First
Federal's current credit analysis. Nonetheless, such loans, are believed to
carry higher credit risk than more traditional thrift investments.
Originations, Purchases and Sales of Loans
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
third-party sources.
<PAGE>
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the year ended December 31,
1996, the Bank originated $27.5 million in fixed-rate loans and $39.9 million in
adjustable rate loans.
Total commercial business loan originations increased in 1996 compared
to 1995 with the largest growth in commercial leases.
In 1996, although rates rose early in the year, refinancing of
residential loans increased contributing to the increase in one- to four-family
originations for the year of $21.7 million to $41.5 million in 1996 from $19.8
million in 1995.
During fiscal year 1996, the Bank purchased $1.2 million of commercial
leases originated by other lenders all of which were secured by equipment
located in various states. At December 31, 1996, none of these loans were
included in the Bank's non-performing assets.
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
------- ------- ---------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.................. $27,830 $15,345 $18,454
- multi-family....................... 396 182 2,891
- commercial......................... 4,044 3,516 5,346
Non-real estate - consumer......................... 1,961 1,626 1,438
- commercial business........... 5,711 5,342 ---
------- ------- ---------
Total adjustable-rate....................... 39,942 26,011 28,129
------- ------- -------
Fixed rate:
Real estate - one- to four-family.................. 13,674 4,469 7,034
- commercial......................... 153 30 68
Non-real estate - consumer......................... 10,187 11,365 7,249
- commercial business........... 3,531 799 5,556
-------- -------- --------
Total fixed-rate............................ 27,545 16,663 19,907
-------- -------- -------
Total loans originated...................... 67,487 42,674 48,036
------- -------- -------
Purchases:
Real estate - one- to four-family.................. 250 2,690 ---
- multi-family....................... 1,189 --- 182
--------- ---------- --------
Total loans purchased....................... 1,439 2,690 182
Sales and Repayments:
Real estate - multi-family......................... --- --- 2,100
- commercial......................... --- --- 650
--------- ---------- --------
Total loans sold............................ --- --- 2,750
Principal repayments............................... 42,338 28,002 27,026
------- ------- -------
Total reductions............................ 42,338 28,002 29,776
------- ------- -------
Net increase (decrease)..................... $26,588 $17,362 $18,442
======= ======= =======
</TABLE>
<PAGE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, reminder notices are sent
to borrowers. If payment is late, appropriate late charges are assessed and a
notice of late charges is sent to the borrower. If the loan is in excess of 90
days delinquent, the loan will be referred to the Bank's legal counsel for
collection. In all cases, if the Bank believes that its collateral is at risk
and added delay would place the collectibility of the balance of the loan in
further question, management may refer loans for collection even sooner than the
90 days described above.
When a loan becomes delinquent 90 days or more, the Bank will place the
loan on non-accrual status and previously accrued interest income on the loan is
charged against current income. The loan will remain on a non-accrual status as
long as the loan is 90 days delinquent.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Indiana consumer protection laws.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at December 31, 1996. The amounts presented
in the table below represent the total remaining principal balances of the
loans, rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- ------------------------------ ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 2 $100 .10% 10 $470 .47% 12 $ 570 .57%
Commercial............... --- --- --- 1 172 1.56 1 172 1.56
Construction or
development............. 2 289 2.40 --- --- --- 2 289 2.40
Consumer................... 8 100 .57 11 63 .36 19 163 .92
Commercial business........ 1 71 .74 --- --- 1 71 .74
--- ---- ---- ----- --- ------
Total................. 13 $560 .37% 22 $705 .46% 35 $1,265 .83%
=== ==== === ==== === ======
</TABLE>
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful. For all years presented, the Bank has 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 that of market rates).
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family................................ $470 $ 9 $--- $ 26 $ 72
Multi-family....................................... --- --- --- --- ---
Commercial real estate............................. 172 171 14 --- ---
Construction or development........................ --- --- 289 --- 396
Consumer........................................... 63 94 30 34 38
Commercial business................................ --- 10 4 8 11
----- ---- ----- ----- -----
Total........................................... 705 284 337 68 517
---- ---- ---- ----- ----
Foreclosed assets:
One- to four-family................................ --- --- --- --- ---
------ ----- ----- ----- ------
Total........................................... --- --- --- --- ---
------ ----- ----- ----- ------
Repossessed assets:
Consumer........................................... 8 --- --- --- ---
----- ----- ----- ----- ------
Total........................................... 8 --- --- --- ---
----- ----- ----- ----- ------
Total non-performing assets.......................... $713 $284 $337 $ 68 $517
==== ==== ==== ==== ====
Total as a percentage of total assets................ .42% .21% .29% .07% .64%
=== === === === ===
</TABLE>
<PAGE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews loans in its portfolio to determine whether such assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 1996, the Bank had classified
a total of $837,000 of its assets as substandard, none as doubtful, and $197,000
as loss which is allocated in specific reserves. At December 31, 1996, total
classified assets comprised $1.0 million, or 4.9% of the Bank's capital, or .61%
of the Bank's total assets.
Other Loans of Concern. In addition to the non-performing loans and
foreclosed real estate held for sale set forth in the tables above, as of
December 31, 1996 there were no loans classified by the Bank with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have some
doubts as to the ability of the borrowers to comply with present loan repayment
terms and which may result in the future inclusion of such items in the
non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
<PAGE>
Although management believes that it uses the information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At December 31, 1996, the Bank had a total allowance for loan
losses of $1.0 million, representing 144.0% of total non-performing loans and
.70% of the Bank's loans, net. See Note 3 of the Notes to Consolidated Financial
Statements.
<PAGE>
The distribution of the Bank's allowance for loan losses at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 209 $ 99,325 65.10% $180 $ 85,533 67.88% $ 145 $ 76,082 70.04%
Multi-family............... 74 2,993 1.96 50 2,029 1.61 45 1,621 1.49
Commercial real estate..... 106 10,996 7.20 100 11,742 9.32 75 8,835 8.13
Construction or
development.............. 311 12,054 7.90 200 6,359 5.05 200 7,033 6.47
Consumer................... 79 17,648 11.57 65 14,550 11.55 50 12,318 11.34
Commercial business........ 165 9,568 6.27 100 5,783 4.59 40 2,745 2.53
Unallocated................ 83 --- --- 186 --- --- 139 --- --
------ -------- ------ ---- -------- ------ ----- --------
Total................. $1,027 $152,584 100.00% $881 $125,996 100.00% $ 694 $108,634 100.00%
====== ======== ====== ==== ======== ====== ===== ======== ======
<CAPTION>
December 31,
--------------------------------------------------------------------
1993 1992
---------------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ $ 76 $ 64,874 71.93% $ 53 $ 55,591 74.86%
Multi-family............... 40 1,610 1.79 30 1,886 2.54
Commercial real estate..... 55 5,431 6.02 30 4,044 5.45
Construction or
development.............. 110 4,366 4.84 50 2,299 3.09
Consumer................... 45 11,235 12.45 30 8,691 11.70
Commercial business........ 40 2,676 2.97 23 1,751 2.36
Unallocated................ 91 --- --- 54 --- ----
Total................. $ 457 $ 90,192 100.00 $ 270 $74,262 100.00%
===== ======== ====== ===== ======= ======
</TABLE>
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 881 $ 694 $ 457 $ 270 $ 175
Charge-offs:
One- to four-family................................ 3 --- --- 2 ---
Commercial......................................... --- 9 --- --- ---
Consumer........................................... 131 65 33 29 46
------ ---- ----- ------- -------
134 74 33 31 46
------ ---- ----- ------- -------
Recoveries:
Consumer........................................... 45 10 7 21 10
------ ---- ----- ------ -------
45 10 7 21 10
------ ---- ----- ------ -------
Net charge-offs...................................... 89 64 26 10 36
Additions charged to operations...................... 235 251 263 197 131
------- ----- ------ ------ ------
Balance at end of period............................. $1,027 $ 881 $ 694 $ 457 $ 270
====== ===== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period......... .07% .06% .03% .01% .05%
===== ==== ===== ===== =====
Ratio of net charge-offs during the period to
average non-performing loans........................ 20.23% 16.41% 9.92% 5.32% 6.67%
====== ===== ===== ===== =====
</TABLE>
Investment Activities
General. First Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. At December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and current
borrowings) was 5.69%.
<PAGE>
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Securities and Other Interest-Earning Assets. At December 31, 1996,
First Federal's interest-earning deposits with other financial institutions
totalled $4.1 million, or 2.4% of total assets, and its securities, consisting
of obligations of states and political subdivisions, money market mutual funds,
and other securities totalled $12.4 million, or 7.3% of total assets. Included
in other securities, as of such date, the Bank had a $2.8 million investment in
FHLB stock, satisfying its requirement for membership in the FHLB of
Indianapolis.
OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities and certain other assets
as held for "investment," "sale," or "trading." In addition, effective January
1, 1994, the Bank adopted SFAS 115 which states that securities available for
sale are accounted for at fair value and securities which management has the
intent and the Bank has the ability to hold to maturity are accounted for on an
amortized cost basis. The Bank's investment policy has strategies for each type
of security. At December 31, 1996, the Bank had $892,000 in securities held to
maturity consisting of obligations of states and political subdivisions and
other debt securities and securities available for sale with a fair value of
$11.5 million. See Note 2 of the Notes to the Consolidated Financial Statements.
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- ---------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Obligations of states and political subdivisions $ 703 5.67% $ 764 11.10 $823 15.26%
Mortgage-backed securities ..................... 6,162 49.73 -- -- -- --
Federal agency obligations ..................... 1,787 14.43 1,104 16.04 -- --
Corporate bonds ................................ 189 1.53 222 3.23 231 4.28
------- ------ ------- ------ ----- ------
Total debt securities ....................... 8,841 71.36 2,090 30.37 1,054 19.54
Equity securities:
Mutual funds ................................... 697 5.63 2,717 39.48 2,566 47.56
FHLB stock ...................................... 2,850 23.01 2,075 30.15 1,775 32.90
------- ------ ------- ------ ------- ------
Total securities ............................ $12,388 100.00% $ 6,882 100.00 $ 5,395 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, payment of
principal and interest on loans, interest earned on securities, interest earned
on interest-earning deposits with other banks, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in
the Bank's asset/liability management strategy. Typically, the Bank does not use
other forms of borrowings. At December 31, 1996, the Bank had total FHLB
advances of $56.0 million with the capacity to borrow as of December 31, 1996 an
additional $4.0 million. See Note 6 of the Notes to Consolidated Financial
Statements.
Deposits. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook,
savings, NOW, checking, money market deposit and certificate accounts. The
certificate accounts currently range in terms from 90 days to five years.
The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Currently, First
Federal solicits deposits from its market area only, and does not use brokers
regularly to obtain deposits. The flow of deposits is influenced significantly
by general economic conditions, changes in money market and prevailing interest
rates and competition.
<PAGE>
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability management.
The ability of the Bank to attract and maintain savings accounts and
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $ 68,203 $ 68,533 $ 69,169
Deposits.................................... 260,248 246,971 205,551
Withdrawals................................. 246,610 250,038 208,240
Interest credited........................... 3,505 2,737 2,053
--------- --------- ---------
Ending balance.............................. $ 85,346 $ 68,203 $ 68,533
======== ======== ========
Net increase (decrease)..................... $ 17,143 $ (330) $ (636)
======== ======== ========
Percent increase (decrease)................. 25.14% (.48)% (.92)%
====== ===== =====
</TABLE>
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank for the periods indicated.
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995 1994
-------------------- ------------------ -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Accounts 2.75% .......... $10,147 11.89% $10,510 15.41 $13,082 19.09%
Demand and NOW Accounts 1.77% .... 10,295 12.06 9,980 14.63 9,743 14.22
Money Market Accounts 3.46% ...... 11,680 13.69 3,408 5.00 5,184 7.56
------- ------ ------- ------ -------- ------
Total Non-Certificates ........... 32,122 37.64 23,898 35.04 28,009 40.87
Certificates:
2.00 - 3.99% 1,286 1.51 919 1.35 7,155 10.44
4.00 - 5.99% 39,177 45.90 25,743 37.74 17,415 25.41
6.00 - 7.99% 12,761 14.95 17,643 25.87 15,836 23.11
8.00 - 9.99% -- -- -- -- 118 .17
------- ------ ------- ------ -------- ------
Total Certificates ............... 53,224 62.36 44,305 64.96 40,524 59.13
------- ------ ------- ------ -------- ------
Total Deposits ................... $85,346 100.00% $68,203 100.00 $68,533 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
-------- -------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
March 31, 1997................. $ 614 $ 8,950 $ 784 $10,348 19.44%
June 30, 1997.................. 652 5,552 2,734 8,938 16.79
September 30, 1997............. 20 8,244 2,436 10,700 20.10
December 31, 1997.............. --- 4,642 4,071 8,713 16.37
March 31, 1998................. --- 6,481 377 6,858 12.89
June 30, 1998.................. --- 2,862 439 3,301 6.20
September 30, 1998............. --- 477 770 1,247 2.34
December 31, 1998.............. --- 484 111 595 1.12
March 31, 1999................. --- 324 10 334 .63
June 30, 1999.................. --- 317 --- 317 .60
September 30, 1999............. --- 99 350 449 .84
December 31, 1999.............. --- 167 204 371 .70
Thereafter..................... --- 578 475 1,053 1.98
------- ------ ------ -------- ------
Total....................... $1,286 $39,177 $12,761 $53,224 100.00%
====== ======= ======= ======= ======
Percent of total............ 2.42% 73.61% 23.98%
====== ====== ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $ 4,989 $5,163 $15,302 $13,065 $38,519
Certificates of deposit of $100,000 or more...... 1,144 2,600 3,884 1,460 9,088
Public funds (1)................................. 4,215 1,175 227 --- 5,617
------- ------- ------- --------- --------
Total certificates of deposit.................... $10,348 $8,938 $19,413 $14,525 $53,224
======= ====== ======= ======= =======
- -------------------
(1) Deposits from governmental and other public entities.
</TABLE>
<PAGE>
Borrowings. First Federal's borrowings historically have consisted of
advances from the FHLB of Indianapolis. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At December 31, 1996, the Bank had $2.8 million of FHLB
of Indianapolis stock. The Bank has the ability to purchase additional capital
stock from the FHLB. As a policy matter, however, the FHLB of Indianapolis
typically limits the amount of borrowings from the FHLB to 50% of adjusted
assets (total assets less borrowings). For additional information regarding the
term to maturity and average rate paid on FHLB advances, see Note 6 of the Notes
to Consolidated Financial Statements and "Business - Lending Activities."
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................... $57,000 $42,500 $ 35,500
Average Balance:
FHLB advances........................................... $46,128 $34,560 $ 27,765
</TABLE>
Service Corporation Activities
As a federally chartered savings bank, First Federal is permitted by
OTS regulations to invest up to 2% of its assets, or approximately $3.4 million
at December 31, 1996, in the stock of, or loans to, service corporation
subsidiaries. First Federal may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes and up to 50% of its total capital in conforming loans to
service corporations in which it owns more than 10% of the capital stock. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal association may engage.
At December 31, 1996, First Federal had no subsidiaries.
REGULATION
General
First Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Indianapolis and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System. As the savings and loan
<PAGE>
holding company of the Bank, the Company also is subject to federal regulation
and oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings associations. The Bank is a member of
the Savings Association Insurance Fund (the "SAIF") and the deposits of the Bank
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of December
31, 1996 and February 25, 1992, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss reserves. The Bank's OTS assessment for the fiscal year ended December 31,
1996, was approximately $38,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1996, the Bank's lending limit under this restriction was $3.0
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
<PAGE>
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also proposed additional guidelines on asset quality and
earnings standards. No assurance can be given as to the final form of the
proposed regulations.
Insurance of Accounts and Regulation by the FDIC
First Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classifications of all insured
institutions are made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as the Bank, equal to 65.7 basis points on
SAIF-insured deposits maintained by those institutions as of March 31, 1995. The
SAIF special assessment applicable to the Bank, which was paid to the FDIC in
November 1996, was approximately $453,000. This amount was accrued by the
Company at September 30, 1996 by a charge to earnings.
<PAGE>
As a result of the SAIF recapitalization, the FDIC has amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. For the period October 1, 1996 through December 31, 1996, the SAIF
insurance premium for all SAIF-insured institutions that are required to pay the
Financing Corporation ("FICO") obligation, such as the Bank, was reduced to a
range of 18 to 27 basis points from 23 to 31 basis points per $100 of domestic
deposits. The FDIC has also further reduced the SAIF insurance premium to a
range of 0 to 27 basis points per $100 of domestic deposits, effective January
1, 1997. The Bank qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a FICO assessment on SAIF-
assessable deposits for the first semi-annual period of 1997 equal to 6.48 basis
points per $100 of domestic deposits, as compared to a FICO assessment on
BIF-assessable deposits for that same period equal to 1.30 basis points per $100
of domestic deposits.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1996, the Bank
did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks or
engaged in certain other activities solely as agent for its customers are
"includable" subsidiaries that are consolidated for capital purposes in
proportion to the association's level of ownership. For excludable subsidiaries
the debt and equity investments in such subsidiaries are deducted from assets
and capital. The Bank has no subsidiary.
At December 31, 1996, the Bank had tangible capital of $21.2 million,
or 12.5% of adjusted total assets, which is approximately $18.6 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
<PAGE>
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions discussed below,
however, a savings association must maintain a core capital ratio of at least 4%
to be considered adequately capitalized unless its supervisory condition is such
to allow it to maintain a 3% ratio. At December 31, 1996, the Bank had no
intangibles which were subject to these tests.
At December 31, 1996, the Bank had core capital equal to $21.2 million,
or 12.5%of adjusted total assets, which is $16.1 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
$830,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
<PAGE>
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
On December 31, 1996, the Bank had total risk-based capital of $22.0
million (including approximately $21.2 million in core capital and $830,000 in
qualifying supplementary capital) and risk-weighted assets of $101.0 million
(with no converted off-balance sheet assets); or total capital of 21.8% of
risk-weighted assets. This amount was $13.9 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions,
discussed below, that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Company's Common Stock. Company shareholders
do not have preemptive rights, and therefore, if the Company is directed by the
OTS or the FDIC to issue additional shares of Common Stock, such issuance may
result in the dilution in the percentage of ownership of the Company.
<PAGE>
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a Company) provided that it has a CAMEL 1 or 2 rating, is not
in troubled condition (as defined by regulation) and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Savings associations that would remain
adequately capitalized following the proposed distribution but do not meet the
<PAGE>
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 5.69% and a short-term
liquid assets ratio of 4.0%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS. The Bank is in compliance with
these amended rules.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments. At
December 31, 1996, the Bank met the test and has always met the test since its
effectiveness.
<PAGE>
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such an association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a Company, then within one
year after the failure, the Company must register as a bank company and become
subject to all restrictions on bank holding companies. See "- Company
Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices 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 OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1996 and received a rating of outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank company or acquire the securities of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
<PAGE>
Company Regulation
The Company is a unitary savings and loan Company subject to regulatory
oversight by the OTS. As such, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank company are more limited than are the activities
authorized for a unitary or multiple savings and loan company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS.
<PAGE>
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1996, the Bank had $2.8 million of FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 8.22% and were 7.84% for calendar
1996.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of
Indianapolis to the Bank totalled $189,000, which constitute a $31,000 increase
from the amount of dividends received in calendar year 1995. The $55,000
dividend received for the quarter ended December 31, 1996 reflects an annualized
rate of 7.85%, or 0.15% below the rate for the same period in 1995.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
<PAGE>
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending December 31, 1996 and thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying loans equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. Through
December 31, 1995, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of December
31, 1988. Recapture of the excess reserves will occur over a six-year period
which could begin for the Association as early as the tax year ending December
31, 1996 commencement of the recapture period may be delayed, however, for up to
two years provided the Bank meets certain residential lending requirements). The
Bank previously established, and will continue to maintain, a deferred tax
liability with respect to its federal tax bad debt reserves in excess of the
base-year balances; accordingly, the legislative changes will have no effect on
total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal
tax bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Association pays a dividend in excess of the
greater of its current or accumulated earnings and profits, redeems any of its
stock, or is liquidated. The Bank has not established a deferred federal tax
liability under SFAS No. 109 for its base-year federal tax bad debt reserves, as
it does not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
<PAGE>
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
The Bank files federal income tax returns on a calendar year basis
using the accrual method of accounting. The Company files federal income tax
returns separately from the Bank.
The Bank has not been audited by the IRS recently with respect to
federal income tax returns. In the opinion of management, any examination of
still open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on
the net income of financial (including thrift) institutions, exempting them from
the current gross income, supplemental net income and intangible taxes. Net
income for franchise tax purposes will constitute federal taxable income before
net operating loss deductions and special deductions, adjusted for certain
items, including Indiana income taxes, tax exempt interest and bad debts. Other
applicable Indiana taxes include sales, use and property taxes.
Delaware Taxation. As a Delaware Company, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
Competition
First Federal faces strong competition, both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, credit unions and savings institutions
located in the Bank's market area. Commercial banks, savings institutions and
credit unions provide vigorous competition in consumer lending. The Bank
competes for real estate and other loans principally on the basis of the quality
of services it provides to borrowers, the interest rates and loan fees it
charges, and the types of loans it originates. See "- Lending Activities."
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
retail brokerage offices, commercial banks, savings institutions and credit
unions located in these communities. The Bank competes for these deposits by
offering a variety of account alternatives at competitive rates and by providing
convenient business hours, branch locations and interbranch deposit and
withdrawal privileges.
The Bank primarily serves Huntington County, Indiana. There are five
commercial banks, one savings institution, other than First Federal, and six
credit unions which compete for deposits and loans in Huntington County. The
Bank estimates that its share of the savings market in Huntington County is
approximately 16.0% and its share of the residential mortgage market is
approximately 30.0%.
<PAGE>
Employees
At December 31, 1996, the Bank had a total of 35 full-time, 6 part-time
and 0 seasonal employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Item 2. Description of Properties
The Bank conducts its business through three offices, all of which are
located in Huntington, Indiana and are owned by the Bank. The following table
sets forth information relating to each of the Bank's offices as of December 31,
1996. The total net book value of the Bank's premises and equipment (including
land, buildings and leasehold improvements and furniture, fixtures and
equipment) at December 31, 1996 was approximately $2.0 million. See Note 4 in
the Notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage December 31, 1996
-------- -------- ------- -----------------
<S> <C> <C> <C>
Main Office:
648 North Jefferson Street 1974 5,200 $ 754,000
Huntington, Indiana 46750
Branch Offices:
1240 South Jefferson Street 1981 1,700 241,000
Huntington, Indiana 46750
100 Frontage Road 1995 3,000 1,014,000
Huntington, Indiana 46750
</TABLE>
First Federal believes that its current and planned facilities are
adequate to meet the present and foreseeable needs of the Bank and the Company.
The Bank maintains an on-line data base with an independent service
bureau servicing financial institutions.
Item 3. Legal Proceedings
The Company and First Federal are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing First Federal and the Company in the proceedings, that
the resolution of these proceedings should not have a material effect on
Company's results of operations on a consolidated basis.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On January 15, 1996, Northeast Indiana Bancorp, Inc. held a Special
Meeting of Stockholders. At the meeting, stockholders voted on the following
matters:
(i) The approval of the Company's 1995 Stock Option and Incentive Plan; and
VOTES: FOR AGAINST ABSTAIN
------ --- ------- -------
1,561,499 104,539 9,570
(iii) The approval of the Company's Recognition and Retention Plan
VOTES: FOR AGAINST ABSTAIN
------ --- ------- -------
1,464,194 201,589 9,825
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 38 of the attached Annual Report to Stockholders is herein incorporated by
reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 3 through 14 of the attached Annual Report to Stockholders are
herein incorporated by reference.
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1996, is not
deemed filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Executive Officers of the Company and the Bank
The following table sets forth certain information regarding the
executive officers of the Company or the Bank who are not also a director.
<TABLE>
<CAPTION>
Position Held with the
Name Age(1) Bank and Company
---- ------ ----------------
<S> <C> <C>
Darrell E. Blocker 43 Senior Vice President,
Treasurer and Chief
Financial Officer
Dee Ann Hammel 44 Senior Vice President
and Chief Operating Officer
(1) At December 31, 1996
</TABLE>
The business experience of the executive officers who are not also
directors is set forth below.
Darrell E. Blocker is Senior Vice President, Treasurer and Chief
Financial Officer of the Bank and the Company, positions he has held since March
1995. Mr. Blocker first joined the Bank in 1988 as an accountant. Mr. Blocker is
responsible for the overall financial functions of the Bank.
Dee Ann Hammel is Senior Vice President and Chief Operations Officer of
the Bank and the Company, positions she has held since March 1995. Ms. Hammel
first joined the Bank in 1975 as a teller. Ms. Hammel is responsible for
directing and controlling the Bank's daily activities.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Bank's equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
<PAGE>
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference Sequential
to Page Number
Prior Where Attached
Filing Exhibits Are
Regulation or Exhibit Located in
S-B Number This
Exhibit Attached Form 10-KSB
Number Document Hereto Report
- ------ -------- ------ ------
<S> <C> <C> <C>
3(i) Articles of Incorporation, including amendments thereto * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the rights of security holders, * Not applicable
including debentures
9 Voting Trust Agreement None Not applicable
10 Executive Compensation Plans and Arrangements
(a) Employment Contract between Stephen E. Zahn * Not applicable
and the Bank
(b) Employment Contract between Darrell Blocker * Not applicable
and the Bank
(c) Employment Contract between Dee Ann Hammel * Not applicable
and the Bank
(d) 1995 Stock Option and Incentive Plan * Not applicable
(e) Recognition and Retention Plan * Not applicable
11 Statement re: computation of per share earnings None Not applicable
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None Not applicable
18 Letter re: change in accounting principles None Not applicable
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of None Not applicable
security holders
23 Consents of Experts and Counsel 23 Not applicable
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance None Not applicable
regulatory authorities
99 Additional Exhibits None Not applicable
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement filed on
March 23, 1995 (File No. 33-90558) of the Securities Act of 1933. All of
such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-B.
</TABLE>
<PAGE>
(b) Reports on Form 8-K
For the year ended December 31, 1996, the Company filed the following:
(i) Form 8-K dated January 29, 1996, regarding Fourth Quarter
Earnings for 1995 and Cash Dividend.
(ii) Form 8-K dated February 12, 1996, regarding Stock Repurchase
Program.
(iii) Form 8-K dated February 16, 1996, regarding Additional Stock
Repurchase Program.
(iv) Form 8-K dated March 27, 1996, regarding Completion of Stock
Repurchase Program.
(v) Form 8-K dated April 17, 1996, regarding First Quarter 1996
Earnings.
(vi) Form 8-K dated April 25, 1996, regarding Declaration of Cash
Dividend.
(vii) Form 8-K dated July 3, 1996, regarding Declaration of Cash
Dividend.
(viii) Form 8-K dated July 8, 1996, regarding Stock Repurchase Program.
(ix) Form 8-K dated July 19, 1996, regarding Second Quarter 1996
Earnings.
(x) Form 8-K dated August 16, 1996, regarding Completion of Stock
Repurchase Program.
(xi) Form 8-K dated September 16, 1996, regarding Stock Repurchase
Program.
(xii) Form 8-K dated October 16, 1996, regarding Third Quarter 1996
Earnings -- Impact of One-time FDIC Assessment.
(xiii) Form 8-K dated October 18, 1996, regarding Declaration of Cash
Dividend.
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTHEAST INDIANA BANCORP, INC.
Date: March 27, 1997 By: /s/ Stephen E. Zahn
-------------- -------------------
Stephen E. Zahn
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Issuer and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Stephen E. Zahn By: /s/ Darrell E. Blocker
- ---------------------------- ----------------------
Stephen E. Zahn, Chairman of the Darrell E. Blocker, Senior Vice
Board, President and Chief President, Treasurer and Chief
Executive Officer Financial Officer
(Principal Executive and Operating (Chief Financial and Accounting
Officer) Officer)
Date: March 27, 1997 Date: March 27, 1997
-------------- --------------
By: /s/ Dan L. Stephan By: /s/ Richard G. Carnes
- --------------------------- ----------------------
Dan L. Stephan, Director Richard G. Carnes, Director
Date: March 27, 1997 Date: March 27, 1997
-------------- ---------------
By: /s/ J. David Carnes By: /s/ Samuel Preston, Jr.
- ---------------------------- -----------------------------
J. David Carnes, Director Samuel Preston, Jr., Director
Date: March 27, 1997 Date: March 27, 1997
-------------- --------------
By: /s/ Randall C. Rider
--------------------
Randall C. Rider, Director
Date: March 27, 1997
</TABLE>
EXHIBIT 13
PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS
- -------------------------------------------------------------------------------
On behalf of the directors, officers, and employees of Northeast Indiana
Bancorp, Inc. and its subsidiary First Federal Savings Bank, I am pleased to
report to you, our shareholders, that 1996 was another successful and profitable
year.
Your company continued to play a vital role in the growth, prosperity, and the
quality of life of the Huntington community. As a community citizen, First
Federal and its employees participated actively and financially in local
organizations and community groups. First Federal Savings Bank is the number one
provider of mortgage loans and consumer financing in our market area, and in
1996 made major advances in developing loan programs attractive to small
business and commercial customers. The success of these programs is reflected by
the fact that assets have grown from $137.6 million on December 31, 1995 to
$169.5 million on December 31, 1996, an increase of 23.2%. Total deposits grew
by $17.1 million to $85.3 million, a 25.1% increase, while net loans receivable
increased 19.7% to $146.9 million on December 31, 1996.
Success, while measured in terms of community involvement and institutional
growth, must also be reflected in company profits and 1996 was a very good year
for First Federal. For the year ended December 31, 1996, Northeast Indiana
Bancorp, Inc.'s net income was $1.57 million or $0.84 per share, an increase of
18.8% from the year ended December 31, 1995 net income of $1.32 million. This
increase in profits took place despite the cost associated with the resolution
of the Savings Association Insurance Fund (SAIF) recapitalization. Without the
SAIF assessment, net income for December 31, 1996 would have been approximately
$1.84 million or $0.98 per share, an increase of 39.4% from the previous fiscal
year.
To enhance shareholder value and earnings per share, Northeast Indiana Bancorp,
Inc. continued an aggressive stock repurchase program during 1996. In that time
frame, 371,539 shares were repurchased as treasury stock leaving the total
number of shares issued and outstanding at year end at 1,810,586.
The financial services market that we serve is affected by many variables,
including but not limited to, federal regulations, economy, competition and
interest rate risk. We begin 1997 recognizing we must deal with these and other
challenges that lie ahead.
Your directors, officers and employees will continue to make every effort to
have First Federal Savings Bank recognized as "Now more than ever...First in
Hometown Banking." We look forward with excitement and commitment to improving
our services, products, profits and your shareholder value in Northeast Indiana
Bancorp, Inc.
Sincerely,
Stephen E. Zahn
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------
December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Selected Financial Condition Data: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets................................$ 169,544 $ 137,569 $ 115,095 $ 96,106 $ 81,412
Loans receivable, net....................... 146,855 122,641 104,402 87,725 73,318
Securities.................................. 12,388 6,882 5,395 4,275 3,162
Deposits ................................... 85,346 68,203 68,533 69,169 70,985
Total borrowings............................ 56,000 37,500 35,500 17,500 2,494
Shareholders' equity........................ 26,529 31,033 10,238 8,901 7,420
Selected Operations Data:
Total interest income.......................$ 11,767 $ 9,644 $ 8,102 $ 7,425 $ 7,316
Total interest expense...................... 6,197 5,307 4,072 3,192 3,651
--------- -------- --------- --------- ---------
Net interest income...................... 5,570 4,337 4,030 4,233 3,665
Provision for loan losses................... 235 251 263 196 131
--------- -------- --------- --------- ---------
Net interest income after provision for loan
losses.................................... 5,335 4,086 3,767 4,037 3,534
Total noninterest income.................... 402 347 384 284 298
Total noninterest expense................... 3,208 2,364 1,938 1,846 1,686
--------- -------- --------- --------- ---------
Income before income taxes.................. 2,529 2,069 2,213 2,475 2,146
Income tax expense.......................... 962 750 876 993 858
--------- -------- --------- --------- ---------
Net income..................................$ 1,567 $ 1,319 $ 1,337 $ 1,482 $ 1,288
========= ======== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net
income to average total assets)....... 1.02% 1.04% 1.22% 1.65% 1.61%
Return on equity (ratio of net income to
average total equity).................. 5.49 6.28 13.77 18.07 18.88
Interest rate spread information:
Average during period.................... 2.90 2.80 3.51 4.53 4.38
End of period............................ 2.70 2.77 2.83 3.92 4.13
Net interest margin (1).................. 3.81 3.57 3.82 4.88 4.71
Ratio of operating expense to average
total assets............................ 2.10 1.86 1.81 2.06 2.10
Ratio of average interest-earning assets
to average interest-bearing liabilities. 121.48 117.70 107.93 105.76 107.11
Quality Ratios:
Non-performing assets to total assets at
end of period.......................... .42 .21 .29 .07 .64
Allowance for loan losses to
non-performing loans................... 144.00 310.21 205.93 672.06 52.22
Allowance for loan losses to loans
receivable net........................ .70 .72 .66 .52 .37
Capital Ratios:
Shareholders' equity to total assets at end of
period................................. 15.65 22.56 8.90 9.26 9.11
Average shareholders' equity to average total
assets................................. 18.64 16.56 8.89 9.16 8.51
Other Data:
Number of full-service offices........... 3 3 2 2 2
(1) Net interest income divided by average interest-earning assets.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- --------------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Northeast Indiana Bancorp, Inc. (the "Company") was formed as a Delaware
corporation in March, 1995 for the purpose of issuing common stock and owning
all of the common stock of First Federal Savings Bank ("First Federal" or
"Bank") as a unitary thrift holding company. The Bank conducts business from its
three offices located in Huntington, Indiana. The Company's primary business
activity is its investment in the Bank, and therefore, the following discussion
relates primarily to the operations of the Bank.
The principal business of savings banks, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Federal's earnings are primarily
dependent on net interest income, the difference between interest income and
interest expense. Interest income is a function of the balances of loans and
investments outstanding during the period and the yield earned on such assets.
Interest expense is a function of the balances of deposits and borrowings
outstanding during the same period and the rates paid on such deposits and
borrowings. First Federal's earnings are also affected by provisions for loan
losses, service charge and fee income, other noninterest income, operating
expenses and income taxes. Operating expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing,
federal deposit insurance premiums and other general and administrative
expenses.
First Federal is significantly affected by prevailing economic conditions as
well as federal regulations concerning monetary and fiscal policies and
financial institutions. The year of 1996 started with the economy moderately
reducing potential inflationary pressures carried over from the fourth quarter
1995. The economy has stayed relatively stable during 1996 overall. Although, at
times, throughout 1996 we have had fluctuations, in general, the economy was
favorable to First Federal's lending growth. There can be no assurance, however,
in periods of rising interest rates, that the Bank will be able to continue to
market its mortgage loans successfully or that such interest rate movements will
not adversely affect net income.
Deposit balances are influenced by a number of factors including interest rates
paid on competing personal investments and the level of personal income and
savings within First Federal's market. Lending activities are influenced by the
demand for housing as well as competition from other lending institutions.
Lending activities may also be impacted by liquidity levels and funds available
to originate loans. The primary sources of funds for lending activities include
deposits, borrowed funds, loan payments and funds provided from operations.
<PAGE>
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
First Federal's total assets increased from $137.6 million at December 31, 1995
to $169.5 million at December 31, 1996, an increase of $31.9 million, or 23.2%.
The increase was due primarily to the increases in loans of $24.2 million or
19.7% and securities of $5.5 million or 80.0%. This growth was funded by
increased advances from the Federal Home Loan Bank ("FHLB") totaling $18.5
million and increased deposits of $17.1 million.
The increase in the loan portfolio was comprised primarily of mortgage loans
which increased $19.7 million. Mortgage loans secured by one-to-four family
residences increased $13.8 million to $99.3 million at December 31, 1996 and
represent 65.1% of First Federal's loan portfolio. The increase in one- to
four-family mortgage loans was comprised of a $8.6 million increase in
adjustable rate loans and a $5.2 million increase in fixed rate loans. Mortgage
loans secured by multi-family and commercial real estate increased $1.5 million
to $15.3 million at December 31, 1996 and construction loans secured by
residential and non-residential real estate increased $4.4 million to $10.7
million.
First Federal also offers a variety of consumer loans including automobile,
credit card, commercial, home equity and second mortgage loans. Total consumer
and commercial business loans increased $6.9 million to $27.2 million at
December 31, 1996. Automobile loans comprise $8.8 million of total consumer
loans while home equity and second mortgage loans represent another $4.5 million
at December 31, 1996.
The North Office, in its first full year of operation, continues to offer a wide
range of banking services in an expanding sector of Huntington.
Total deposits increased $17.1 million to $85.3 million at December 31, 1996.
Deposits had remained relatively constant since December 31, 1991 until this
year. This year's 25.1% growth was due to aggressive advertising and pricing of
selected products for a limited time slightly above local market competitors.
Total borrowed funds increased $18.5 million, from $37.5 million to $56.0
million at December 31, 1996. Borrowed funds consist of advances from the FHLB
with variable interest rates and stated maturities ranging through 2001. The
increase in advances was utilized to fund increases in loans and investments as
total deposit growth wasn't sufficient to fund our growth in earning assets.
Management plans to continue to utilize FHLB advances in conjunction with a
continued aggressive approach to increasing our deposit base as a source of
funds which will provide the necessary funding for loan demand. First Federal's
borrowing limit at the FHLB as of December 31, 1996, was $60.0 million.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Comparison of Years Ended December 31, 1996 and 1995
General. Net income for the year ended December 31, 1996 was $1.57 million, an
increase of $248,000 compared to net income for the year ended December 31,
1995. This increase was primarily the result of an increase in noninterest
income of $56,000 and increases in net interest income of $1.23 million
partially offset by an increase in non-interest expenses of $844,000 and income
tax expense of $212,000, respectively. Further details regarding changes in the
major categories of income and expense are discussed below.
Interest Income. Interest income increased $2.13 million, or 22.10%, from $9.64
million to $11.77 million for the year ended December 31, 1996. The increase in
interest income was primarily the result of an increase in interest income on
mortgage loans of $1.49 million and an increase in interest income on consumer
and other loans of $423,000. The increase in interest income on loans is due
primarily to an increase in the average balance of the loan portfolio. The yield
on the loan portfolio increased from 8.06% in 1995 to 8.16% in 1996, due to the
high volume of loans in the portfolio which were originated or repriced at a
higher interest rate than 1995. Yields on the loan portfolio are expected to
increase slightly for 1997 as yields on loans that are originated in the recent
falling interest rate environment are offset by the yields on adjustable rate
mortgage ("ARM") loans that are repricing at higher rates but will remain in our
portfolio. Yields are also expected to be positively impacted by increases in
commercial and consumer loans which typically have interest rates higher than
residential mortgage loans.
Interest Expense. Interest expense has risen $890,000, or 16.8%, from $5.31
million to $6.20 million for the year ended December 31, 1996. The majority of
this increase was the result of higher interest expense of $485,000 on borrowed
funds. This increase was due to a combination of a significantly larger average
balance of borrowed funds during the year, which increased by $11.57 million
from $34.56 million for 1995 to $46.13 million for 1996 partially offset by the
lower average rate paid for borrowed funds during the year. Interest expense on
deposits increased $405,000 during 1996 due primarily to higher average rates
paid for money market deposits and the higher average balance of deposits during
the year.
Net interest income. Net interest income increased $1.23 million or 28.4% from
$4.34 million to $5.57 million for the year ended December 31, 1996. First
Federal's net interest rate spread improved during 1996. The interest rate
spread averaged 2.90% during 1996 compared to 2.80% during 1995 and was 2.70% at
December 31, 1996. The increase in net interest spread during 1996 was primarily
due to an increase in the average rates on interest earning assets. Mortgage
loans averaged 8.06% in 1995 compared to 8.16% in 1996, while the average costs
of interest bearing liability rates remained almost stable at 5.15% in 1995
compared to 5.16% in 1996.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations (continued)
- --------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1996 was $235,000 compared to $251,000 in the prior year, a
decrease of $16,000. The provision for loan losses, less net charge-offs for the
year of $188,000, increased the allowance for loan losses to $1.03 million at
December 31, 1996, a 16.7% increase compared to December 31, 1995. Management
will continue to record a provision for loan losses to maintain the allowance
for loan losses at a level deemed adequate by management based on a quarterly
analysis.
Noninterest Income. Noninterest income increased from $347,000 in 1995 to
$403,000 in 1996. This increase of $56,000 was primarily the result of fees and
service charges on loan and deposit accounts increasing by $36,000 during 1996
to $274,000 compared to 1995 income of $238,000.
Noninterest Expense. Noninterest expense increased from $2.36 million in 1995 to
$3.21 million in 1996. This increase of $844,000, or 35.7%, was primarily the
result of increases in FDIC expense of $343,000 including the one time FDIC
assessment for the recapitalization of the SAIF fund of $453,000 taken in
September 1996. This FDIC assessment represents 53.7% of the total increase in
the 1996 noninterest expense compared to 1995. The increase in compensation and
benefits of $241,000 was mostly a result of recording additional benefit expense
of $205,000 related to the stock incentive plans approved by shareholders in
January 1996. Occupancy and equipment and office supplies also increased due to
increased volume and the first full year of operating the North Office. For
1997, the Bank's expense for FDIC deposit insurance will decrease as the
assessment rate is expected to be reduced from $.23 per $100 of insured deposits
in 1996 to $.0648 per $100 of insured deposits in 1997.
Income Tax Expense. Income tax expense increased from $750,000 in 1995 to
$962,000 in 1996 due primarily to increased earnings before income taxes.
Comparison of Years Ended December 31, 1995 and 1994
General. Net income for the year ended December 31, 1995 was $1.32 million, a
decrease of $18,000 compared to net income for the year ended December 31, 1994.
This decrease was primarily the result of increases in noninterest expense of
$426,000 partially offset by an increase in net interest income of $307,000 and
a decrease in provision for loan losses and income tax expense of $12,000 and
$126,000, respectively. Further details regarding changes in the major
categories of income and expense are discussed below.
Interest Income. Interest income increased $1.5 million, or 19.0%, from $8.1
million to $9.6 million for the year ended December 31, 1995. The increase in
interest income was primarily the result of an increase in interest income on
mortgage loans of $899,000 and an increase in interest income on consumer and
other loans of $286,000. The increase in interest income on loans is due to an
increase in the average balance of the loan portfolio and an increase in the
yield on the loan portfolio for the year. The yield on the loan portfolio
increased from 7.97% in 1994 to 8.06% in 1995, due to the high volume of loans
in the portfolio which were originated or repriced during the higher interest
rate cycle earlier in the year.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest Expense. Interest expense increased $1.2 million, or 30.3%, from $4.1
million to $5.3 million for the year ended December 31, 1995. The increase in
interest expense was the result of an increase of $791,000 on borrowed funds.
This increase was the result of a significant increase in the average balance of
borrowed funds during the year, which increased by $6.8 million from $27.8
million for 1994 to $34.6 million for 1995. Also contributing to this increase
was an increase in the average rate paid for borrowed funds during the year.
Interest expense on deposits increased $444,000 during 1995 due primarily to
higher average rates paid for certificates of deposit as the average balance of
deposits remained fairly constant during the year.
Net interest income. Net interest income increased $307,000 or 7.6% from $4.0
million to $4.3 million for the year ended December 31, 1995. First Federal's
net interest rate spread contracted during 1995. The interest rate spread
averaged 2.80% during 1995 compared to 3.51% during 1994 and was 2.77% at
December 31, 1995. The reduction in net interest spread during 1995 was
primarily due to an increase in the cost on interest bearing liabilities,
especially borrowings, from 4.78% in 1994 to 6.13% in 1995. Although borrowing
rates declined in July and again in December, the average cost of funds remained
higher in 1995 than in 1994.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1995 was $251,000 compared to $263,000 in the prior year, an
decrease of $12,000. The provision for loan losses, less net charge-offs for the
year of $64,000, increased the allowance for loan losses to $881,000 at December
31, 1995, a 26.9% increase compared to December 31, 1994. Management will
continue to record a provision for loan losses to maintain the allowance for
loan losses at a level deemed adequate by management based on a quarterly
analysis.
Noninterest Income. Noninterest income decreased from $384,000 in 1994 to
$347,000 in 1995. This decrease of $37,000 was primarily the result of a $2,000
loss on the sale of fixed assets during 1995 compared to a $74,000 gain in 1994.
Fees and service charges on loan and deposit accounts increased by $32,000
during 1995 to $237,000 compared to 1994 income of $205,000.
Noninterest Expense. Noninterest expense increased from $1.9 million in 1994 to
$2.4 million in 1995. This increase of $426,000, or 22.0%, was primarily the
result of increases in compensation and benefits and occupancy expenses. The
increase in compensation and benefits of $283,000 was a result of recording
additional benefit expense of $159,000 related to the Employee Stock Ownership
Plan established in conjunction with the stock conversion and staffing costs
related to the new office opened in October 1995. Part of those costs were
offset by the deferred costs contra for lending operations due to our increase
in loan volume. Occupancy and equipment and office supplies also increased due
to increased volume and the new office operating during the fourth quarter of
1995.
Income Tax Expense. Income tax expense decreased from $876,000 in 1994 to
$750,000 in 1995 due primarily to a decrease in earnings before income taxes.
<PAGE>
- --------------------------------------------------------------------------------
Asset/Liability Management
- --------------------------------------------------------------------------------
First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a different
basis than its interest-earning assets. Office of Thrift Supervision ("OTS")
regulations provide a Net Portfolio Value ("NPV") approach to the quantification
of interest rate risk. In essence, this approach calculates the difference
between the present value of liabilities, expected cash flows from assets and
cash flows from off balance sheet contracts.
Management has established maximum limits for changes in net portfolio value
resulting from changes in interest rates based on consideration of the Bank's
portfolio mix of interest-earning assets and interest-bearing liabilities along
with management's objectives for managing these portfolios in varying interest
rate environments. Management monitors various indicators of interest rate risk,
including NPV, and expectations regarding interest rate movements along with
consideration of the Bank's overall capital levels to determine acceptable
levels of interest rate risk. The Bank's interest-earning assets are composed
primarily of loans, especially mortgage loans. Management has offered adjustable
rate loan products to assist in the management of interest rate risk. At
December 31, 1996, adjustable rate loans comprised 59.0% of the portfolio. The
interest rate exposure as outlined in the NPV table reflects the Bank's exposure
to a rising interest rate environment due to the concentration of longer term
mortgage loans funded by relatively shorter-term deposits and FHLB advances. In
addition, the interest rate risk is also impacted by adjustable rate loans which
are tied to indices which lag behind market rates. Management is aware of First
Federal's interest rate risk exposure in a rising interest rate environment. To
address this interest rate risk, management will continue to market adjustable
rate mortgage loans and review longer term funding sources. Management also
considers the current capital position of the Bank and the composition of the
loan portfolio and monitors these factors in conjunction with its strategic plan
of offering various mortgage loan products to customers in the Bank's market
area. Nonetheless, the Bank's interest rate exposure, particularly in a rising
interest rate environment, will grow, especially to the extent that loan demand
produces increases in balance sheet growth.
<PAGE>
Asset/Liability Management (continued)
- --------------------------------------------------------------------------------
Presented below, as of December 31, 1996, is an analysis of the Bank's estimated
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in interest rates, up and down 300 basis points in 100 point
increments. Assumptions used in calculating the amounts in this table are those
assumptions utilized by the OTS in assessing the interest rate risk of the
thrifts it regulates. NPV is calculated by the OTS for the purposes of interest
rate risk assessment and should not be considered as an indicator of value of
the Bank.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
Change In Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 16,286 $ (8,740) (35) 10.00 442 bp
+200 19,439 (5,587) (22) 11.67 275
+100 22,413 (2,613) (10) 13.17 125
0 25,026 - - 14.42 -
-100 26,935 1,909 8 15.29 .87
-200 28,083 3,057 12 15.76 134
-300 29,129 4,103 16 16.17 175
</TABLE>
In the event of a 300 basis point change in interest rate based upon estimates
as of December 31, 1996, the Bank would experience a 16% increase in NPV in a
declining rate environment and a 35% decrease in NPV in a rising rate
environment. During periods of rising rates, the value of monetary assets and
liabilities decline. Conversely, during periods of falling rates, the value of
monetary assets and liabilities increase. However, the amount of change in value
of specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by the Bank
in recent periods was due to the increased use of relatively short-term FHLB
advances to fund its investment in loans with substantially longer maturities
than the advances and the Bank's use of an interest rate index which lags behind
market rate indices to adjust the interest rate on its ARM loans originated
prior to December 1996. To the extent that the Bank continues to use liabilities
with shorter terms to maturity than the assets in which it invests, the Bank
will continue to experience increased levels of interest rate risk in a rising
interest rate environment.
<PAGE>
Asset/Liability Management (continued)
- --------------------------------------------------------------------------------
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
<PAGE>
- --------------------------------------------------------------------------------
Average Balances, Interest Rates and Yields
- --------------------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
______________________________________Year Ended December 31,________________________________
----------------------1 9 9 6----------------- -------------------1 9 9 5------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $ 133,508 $ 10,897 8.16% $ 111,496 $ 8,990 8.06%
Securities 8,479 551 6.50 3,708 209 5.64
FHLB stock 2,411 189 7.84 2,006 158 7.88
Other interest-earning
assets 1,632 130 7.97 4,143 287 6.93
------------ ------------ ------------ ------------
Total interest-earning
assets(1) $ 146,030 11,767 8.06 $ 121,353 9,644 7.95
============ ------------ ============ ------------
Interest-Bearing Liabilities:
Savings $ 10,465 288 2.75 $ 12,752 375 2.94
Money market 8,793 437 4.97 4,246 137 3.23
Demand and NOW 8,276 184 2.22 8,101 208 2.57
Certificate accounts 46,549 2,685 5.77 43,448 2,469 5.68
Borrowings 46,128 2,603 5.64 34,560 2,118 6.13
------------ ------------ ------------ ------------
Total interest-bearing
liabilities $ 120,211 6,197 5.16 $ 103,107 5,307 5.15
============ ------------ ============ ------------
Net interest income $ 5,570 $ 4,337
============ ============
Net interest rate spread 2.90% 2.80%
======== ========
Net interest earning assets $ 25,819 $ 18,246
============ ============
Net yield on average interest-
earning assets 3.81% 3.57%
======== ========
Average interest-earning assets
to average interest-bearing
liabilities 1.21x 1.18x
<PAGE>
<CAPTION>
--------------------1 9 9 4-----------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $ 97,450 $ 7,762 7.97%
Securities 3,477 154 4.43
FHLB stock 1,488 87 5.85
Other interest-earning
assets 3,072 99 3.22
------------ ----------
Total interest-earning
assets(1) $ 105,487 8,102 7.68
============ ----------
Interest-Bearing Liabilities:
Savings $ 12,912 388 3.00
Money market 6,332 196 3.10
Demand and NOW 9,503 217 2.28
Certificate accounts 41,223 1,944 4.72
Borrowings 27,765 1,327 4.78
------------ ----------
Total interest-bearing
liabilities $ 97,735 4,072 4.17
============ ----------
Net interest income $ 4,030
==========
Net interest rate spread 3.51%
====
Net interest earning assets $ 7,752
============
Net yield on average interest-
earning assets 3.82%
====
Average interest-earning assets
to average interest-bearing
liabilities 1.08x
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
The following table presents the weighted average yields on loans, investments
and other interest-earning assets, and the weighted average rate on deposits and
borrowings and the resultant interest rate spreads at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable............................................ 8.15% 8.09% 7.82%
Investment securities....................................... 6.64 6.61 6.06
Other interest-earning assets............................... 7.01 6.01 2.80
Combined weighted average yield on interest-
earning assets.......................................... 8.01 7.98 7.65
Weighted average rate on:
Savings deposits............................................ 2.75 2.74 3.00
Money market................................................ 5.01 3.45 3.19
Demand and NOW deposits..................................... 2.23 2.26 2.25
Certificate accounts........................................ 5.69 5.83 5.25
Borrowings.................................................. 5.84 5.99 5.95
Combined weighted average rate on interest-
bearing liabilities..................................... 5.31 5.21 4.82
Spread....................................................... 2.70 2.77 2.83
</TABLE>
Due in part to the increase in rates overall, the Bank has experienced a
narrowing of its average interest rate spread from 2.77% at December 31, 1995 to
2.70% at December 31, 1996. A narrowing of the Bank's interest rate spread may
have the effect of reducing net interest income in future periods.
<PAGE>
- --------------------------------------------------------------------------------
Rate/Volume Analysis
- --------------------------------------------------------------------------------
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, 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.
<TABLE>
<CAPTION>
___________________________________Year Ended December 31,________________________________
1996 vs. 1995 1995 vs. 1994
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 1,795 $ 112 $ 1,907 $ 1,134 $ 94 $ 1,228
Securities 306 36 342 11 44 55
FHLB stock 32 (1) 31 36 35 71
Other interest-
earning assets (209) 52 (157) 117 71 188
----------- ----------- ----------- ----------- ----------- -----------
Total interest-
earning assets $ 1,924 $ 199 $ 2,123 $ 1,298 $ 244 $ 1,542
=========== =========== =========== =========== =========== ===========
Interest-bearing
liabilities:
Savings $ (64) $ (23) $ (87) $ (5) $ (8) $ (13)
Money market 200 100 300 (67) 8 (59)
Demand and
NOW 4 (28) (24) (2) (7) (9)
Certificate
accounts 177 39 216 109 416 525
Borrowings 781 (296) 485 367 424 791
----------- ----------- ----------- ----------- ----------- -----------
Total interest-
bearing
liabilities $ 1,098 $ (208) 890 $ 402 $ 833 1,235
=========== =========== ----------- =========== =========== -----------
Net interest income $ 1,233 $ 307
=========== ===========
</TABLE>
<PAGE>
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
First Federal's primary sources of funds are deposits, borrowings from the FHLB
and principal and interest payments on loans. While scheduled repayments of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. First Federal has managed this fluctuation in its source of funds
through borrowings from the FHLB.
A standard measure of liquidity for thrift institutions is the ratio of cash and
eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. As of December 31, 1996, First Federal's average
liquidity ratio was 5.69%, of which 83.8% was comprised of short-term
investments.
During the year ended December 31, 1996, there was a net increase in cash and
cash equivalents of $2.0 million. The major source of funds during the year
included an additional $18.5 million of borrowings from the FHLB and an increase
in deposits of $17.1 million which were used to fund a net increase of $24.5
million in loans and a $5.5 million increase in securities.
During the year ended December 31, 1995, there was a net increase in cash and
cash equivalents of $1.9 million The major source of funds during the year was a
net increase of $2.0 million of borrowings from the FHLB and proceeds of $19.5
million (which is net of ESOP shares acquired) from the sale of the stock
received when the Bank converted on June 27, 1996. These funds were used
primarily to support the $18.5 million net increase in loans.
During the year ended December 31, 1994, there was a net increase in cash and
cash equivalents of $880,000. The major source of funds during the year was a
net increase of $18.0 million of borrowings from the FHLB which was used to fund
a net increase of $19.7 million in loans.
Under currently effective capital regulations, savings associations must meet a
1.5% tangible capital requirement, a 3.0% core capital requirement and a total
risk-based capital to risk weighted assets ratio of 8.0%. At December 31, 1996,
First Federal's tangible capital ratio was 12.5%, its core capital ratio was
12.5% and its risk-based capital to risk weighted assets ratio was 21.8%.
Therefore, First Federal's capital significantly exceeds all capital
requirements currently in effect.
During 1996 the Company received three approvals from the OTS to repurchase
stock in addition to the repurchase by its Recognition and Retention Plan Stock
("RRP"). The repurchase program's stock when purchased becomes treasury shares
and can be used for general corporate purposes. The RRP approval was for 4% or
87,285 shares of which 75,936 were allocated shares and 11,349 were for future
awards. This program was completed in March 1996. The first repurchase plan
approved in February 1996 for purchasing treasury stock was for up to 5% or
109,106 shares and was completed in March 1996. A request for a second
repurchase program for up to 5% of outstanding shares or 103,084 shares was
approved by OTS and the board in July 1996. This repurchase program was
completed in August 1996. In September the third treasury stock repurchase
program was approved for up to 10% of the outstanding shares or 195,859 shares.
At December 31, 1996 the Company had repurchased 371,539 shares as treasury
stock and had 1,810,586 shares outstanding. The Company has purchased 30,500
shares as treasury stock during January and February 1997 to further reduce
outstanding shares to 1,780,086 as of the end of February 1997.
<PAGE>
Impact of New Accounting Standards
- --------------------------------------------------------------------------------
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", was issued by the
Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
has not yet been determined.
Impact of Inflation and Changing Prices
The Financial Statements 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
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation can be found in the increased cost of
the Company's operations. Nearly all the assets and liabilities of the Company
are financial, unlike most industrial companies. As a result, the Company's
performance is directly impacted by changes in interest rates, which are
indirectly influenced by inflationary expectations. The Company's ability to
match the financial assets to the financial liabilities in its asset/liability
management will tend to minimize the change of interest rates on the Company's
performance. Changes in investment rates do not necessarily move to the same
extent as changes in the price of goods and services.
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Northeast Indiana Bancorp, Inc.
Huntington, Indiana
We have audited the accompanying consolidated balance sheets of Northeast
Indiana Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Indiana
Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for the years ended December 31, 1996,
1995 and 1994 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
January 28, 1997
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 6,672,374 $ 4,672,341
Interest-earning deposits in financial institutions 100,000 100,000
Securities available for sale 11,496,031 5,895,759
Securities held to maturity (fair value: 1996 - $891,236;
1995 - $986,000) 892,036 985,906
Loans receivable, net 146,854,690 122,640,770
Accrued interest receivable 363,563 232,924
Premises and equipment 2,009,026 2,131,617
Other assets 1,156,400 909,264
----------------- -----------------
Total assets $ 169,544,120 $ 137,568,581
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 1,847,734 $ 1,791,586
Savings, NOW and MMDA 30,274,738 22,106,480
Other time deposits 53,223,768 44,304,864
----------------- -----------------
Total deposits 85,346,240 68,202,930
Borrowed funds 56,000,000 37,500,000
Accrued expenses and other liabilities 1,668,764 832,606
----------------- -----------------
Total liabilities 143,015,004 106,535,536
Shareholders' equity
Common stock, $.01 par value: 4,000,000 shares
authorized; 2,182,125 shares issued 21,821 21,821
Additional paid in capital 21,253,458 21,215,284
Retained earnings, substantially
restricted 12,338,919 11,393,893
Unearned employee stock ownership plan shares (1,454,750) (1,600,225)
Unearned recognition and retention plan shares (820,109) -
Net unrealized appreciation on securities available
for sale 15,799 2,272
Treasury stock, 371,539 and -0- common shares, at
cost, at December 31, 1996 and 1995 (4,826,022) -
----------------- -----------------
Total shareholders' equity 26,529,116 31,033,045
----------------- -----------------
Total liabilities and shareholders' equity $ 169,544,120 $ 137,568,581
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income
Loans, including fees $ 10,897,032 $ 8,989,561 $ 7,762,452
Taxable securities 707,048 331,244 207,054
Non-taxable securities 33,394 36,132 33,523
Deposits with banks 129,581 286,837 98,511
-------------- -------------- ---------------
Total interest income 11,767,055 9,643,774 8,101,540
Interest expense
Deposits 3,593,583 3,188,996 2,745,305
Borrowed funds 2,603,092 2,117,798 1,326,413
-------------- -------------- ---------------
Total interest expense 6,196,675 5,306,794 4,071,718
-------------- -------------- ---------------
Net interest income 5,570,380 4,336,980 4,029,822
Provision for loan losses 235,155 250,648 262,799
-------------- -------------- ---------------
Net interest income after provision for loan losses 5,335,225 4,086,332 3,767,023
Noninterest income
Service charges on deposit accounts 151,666 140,127 134,627
Loan servicing fees 122,190 97,288 70,406
Net realized gain on sale of securities 348 - -
Other 128,363 109,637 178,910
-------------- -------------- ---------------
Total noninterest income 402,567 347,052 383,943
Noninterest expense
Salaries and employee benefits 1,340,887 1,099,642 817,129
Occupancy 279,894 229,918 176,759
Data processing 274,985 160,963 158,946
Insurance expense 605,593 262,652 228,473
Professional fees 137,080 85,114 102,713
Correspondent bank charges 143,398 136,757 136,160
Other expense 426,320 389,291 317,843
-------------- -------------- ---------------
Total noninterest expense 3,208,157 2,364,337 1,938,023
-------------- -------------- ---------------
Income before income taxes 2,529,635 2,069,047 2,212,943
Income tax expense 962,090 749,759 875,946
-------------- -------------- ---------------
Net income $ 1,567,545 $ 1,319,288 $ 1,336,997
============== ============== ===============
Earnings per common share subsequent to
conversion (Note 1) $ .84 $ .39 $ N/A
============== ============= ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Unearned
Employee Unearned
Additional Stock Recognition
Common Paid in Retained Ownership and Retention
Stock Capital Earnings Plan Shares Plan Shares
----- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ - $ - $ 8,901,268 $ - $
Net income - - 1,336,997 -
-------------- -------------- -------------- ------------- --------------
Balance, December 31, 1994 - - 10,238,265 -
Proceeds from the sale of 2,182,125 shares
of common stock, net of conversion costs 21,821 21,189,036 - -
Unearned ESOP shares - - - (1,745,700)
Cash dividends ($.075 per share) - - (163,660) -
Shares committed to be released under the
Employee Stock Ownership Plan - 26,248 - 145,475
Change in net unrealized appreciation on
securities available for sale - - - -
Net income - - 1,319,288 -
-------------- -------------- -------------- ------------- --------------
Balance, December 31, 1995 21,821 21,215,284 11,393,893 (1,600,225)
Cash dividends ($.305 per share) - - (622,519) - -
Purchase of shares of treasury stock - - - - -
Shares committed to be released under the ESOP - 38,174 - 145,475 -
Purchase of shares for RRP - - - - (1,025,136)
Amortization of RRP contributions - - - - 205,027
Change in net unrealized appreciation on
securities available for sale - - - - -
Net income - - 1,567,545 - -
-------------- -------------- -------------- ------------- --------------
Balance, December 31, 1996 $ 21,821 $ 21,253,458 $ 12,338,919 $ (1,454,750) $ (820,109)
============== ============== ============== ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
on Securities Total
Available Treasury Shareholders'
For Sale Stock Equity
-------- ----- ------
<S> <C> <C> <C>
Balance, January 1, 1994 $ - $ $ 8,901,268
Net income - 1,336,997
------------ ----------- --------------
Balance, December 31, 1994 - 10,238,265
Proceeds from the sale of 2,182,125 shares
of common stock, net of conversion costs - 21,210,857
Unearned ESOP shares - (1,745,700)
Cash dividends ($.075 per share) - (163,660)
Shares committed to be released under the
Employee Stock Ownership Plan - 171,723
Change in net unrealized appreciation on
securities available for sale 2,272 2,272
Net income - 1,319,288
------------ ----------- --------------
Balance, December 31, 1995 2,272 31,033,045
Cash dividends ($.305 per share) - - (622,519)
Purchase of shares of treasury stock - (4,826,022) (4,826,022)
Shares committed to be released under the ESOP - - 183,649
Purchase of shares for RRP - - (1,025,136)
Amortization of RRP contributions - - 205,027
Change in net unrealized appreciation on
securities available for sale 13,527 - 13,527
Net income - - 1,567,545
------------ ----------- --------------
Balance, December 31, 1996 $ (15,799) $(4,826,022) $ 26,529,116
============ ============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,567,545 $ 1,319,288 $ 1,336,997
Adjustments to reconcile net income
to net cash from operating activities
Net (gain) loss on sale of premises and equipment 421 2,289 (74,223)
Gain on sale of securities (348) - -
Gain on sale of foreclosed real estate (6,879) - -
Provision for loan losses 235,155 250,648 262,799
Depreciation and amortization 186,555 113,950 80,009
Reduction of obligation under ESOP 183,649 171,723 -
Amortization of RRP 205,027 - -
Net change in other assets (247,136) 32,586 (179,984)
Net change in accrued interest receivable (130,639) (83,517) (31,717)
Net change in accrued expenses and other liabilities 823,528 8,009 289,589
----------- ------------- -------------
Total adjustments 1,249,333 495,688 346,473
----------- ------------- -------------
Net cash from operating activities 2,816,878 1,814,976 1,683,470
Cash flows from investing activities
Proceeds from maturities and principal payments
of securities held to maturity 93,870 67,770 41,852
Proceeds from maturities and principal payments
of securities available for sale 2,600,000 - -
Proceeds from sale of securities available for sale 2,100,348 - -
Purchases of securities available for sale (10,316,095) (1,551,154) (1,001,410)
Purchases of securities held to maturity - - (160,000)
Net change interest-earning deposits in financial
institutions - (100,000) -
Proceeds from sale of participation loans - - 2,750,000
Purchase of participation loans - (2,690,155) (182,000)
Net change in loans (24,469,186) (15,799,442) (19,507,620)
Expenditures on premises and equipment (22,455) (860,152) (222,980)
Proceeds from sale of premises and equipment 50 4,150 115,000
Proceeds from sale of foreclosed real estate 26,990 - -
----------- ------------- -------------
Net cash from investing activities (29,986,478) (20,928,983) (18,167,158)
Cash flows from financing activities
Advances from FHLB 58,000,000 17,000,000 33,500,000
Repayment of FHLB advances (39,500,000) (15,000,000) (15,500,000)
Dividends paid (622,519) (163,660) -
Proceeds from issuance of stock, net of
conversion costs and stock acquired by ESOP - 19,465,157 -
Purchase of stock (5,851,158) - -
Net change in deposits 17,143,310 (329,573) (636,751)
----------- ------------- -------------
Net cash from financing activities 29,169,633 20,971,924 17,363,249
----------- ------------- -------------
<PAGE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ------------- -------------
<S> <C> <C> <C>
Net increase change cash and cash equivalents 2,000,033 1,857,917 879,561
Cash and cash equivalents at beginning of year 4,672,341 2,814,424 1,934,863
----------- ------------- -------------
Cash and cash equivalents at end of year $ 6,672,374 $ 4,672,341 $ 2,814,424
============ ============= =============
Cash paid for:
Interest $ 6,154,009 $ 5,268,413 $ 4,017,792
Income taxes 1,034,925 803,594 952,076
Transfer from investment securities to
securities available for sale $ - $ - $ 3,339,432
Transfer from investment securities to
securities held to maturity - - 935,528
Transfer from loans to other real estate 20,112 - -
</TABLE>
<PAGE>
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation: The consolidated financial
statements include the accounts of Northeast Indiana Bancorp, Inc. (the
"Company") and its wholly-owned subsidiary, First Federal Savings Bank (the
"Bank"). Northeast Indiana Bancorp, Inc. was organized for the purpose of owning
all of the outstanding stock of First Federal Savings Bank. All significant
intercompany transactions and balances have been eliminated in consolidation.
Financial information presented herein, prior to the conversion to stock form of
ownership, reflects the financial position, results of operations and cash
flows, and concentration of credit risk of the Bank.
Nature of Business: The primary source of income for the Company is the
origination of commercial and residential real estate loans in northeastern
Indiana. Loans secured by real estate mortgages comprise approximately 82% of
the loan portfolio at December 31, 1996 and are primarily secured by residential
mortgages.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The collectibility of loans, fair values of financial
instruments, and status of contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due from
banks and short-term interest earning deposits in financial institutions with
original maturities under 90 days. Included in cash equivalents are
interest-earning deposits in financial institutions totaling $2,654,963 and
$2,204,407 at December 31, 1996 and 1995, respectively. Net cash flows are
reported for customer loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and the allowance for loan losses. Interest income is
reported on the interest method and includes amortization of net deferred loan
fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses. The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impaired loans are carried at the present value of expected future
cash flows discounted at the loan's effective interest rate or at the fair value
of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans if the value of such
loans is less than the unpaid balance. If these allocations cause the allowance
for loan losses to require increase, such increase is reported in the provision
for loan losses.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. Smaller-balance homogeneous loans such as
residential first mortgage loans, are evaluated for impairment in total. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet debt
service requirements, the loan is evaluated for impairment. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
Other Real Estate: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the valuation allowance are reported as a net loss on other real estate.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment. Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated on the straight-line method over the
estimated useful lives of the assets ranging from 3 to 40 years. These assets
are reviewed for impairment under Financial Accounting Standard No. 121 when
events indicate the carrying amount may not be recoverable.
Income Taxes: Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense.
Stock Compensation. Expense for employee compensation under stock option plans
is based on Opinion 25, with expense reported only if options are granted below
market price at grant date. Pro forma disclosures of net income and earnings per
share are provided as if the fair value method of Financial Accounting Standard
No. 123 were used for stock-based compensation.
Earnings Per Share: Earnings per share of common stock is based on
weighted-average outstanding shares during the year plus dilutive common stock
equivalents using the average stock price. Diluted earnings per share is
calculated assuming any conversions occurred at the start of the year and uses
ending market price, if more dilutive. The weighted-average number of shares
outstanding in 1996 was 1,870,474. Earnings per common share for 1995 was
computed by dividing net income subsequent to the Bank's conversion from mutual
to stock form (the "conversion") by the weighted average number of shares
outstanding subsequent to the conversion. Net income subsequent to the
conversion was $788,008 for the period ended December 31, 1995. The weighted
average number of shares outstanding for the 1995 period subsequent to the
conversion was 2,014,829.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
<PAGE>
NOTE 2 - SECURITIES
Year end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Available for sale - 1996
U.S. Government agencies $ 1,797,805 $ - $ (10,727) $ 1,787,078
Mutual funds 697,358 - - 697,358
Mortgage-backed 6,124,711 38,833 (1,949) 6,161,595
Equity securities 2,850,000 - - 2,850,000
---------------- ------------- ------------- --------------
$ 11,469,874 $ 38,833 $ (12,676) $ 11,496,031
================ ============= ============= ==============
Available for sale - 1995
U.S. Government agencies $ 1,099,666 $ 3,771 $ (8) $ 1,103,429
Equity securities 2,075,000 - - 2,075,000
Mutual funds 2,717,330 - - 2,717,330
---------------- -------------- ------------- ---------------
$ 5,981,996 $ 3,771 $ (8) $ 5,895,759
================ ============= ============= ===============
Held to maturity - 1996
States and political
subdivisions $ 703,000 $ - $ (800) $ 702,200
Other debt securities 189,036 - - 189,036
---------------- ------------- ------------- ---------------
$ 892,036 $ - $ (800) $ 891,236
================ ============= ============= ===============
Held to maturity - 1995
States and political
subdivisions $ 764,000 $ - $ - $ 764,000
Other debt securities 221,906 94 - 222,000
---------------- ------------- ------------- ---------------
$ 985,906 $ 94 $ - $ 986,000
================ ============= ============= ===============
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, 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, primarily mortgage-backed securities, are shown
separately.
<PAGE>
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
--------Available for Sale------- --------Held to Maturity---------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 134,000 $ 134,000
Due from one to five years 1,297,493 1,286,766 452,036 451,236
Due from five to ten years 500,312 500,312 306,000 306,000
Due after ten years - - - -
Mortgage backed securities 6,124,711 6,161,595 - -
--------------- -------------- -------------- ---------------
$ 7,922,516 $ 7,948,673 $ 892,036 $ 891,236
=============== ============== ============== ===============
</TABLE>
Sales of securities available for sale were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 2,100,348 $ - $ -
Gross gains 348 - -
Gross losses - - -
</TABLE>
NOTE 3 - LOANS RECEIVABLE, NET
Year end loans were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ---------------
<S> <C> <C>
Mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 99,325,141 $ 85,532,582
Secured by other properties 15,293,158 13,770,839
Construction - residential 8,256,360 4,210,201
Construction - nonresidential 2,492,913 2,148,712
------------------ ---------------
125,367,572 105,662,334
Less
Loans in process (208,005) (169,390)
Undisbursed portion of construction
loans (4,380,437) (2,209,804)
Net deferred loan origination fees (113,593) (95,197)
------------------ ---------------
Total mortgage loans 120,665,537 103,187,943
</TABLE>
<PAGE>
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
Consumer and other loans
Principal balances
Automobile $ 8,820,024 $ 7,756,339
Credit card 982,421 795,295
Commercial 9,567,748 5,783,183
Home equity and second mortgage 4,466,938 3,378,623
Other 3,379,322 2,619,953
----------------- ----------------
Total consumer and other loans 27,216,453 20,333,393
----------------- ----------------
Less
Allowance for loan losses (1,027,300) (880,566)
----------------- ----------------
Loans receivable, net $ 146,854,690 $ 122,640,770
================= ================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 880,566 $ 694,000 $ 457,050
Provision charged to income 235,155 250,648 262,799
Charge-offs (133,561) (73,846) (33,148)
Recoveries 45,140 9,764 7,299
--------------- ------------ ------------
Balance at end of year $ 1,027,300 $ 880,566 $ 694,000
=============== ============ ============
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
Land $ 458,331 $ 458,331
Buildings and leasehold improvements 1,568,122 1,556,236
Furniture, fixtures and equipment 681,104 677,299
-------------- ---------------
Total costs 2,707,557 2,691,866
Accumulated depreciation and amortization (698,531) (560,249)
-------------- ---------------
$ 2,009,026 $ 2,131,617
============== ===============
</TABLE>
<PAGE>
NOTE 5 - DEPOSITS
Certificates of deposit accounts individually exceeding $100,000 or more totaled
$14,705,000 and $8,755,000 at December 31, 1996 and 1995.
At December 31, 1996, scheduled maturities of certificates of deposit were, for
the years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 38,699,013
1998 12,000,846
1999 1,470,826
2000 529,674
2001 523,409
---------------
$ 53,223,768
===============
</TABLE>
NOTE 6 - BORROWED FUNDS
Borrowed funds consisted of advances from the Federal Home Loan Bank of
Indianapolis totaling $56,000,000 at December 31, 1996. The majority of the
advances have variable interest rates ranging from 5.06% to 6.80% and the
scheduled maturities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 21,000,000
1998 20,900,000
1999 13,100,000
2000 600,000
2001 400,000
---------------
$ 56,000,000
===============
</TABLE>
At December 31, 1996, collateral consisting of qualifying first mortgage loans
totaling approximately $97.7 million and U.S. Government and Agency securities,
including mortgage-backed securities, totaling approximately $7.9 million is
pledged to the Federal Home Loan Bank of Indianapolis to secure advances
outstanding. Also, the Bank may borrow up to an aggregate of $60 million from
the Federal Home Loan Bank.
<PAGE>
NOTE 7 - EMPLOYEE BENEFITS
Employee Pension Plan: The Company is part of a noncontributory multi-employer
defined benefit pension plan covering substantially all employees. The plan is
administered by the trustees of the Financial Institutions Retirement Fund.
There is no separate actuarial valuation of plan benefits nor segregation of
plan assets specifically for the Company because the plan is a multi-employer
plan and separate actuarial valuations are not made with respect to each
employer nor are the plan assets so segregated. The pension plan expense was
$52,465, $50,895, and $50,632 for the years ended December 31, 1996, 1995 and
1994.
401(k) Plan: The Company has a 401(k) plan for all employees who have completed
one year of service (1,000 hours). Participants may make deferrals up to 15% of
compensation. The Company matches 50% of elective deferrals on the first 6% of
the participant's compensation. Expense under the plan was $17,846, $13,787 and
$12,405 for the years ended December 31, 1996, 1995 and 1994.
Supplemental Retirement Plan: The Company has a supplemental retirement plan for
the President and a deferred compensation plan for certain directors of the
Company. The Company is recording an expense equal to the change in the present
value of the payment due at retirement based on the projected remaining years of
service using the projected unit credit method. The cost of the plans charged to
expense was $64,204, $56,484 and $49,634 for the years ended December 31, 1996,
1995 and 1994. The Company has purchased insurance on the lives of the
participants in the supplemental retirement plan and the deferred compensation
plan with the Company as beneficiary. The cash surrender value of the life
insurance was approximately $809,000 and $769,000 at December 31, 1996 and 1995.
The income derived from the investment in life insurance included in other
income was $40,071, $35,981 and $33,930 for the years ended December 31, 1996,
1995 and 1994.
Employee Stock Ownership Plan (ESOP): As part of the conversion transaction, the
Company established an ESOP for the benefit of substantially all employees.
Contributions to the ESOP are made by the Company and are determined by the
Company's Board of Directors at their discretion. The contributions may be made
in the form of cash or the Company's common stock. The annual contributions may
not be greater than the amount deductible for federal income tax purposes and
cannot cause the Company to violate regulatory capital requirements.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7 - EMPLOYEE BENEFITS (Continued)
- --------------------------------------------------------------------------------
To fund the plan, the ESOP borrowed $1,745,700 from the Company for the purpose
of purchasing 174,570 shares of stock at $10 per share. Principal payments on
the loan are due in equal semi-annual installments over a twelve-year period
beginning June 30, 1995. Interest is payable semi-annually during the term of
the loan at 6.65%. The loan is collateralized by the shares of the Company's
common stock purchased with the proceeds and will be repaid by the ESOP with
funds from the Bank's contributions to the ESOP and earnings on ESOP assets.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a reduction of
debt.
Shares are allocated among participants each December 31 on the basis of
principal repayments made by the ESOP on the loan from the Company, according to
each participant's relative compensation.
During the years ended December 31, 1996 and 1995, contributions of $96,134 and
$132,427, respectively, were made to the ESOP. For the same periods, ESOP
compensation expense was $134,308 and $158,613, respectively. The 14,548 shares
committed to be released in 1996 will be allocated on January 1, 1997.
Shares held by the ESOP at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Allocated shares 14,548 -
Shares released for allocation 14,548 14,548
Unreleased shares 145,474 160,022
-------------- --------------
Total ESOP shares 174,570 174,570
============== ==============
Fair value of unreleased shares $ 1,982,083 $ 1,920,264
============== ==============
</TABLE>
Recognition and Retention Plan (RRP): In 1996, the Company's Board of Directors
and shareholders established an RRP for the benefit of officers and directors as
a method of providing a proprietary interest in the Company in a manner designed
to encourage such persons to remain with the Bank. The RRP is administered by
the compensation committee of the Company. Eligible persons will become vested
in shares of common stock covered by the award equally over a five year period.
The maximum total shares available under the RRP are 87,285. During 1996, 75,936
shares were awarded to RRP participants at $13.50 per share. The expense
associated with the RRP was $205,027 in 1996.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
- --------------------------------------------------------------------------------
Income tax expense for the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current federal $ 850,741 $ 664,372 $ 717,339
Deferred federal (100,203) (89,538) (37,645)
Current state 239,901 197,302 215,342
Deferred state (28,349) (22,377) (19,090)
------------ ------------ ------------
Income tax expense $ 962,090 $ 749,759 $ 875,946
============ ============ ============
</TABLE>
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes at statutory rate $ 860,076 $ 703,476 $ 752,401
Tax effect of:
State tax, net of federal income tax effect 139,624 115,450 129,526
Other, net (37,610) (69,167) (5,981)
------------ ------------ ------------
Income tax expense $ 962,090 $ 749,759 $ 875,946
============ ============ ============
Effective tax rate 38.0% 36.2% 39.6%
==== ==== ====
</TABLE>
<PAGE>
The components of the net deferred tax asset recorded in the balance sheet as of
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 65,750 $ 74,379
Bad debts 130,711 72,970
Deferred loan fees 44,994 37,698
Unearned compensation 81,211 -
Other 2,763 -
------------ ------------
325,429 185,047
Deferred tax liabilities
Depreciation (121,114) (109,374)
Other (10,358) (1,401)
------------ ------------
(131,472) (110,775)
Valuation allowance - -
------------ ------------
Net deferred tax asset $ 193,957 $ 74,272
============ ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
- --------------------------------------------------------------------------------
Retained earnings at December 31, 1996 and 1995 includes approximately $1.3
million for which no deferred federal income tax liability has been recognized.
This amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $449,000 at December 31, 1996 and 1995.
Legislation passed in August 1996 now requires the Company to deduct a provision
for bad debts for tax purposes based on actual loss experience and to recapture
the excess bad debt reserve accumulated in tax years after 1986. The related
amount of deferred tax liability which must be recaptured is $276,000 and is
payable over a six year period beginning no later than 1998.
NOTE 9 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
regulatory 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.
<PAGE>
NOTE 9 - REGULATORY MATTERS (Continued)
At year end, actual capital levels (in millions) and minimum required levels
were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted assets) $ 22.0 21.8% $ 8.1 8.0% $ 10.1 10.0%
Tier 1 (core) capital (to risk weighted
assets) 21.2 21.0 4.0 4.0 6.1 6.0
Tier 1 (core) capital (to adjusted total
assets) 21.2 12.5 5.1 3.0 8.5 5.0
Tangible capital (to adjusted total
assets) 21.2 12.5 2.5 1.5 N/A
1995
Total capital (to risk weighted assets) $ 21.1 25.1% $ 6.7 8.0% $ 8.4 10.0%
Tier 1 (core) capital (to risk weighted
assets) 20.5 24.3 3.4 4.0 5.1 6.0
Tier 1 (core) capital (to average total
assets) 20.5 14.9 4.1 3.0 6.9 5.0
Tangible capital (to adjusted total
assets) 20.5 14.9 2.1 1.5 N/A
</TABLE>
The Bank at year end 1996 was categorized as well capitalized.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institutions
without prior approval of the Office of Thrift Supervision. The regulatory
restriction is based on a three-tiered system with the greatest flexibility
being afforded to well-capitalized (Tier 1) institutions. The Bank is currently
a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half its
"surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at December 31, 1996 approximately
$8,546,000 of the Bank's retained earnings is potentially available for
distribution to the Company.
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Fixed rate commitments $ 2,440,000 $ 374,000
Variable rate commitments 16,604,000 8,089,000
Credit card arrangements 1,698,000 1,397,000
Letters of credit 50,000 50,000
</TABLE>
Most loan commitments have terms up to 60 days. At year end 1996, fixed
commitments have contractual rates ranging from 7.25% to 9.5%. Credit cards are
fixed at 14.9%. Most variable rate arrangements are tied either to prime or the
U.S. Treasury bill rate and have spreads between .75% and 2%.
The Company and the Bank are subject to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
NOTE 11 - STOCK OPTIONS
The Company established a stock option plan during 1996. Financial Accounting
Standard No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share had the Standard's fair
value method been used to measure compensation cost for stock option plans.
Compensation cost actually recognized for stock options was $0 for 1996.
<TABLE>
<CAPTION>
1996
---------------
<S> <C>
Net income as reported $ 1,567,545
Pro forma net income 1,398,379
Earnings per share as reported $ .84
Pro forma earnings per share .75
</TABLE>
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
<PAGE>
NOTE 11 - STOCK OPTIONS (Continued)
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10 year periods, with vesting
occurring evenly over the first five years. At year end 1996, 27,280 shares were
authorized for future grants. Information about option grants follows.
<TABLE>
<CAPTION>
Number Exercise Fair Value
of Options Price of Grants
------------ ----------- ---------
<S> <C> <C> <C>
Outstanding, beginning of 1996 - $ - $ -
Granted 190,932 11.75 4.43
Exercised - - -
------------
Outstanding, end of 1996 190,932 11.75 4.43
============
</TABLE>
The fair value of options granted during 1996 is estimated using the following
weighted-average information: risk-free interest rate of 6.15%, expected life of
10 years, expected volatility of stock price of 3.01%, and expected dividends of
2.35% per year.
At year end 1996, options outstanding were as follows:
<TABLE>
<CAPTION>
<S> <C>
Number of options 190,932
Exercise price $11.75
Weighted-average remaining option life 9 years
</TABLE>
There are no options exerciseable at year end 1996.
NOTE 12 - RELATED PARTY TRANSACTIONS
Certain directors and officers of the Company are loan customers. A summary of
related party loan activity for loans aggregating $60,000 or more to any one
related party is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance - January 1, 1996 $ 308,101
New loans 95,591
Repayments (14,280)
Other changes (44,714)
------------
Balance - December 31, 1996 $ 344,698
============
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107 prescribes that the Company
disclose the estimated fair value of its financial instruments. The following
table shows those values and the related carrying amounts at December 31, 1996.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and interest-earning deposits
in financial institutions $ 6,772,374 $ 6,772,374 $ 4,772,341 $ 4,772,341
Securities held to maturity 892,036 891,236 985,906 986,000
Securities available for sale 11,496,031 11,496,031 5,895,759 5,895,759
Loans receivable, net 146,854,690 147,769,000 122,640,770 122,881,000
Financial liabilities
Deposit liabilities 85,346,240 85,633,000 68,202,930 70,879,066
Advances from the Federal
Home Loan Bank 56,000,000 55,949,000 37,500,000 37,542,000
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1996 and 1995. The estimated fair value
for cash and interest-earning deposits in financial institutions is considered
to approximate cost. The estimated fair value for securities is based on quoted
market values for the individual securities or equivalent securities. The
estimated fair value for loans is based on estimates of the rate the Company
would charge for similar such loans at December 31, 1996 and 1995, applied for
the time period until estimated repayment. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair value
for certificates of deposit and advances from the Federal Home Loan Bank are
based on estimates of the rate the Company would pay on such deposits or for
such advances at December 31, 1996 and 1995, applied for the time period until
maturity. The estimated fair value of other financial instruments and
off-balance sheet loan commitments approximate cost and are not considered
significant for this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at December 31, 1996 or 1995, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1996 and 1995 should not necessarily be considered to apply at subsequent
dates.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Condensed financial information of Northeast Indiana Bancorp, Inc. is as
follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
December 31, 1996 and 1995
1996 1995
--------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 371,124 $ 299,402
Loan receivable from Employee Stock Ownership Plan 1,454,750 1,600,225
Loan receivable from subsidiary bank 3,750,000 8,600,000
Investment in subsidiary bank 21,184,450 20,461,354
Other assets 65,949 139,415
--------------- ----------------
Total assets $ 26,826,273 $ 31,100,396
=============== ================
LIABILITIES
Accrued expenses $ 297,157 $ 67,351
SHAREHOLDERS' EQUITY 26,529,116 31,033,045
--------------- ----------------
Total liabilities and shareholders' equity $ 26,826,273 $ 31,100,396
=============== ================
<CAPTION>
CONDENSED STATEMENT OF INCOME
For the year ended December 31, 1996 and
the period from July 1, 1995 through December 31, 1995
1996 1995
--------------- ----------------
<S> <C> <C>
Interest income $ 497,921 $ 266,012
Operating expenses 176,014 50,873
--------------- ----------------
Income before income taxes and equity in undistributed
earnings of subsidiary bank 321,907 215,139
Income tax expense 100,391 85,216
--------------- ----------------
Income before equity in undistributed earnings of
subsidiary bank 221,516 129,923
Equity in undistributed earnings of subsidiary bank 1,346,029 658,085
--------------- ----------------
Net income $ 1,567,545 $ 788,008
=============== ================
</TABLE>
<PAGE>
NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996 and
the period from July 1, 1995 through December 31, 1995
1996 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,567,545 $ 788,008
Adjustments to reconcile net income to cash provided by
operations
Equity in undistributed earnings of subsidiary bank (1,346,029) (658,085)
Change in
Other assets 73,466 (139,415)
Accrued expenses 229,806 67,351
--------------- ----------------
Net cash from operating activities 524,788 57,859
Cash flows from investing activities
Origination of loan receivable from ESOP - (1,745,700)
Origination of loan receivable from subsidiary bank - (8,600,000)
Repayments on loan receivable from subsidiary bank 4,850,000 -
Repayments on loan receivable from ESOP 145,475 145,475
Purchase of stock in subsidiary bank - (10,605,429)
--------------- ----------------
Net cash used for investing activities 4,995,475 (20,805,654)
Cash flows from financing activities
Dividend paid (622,519) (163,660)
Purchase of stock (4,826,022) -
Proceeds from issuance of common stock, net of
conversion costs - 21,210,857
--------------- ----------------
Net cash from financing activities (5,448,541) 21,047,197
--------------- ----------------
Net change in cash and cash equivalents 71,722 299,402
Cash and cash equivalents at beginning of period 299,402 -
--------------- ----------------
Cash and cash equivalents at end of period $ 371,124 $ 299,402
=============== ================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PRESIDENT'S LETTER TO STOCKHOLDERS
SELECTED CONSOLIDATED FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDER INFORMATION
<PAGE>
- --------------------------------------------------------------------------------
STOCKHOLDER INFORMATION
Stock Listing Information
The Company's common stock is traded on the NASDAQ National Market under the
symbol "NEIB".
Stock Price Information
The following table sets forth the high and low bid prices and dividends
declared per share of common stock for the periods indicated. The prices do not
represent actual transactions and do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
<S> <C> <C> <C>
March 31, 1995 N/A N/A N/A
June 30, 1995 $ 11.75 $11.00 -
September 30, 1995 $ 12.75 $11.25 -
December 31, 1995 $ 12.50 $11.50$.075
March 31, 1996 $ 13.50 $11.50$.075
June 30, 1996 $ 13.25 $11.50$.075
September 30, 1996 $ 13.00 $11.75$.075
December 31, 1996 $ 14.00 $12.63$.080
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions of dividend payments are described in Note 9 of the
Notes to Consolidated Financial Statements included in this report.
As of February 10, 1997, there were approximately 608 shareholders of record,
not including those shares held in nominee or street name through various
brokerage firms or banks.
Annual Report on Form 10-KSB
A copy of the Company's annual report on Form 10-KSB, filed with the Securities
and Exchange Commission, is available without charge by writing:
Darrell E. Blocker
Chief Financial Officer
Northeast Indiana Bancorp, Inc.
648 North Jefferson Street
Huntington, Indiana 46750
<PAGE>
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Stockholders, investors, and analysts interested in additional information may
contact Darrell E. Blocker, Chief Financial Officer, Northeast Indiana Bancorp,
Inc.
<TABLE>
<CAPTION>
Corporate Office Special Counsel Independent Auditor
---------------- --------------- -------------------
<S> <C> <C>
Northeast Indiana Bancorp, Inc. Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
648 North Jefferson Street 1100 New York Avenue, N.W. 330 E. Jefferson Blvd.
Huntington, Indiana 46750 Washington, D.C. 20005 South Bend, Indiana 46624
(219) 356-3311
</TABLE>
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
NORTHEAST INDIANA BANCORP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Stephen E. Zahn Stephen E. Zahn
Chairman of the Board President and Chief Executive Officer
President and Chief Executive Officer
Dan L. Stephan Dee Ann Hammel
State Representative Senior Vice President
Indiana Legislature and Chief Operations Officer
Agent
Variable Annuity Life Insurance Company Darrell E. Blocker
Senior Vice President,
Treasurer and Chief Financial Officer
Richard G. Carnes
Retired Former owner/manager
Wissel's Clothing Store
J. David Carnes
Medical Doctor and Associate
Family Practice Associates
Samuel Preston, Jr.
Retired Pharmacist
Randall C. Rider
President
Lime City Manufacturing Company, Inc.
</TABLE>
ANNUAL MEETING
The Annual Meeting of Stockholders of Northeast Indiana Bancorp, Inc., will
be held on April 23, 1997 at 1:00 p.m. at First Federal Savings Bank's
north office located at 100 Frontage Road, Huntington, Indiana 46750.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
Northeast Indiana First Federal 100% Federal
Bancorp, Inc. Savings Bank
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Northeast Indiana Bancorp, Inc. on Form S-8 (Registration Nos. 333-4172 and
333-4166), of our report dated January 28, 1997 on the 1996 consolidated
financial statements of Northeast Indiana Bancorp, Inc., which report is
included in the 1996 Annual Report on Form 10-K of Northeast Indiana Bancorp,
Inc.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31,1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,654,963
<INT-BEARING-DEPOSITS> 4,117,411
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,496,031
<INVESTMENTS-CARRYING> 892,036
<INVESTMENTS-MARKET> 891,238
<LOANS> 147,881,990
<ALLOWANCE> (1,027,300)
<TOTAL-ASSETS> 169,544,120
<DEPOSITS> 85,346,240
<SHORT-TERM> 21,000,000
<LIABILITIES-OTHER> 1,668,764
<LONG-TERM> 35,000,000
0
0
<COMMON> 21,821
<OTHER-SE> 26,507,295
<TOTAL-LIABILITIES-AND-EQUITY> 169,544,120
<INTEREST-LOAN> 10,897,032
<INTEREST-INVEST> 740,442
<INTEREST-OTHER> 129,581
<INTEREST-TOTAL> 11,767,055
<INTEREST-DEPOSIT> 3,593,583
<INTEREST-EXPENSE> 6,196,675
<INTEREST-INCOME-NET> 5,570,380
<LOAN-LOSSES> 235,155
<SECURITIES-GAINS> 348
<EXPENSE-OTHER> 3,208,157
<INCOME-PRETAX> 2,529,983
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,567,893
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.81
<LOANS-NON> 705,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (880,566)
<CHARGE-OFFS> 133,561
<RECOVERIES> (45,140)
<ALLOWANCE-CLOSE> (1,027,300)
<ALLOWANCE-DOMESTIC> (944,300)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (83,000)
</TABLE>
