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, 1997
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 ]
<PAGE>
State the issuer's revenues for its most recent fiscal year: $14.9
million.
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 16, 1998, was $36.75 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 16, 1998, there were 1,698,927 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, 1997. 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, is the holding company for First Federal Savings Bank (the "Bank"
or "First Federal"). All references to the Company prior to June 27, 1995, the
date of the Bank's conversion from mutual to stock form, except where otherwise
indicated, are to the Bank.
At December 31, 1997, the Company had $199.37 million of assets and
stockholders' equity of $27.29 million (or 13.69% 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 Company 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 loans and equipment leases. At December 31, 1997,
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 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, 1997, the Company had $100,000 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
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
<PAGE>
Huntington County are engaged in light industry and include Wabash Magnetics,
United Technologies Electronic Controls, Hayes Lemmerz, CFM Majestic, Preferred
Technical Group, Pyle Mfg, LLC, Good Humor-Breyer, 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, 1997, the Bank's
gross loans outstanding totaled $180.19 million, of which $109.08 million or
60.53% were one-to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 40.52% were fixed-rate
loans, and 59.48% were adjustable-rate loans. At that same date, commercial real
estate and multi-family loans totaled $19.34 million, of which 59.47% were
fixed-rate loans and 40.53% were adjustable-rate loans. Also at that date, the
Bank's construction or development loans totaled $10.60 million or 5.88% of the
Bank's total loan portfolio, 79.59% of which were adjustable-rate loans. At
December 31, 1997, commercial business loans totaled $17.53 million or 9.73% of
the Bank's total loan portfolio, of which 66.73% were fixed-rate loans and
33.27% were adjustable-rate loans.
At December 31, 1997, the balance of the Bank's consumer loans
consisted of $23.65 million of loans, which represented 13.12% of the Bank's
gross loan portfolio. Of the consumer loans outstanding, 69.60% were fixed-rate
loans and 30.40% were adjustable-rate loans.
The Bank and the Company also invest in mutual funds, obligations of
states and political subdivisions, and other debt securities and mortgage-backed
securities. At December 31, 1997, mutual funds totaled $736,000 or 0.37% of
total assets, mortgage-backed securities totaled $6.6 million or 3.26% of total
assets, Government agencies totaled $4.0 million or 2.01% of total assets, and
obligations of states and political subdivisions totaled $639,000 or 0.32% 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, 1997, the maximum
which the Bank could have lent under this limit to any one borrower and the
borrower's related entities was approximately $3.6 million. At December 31,
1997, 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, 1997 was $2.19 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, 1997 was $2.01 million in loans to
one borrower secured by a manufacturing facility located in Huntington County,
Indiana. The next largest lending relationship at December 31, 1997 was $1.41
million secured by a hotel in Kosciusko County, Indiana. The next largest
lending relationship at that date was $1.40 million in loans secured by parcels
of real estate located in Steuben County, Indiana. Finally, the next largest
lending relationship at December 31, 1997 was a $1.33 million in loans secured
by various spec homes being built in Allen 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,
---------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------------------------------------------------------------------------
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........................$109,080 60.53% $ 99,325 65.10% $ 85,533 67.88% $ 76,082 70.04%
Multi-family............................... 2,606 1.45 2,993 1.96 2,029 1.61 1,621 1.49
Commercial................................. 16,734 9.29 12,301 8.06 11,742 9.32 8,835 8.13
Construction or development................ 10,596 5.88 10,749 7.04 6,359 5.05 7,033 6.47
-------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans................ 139,016 77.15 125,368 82.16 105,663 83.86 93,571 86.13
-------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
Consumer Loans:
Deposit account........................... 44 .02 157 .10 170 .13 264 .24
Student................................... --- --- --- --- --- --- --- ---
Automobile................................ 11,573 6.42 8,820 5.78 7,756 6.16 6,719 6.19
Home equity............................... 5,506 3.06 4,176 2.74 3,121 2.48 2,895 2.66
Home improvement.......................... 656 .36 291 .19 258 .20 202 .19
Other..................................... 5,873 3.26 4,204 2.76 3,245 2.58 2,238 2.06
-------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans................... 23,652 13.12 17,648 11.57 14,550 11.55 12,318 11.34
-------- ----- -------- ----- -------- ----- -------- -----
Commercial business loans.................. 17,526 9.73 9,568 6.27 5,783 4.59 2,745 2.53
Total loans............................ 180,194 100.00% 152,584 100.00% 125,996 100.00% 108,634 100.00%
====== ====== ====== ======
Less:
Undisbursed portion of construction loans.. 3,981 4,380 2,210 3,333
Loans in process........................... 355 208 169 124
Deferred fees and discounts................ 125 114 95 81
Allowance for loan losses.................. 1,194 1,027 881 694
-------- -------- -------- --------
Total loans receivable, net................$174,539 $146,855 $122,641 $104,402
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
1993
---------------------
Amount Percent
------ -------
<S> <C> <C>
Real Estate Loans:
One- to four-family........................ $ 64,874 71.93%
Multi-family............................... 1,610 1.79
Commercial................................. 5,431 6.02
Construction or development................ 4,366 4.84
-------- ------
Total real estate loans................ 76,281 84.58
-------- ------
Other Loans:
Consumer Loans:
Deposit account........................... 212 .24
Student................................... --- ---
Automobile................................ 6,947 7.70
Home equity............................... 2,259 2.50
Home improvement.......................... 184 .20
Other..................................... 1,633 1.81
-------- ------
Total consumer loans................... 11,235 12.45
-------- ------
Commercial business loans.................. 2,676 2.97
Total loans............................ 90,192 100.00%
======
Less:
Undisbursed portion of construction loans.. 1,546
Loans in process........................... 451
Deferred fees and discounts................ 13
Allowance for loan losses.................. 457
--------
Total loans receivable, net................ $ 87,725
========
</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,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........................... $44,203 24.53 $ 35,764 23.44% $ 30,539 24.24%
Multi-family.................................. 1,586 .88 2,397 1.57 2,029 1.61
Commercial.................................... 9,916 5.50 5,922 3.88 4,409 3.50
Construction or development................... 2,163 1.20 1,421 .94 2,881 2.28
------- ----- -------- ----- -------- -----
Total real estate loans.................... 57,868 32.11 45,504 29.83 39,858 31.63
------- ----- -------- ----- -------- -----
Consumer....................................... 16,462 9.14 12,619 8.27 11,379 9.03
Commercial business............................ 11,694 6.49 4,399 2.88 1,460 1.16
------- ----- -------- ----- -------- -----
Total fixed-rate loans..................... 86,024 47.74 62,522 40.98 52,697 41.82
Adjustable-Rate Loans:
Real estate:
One- to four-family........................... 64,877 36.00 63,561 41.66 54,994 43.65
Multi-family.................................. 1,020 .57 595 .39 --- ---
Commercial.................................... 6,818 3.78 6,380 4.17 7,333 5.82
Construction or development................... 8,433 4.68 9,328 6.11 3,478 2.76
------- ----- -------- ----- -------- -----
Total real estate loans.................... 81,148 45.03 79,864 52.33 65,805 52.23
------- ----- -------- ----- -------- -----
Consumer....................................... 7,190 3.99 5,029 3.30 3,171 2.52
Commercial business............................ 5,832 3.24 5,169 3.39 4,323 3.43
------- ----- -------- ----- -------- -----
Total adjustable-rate loans................ 94,170 52.26 90,062 59.02 73,297 58.18
------- ----- -------- ----- -------- -----
Total loans................................ 180,194 100.00% 152,584 100.00% 125,996 100.00%
====== ====== ======
Less:
Undisbursed portion of construction loans...... 3,981 4,380 2,210
Loans in process............................... 355 208 169
Deferred fees and discounts.................... 125 114 95
Allowance for loan losses...................... 1,194 1,027 881
-------- -------- --------
Total loans receivable, net................. $174,539 $146,855 $122,641
======== ======== ========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1997. 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
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
December 31,
<S> <C> <C> <C> <C> <C> <C>
1998(1)................ $ 54 9.06% $ 173 8.75% $ 4,201 9.34%
1999 and 2000.......... 254 9.05 19 10.59 --- ---
2001 and 2002.......... 2,428 8.16 573 8.42 --- ---
2003 to 2007........... 17,536 8.12 8,454 8.88 120 8.56
2008 to 2022........... 88,808 7.64 10,121 8.98 6,275 7.33
<CAPTION>
Commercial
Consumer Business Total
------------------ ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
1998(1)................ $ 5,424 10.80% $ 4,483 9.62% $ 14,335 9.96%
1999 and 2000.......... 3,861 9.39 2,805 9.67 6,939 9.50
2001 and 2002.......... 7,516 9.20 4,269 8.92 14,786 8.92
2003 to 2007........... 6,393 9.12 3,002 9.38 35,505 8.59
2008 to 2022........... 458 9.13 2,967 10.39 108,629 7.83
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $86.0 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $94.2
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 and referrals from real estate brokers. 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, 1997, the Bank's one- to four-family residential mortgage loans
totaled $109.08 million, or 60.53%, of the Bank's gross loan portfolio.
The Bank currently offers fixed-rate and adjustable-rate mortgage
loans. For the year ended December 31, 1997, the Bank originated $12.90 million
of fixed-rate loans and $8.83 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 5.0% over the life of a 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 provide for a minimum interest rate based on margins and caps over
the life of the loans. At December 31, 1997, the total balance of one-to
four-family adjustable-rate loans was $64.88 million or 36.00% 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, 1997, the total balance of one- to four-family
fixed-rate loans was $44.20 million or 24.53% 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 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, 1997, the Bank had $16.73 million and $2.61 million of
commercial and multi-family real estate loans, respectively, which represented
9.29% and 1.45%, 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, 1997, the Bank had
$10.60 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, 1997, the Bank had $2.16 million and $8.43 million of
fixed-rate and adjustable-rate construction or development loans, respectively,
which represented 1.20% and 4.68%, 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, 1997, the Bank's automobile loans totaled
$11.57 million or 6.42% of the Bank's gross loan portfolio. Of this amount
approximately $3.29 million or 28.44% and $8.28 million or 71.56% 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 70% 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, 1997, home equity and home improvement loans,
most of which are secured by second mortgages, amounted to $5.51 million and
$656,000, respectively, which represented 3.06% and .36%, respectively, of the
Bank's gross loan portfolio.
At December 31, 1997, the Bank's consumer loan portfolio totaled $23.65
million, or 13.12% of its gross loan portfolio. At December 31, 1997,
approximately 69.60% of consumer loans were short- and intermediate-term,
fixed-rate consumer loans and 30.40% 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, 1997, $37,000 of the Bank's consumer loans were
non-performing representing .02% of the gross loan portfolio.
Commercial Business Lending. The Bank also originates commercial
business loans and purchases commercial leases. At December 31, 1997
approximately $17.53 million, or 9.73% of the Bank's gross loan portfolio was
commercial business lending. The largest commercial business loan is a line of
credit of $3.3 million to an automobile leasing company, of which $2.19 million
was outstanding at December 31, 1997.
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 lending.
Originations, Purchases and Sales of Loans
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
other 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,
1997, the Bank originated $42.35 million in fixed-rate loans and $32.24 million
in adjustable rate loans.
Total commercial business loan originations increased in 1997 compared
to 1996 with the largest growth in commercial leases.
In 1997, refinancing of residential loans decreased contributing to the
decrease in one- to four-family originations for the year of $7.43 million to
$21.73 million in 1997 from $29.16 million in 1996.
During fiscal 1997, the Bank purchased $3.0 million of loans originated
by other lenders all of which were secured by mobile homes. At December 31,
1997, 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,
-----------------------------------
1997 1996 1995
--------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.................. $ 8,983 $17,971 $ 9,296
- multi-family................... --- --- 361
- commercial..................... 2,632 1,061 2,447
- construction................... 10,551 8,466 5,441
Non-real estate - consumer......................... 2,414 1,961 1,626
- commercial business..... 7,661 5,711 5,342
--------- ------- -------
Total adjustable-rate....................... 32,241 35,170 24,513
--------- ------- -------
Fixed rate:
Real estate - one- to four-family.................. 13,024 11,186 3,919
- multi-family................... 729 --- 20
- commercial..................... 3,757 1,461 504
- construction................... 2,962 3,641 508
Non-real estate - consumer......................... 14,216 10,187 11,365
- commercial business..... 7,658 3,531 799
--------- --------- ----------
Total fixed-rate............................ 42,346 30,006 17,115
--------- ------- -------
Total loans originated...................... 74,587 65,176 41,628
--------- -------- --------
Purchases:
Real estate - one- to four-family.................. --- --- 2,690
- multi-family................... --- 250 ---
- commercial..................... 300 --- ---
Non real estate - commercial...................... 2,962 1,189 ---
-------- ------- --------
Total loans purchased....................... 3,262 1,439 2,690
Sales and Repayments:
Real estate - multi-family......................... 352 --- ---
- commercial..................... --- --- ---
--------- ------- -------
Total loans sold............................ 352 --- ---
Principal repayments............................... 49,887 40,027 26,956
--------- ------- -------
Total reductions............................ 50,239 40,027 26,956
--------- ------- -------
Net increase (decrease)..................... $ 27,610 $26,588 $17,362
========= ======= =======
</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 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, 1997. 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>
30 to 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
------ ------ -------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 37 $1,350 1.24% 16 $ 334 .31% 53 $1,684 1.55%
Commercial............... 2 33 .20 2 706 4.22 4 739 4.42
Construction or
development............ 2 269 2.54 -- -- -- 2 269 2.54
Consumer................... 46 287 1.21 10 37 .16 56 324 1.37
Commercial business........ 46 937 5.35 6 89 .51 52 1,026 5.86
Total................. 133 $2,876 1.60% 34 $1,166 .65% 167 $4,042 2.25%
=== ====== ==== === ====== ===== === ====== ====
</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
becomes 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.
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family................................ $334 $470 $ 9 $--- $ 26
Multi-family....................................... --- --- --- --- ---
Commercial real estate............................. 706 172 171 14 ---
Construction or development........................ --- --- --- 289 ---
Consumer........................................... 37 63 94 30 34
Commercial business................................ 89 --- 10 4 8
----- ---- ---- ---- ----
Total........................................... 1,166 705 284 337 68
----- ---- ---- ---- -----
Foreclosed assets:
One- to four-family................................ --- --- --- --- ---
----- ------ ----- ----- -----
Total........................................... ---- --- --- --- ---
----- ------ ----- ----- -----
Repossessed assets:
Consumer........................................... 7 8 --- --- ---
---- ----- ----- ----- -----
Total........................................... 7 8 --- --- ---
---- ----- ----- ----- -----
Total non-performing assets.......................... $1,173 $713 $284 $337 $ 68
====== ==== ==== ==== ====
Total as a percentage of total assets................ .58% .42% .21% .29% .07%
=== === === === ===
</TABLE>
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
<PAGE>
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, 1997, the Bank had classified
a total of $944,000 of its assets as special mention, $529,000 as substandard,
net of specific reserves, none as doubtful, and none as loss. At December 31,
1997, total classified assets comprised $1.47 million, or 6.20% of the Bank's
capital, or 0.74% of the Bank's total assets.
Other Loans of Concern. Other than the non-performing loans and
foreclosed real estate held for sale set forth in the tables above, as of
December 31, 1997 and the classified assets 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.
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, 1997, the Bank had a total allowance for loan
losses of $1.19 million, representing 10.24% of total non-performing loans and
0.68% 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,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- ---------------------------------
Percent of Percent Percent
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
--------- -------- ----- --------- -------- ----- --------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... $ 240 $109,080 60.53% $ 209 $ 99,325 65.10% $180 $ 85,533 67.88%
Multi-family............. 22 2,606 1.45 74 2,993 1.96 50 2,029 1.61
Commercial real estate... 163 16,734 9.29 106 10,996 7.20 100 11,742 9.32
Construction or
development............ 237 10,596 5.88 311 12,054 7.90 200 6,359 5.05
Consumer................. 136 23,652 13.12 79 17,648 11.57 65 14,550 11.55
Commercial business...... 244 17,526 9.73 165 9,568 6.27 100 5,783 4.59
Unallocated.............. 152 --- --- 83 --- --- 186 --- ---
------ -------- ------ ------ -------- ------ ---- -------- ------
Total............... $1,194 $180,194 100.00% $1,027 $152,584 100.00% $881 $125,996 100.00%
====== ======== ====== ====== ======== ====== ==== ======== ======
<CAPTION>
December 31
----------------------------------------------------------------------------
1994 1993
------------------------------------ -------------------------------------
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...... $ 145 $ 76,082 70.04% $ 76 $ 64,874 71.93%
Multi-family............. 45 1,621 1.49 40 1,610 1.79
Commercial real estate... 75 8,835 8.13 55 5,431 6.02
Construction or
development............ 200 7,033 6.47 110 4,366 4.84
Consumer................. 50 12,318 11.34 45 11,235 12.45
Commercial business...... 40 2,745 2.53 40 2,676 2.97
Unallocated.............. 139 --- --- 91 --- --
Total............... $ 694 $108,634 100.00% $ 457 $ 90,192 100.00
===== ======== ====== ===== ======== ======
</TABLE>
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses activity.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
-------- ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $1,027 $ 881 $ 694 $ 457 $ 270
Charge-offs:
One- to four-family................................ 2 3 --- --- 2
Commercial......................................... 1 --- 9 --- ---
Consumer........................................... 133 131 65 33 29
-------- ------ ---- ----- -------
136 134 74 33 31
-------- ------ ---- ----- -------
Recoveries:
Consumer........................................... 38 45 10 7 21
-------- ------ ---- ----- ------
38 45 10 7 21
-------- ------ ---- ----- ------
Net charge-offs...................................... 98 89 64 26 10
Additions charged to operations...................... 265 235 251 263 197
------- ------- ----- ------ ------
Balance at end of period............................. $1,194 $1,027 $ 881 $ 694 $ 457
====== ====== ===== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period......... .06% .07% .06% .03% .01%
=== ===== ==== ===== =====
Ratio of net charge-offs during the period to
average non-performing loans........................ 13.07% 20.23% 16.41% 9.92% 5.32%
===== ====== ===== ===== =====
</TABLE>
Investment Activities
General. Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in relation to the
return on loans. The Bank has generally maintained liquid assets at levels above
the minimum requirements that had been imposed by 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,
1997, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 5.55%.
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.
<PAGE>
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, 1997,
First Federal's interest-earning deposits with other financial institutions
totaled $3.14 million, or 1.57% of total assets, and its securities, consisting
of obligations of states and political subdivisions, money market mutual funds,
and other securities totaled $15.39 million, or 7.72% of total assets. Included
in other securities, as of such date, the Bank had a $3.25 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, 1997, the Bank had $757,000 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
$14.63 million. See Note 2 of the Notes to the Consolidated Financial
Statements.
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- -------------------
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........ $ 639 4.15% $ 703 5.67% $ 764 11.10%
Mortgage-backed securities.............................. 6,599 42.89 6,162 49.73 --- ---
Federal agency obligations.............................. 4,044 26.29 1,787 14.43 1,104 16.04
Corporate bonds......................................... 118 .77 189 1.53 222 3.23
------- ---- -------- ---- ------ -----
Total debt securities................................ 11,400 74.10 8,841 71.36 2,090 30.37
Equity securities:
Mutual funds............................................ 735 4.78 697 5.63 2,717 39.48
FHLB stock.............................................. 3,250 21.12 2,850 23.01 2,075 30.15
------- ---- -------- ---- ------ -----
Total securities..................................... $15,385 100.00% $ 12,388 100.00% $6,882 100.00%
======= ====== ======== ====== ====== ======
</TABLE>
<PAGE>
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, 1997, the Bank had total FHLB
advances of $63.0 million with the capacity to borrow as of December 31, 1997 an
additional $3.0 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 time deposit accounts. The time
deposit 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. First Federal
generally solicits deposits from its market area 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.
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 time
deposit accounts 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,
-------------------------------------
1997 1996 1995
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $ 85,346 $ 68,203 $ 68,533
Deposits.................................... 303,686 260,248 246,971
Withdrawals................................. 286,040 246,610 250,038
Interest credited........................... 4,558 3,505 2,737
-------- -------- ---------
Ending balance.............................. $107,550 $ 85,346 $ 68,203
======== ======== ========
Net increase (decrease)..................... $22,204 $ 17,143 $ (330)
======= ======== ========
Percent increase (decrease)................. 26.02% 25.14% (.48)%
===== ====== =====
</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,
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
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%........................ $ 9,336 8.68% $10,147 11.89% $10,510 15.41%
Demand and NOW Accounts 1.19%.................. 12,037 11.19 10,295 12.06 9,980 14.63
Money Market Accounts 5.10%.................... 17,098 15.90 11,680 13.69 3,408 5.00
--------- ----- ------- ------ ------- ------
Total Non-Time Deposits........................ 38,471 35.77 32,122 37.64 23,898 35.04
--------- ----- ------- ------ ------- ------
Time Deposits:
2.00 - 3.99%................................. 1,045 .97 1,286 1.51 919 1.35
4.00 - 5.99%................................. 38,467 35.77 39,177 45.90 25,743 37.74
6.00 - 7.99%................................. 29,567 27.49 12,761 14.95 17,643 25.87
--------- ------ ------- ------ ------- ------
Total Time Deposits............................ 69,079 64.23 53,224 62.36 44,305 64.96
--------- ------ ------- ------ ------- ------
Total Deposits................................. $107,550 100.00% $85,346 100.00 $68,203 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Bank's
time deposit accounts as of December 31, 1997.
<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>
Time deposit accounts
maturing in quarter ending:
March 31, 1998................. $484 $11,740 $ 3,972 $16,196 23.45%
June 30, 1998.................. 508 7,104 2,695 10,307 14.92
September 30, 1998............. 53 7,112 11,834 18,999 27.50
December 31, 1998.............. --- 6,061 8,260 14,321 20.73
March 31, 1999................. --- 2,383 510 2,893 4.19
June 30, 1999.................. --- 1,163 100 1,263 1.83
September 30, 1999............. --- 127 510 637 .92
December 31, 1999.............. --- 396 1,013 1,409 2.04
March 31, 2000 --- 136 68 204 .30
June 30, 2000 --- 505 209 714 1.03
September 30, 2000 --- 377 165 542 .78
December 31, 2000 --- 410 230 640 .93
Thereafter..................... --- 953 1 954 1.38
Total....................... $1,045 $38,467 $29,567 $69,079 100.00%
====== ======= ======= ======= ======
Percent of total............ 1.51% 55.69% 42.80% 100.00%
======
</TABLE>
The following table indicates the amount of the Bank's time deposit
accounts by time remaining until maturity as of December 31, 1997.
<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>
Time deposit accounts less than $100,000......... $11,592 $ 8,134 $14,734 $7,195 $41,655
Time deposit accounts of $100,000 or more........ 3,429 1,789 17,546 2,061 24,825
Public funds (1)................................. 1,175 384 1,040 --- 2,599
------- ------- ------- ------ -------
Total time deposit accounts...................... $16,196 $10,307 $33,320 $9,256 $69,079
======= ======= ======= ====== =======
</TABLE>
- -------------------
(1) Deposits from governmental and other public entities.
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
<PAGE>
collateral requirements. At December 31, 1997, the Bank had $3.25 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,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................ $63,000 $57,000 $42,500
Average Balance:
FHLB advances................ $58,859 $46,128 $34,560
</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 $4.0 million
at December 31, 1997, 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, 1997,
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
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.
<PAGE>
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
September 30, 1997 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,
1997, was approximately $50,000.
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, 1997, the Bank's lending limit under this restriction was $3.6
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
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.
<PAGE>
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.
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 currently qualifies for the minimum SAIF assessment.
<PAGE>
Additionally, the FDIC has imposed a FICO assessment on SAIF-
assessable deposits for the first quarter period of 1998 equal to 6.28 basis
points per $100 of domestic deposits, as compared to a FICO assessment on
BIF-assessable deposits for that same period equal to 1.26 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, 1997, 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 subsidiaries.
At December 31, 1997, the Bank had tangible capital of $23.7 million,
or 11.9% of adjusted total assets, which is approximately $20.7 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
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, 1997, the Bank had no
intangibles which were subject to these tests.
At December 31, 1997, the Bank had core capital equal to $23.7 million,
or 11.9% of adjusted total assets, which is $17.7 million above the minimum
leverage ratio requirement of 3% in effect on that date.
<PAGE>
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, 1997, the Bank had
$1.1 million 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, 1997.
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
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, 1997, the Bank had total risk-based capital of $24.8
million (including approximately $23.7 million in core capital and $1.1 million
in qualifying supplementary capital) and risk-weighted assets of $125.7 million
(with no converted off-balance sheet assets); or total capital of 19.8% of
risk-weighted assets. This amount was $14.7 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
<PAGE>
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.
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."
<PAGE>
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
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%.
<PAGE>
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, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 5.55% and a short-term
liquid assets ratio of 3.37%.
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, 1997, the Bank met the test and has always met the test since its
inception.
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."
<PAGE>
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.
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 any 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.
<PAGE>
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, 1997, 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.
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.
<PAGE>
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, 1997, the Bank had $3.25 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 7.56% and were 7.99% for calendar
1997.
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, 1997, dividends paid by the FHLB of
Indianapolis to the Bank totaled $244,000, which constituted a $56,000 increase
from the amount of dividends received in calendar year 1996. The $66,000
dividend received for the quarter ended December 31, 1997 reflects an annualized
rate of 8.00%, or 0.15% above the rate for the same period in 1996.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank, are permitted
to establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
<PAGE>
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.
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
exemptions. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
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.
<PAGE>
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 23% and its share of the residential mortgage market is
approximately 31.7%.
Employees
At December 31, 1997, the Bank had a total of 41 full-time, 5 part-time
and 1 seasonal employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
<PAGE>
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,
1997. 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, 1997 was approximately $1.96 million. See Note 4 of
the Notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage December 31, 1997
-------- -------- ------- -----------------
<S> <C> <C> <C>
Main Office:
648 North Jefferson Street 1974 5,200 $ 714,000
Huntington, Indiana 46750
Branch Offices:
1240 South Jefferson Street 1981 1,700 237,000
Huntington, Indiana 46750
100 Frontage Road 1995 3,000 1,013,000
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 the
Company's results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 37 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 5 through 15 of the attached Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1997, is incorporated by reference
in this Annual Report on Form 10- KSB as Exhibit 13.
Pages
in
Annual
Annual Report Section Report
- --------------------- ------
Report of Independent Auditors........................................... 16
Consolidated Balance Sheets as of December 31, 1997 and 1996............. 17
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995..................................................... 18
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995............................ 19
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995..................................................... 20
Notes to Consolidated Financial Statements............................... 21-36
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1997, 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 1998, 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 directors.
Position Held with the
Name Age(1) Bank and Company
---- ------ ----------------
Darrell E. Blocker 44 Senior Vice President,
Treasurer and Chief
Financial Officer
Dee Ann Hammel 45 Senior Vice President
and Chief Operating Officer
(1) At December 31, 1997
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.
<PAGE>
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.
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, 1997, 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 1998, 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 1998, 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 1998, 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
</TABLE>
- ----------------
* 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.
<PAGE>
(b) Reports on Form 8-K
For the year ended December 31, 1997, the Company filed the following:
(i) Form 8-K dated February, 3, 1997, regarding Fourth Quarter
Earnings for 1996 and Cash Dividend.
(ii) Form 8-K dated March 12, 1997, regarding Stock Repurchase
Program.
(iii) Form 8-K dated April 18, 1997, regarding First Quarter
earnings.
(iv) Form 8-K dated May 14, 1997, regarding Cash Dividend and
results of Shareholder Meeting.
(v) Form 8-K dated July 17, 1997, regarding Second Quarter
Earnings.
(vi) Form 8-K dated July 18, 1997, regarding Stock Repurchase
Program.
(vii) Form 8-K dated July 25, 1997, regarding Declaration of Cash
Dividend.
(viii) Form 8-K dated October 23, 1997, regarding Third Quarter
Earnings.
(ix) Form 8-K dated October 29, 1997, regarding 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 31, 1998 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 31, 1998 Date: March 31, 1998
By: /s/ Dan L. Stephan By: /s/ Richard G. Carnes
------------------ ---------------------
Dan L. Stephan, Director Richard G. Carnes, Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ J. David Carnes By: /s/ Samuel Preston, Jr.
------------------- -----------------------
J. David Carnes, Director Samuel Preston, Jr., Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ Randall C. Rider
--------------------
Randall C. Rider, Director
Date: March 31, 1998
</TABLE>
[GRAPHIC-PHOTO OF MR. ZAHN]
Stephen E. Zahn
Chairman of the
Board, President and
Chief Executive
Officer
We have now completed our second full year as a public company and it's hard to
imagine how 1997 could have been more successful. We not only met our budgeted
goals, but in most cases surpassed our targets by a wide margin. As a result,
earnings for 1997 set a new record of $2.2 million or $1.41 per share. This
represents an increase of 40% over 1996 operating earnings and an additional
$0.53 per share. Returns for 1997 were 8.12% on average equity and 1.21% on
average assets exceeding our budgeted goals of 7.19% and 0.98%, respectively.
During 1997, the Company continued to aggressively grow in order to leverage our
capital. Total assets increased at a near record pace of $29.9 million or 17.6%.
Assets of the Company reached $199.4 million as of December 31, 1997.
Our deposit base increased over the past twelve months by $22.2 million or
26.0%. This was accomplished through competitive product pricing, aggressive
marketing, excellent customer service and the introduction of new products and
services such as Generations Gold, a family club checking account and the
Anytime Line, our new 24 hour voice response system.
In addition to taking measures aimed at increasing our deposit accounts, equal
emphasis was directed toward loan portfolio growth. As a result, total mortgage
loans increased by $13.9 million and total commercial and consumer loans by
$14.0 million. Your Company continues to be the premier provider of financial
products in the markets we serve.
As we continue to grow, your officers and directors are inherently aware of our
responsibility to provide you, our shareholders, with an acceptable return on
your investment. To that end your Board of Directors continues to support strong
stock dividend and repurchase programs. Since becoming a publicly owned company
in June 1995, we have paid a dividend for nine consecutive quarters increasing
from $0.075 in 1995 to our current level of $0.085 per share. In 1997, the
market price of our stock rose from $13.63 on December 31, 996 to $22.13 on
December 31, 1997. This represents a 62% appreciation in value to our
shareholders. Also, over the past two years 449,798 shares of company stock has
been repurchased and the Company has been given approval to repurchase an
additional 145,273 shares. The Board of Directors will continue to assess the
viability of all shareholder enhancement strategies that promote long term
benefit to our shareholders.
1997 was rewarding in other ways as well. Throughout the year, your institution
emphasized a total commitment to Huntington County and our customers. We were
honored for our community support with the R.M. Hafner Business Citizen of the
Year award. Many of our employees are largely responsible for this award, due to
their dedicated service to community and charitable organizations. We also thank
our employees for their service to customers, a strong reason for our growth and
prosperity.
<PAGE>
In conclusion, I would like to recognize long time director Richard G. Carnes
who passed away this past year. Dick was a faithful and dedicated board member
for the past 25 years; his advice and expertise will be missed. I would like to
thank our employees for their dedication to this Company and the community,
which we serve, and to you our customers and stockholders for your continued
faith and support.
Sincerely,
/S/Stephen E. Zahn
- ------------------
Stephen E. Zahn
Chairman of the Board,
President, Chief Executive Officer
<PAGE>
TABLE OF CONTENTS
PRESIDENT'S LETTER TO STOCKHOLDERS.............. 1
FINANCIAL HIGHLIGHTS............................ 03
SELECTED CONSOLIDATED FINANCIAL INFORMATION..... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 5
REPORT OF INDEPENDENT AUDITORS.................. 16
CONSOLIDATED FINANCIAL STATEMENTS............... 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...... 21
STOCKHOLDER INFORMATION......................... 37
DESCRIPTION OF BUSINESS
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 principal business of First
Federal consists of attracting deposits from the general public and making loans
secured by residential real estate. Historically, First Federal has been among
the top real estate lenders and is the largest financial institution by asset
size in Huntington County. First Federal has been serving the Huntington
community for 85 years.
2
<PAGE>
FINANCIAL HIGHLIGHTS
[GRAPHIC-GRAPH SHOWING TOTAL ASSETS]
[GRAPHIC-GRAPH SHOWING NET INCOME]
[GRAPHIC-GRAPH SHOWING EARNINGS PER SHARE
[GRAPHIC-GRAPH SHOWING RETURN ON ASSETS]
[GRAPHIC-GRAPH SHOWING DIVIDENDS PAID]
[GRAPHIC-GRAPH SHOWING RETURN ON EQUITY]
[GRAPHIC-GRAPH SHOWING PER SHARE MARKET VALUE]
- --------------------------------------------------------------------------------
1 End of period
2 Reflects only income after conversion date of June 27, 1995
3 Reflects full year of 1995
4 Only one quarterly cash dividend was paid in 1995
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
December 31
1997 1996 1995 1994 1993
SELECTED FINANCIAL CONDITION DATA: (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $199,369 $ 169,544 $137,569 $115,095 $ 96,106
Loans receivable, net 174,539 146,855 122,641 104,402 87,725
Securities 15,385 12,388 6,882 5,395 4,275
Deposits 107,550 85,346 68,203 68,533 69,169
Total borrowings 63,522 55,996 37,500 35,500 17,500
Shareholders' equity 27,293 26,529 31,033 10,238 8,901
SELECTED OPERATIONS DATA:
Total interest income $ 14,316 $ 11,767 $ 9,644 $ 8,102 $ 7,425
Total interest expense 7,950 6,197 5,307 4,072 3,192
-------- --------- -------- -------- ---------
Net interest income 6,366 5,570 4,337 4,030 4,233
Provision for loan losses 265 235 251 263 196
-------- --------- -------- -------- ---------
Net interest income after
provision for loan losses 6,101 5,335 4,086 3,767 4,037
Total noninterest income 565 402 347 384 284
Total noninterest expense 3,062 3,208 2,364 1,938 1,846
-------- --------- -------- -------- ---------
Income before income taxes 3,604 2,529 2,069 2,213 2,475
Income tax expense 1,411 962 750 876 993
-------- --------- -------- -------- ---------
Net income $ 2,193 $ 1,567 $ 1,319 $ 1,337 $ 1,482
======== ========= ======== ======== =========
Basic earnings per common share (2) $ 1.41 $ .88 $ .39 N/A N/A
Diluted earnings per common share (2) $ 1.37 $ .87 $ .39 N/A N/A
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 1.21% 1.03 % 1.04% 1.22% 1.65%
Return on equity (ratio of net
income to average total equity) 8.12 5.43 6.55 13.77 18.07
Interest rate spread information:
Average during period 2.91 2.90 2.80 3.51 4.53
End of period 2.95 2.70 2.77 2.83 3.92
Net interest margin (1) 3.63 3.81 3.57 3.82 4.88
Ratio of operating expense to
average total assets 1.69 2.12 1.87 1.81 2.06
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.97 121.48 117.70 107.93 105.76
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Quality Ratios:
Non-performing assets to total assets
at end of period .58 .42 .21 .29 .07
Allowance for loan losses to
non-performing loans 102.50 144.00 310.21 205.93 672.06
Allowance for loan losses to
loans receivable, net .68 .70 .72 .66 .52
Capital Ratios:
Shareholders' equity to total assets
at end of period 13.69 15.65 22.56 8.90 9.26
Average shareholders' equity to average
total assets 14.89 19.03 15.92 8.89 9.16
Other Data:
Number of full-service offices 3 3 3 2 2
</TABLE>
(1)Net interest income divided by average interest-earning assets.
(2)All amounts have been restated to reflect the adoption of SFAS No. 128,
Earnings Per Share. 1995 earnings per share amounts are subsequent to
conversion.
4
<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. Provisions for loan losses, service charge and fee income, other
noninterest income, operating expenses and income taxes also affect First
Federal's earnings. 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.
Prevailing economic conditions as well as federal regulations concerning
monetary and fiscal policies and financial institutions significantly affect
First Federal. The year of 1997 started with the economy moderately reducing
potential inflationary pressures carried over from the fourth quarter 1996. The
economy has stayed relatively stable during 1997 overall. Although at times
throughout 1997 we have had fluctuations, the economy was generally 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.
Liquidity levels and funds available to originate loans may also impact lending
activities. The primary sources of funds for lending activities include
deposits, borrowed funds, loan payments and funds provided from operations.
5
<PAGE>
FINANCIAL CONDITION
First Federal's total assets increased from $169.5 million at December 31, 1996
to $199.4 million at December 31, 1997, an increase of $29.9 million, or 17.6%.
The increase was due primarily to the increases in loans of $27.7 million or
18.8% and securities of $3.0 million or 24.2%. Increased advances from the
Federal Home Loan Bank ("FHLB") totaling $7.0 million and increased deposits of
$22.2 million funded this growth.
Approximately one half of the increase in the loan portfolio was comprised of
mortgage loans, which increased $13.9 million. Mortgage loans secured by
one-to-four family residences increased $9.8 million to $109.1 million at
December 31, 1997 and represent 62.5% of First Federal's loan portfolio. The
increase in one to four-family mortgage loans was comprised of a $1.5 million
increase in adjustable rate loans and an $8.3 million increase in fixed rate
loans. Mortgage loans secured by multi-family and commercial real estate
increased $4.0 million to $19.3 million at December 31, 1997 and construction
loans secured by residential and non-residential real estate decreased $153,000
to $10.6 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 $14.0 million to $41.2 million at
December 31, 1997. Automobile loans comprise $11.6 million of total consumer
loans while home equity and second mortgage loans represent another $6.2 million
at December 31, 1997.
Total deposits increased $22.2 million to $107.5 million at December 31, 1997.
This year's 26.0% growth was due to aggressive advertising and pricing of
selected products for a limited time slightly above local market competitors.
Total borrowed funds increased $7.5 million, from $56.0 million to $63.5 million
at December 31, 1997. Borrowed funds consist of advances from the FHLB with
various interest rates and stated maturities ranging through 2002. The increase
in advances was utilized to fund increases in loans and investments, as total
deposit growth was not 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, 1997, was $66 million.
6
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED
DECEMBER 31, 1997 AND 1996
General. Net income for the year ended December 31, 1997 was a record $2.19
million, an increase of $625,000 compared to net income for the year ended
December 31, 1996. This increase was primarily the result of an increase in
noninterest income of $163,000, increases in net interest income before
provision for loan losses of $795,000, and a decrease in non-interest expenses
of $145,000, partially offset by increases in provision for loan losses of
$30,000 and income tax expense of $448,000. Further details regarding changes in
the major categories of income and expense are discussed below.
Interest Income. Interest income increased $2.55 million, or 21.66%, from $11.77
million to $14.32 million for the year ended December 31, 1997. The increase in
interest income was primarily the result of an increase in interest income on
mortgage loans of $1.46 million and an increase in interest income on consumer
and other loans of $230,000. 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 8.16% in 1996 to 8.28% in 1997, due to the
high volume of loans in the portfolio which were originated or repriced at a
higher interest rate than 1996. Yields are 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 $1.75 million, or 28.3%, from $6.20
million to $7.95 million for the year ended December 31, 1997. The majority of
this increase was the result of higher interest expense on deposits. Interest
expense on deposits increased $954,000 during 1997 due primarily to the higher
average balance of deposits during the year. The increase in interest expense on
borrowed funds was due to a combination of a significantly larger average
balance of borrowed funds during the year, which increased by $12.73 million
from $46.13 million for 1996 to $58.86 million for 1997, and the higher average
rate paid for borrowed funds during the year.
Net interest income. Net interest income increased $795,000 or 14.28% from $5.57
million to $6.37 million for the year ended December 31, 1997. First Federal's
net interest rate spread improved during 1997. The interest rate spread averaged
2.91% during 1997 compared to 2.90% during 1996 and was 2.95% at December 31,
1997. Interest-earning asset yields increased from 8.06% in 1996 compared to
8.16% in 1997, while the average costs of interest bearing liabilities increased
from 5.16% in 1996 compared to 5.25% in 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1997 was $265,000 compared to $235,000 in the prior year, an
increase of $30,000. The provision for loan losses, less net charge-offs for the
year, increased the allowance for loan losses $167,000 to $1.19 million at
December 31, 1997, a 16.23% increase compared to December 31, 1996. 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 $403,000 in 1996 to
$566,000 in 1997. This increase of $163,000 was primarily the result of fees and
service charges on loan and deposit accounts increasing by $149,000 during 1997
to $423,000 compared to 1996 income of $274,000.
<PAGE>
Noninterest Expense. Noninterest expense decreased from $3.21 million in 1996 to
$3.06 million in 1997. This decrease of $145,000, or 4.55%, was primarily the
result of the one time FDIC assessment for the recapitalization of the SAIF fund
of $453,000 taken in September 1996. The increase in salaries and employee
benefits of $190,000 was mostly a result of additional staff and normal salary
increases.
Income Tax Expense. Income tax expense increased from $962,000 in 1996 to $1.41
million in 1997 due primarily to increased earnings before income taxes.
7
<PAGE>
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.
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 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 liabilities remained almost stable at 5.15% in 1995 compared
to 5.16% in 1996.
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.
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.
<PAGE>
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 $0.23 per $100 of insured
deposits in 1996 to $0.0648 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.
8
<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, 1997, adjustable rate loans comprised 52.26% of the gross loan
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 balance sheet growth.
Presented in the following table, as of December 31, 1997, 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.
9
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
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> <C>
+300 bp $16,588 $(11,416) (41) 8.71 (504) bp
+200 20,681 (7,323) (26) 10.60 (315)
+100 24,557 (3,447) (12) 12.30 (145)
0 28,004 - - 13.75 -
-100 30,719 2,715 10 14.84 109
-200 32,761 4,757 17 15.61 186
-300 34,776 6,772 24 16.36 261
</TABLE>
In the event of a 300 basis point change in interest rates based upon estimates
as of December 31, 1997, the Bank would experience a 24% increase in NPV in a
declining rate environment and a 41% 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 1997. 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. 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.
10
<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 daily average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1 9 9 7 1 9 9 6 1 9 9 5
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $159,095 $13,167 8.28% $133,508 $10,897 8.16% $111,496 $8,990 8.06%
Securities 10,659 709 6.66 8,479 551 6.50 3,708 209 5.64
FHLB stock 3,054 244 7.99 2,411 189 7.84 2,006 158 7.88
Other interest-earning
assets 2,670 195 7.29 1,632 130 7.97 4,143 287 6.93
-------- ------- -------- ------- -------- ------
Total interest earning
assets(1) 175,478 14,315 8.16 146,030 11,767 8.06 121,353 9,644 7.95
Non-interest earning assets 6,001 5,587 5,088
Total assets $181,479 $151,617 $126,441
======== ======== ========
Interest-Bearing Liabilities:
Savings $ 9,655 265 2.75 $ 10,465 288 2.75 $ 12,752 375 2.94
Money market 14,232 719 5.05 8,793 437 4.97 4,246 137 3.23
Demand and NOW 8,960 148 1.65 8,276 184 2.22 8,101 208 2.57
Time deposit accounts 59,608 3,416 5.73 46,549 2,685 5.77 43,448 2,469 5.68
Borrowings 58,859 3,402 5.78 46,128 2,603 5.64 34,560 2,118 6.13
-------- ------- -------- ------- -------- ------
Total interest bearing
liabilities 151,314 7,950 5.25 120,211 6,197 5.16 103,107 5,307 5.15
Non-interest bearing liabilities 3,142 2,539 3,208
-------- -------- --------
Total liabilities 154,456 122,750 106,315
-------- -------- --------
Total equity 27,023 28,867 20,126
-------- -------- --------
Total liabilities and
equity $181,479 $151,617 $126,441
======== ======== ========
Net interest income $ 6,365 $ 5,570 $4,337
======= ======= ======
Net interest rate spread 2.91% 2.90% 2.80%
Net interest earning assets $ 24,164 $ 25,819 $ 18,246
======== ======== ========
Net yield on average
interest-earning assets 3.63% 3.81% 3.57%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.16x 1.21x 1.18x
==== ==== ====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
11
<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,
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.38% 8.15% 8.09%
Securities and FHLB stock 6.90 6.64 6.61
Other interest-earning assets 5.65 7.01 6.01
Combined weighted average yield
on interest-earning assets 8.26 8.01 7.98
Weighted average rate on:
Savings deposits 2.75 2.75 2.74
Money market 5.10 5.01 3.45
Demand and NOW deposits 1.53 2.23 2.26
Time deposit accounts 5.76 5.69 5.83
Borrowings 5.83 5.84 5.99
Combined weighted average rate on
interest-bearing liabilities 5.31 5.31 5.21
Spread 2.95 2.70 2.77
</TABLE>
Due in part to more loans being made to consumer and commercial customers and
the increase in rates overall on the assets and liabilities, the Bank has
experienced a widening of its average interest rate spread from 2.70% at
December 31, 1996 to 2.95% at December 31, 1997. A narrowing of the Bank's
interest rate spread may have the effect of reducing net interest income in
future periods.
12
<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,
1997 vs. 1996 1996 vs. 1995
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 $2,116 $154 $2,270 $1,795 $ 112 $1,907
Securities 145 13 158 306 36 342
FHLB stock 51 4 55 32 (1) 31
Other interest-
earning assets 77 (12) 65 (209) 52 (157)
------ ---- ------ ------ ----- ------
Total interest-
earning assets $2,389 $159 $2,548 $1,924 $ 199 $2,123
====== ==== ====== ====== ===== ======
Interest-bearing liabilities:
Savings $ (22) $ (1) $ (23) $ (64) $ (23) $ (87)
Money market 275 7 282 200 100 300
Demand and
NOW 14 (50) (36) 4 (28) (24)
Certificate
accounts 748 (17) 731 177 39 216
Borrowings 734 65 799 781 (296) 485
------ ---- ------ ------ ----- ------
Total interest-
bearing
liabilities $1,749 $ 4 $1,753 $1,098 $(208) 890
====== ==== ====== ====== ===== ======
Net interest income $ 795 $1,233
</TABLE>
13
<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, 1997, First Federal's average
liquidity ratio was 5.55%, of which 60.74% was comprised of short-term
investments.
During the year ended December 31, 1997, there was a net decrease in cash and
cash equivalents of $1.9 million. The major source of funds during the year
included net additional borrowings of $7.0 million from the FHLB and an increase
in deposits of $22.2 million which were used to fund a net increase of $28.0
million in loans and a $3.0 million increase in securities.
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 was
a net increase of $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, 1995. These funds were used
primarily to support the $18.5 million net increase 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, 1997,
First Federal's tangible capital ratio was 11.9%, its core capital ratio was
11.9% and its risk-based capital to risk weighted assets ratio was 19.8%.
Therefore, First Federal's capital significantly exceeds all capital
requirements currently in effect.
During 1997 the Company completed its third stock repurchase program which began
in September 1996. The Company also received approval from the OTS to begin its
fourth stock repurchase program. The stock when purchased becomes treasury stock
and can be used for general corporate purposes. The fourth repurchase program
was approved in July 1997 for 10% of the outstanding shares or 176,273 shares.
The Company had repurchased 31,000 of these shares at the end of December 1997.
At December 31, 1997, the Company had 449,798 shares of treasury stock and
1,732,327 shares outstanding.
<PAGE>
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.
14
<PAGE>
IMPACT OF THE YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed primarily by a third party servicer. The Company and the
Bank also utilize software and hardware which is under maintenance agreements
with third party vendors, consequently the Company and Bank are very dependent
on those vendors to conduct its business. The Company has already contacted each
vendor to request time tables for year 2000 compliance and expected costs, if
any, to be passed along to the Company. To date, the Company has been informed
that its primary service providers anticipate that all reprogramming efforts
will be completed by December 31, 1998, allowing the Company adequate time for
testing. Certain other vendors have not yet responded, however, the Company will
pursue other options if it appears that these vendors will be unable to comply.
Management does not expect these costs to have a significant impact on its
financial position or results of operations however, there can be no assurance
that the vendors' systems will be 2000 compliant, consequently the Company could
incur incremental costs to convert to another vendor. The Company has identified
certain hardware and software equipment that will not be Year 2000 compliant and
intends to purchase new equipment and software prior to December 31, 1998. These
capital expenditures are not expected to be material.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and advise readers that various factors, including regional
and national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities and
competitive and regulatory factors, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
15
<PAGE>
[GRAPHIC-LOGO OF CROWE CHIZEK]
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. as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Indiana
Bancorp, Inc. as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
February 6, 1998
16
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Interest-earning cash and cash equivalents $ 3,036,847 $ 4,017,411
Noninterest earning cash and cash equivalents 1,782,839 2,654,963
------------ ------------
Total cash and cash equivalents 4,819,686 6,672,374
Interest-earning deposits in financial institutions 100,000 100,000
Securities available for sale 14,628,590 11,496,031
Securities held to maturity (fair value: $756,846 - 1997
and $891,236 - 1996) 756,846 892,036
Loans receivable, net of allowance for loan losses
of $1,194,000 in 1997 and $1,027,300 in 1996 174,538,907 146,854,690
Accrued interest receivable 511,950 363,563
Premises and equipment, net 1,964,374 2,009,026
Other assets 2,048,244 1,156,400
------------ ------------
Total assets $199,368,597 $169,544,120
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 2,502,911 $ 1,847,734
Savings, NOW and MMDA 35,968,057 30,274,738
Time deposits 69,078,818 53,223,768
------------ ------------
Total deposits 107,549,786 85,346,240
Borrowed funds 63,521,682 55,995,650
Accrued expenses and other liabilities 1,004,495 1,673,114
------------ ------------
Total liabilities 172,075,963 143,015,004
Shareholders' equity
Preferred stock, no par value, 500,000 shares authorized;
-0- shares issued - -
Common stock, $.01 par value: 4,000,000 shares
authorized; 2,182,125 shares issued; shares
outstanding: 1,732,327 - 1997 and 1,810,586 - 1996 21,821 21,821
Additional paid in capital 21,350,326 21,253,458
Retained earnings, substantially restricted 13,956,340 12,338,919
Unearned employee stock ownership plan shares (1,309,275) (1,454,750)
Unearned recognition and retention plan shares (621,817) (820,109)
Net unrealized appreciation on securities available
for sale, net of tax 41,672 15,799
Treasury stock, 449,798 and 371,539 common shares, at
cost, at December 31, 1997 and 1996 (6,146,433) (4,826,022)
------------ ------------
Total shareholders' equity 27,292,634 26,529,116
------------ ------------
Total liabilities and shareholders' equity $199,368,597 $169,544,120
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans, including fees $13,167,279 $10,897,032 $ 8,989,561
Taxable securities 921,263 707,048 331,244
Non-taxable securities 32,587 33,394 36,132
Deposits with banks 194,647 129,581 286,837
----------- ----------- -----------
Total interest income 14,315,776 11,767,055 9,643,774
Interest expense
Deposits 4,547,834 3,593,583 3,188,996
Borrowed funds 3,402,363 2,603,092 2,117,798
----------- ----------- -----------
Total interest expense 7,950,197 6,196,675 5,306,794
----------- ----------- -----------
Net interest income 6,365,579 5,570,380 4,336,980
----------- ----------- -----------
Provision for loan losses 265,300 235,155 250,648
----------- ----------- -----------
Net interest income after
provision for loan losses 6,100,279 5,335,225 4,086,332
Noninterest income
Service charges on deposit accounts 245,304 151,666 140,127
Loan servicing fees 177,584 122,190 97,288
Net realized gain on sale of securities - 348 -
Other 142,698 128,363 109,637
----------- ----------- -----------
Total noninterest income 565,586 402,567 347,052
Noninterest expense
Salaries and employee benefits 1,530,579 1,340,887 1,099,642
Occupancy 318,945 279,894 229,918
Data processing 311,537 274,985 160,963
Insurance expense 54,829 605,593 262,652
Professional fees 147,319 137,080 85,114
Correspondent bank charges 142,466 143,398 136,757
Other expense 556,648 426,320 389,291
----------- ----------- -----------
Total noninterest expense 3,062,323 3,208,157 2,364,337
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income taxes 3,603,542 2,529,635 2,069,047
Income tax expense 1,410,563 962,090 749,759
----------- ----------- -----------
Net income $ 2,192,979 $ 1,567,545 $ 1,319,288
=========== =========== ===========
Basic earnings per common share $ 1.41 $ .88 $ .39
====== ===== =====
Diluted earnings per common share $ 1.37 $ .87 $ .39
====== ===== =====
</TABLE>
The accompanying nots are an integral part of these consolidated financial
statements.
18
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
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, 1995 ............ $ -- $ $ 10,238,265 $ -- $ --
Proceeds from the sale of
2,182,125 shares of common stock,
net of conversion costs ........... 21,821 21,189,036 -- -- --
Purchase of 174,570 ESOP shares ..... -- -- -- (1,745,700) --
Cash dividends ($.075 per share) .... -- -- (163,660) -- --
14,548 shares committed to
be released under the ESOP ......... -- 26,248 -- 145,475 --
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. -- -- -- -- --
Net income .......................... -- 1,319,288 -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 .......... 21,821 21,215,284 11,393,893 (1,600,225) --
Cash dividends ($.305 per share) .... -- -- (622,519) -- --
Purchase of 371,539 shares
of treasury stock .................. -- -- -- -- --
14,548 shares committed to be
released under the ESOP ............ -- 38,174 -- 145,475 --
Purchase of 75,936 shares for RRP ... -- -- -- -- (1,025,136)
Amortization of RRP contributions ... -- -- -- -- 205,027
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. -- -- -- -- --
Net income .......................... -- -- 1,567,545 -- --
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .......... 21,821 21,253,458 12,338,919 (1,454,750) (820,109)
Cash dividends ($.325 per share) .... -- -- (575,558) -- --
Purchase of 78,859 shares of
treasury stock ..................... -- -- -- -- --
Sale of 600 shares of treasury stock -- 1,000 -- -- --
14,548 shares committed to be
released under the ESOP ............ -- 95,868 -- 145,475 --
Purchase of 500 shares for RRP ...... -- -- -- -- (7,625)
Amortization of RRP contributions ... -- -- -- -- 205,917
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. -- -- -- -- --
Net income .......................... -- -- 2,192,979 -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 .......... $ 21,821 $ 21,350,326 $ 13,956,340 $ (1,309,275) $ (621,817)
============ ============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
on Securities
Available Total
For Sale, Treasury Shareholders'
Net of Tax Stock Equity
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 ............ $ -- $ -- $ 10,238,265
Proceeds from the sale of
2,182,125 shares of common stock,
net of conversion costs ........... -- -- 21,210,857
Purchase of 174,570 ESOP shares ..... -- -- (1,745,700)
Cash dividends ($.075 per share) .... -- -- (163,660)
14,548 shares committed to
be released under the ESOP ......... -- -- 171,723
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. 2,272 -- 2,272
Net income .......................... -- -- 1,319,288
------------ ------------ ------------
Balance, December 31, 1995 .......... 2,272 -- 31,033,045
Cash dividends ($.305 per share) .... -- -- (622,519)
Purchase of 371,539 shares
of treasury stock .................. -- (4,826,022) (4,826,022)
14,548 shares committed to be
released under the ESOP ............ -- -- 183,649
Purchase of 75,936 shares for RRP ... -- -- (1,025,136)
Amortization of RRP contributions ... -- -- 205,027
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. 13,527 -- 13,527
Net income .......................... -- -- 1,567,545
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance, December 31, 1996 .......... 15,799 (4,826,022) 26,529,116
Cash dividends ($.325 per share) .... -- -- (575,558)
Purchase of 78,859 shares of
treasury stock ..................... -- (1,328,211 (1,328,211)
Sale of 600 shares of treasury stock -- 7,800 8,800
14,548 shares committed to be
released under the ESOP ............ -- -- 241,343
Purchase of 500 shares for RRP ...... -- -- (7,625)
Amortization of RRP contributions ... -- -- 205,917
Change in net unrealized
appreciation on securities available
for sale, net of tax .............. 25,873 -- 25,873
Net income .......................... -- -- 2,192,979
------------ ------------ ------------
Balance, December 31, 1997 .......... $ 41,672 $ (6,146,433) $ 27,292,634
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,192,979 $ 1,567,545 $ 1,319,288
Adjustments to reconcile net income
to net cash from operating activities
Net (gain) loss on sale of premises and equipment (152) 421 2,289
Gain on sale of securities - (348) -
Gain on sale of foreclosed real estate (1,335) (6,879) -
Provision for loan losses 265,300 235,155 250,648
Depreciation and amortization 144,898 186,555 113,950
Reduction of obligation under ESOP 241,343 183,649 171,723
Amortization of RRP 205,917 205,027 -
Net change in other assets (381,807) (247,136) 32,586
Net change in accrued interest receivable (148,387) (130,639) (83,517)
Net change in accrued expenses and other liabilities (668,619) 823,528 8,009
----------- ----------- -----------
Total adjustments (342,842) 1,249,333 495,688
----------- ----------- -----------
Net cash from operating activities 1,850,137 2,816,878 1,814,976
Cash flows from investing activities
Proceeds from maturities and principal payments
of securities held to maturity 135,190 93,870 67,770
Proceeds from maturities and principal payments
of securities available for sale 1,716,890 2,600,000 -
Proceeds from sale of securities available for sale - 2,100,348 -
Purchases of securities available for sale (4,803,829) (10,316,095) (1,551,154)
Net change in interest earning deposits in financial
institutions - - (100,000)
Proceeds from sale of participation loans 351,500 - -
Purchase of loans (3,261,911) - (2,690,155)
Net change in loans (25,136,614) (24,469,186) (15,799,442)
Expenditures on premises and equipment (110,826) (22,455) (860,152)
Proceeds from sale of premises and equipment 5,948 50 4,150
Proceeds from sale of foreclosed real estate 98,843 26,990 -
----------- ----------- -----------
Net cash from investing activities (31,004,809) (29,986,478) (20,928,983)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities
Advances from FHLB 56,000,000 58,000,000 17,000,000
Repayment of FHLB advances (48,998,968) (39,500,000) (15,000,000)
Dividends paid (575,558) (622,519) (163,660)
Proceeds from issuance of stock, net of
conversion costs and stock acquired by ESOP - - 19,465,157
Purchase of treasury stock (1,335,836) (5,851,158) -
Sale of treasury stock 8,800 - -
Net change in deposits 22,203,546 17,143,310 (329,573)
----------- ----------- -----------
Net cash from financing activities 27,301,984 29,169,633 20,971,924
----------- ----------- -----------
Net change in cash and cash equivalents (1,852,688) 2,000,033 1,857,917
Cash and cash equivalents at beginning of year 6,672,374 4,672,341 2,814,424
----------- ----------- -----------
Cash and cash equivalents at end of year $4,819,686 $6,672,374 $4,672,341
=========== =========== ==========
Cash paid for:
Interest $7,909,627 $6,154,009 $5,268,413
Income taxes 1,573,308 1,034,925 803,594
Non-Cash Transactions:
Investment in obligation relative to limited partnership $525,000 $ - $ -
Transfer from loans to other real estate 97,508 20,112 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
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 77% of
the loan portfolio at December 31, 1997 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. Net cash flows are reported for customer loan
and deposit transactions as well as interest-earning deposits in financial
institutions.
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.
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.
<PAGE>
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
chargeoffs 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.
21
<PAGE>
Note 1 - Summary of Signifcant Accounting Policies (continued)
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.
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 when events indicate the carrying amount may not be
recoverable.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates.
Off-Balance-Sheet Financial Instruments: Off-balance sheet financial instruments
represent credit instruments, such as loan commitments and standby letters of
credit and similar items. The face amount of credit instruments represents the
exposure to loss assuming customer collateral or ability to repay is worthless.
No gain or loss is recognized on derivatives until cash payments are made or
received, except for credit losses which are recognized when probable.
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 stockbased compensation.
Earnings Per Share: Basic earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share further assumes issue of any
dilutive potential common shares. The accounting standard for computing earnings
per share was revised for 1997, and all earnings per share previously reported
are restated to follow the new standard.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
<PAGE>
Future Accounting Changes: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus holding gains
and losses on available for sale securities) and may require redetermination of
industry segment financial information.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
22
<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 - 1997
U.S. Government agencies $ 4,047,866 $ - $ (3,507) $ 4,044,359
Mutual funds 735,584 - - 735,584
Mortgage-backed 6,526,147 74,992 (2,492) 6,598,647
Equity securities 3,250,000 - - 3,250,000
----------- ------ -------- -----------
$14,559,597 $74,992 $ (5,999) $14,628,590
=========== ======= ======== ===========
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
=========== ======= ======== ===========
Held to maturity - 1997
States and political
subdivisions $ 639,000 $ - $ - $ 639,000
Other debt securities 117,846 - - 117,846
----------- ------ -------- -----------
$ 756,846 $ - $ - $ 756,846
=========== ======= ======== ===========
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
=========== ======= ======== ===========
</TABLE>
23
<PAGE>
Note 2 - SECURITIES (continued)
The amortized cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may 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.
<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 $ 2,999,272 $ 2,998,200 $160,000 $160,000
Due from one to five years 1,048,594 1,046,159 - -
Due from five to ten years - - 596,846 596,846
Mortgage backed securities 6,526,147 6,598,647 - -
----------- ----------- -------- --------
$10,574,013 $10,643,006 $756,846 $756,846
=========== =========== ======== ========
</TABLE>
Sales of securities available for sale were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<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>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $109,079,816 $ 99,325,141
Secured by other properties 19,339,654 15,293,158
Construction - residential 8,661,893 8,256,360
Construction - nonresidential 1,934,354 2,492,913
------------ ------------
139,015,717 125,367,572
Less
Loans in process (355,314) (208,005)
Undisbursed portion of construction
loans (3,980,594) (4,380,437)
Net deferred loan origination fees (125,011) (113,593)
------------ ------------
Total mortgage loans 134,554,798 120,665,537
</TABLE>
24
<PAGE>
Note 3 - Loans Receivable, Net (continued)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer and other loans
Principal balances
Automobile $ 11,572,940 $ 8,820,024
Credit card 1,297,424 982,421
Commercial 14,579,936 9,303,727
Home equity and second mortgage 6,162,479 4,466,938
Mobile home 2,945,635 264,021
Other 4,619,695 3,379,322
------------ ------------
Total consumer and other loans 41,178,109 27,216,453
------------ ------------
Less
Allowance for loan losses (1,194,000) (1,027,300)
------------ ------------
Loans receivable, net $174,538,907 $146,854,690
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,027,300 $ 880,566 $ 694,000
Provision charged to income 265,300 235,155 250,648
Charge-offs (136,601) (133,561) (73,846)
Recoveries 38,001 45,140 9,764
----------- ---------- ---------
Balance at end of year $ 1,194,000 $1,027,300 $ 880,566
=========== ========== =========
</TABLE>
At December 31, 1997, loans individually evaluated for impairment totaled
approximately $949,000. The average balance for impaired loans during 1997 was
approximately $594,000. At year end 1997, the portion of the allowance allocated
to impaired loans was $75,000. Impaired loans were not material in 1996.
Interest recognized on the accrual and cash bases for impaired loans was not
material for all years presented.
<PAGE>
Note 4 - Premises and Equipment, Net
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 458,331 $ 458,331
Buildings and leasehold improvements 1,625,036 1,568,122
Furniture, fixtures and equipment 718,310 681,104
Total costs 2,801,677 2,707,557
Accumulated depreciation and amortization (837,303) (698,531)
---------- ----------
$1,964,374 $2,009,026
========== ==========
</TABLE>
25
<PAGE>
Note 5 - Deposits
Time deposits in denominations of $100,000 or more totaled $27,358,000 and
$14,705,000 at December 31, 1997 and 1996.
At December 31, 1997, scheduled maturities of time deposits were, for the years
ended December 31:
1998 $ 59,821,634
1999 6,202,533
2000 2,100,384
2001 652,851
2002 301,416
------------
$ 69,078,818
============
Note 6 - Borrowed Funds
Borrowed funds consisted of advances from the Federal Home Loan Bank of
Indianapolis totaling $62,996,682 at December 31, 1997 and a demand note of
$525,000 for total borrowings of $63,521,682. All 1996 borrowings were advances
from the Federal Home Loan Bank of Indianapolis.
The majority of the advances have variable interest rates ranging from 5.06% to
6.54%. Scheduled maturities at December 31, 1997 are as follows:
1998 $ 51,899,170
1999 8,099,171
2000 599,170
2001 399,171
2002 2,000,000
------------
$ 62,996,682
============
At December 31, 1997, collateral consisting of qualifying first mortgage loans
totaling approximately $107.7 million and U.S. Government and Agency securities,
including mortgage-backed securities, totaling approximately $10.8 million is
available to the Federal Home Loan Bank of Indianapolis to secure advances
outstanding. The Bank may borrow up to an aggregate of $66 million from the
Federal Home Loan Bank.
The demand note relates to an investment in a limited partner interest in a
partnership formed for the construction, ownership and management of affordable
housing projects. The original amount of the note was $750,000 with $225,000
funded as of December 31, 1997. Payments are required within five days of
written demand; however, the note may be prepaid in full or in part at the
option of maker at any time without penalty. The obligation to make payment is
absolute and unconditional. No interest is required by the note.
26
<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 trustees
of the Financial Institutions Retirement Fund administer the plan. 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 $29,229, $52,465,
and $50,895 for the years ended December 31, 1997, 1996 and 1995.
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 $22,776, $17,846 and
$13,787 for the years ended December 31, 1997, 1996 and 1995.
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 balance of the plans was
approximately $182,000 and $166,000 at year end 1997 and 1996. The cost of the
plans charged to expense was $48,219, $64,204 and $56,484 for the years ended
December 31, 1997, 1996 and 1995. 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 $847,000 and $809,000 at December 31, 1997
and 1996. The income derived from the investment in life insurance included in
other income was $37,806, $40,071 and $35,981 for the years ended December 31,
1997, 1996 and 1995.
Employee Stock Ownership Plan (ESOP): As part of the conversion transaction in
1995, 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.
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.
<PAGE>
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. Benefits generally become 100% vested
after five years of credited service. A participant who terminates employment
for reasons other than death, normal retirement (or early retirement), or
disability prior to the completion of five years of credited services does not
receive any benefits under the ESOP. Forfeitures are reallocated among the
remaining participating employees, in the same proportion as contributions.
Benefits are payable in the form of stock except for fractional shares which are
paid in cash upon termination of employment.
27
<PAGE>
Note 7 - Employee Benefits (continued)
During the years ended December 31, 1997 and 1996, contributions, including
dividends on unearned ESOP shares, of $98,196 and $96,134 were made to the ESOP.
ESOP compensation expense was $194,064, $134,308 and $158,613 for 1997, 1996 and
1995. The 14,548 shares released for allocation at December 31, 1997 will be
allocated on January 1, 1998.
Shares held by the ESOP at year end are as follows:
1997 1996
- --------------------------------------------------------------------------------
Allocated shares 29,096 14,548
Shares released for allocation 14,548 14,548
Unreleased shares 130,926 145,474
---------- ----------
Total ESOP shares 174,570 174,570
========== ==========
Fair value of
unreleased shares $2,896,738 $1,982,083
========== ==========
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 compensation committee of
the Company administers the RRP. 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. In 1997, an
additional 500 shares were awarded at $15.25. The expense associated with the
RRP was $205,917 and $205,027 in 1997 and 1996.
Note 8 - Income Taxes
Income tax expense for the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal $1,154,613 $ 850,741 $ 664,372
Deferred federal (55,894) (100,203) (89,538)
Current state 327,116 239,901 197,302
Deferred state (15,272) (28,349) (22,377)
---------- ---------- ----------
Income tax expense $1,410,563 $ 962,090 $ 749,759
========== ========== ==========
</TABLE>
28
<PAGE>
Note 8 - Income Taxes (continued)
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>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate $1,225,204 $ 860,076 $ 703,476
Tax effect of:
State tax, net of federal income tax effect 205,817 139,624 115,450
Other, net (20,458) (37,610) (69,167)
---------- ---------- ----------
Income tax expense $1,410,563 $ 962,090 $ 749,759
========== ========== ==========
Effective tax rate 39.1% 38.0% 36.2%
==== ==== ====
</TABLE>
The components of the net deferred tax asset recorded in the balance sheet as of
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 72,055 $ 65,750
Bad debts 196,844 130,711
Deferred loan fees 49,517 44,994
Unearned compensation 81,564 81,211
Other 9,698 2,763
--------- ---------
409,678 325,429
Deferred tax liabilities
Depreciation (120,333) (121,114)
Other (41,185) (10,358)
--------- ---------
(161,518) (131,472)
Valuation allowance - -
--------- ---------
Net deferred tax asset $ 248,160 $ 193,957
========== ==========
</TABLE>
<PAGE>
Retained earnings at December 31, 1997 and 1996 include 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, 1997 and 1996.
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 in 1998.
29
<PAGE>
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.
At year end, actual Bank 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
1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $24.8 19.8% $10.1 8.0% $12.6 10.0%
Tier 1 (core) capital
(to risk weighted assets) 23.7 18.9 5.0 4.0 7.5 6.0
Tier 1 (core) capital
(to adjusted total assets) 23.7 11.9 6.0 3.0 N/A N/A
Tangible capital
(to adjusted total assets) 23.7 11.9 3.0 1.5 N/A N/A
Tier 1 (core) capital
(to average assets) 23.7 13.0 7.3 4.0 9.1 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<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 N/A N/A
Tangible capital
(to adjusted total assets) 21.2 12.5 2.5 1.5 N/A N/A
Tier 1 (core) capital
(to average assets) 21.2 13.9 6.1 4.0 7.7 5.0
</TABLE>
The Bank at year-end 1997 and 1996 was categorized as well capitalized.
<PAGE>
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by 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, 1997, approximately $9,058,000
of the Bank's retained earnings was potentially available for distribution to
the Company.
30
<PAGE>
Note 10 - Commitments and Contingencies and Financial Instruments with
Off-Balance-Sheet Risk
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate commitments $ 4,159,000 $ 2,440,000
Variable rate commitments 14,916,000 16,604,000
Credit card arrangements 2,636,000 1,698,000
Letters of credit 760,000 50,000
</TABLE>
\
Most loan commitments have terms up to 60 days. At year-end 1997, fixed
commitments have contractual rates ranging from 7.50% to 9.25%. Credit cards are
fixed at 14.9%. Most variable rate arrangements are tied to national monthly
median cost of funds, prime or the U.S. Treasury bill rate and have spreads
between 0% and 5%.
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 requires pro forma disclosures for companies that do not adopt
its fair value accounting method for stock-based employee compensation.
Accordingly, the following pro forma information presents net income and
earnings per share had the fair value method been used to measure compensation
cost for stock option plans. No compensation cost was actually recognized for
stock options for 1997 or 1996.
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income as reported $2,192,979 $1,567,545
Pro forma net income 2,022,367 1,398,379
Basic earnings per common share as reported $ 1.41 $ .88
Diluted earnings per common share as reported 1.37 .87
Pro forma basic earnings per common share 1.30 .78
Pro forma diluted earnings per common share 1.26 .78
</TABLE>
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
31
<PAGE>
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 1997, 25,780 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
Granted 1,500 15.25 4.82
Exercised (100) 11.75
------- ---------------
Outstanding, end of 1997 192,332 $11.75 - $15.25
======= ====== ======
</TABLE>
The fair value of options granted during 1997 is estimated using the following
weighted-average information: risk-free interest rate of 5.75%, expected life of
10 years, expected volatility of stock price of 13.90%, and expected dividends
of 1.61% per year.
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.
Options outstanding at year end were as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Number of options 192,332 190,932
Minimum exercise price $11.75 $11.75
Maximum exercise price $15.25 $11.75
Weighted-average exercise price $11.78 $11.75
Weighted-average remaining option life 8.0 years 9.0 years
</TABLE>
There are 38,086 options exerciseable at year-end 1997. All options exercisable
have an exercise price of $11.75 and a weighted-average remaining term of 8
years.
<PAGE>
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:
Balance - January 1, 1997 $ 344,698
New loans 2,323,320
Repayments (182,536)
Change in persons included 53,087
Balance - December 31, 1997 $2,538,569
32
<PAGE>
Note 13 - Fair Values of Financial Instruments
The following table shows the fair values of financial instruments and the
related carrying amounts at December 31, 1997 and 1996. Items which are not
financial instruments are not included.
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents and
interest-earning deposits
in financial institutions $ 4,919,686 $ 4,919,686 $ 6,772,374 $ 6,772,374
Securities available for sale 14,628,590 14,628,590 11,496,031 11,496,031
Securities held to maturity 756,846 756,846 892,036 891,236
Loans receivable, net 174,538,907 176,470,000 146,854,690 147,769,000
Accrued interest receivable 511,950 511,950 363,563 363,563
Financial liabilities
Deposits (107,549,786) (107,866,000) (85,346,240) (85,633,000)
Borrowed funds (63,521,682) (63,469,000) (55,995,650) (55,949,000)
Accrued interest payable (283,427) (283,427) (242,855) (242,855)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1997 and 1996. The estimated fair value
for cash and cash equivalents, interest-earning deposits in financial
institutions, accrued interest receivable and accrued interest payable 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 values for loans is based on estimates of the rate the
Company would charge for similar such loans at December 31, 1997 and 1996,
applied for the time period until estimated repayment. The estimated fair value
for demand and savings deposits is based on their carrying value. The estimated
fair values for time deposits and borrowed funds are based on estimates of the
rate the Company would pay on such deposits or for such borrowings at December
31, 1997 and 1996, 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, 1997 or 1996, 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, 1997 and 1996 should not necessarily be considered to apply at subsequent
dates.
33
<PAGE>
Note 14 - Parent Company Only Condensed Financial Information
Condensed financial information of Northeast Indiana Bancorp, Inc. is as follows
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 225,944 $ 371,124
Loan receivable from Employee Stock Ownership Plan 1,309,275 1,454,750
Loan receivable from subsidiary bank 2,000,000 3,750,000
Investment in subsidiary bank 23,757,476 21,184,450
Other assets 8,899 65,949
----------- -----------
Total assets $27,301,594 $26,826,273
=========== ===========
LIABILITIES
Accrued expenses $ 8,960 $ 297,157
SHAREHOLDERS' EQUITY 27,292,634 26,529,116
----------- -----------
Total liabilities and shareholders' equity $27,301,594 $26,826,273
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and
and the period from July 1, 1995 through December 31, 1995
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 263,767 $ 497,921 $ 266,012
Operating expenses 166,532 176,014 50,873
----------- ---------- ----------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 97,235 321,907 215,139
Income tax expense 11,774 100,391 85,216
----------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary bank 85,461 221,516 129,923
Equity in undistributed earnings of subsidiary bank 2,107,518 1,346,029 658,085
----------- ---------- ----------
Net income $2,192,979 $1,567,545 $ 788,008
========== ========== ==========
</TABLE>
34
<PAGE>
Note 14 - Parent Company Only Condensed Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and the period from July 1, 1995
through December 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $2,192,979 $1,567,545 $788,008
Adjustments to reconcile net income to cash
provided by operations
Equity in undistributed earnings of subsidiary bank (2,107,518) (1,346,029) (658,085)
Change in
Other assets 57,050 73,466 (139,415)
Accrued expenses (288,197) 229,806 67,351
---------- ---------- -----------
Net cash from operating activities (145,686) 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 1,750,000 4,850,000 -
Repayments on loan receivable from ESOP 145,475 145,475 145,475
Purchase of stock in subsidiary bank - - (10,605,429)
---------- ---------- -----------
Net cash from investing activities 1,895,475 4,995,475 (20,805,654)
Cash flows from financing activities
Dividends paid (575,558) (622,519) (163,660)
Purchase of treasury stock (1,328,211) (4,826,022) -
Proceeds from sales of treasury stock 8,800 - -
Proceeds from issuance of common stock,
net of conversion costs - - 21,210,857
---------- ---------- -----------
Net cash from financing activities (1,894,969) (5,448,541) 21,047,197
---------- ---------- -----------
Net change in cash and cash equivalents (145,180) 71,722 299,402
Cash and cash equivalents at beginning of period 371,124 299,402 -
---------- ---------- -----------
Cash and cash equivalents at end of period $225,944 $371,124 $299,402
========== ========== ===========
</TABLE>
35
<PAGE>
Note 15 - Earnings Per Share
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for the years
ended December 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Per Share
Net income available to common
shareholders (subsequent to conversion) $2,192,979 $1,567,545 $ 788,008
========== ========== ==========
Weighted average common shares
outstanding before adjustment 1,766,112 2,023,222 2,182,125
Less: unallocated ESOP shares 145,474 160,022 174,570
Less: non-vested RRP shares 61,244 75,936 -
---------- ---------- ----------
Weighted average common shares
outstanding for basic earnings per share 1,559,394 1,787,264 2,007,555
---------- ---------- ----------
Earnings Per Share $ 1.41 $ .88 $ .39
========== ========== ==========
Earnings Per Share Assuming Dilution
Net income available to common
shareholders, per above $2,192,979 $1,567,545 $ 788,008
========== ========== =========
Weighted average common shares
outstanding 1,559,394 1,787,264 2,007,555
Add: dilutive effects of assumed conversions
and exercises of stock options 42,758 10,969 -
---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 1,602,152 1,798,233 2,007,555
Earnings Per Share Assuming Dilution $ 1.37 $ .87 $ .39
========== ========== ==========
</TABLE>
36
<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.
Dividends
Quarter Ended High Low Declared
- --------------------------------------------------------------------------------
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
March 31, 1997 $15.75 $13.50 $.080
June 30, 1997 $16.00 $12.50 $.080
September 30, 1997 $20.25 $14.75 $.080
December 31, 1997 $22.13 $18.25 $.085
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
As of February 26, 1998, there were approximately 582 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
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
<PAGE>
INVESTOR INFORMATION
Stockholders, investors, and analysts interested in additional information may
contact Darrell E. Blocker, Chief Financial Officer, Northeast Indiana Bancorp,
Inc.
Corporate Office
Northeast Indiana Bancorp, Inc.
648 North Jefferson Street
Huntington, Indiana 46750
(219) 356-3311
Special Counsel Independent Auditor
Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
1100 New York Avenue, N.W. 330 E. Jefferson Blvd.
Washington, D.C. 20005 South Bend, Indiana 46601
37
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
<S> <C> <C> <C>
Northeast Indiana First Federal 100% Federal
Bancorp, Inc. Savings Bank
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated February
6, 1998 on the consolidated financial statements of Northeast Indiana Bancorp,
Inc., which report is incorporated by reference in Form 10-KSB from Northeast
Indiana Bancorp, Inc.'s Annual Report to Shareholders for the year ended
December 31, 1997 in Northeast Indiana Bancorp, Inc.'s previously filed
Registration Statements on Form S-8.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,782,839
<INT-BEARING-DEPOSITS> 3,136,847
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,628,590
<INVESTMENTS-CARRYING> 756,846
<INVESTMENTS-MARKET> 756,846
<LOANS> 175,732,907
<ALLOWANCE> (1,194,000)
<TOTAL-ASSETS> 199,368,597
<DEPOSITS> 107,549,786
<SHORT-TERM> 52,424,170
<LIABILITIES-OTHER> 1,004,495
<LONG-TERM> 11,097,512
0
0
<COMMON> 21,821
<OTHER-SE> 27,270,813
<TOTAL-LIABILITIES-AND-EQUITY> 199,368,597
<INTEREST-LOAN> 13,167,279
<INTEREST-INVEST> 953,850
<INTEREST-OTHER> 194,647
<INTEREST-TOTAL> 14,315,776
<INTEREST-DEPOSIT> 4,547,834
<INTEREST-EXPENSE> 7,950,197
<INTEREST-INCOME-NET> 6,365,579
<LOAN-LOSSES> 265,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,062,323
<INCOME-PRETAX> 3,603,542
<INCOME-PRE-EXTRAORDINARY> 2,192,979
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,192,979
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 3.63
<LOANS-NON> 1,166,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,027,300)
<CHARGE-OFFS> 136,000
<RECOVERIES> (38,000)
<ALLOWANCE-CLOSE> (1,194,000)
<ALLOWANCE-DOMESTIC> 1,042,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 152,000
</TABLE>
