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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26012
NORTHEAST INDIANA BANCORP, INC.
- - --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 35-1948594
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
648 North Jefferson Street, Huntington, Indiana 46750
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 356-3311
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES [ X ]. NO [ ].
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State the issuer's revenues for its most recent fiscal year: $16.9
million.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and ask price
of such stock as of March 15, 1999, was $20.60 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 15, 1999, there were 1,652,917 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, 1998.
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.
Northeast Indiana Financial, Inc. was established as a subsidiary of
First Federal Savings Bank to provide brokerage services through an affiliation
with VESTAX Securities Corporation (broker/dealer). The new subsidiary has two
financial professionals with series seven licenses.
At December 31, 1998, the Company had $212.42 million of assets and
stockholders' equity of $25.00 million (or 11.77% 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, municipal bonds
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, 1998,
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.
First Federal Savings Bank offers traditional Trust services, including
but not limited to, Revocable Living Trusts, Testamentary Trusts, Investment
Agency relationships, Estate administration, Guardianships, and Custodial
accounts. The professionals in the Trust Department have collectively over 30
years of banking and investments experience.
<PAGE>
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, 1998, 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
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, 1998, the Bank's
gross loans outstanding totaled $190.96 million, of which $113.92 million or
59.66% were one-to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 43.88% were fixed-rate
loans, and 56.12% were adjustable-rate loans. At that same date, commercial real
estate and multi-family loans totaled $19.42 million, of which 69.06% were
fixed-rate loans and 30.94% were adjustable-rate loans. Also at that date, the
Bank's construction or development loans totaled $11.37 million or 5.95% of the
Bank's total loan portfolio, 65.38% of which were adjustable-rate loans. At
December 31, 1998, commercial business loans totaled $21.39 million or 11.20% of
the Bank's total loan portfolio, of which 68.63% were fixed-rate loans and
31.37% were adjustable-rate loans.
At December 31, 1998, the balance of the Bank's consumer loans
consisted of $24.86 million of loans, which represented 13.02% of the Bank's
gross loan portfolio. Of the consumer loans outstanding, 72.03% were fixed-rate
loans and 27.97% 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, 1998, mutual funds totaled $775,000 or 0.37% of
total assets, mortgage-backed securities totaled $5.35 million or 2.52% of total
assets, Government agencies totaled $4.08 million or 1.92% of total assets, and
obligations of states and political subdivisions totaled $612,000 or 0.29% of
total assets. See "Investment Activities."
<PAGE>
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, 1998, the maximum
which the Bank could have lent under this limit to any one borrower and the
borrower's related entities was approximately $3.44 million. At December 31,
1998, 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, 1998 was $2.96 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, 1998 was $2.03 million in loans to
one borrower secured by equipment inventory, accounts receivable and real
estate. The next largest lending relationship at December 31, 1998 was $1.93
million in loans to one borrower secured by real estate development and various
spec homes in Allen County, Indiana. The next largest lending relationship at
December 31, 1998 was $1.71 million secured by a manufacturing facility located
in Huntington County, Indiana. Finally, the next largest lending relationship at
December 31, 1998 was $1.36 million in loans secured by parcels of real estate
located in Steuben 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,
------------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $113,919 59.66% $109,080 60.53% $ 99,325 65.10%
Multi-family 2,908 1.52 2,606 1.45 2,993 1.96
Commercial 16,514 8.65 16,734 9.29 12,301 8.06
Construction or development 11,365 5.95 10,596 5.88 10,749 7.04
-------- ----- -------- ----- -------- -----
Total real estate loans 144,706 75.78 139,016 77.15 125,368 82.16
-------- ----- -------- ----- -------- -----
Other Loans:
Consumer Loans:
Deposit account 146 .08 44 .02 157 .10
Student --- --- --- --- --- ---
Automobile 12,248 6.41 11,573 6.42 8,820 5.78
Home equity 5,206 2.73 5,506 3.06 4,176 2.74
Home improvement 742 .39 656 .36 291 .19
Other 6,521 3.41 5,873 3.26 4,204 2.76
-------- ----- -------- ----- -------- -----
Total consumer loans 24,863 13.02 23,652 13.12 17,648 11.57
-------- ----- -------- ----- -------- -----
Commercial business loans 21,393 11.20 17,526 9.73 9,568 6.27
Total loans 190,962 100.00% 180,194 100.00% 152,584 100.00%
====== ====== ======
Less:
Undisbursed portion of construction loans 2,800 3,981 4,380
Loans in process 663 355 208
Deferred fees and discounts 139 125 114
Allowance for loan losses 1,454 1,194 1,027
---------- ----------- ---------
Total loans receivable, net $185,906 $174,539 $146,855
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $ 85,533 67.88% $ 76,082 70.04%
Multi-family 2,029 1.61 1,621 1.49
Commercial 11,742 9.32 8,835 8.13
Construction or development 6,359 5.05 7,033 6.47
-------- ----- -------- -----
Total real estate loans 105,663 83.86 93,571 86.13
-------- ----- -------- -----
Other Loans:
Consumer Loans:
Deposit account 170 .13 264 .24
Student --- --- --- ---
Automobile 7,756 6.16 6,719 6.19
Home equity 3,121 2.48 2,895 2.66
Home improvement 258 .20 202 .19
Other 3,245 2.58 2,238 2.06
-------- ----- -------- -----
Total consumer loans 14,550 11.55 12,318 11.34
-------- ----- -------- -----
Commercial business loans 5,783 4.59 2,745 2.53
Total loans 125,996 100.00% 108,634 100.00%
====== ======
Less:
Undisbursed portion of construction loans 2,210 3,333
Loans in process 169 124
Deferred fees and discounts 95 81
Allowance for loan losses 881 694
-------- ---------
Total loans receivable, net $122,641 $104,402
======== ========
</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,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ---------------------
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 $49,993 26.18% $44,203 24.53% $ 35,764 23.44%
Multi-family 2,323 1.22 1,586 .88 2,397 1.57
Commercial 11,089 5.81 9,916 5.50 5,922 3.88
Construction or development 3,935 2.06 2,163 1.20 1,421 .94
------- ------ ------- ------ -------- ------
Total real estate loans 67,340 35.26 57,868 32.11 45,504 29.83
-------- ------ ------ ----- -------- ------
Consumer 17,909 9.38 16,462 9.14 12,619 8.27
Commercial business 14,683 7.69 11,694 6.49 4,399 2.88
-------- ------- ------- ------ -------- ------
Total fixed-rate loans 99,932 52.33 86,024 47.74 62,522 40.98
Adjustable-Rate Loans:
Real estate:
One- to four-family 63,926 33.48 64,877 36.00 63,561 41.66
Multi-family 585 .31 1,020 .57 595 .39
Commercial 5,425 2.84 6,818 3.78 6,380 4.17
Construction or development 7,430 3.89 8,433 4.68 9,328 6.11
-------- ------ ------ -------- ------
Total real estate loans 77,366 40.52 81,148 45.03 79,864 52.33
-------- ------ -------- ------- -------- ------
Consumer 6,954 3.64 7,190 3.99 5,029 3.30
Commercial business 6,710 3.51 5,832 3.24 5,169 3.39
-------- ------- --------
Total adjustable-rate loans 91,030 47.67 94,170 52.26 90,062 59.02
-------- ------- ------- ------ -------- ------
Total loans 190,962 100.00% 180,194 100.00% 152,584 100.00%
====== ====== ======
Less:
Undisbursed portion of construction loans 2,800 3,981 4,380
Loans in process 663 355 208
Deferred fees and discounts 139 125 114
Allowance for loan losses 1,454 1,194 1,027
-------- -------- --------
Total loans receivable, net $185,906 $174,539 $146,855
======== ======== ========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1998. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
Multi-family and Construction
One- to Four-Family Commercial or Development Consumer
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) $ 31 9.68% $ --- ---% $ 10,669 8.45% $ 5,668 10.44%
2000 and 2001 354 8.47 248 8.06 250 9.60 4,127 9.40
2002 and 2003 2,218 7.80 1,164 8.68 --- --- 8,611 9.15
2004 to 2008 21,399 7.84 7,147 8.84 --- --- 5,915 9.10
2009 to 2023 89,917 7.44 10,863 8.65 446 6.50 542 9.23
<CAPTION>
Commercial
Business Total
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
1999(1)
2000 and 2001 $ 6,071 8.83% $ 22,439 9.05%
2002 and 2003 4,931 8.66 9,910 8.97
2004 to 2008 5,667 8.56 17,660 8.75
2009 to 2023 3,917 8.78 38,378 8.32
807 9.17 102,575 7.58
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $91.23 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $77.29
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, 1998, the Bank's one- to four-family residential mortgage loans
totaled $113.92 million, or 59.66%, of the Bank's gross loan portfolio.
The Bank currently offers fixed-rate and adjustable-rate mortgage
loans. For the year ended December 31, 1998, the Bank originated $17.33 million
of fixed-rate loans and $20.26 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, 1998, the total balance of one-to
four-family adjustable-rate loans was $63.93 million or 33.48% 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, 1998, the total balance of one- to four-family
fixed-rate loans was $49.99 million or 26.18% of the Bank's gross loan
portfolio.
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
<PAGE>
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, 1998, the Bank had $16.51 million and $2.91 million of
commercial and multi-family real estate loans, respectively, which represented
8.65% and 1.52%, 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
performed by independent appraisers to the extent required by federal
regulations.
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.
Construction or Development Lending. At December 31, 1998, the Bank had
$11.37 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, 1998, the Bank had $3.94 million and $7.43 million of
fixed-rate and adjustable-rate construction or development loans, respectively,
which represented 2.06% and 3.89%, 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.
<PAGE>
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, 1998, the Bank's automobile loans totaled
$12.25 million or 6.41% of the Bank's gross loan portfolio. Of this amount
approximately $4.41 million or 35.98% and $7.84 million or 64.02% 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, 1998, home equity and home improvement loans,
most of which are secured by second mortgages, amounted to $5.21 million and
$742,000, respectively, which represented 2.73% and 0.39%, respectively, of the
Bank's gross loan portfolio.
At December 31, 1998, the Bank's consumer loan portfolio totaled $24.86
million, or 13.02% of its gross loan portfolio. At December 31, 1998,
approximately 72.03% of consumer loans were short- and intermediate-term,
fixed-rate consumer loans and 27.97% were adjustable rate consumer loans.
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
<PAGE>
and insolvency laws, may limit the amount which can be recovered on such loans.
At December 31, 1998, $107,000 of the Bank's consumer loans were non-performing
representing 0.06% of the gross loan portfolio.
Commercial Business Lending. The Bank also originates commercial
business loans and purchases commercial leases. At December 31, 1998
approximately $21.39 million, or 11.20% 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 $2.96 million
was outstanding at December 31, 1998.
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.
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,
1998, the Bank originated $44.69 million in fixed-rate loans and $38.94 million
in adjustable rate loans.
Total commercial business loan originations decreased in 1998 compared
to 1997.
In 1998, refinancing of residential loans increased, contributing to
the increase in one- to four-family originations for the year of $15.59 million
to $37.60 million in 1998 from $22.01 million in 1997.
<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,
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family $20,263 $ 8,983 $17,971
- multi-family -- -- --
- commercial 1,382 2,632 1,061
- construction 8,122 10,551 8,466
Non-real estate - consumer 2,094 2,414 1,961
- commercial business 6,653 7,661 5,711
------- ------- -------
Total adjustable-rate 38,514 32,241 35,170
------- ------- -------
Fixed rate:
Real estate - one- to four-family 17,332 13,024 11,186
- multi-family 347 729 --
- commercial 1,988 3,757 1,461
- construction 4,334 2,962 3,641
Non-real estate - consumer 13,482 14,216 10,187
- commercial business 4,586 7,658 3,531
------- ------- -------
Total fixed-rate 42,069 42,346 30,006
------- ------- -------
Total loans originated 80,583 74,587 65,176
------- ------- -------
Purchases:
Real estate - one- to four-family -- -- --
- multi-family -- -- 250
- commercial -- 300 --
Non real estate - commercial 3,046 2,962 1,189
------- ------- -------
Total loans purchased 3,046 3,262 1,439
Sales and Repayments:
Real estate - multi-family -- 352 --
- commercial -- -- --
Non real estate - commercial 2,431 -- --
-------
Total loans sold 2,431 352 --
Principal repayments 70,430 49,887 40,027
------- ------- -------
Total reductions 72,861 50,239 40,027
------- ------- -------
Net increase (decrease) $10,768 $27,610 $26,588
======= ======= =======
</TABLE>
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
<PAGE>
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, 1998. 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 18 $ 904 0.79% 8 $ 149 0.13% 26 $1,053 0.92%
Commercial 2 785 4.75 6 614 3.72 8 1,399 8.47
Construction or -- ------ ---- -- ------ ---- --- ------ ----
development
Consumer 65 494 1.99 25 107 0.43 90 601 2.42
Commercial business 4 41 0.19 8 338 1.58 12 379 1.77
-- ------ ---- --- ------ ---- --- ------ ----
Total 89 $2,224 1.16% 47 $1,208 0.63 136 $3,432 1.80%
=== ====== ==== === ====== ==== === ====== ====
</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.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $149 $334 $470 $ 9 $---
Multi-family --- --- --- --- ---
Commercial real estate 614 706 172 171 14
Construction or development --- --- --- --- 289
Consumer 107 37 63 94 30
Commercial business 338 89 --- 10 4
----- ------- ------ ---- -----
Total 1,208 1,166 705 284 337
----- ------ ---- ---- ----
Foreclosed assets:
One- to four-family 58 --- --- --- ---
Commercial 52 --- --- --- ---
-------
Total 110 --- --- --- ---
------ -------- ------ ------ ------
Repossessed assets:
Consumer 10 7 8 --- ---
------ -------- ------ ----- -----
Total 10 7 8 --- ---
------ -------- ------ ----- -----
Total non-performing assets $1,328 $1,173 $713 $284 $337
====== ====== ==== ==== ====
Total as a percentage of total assets 0.63% 0.58% 0.42% 0.21% 0.29%
====== ==== ==== ==== ====
</TABLE>
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $33,000, none of which was included in interest income.
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.
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews loans in its portfolio to determine whether such assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 1998, the Bank had classified
a total of $720,000 of its assets as special mention, $1.59 million as
substandard, net of specific reserves, none as doubtful, and none as loss. At
December 31, 1998, total classified assets comprised $2.3 million, or 9.20% of
the Bank's capital, or 1.08% 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, 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, 1998, the Bank had a total allowance for loan
losses of $1.45 million, representing 120.40% of total non-performing loans and
0.78% 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,
1998 1997 1996
Percent Percent
of Loans Percent of of Loans
Loan in Each Loan Loans Loan in Each
Amount of Amounts Category Amount of Amounts in Each Amount of Amounts Category
Loan Loss by to Total Loan Loss by Category to Loan Loss by to Total
Allowance Category Loans Allowance Category Total Loans Allowance Category Loans
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 266 $113,919 59.66% $ 240 $109,080 60.53% $ 209 $ 99,325 65.10%
Multi-family 27 2,908 1.52 22 2,606 1.45 74 2,993 1.96
Commercial real estate 204 16,514 8.65 163 16,734 9.29 106 10,996 7.20
Construction or
development 278 11,365 5.95 237 10,596 5.88 311 12,054 7.90
Consumer 183 24,863 13.02 136 23,652 13.12 79 17,648 11.57
Commercial business 305 21,393 11.20 244 17,526 9.73 165 9,568 6.27
Unallocated 191 -- -- 152 --- --- 83 --- ---
Total $ 1,454 $190,962 100.00 $1,194 $180,194 100.00% $1,027 $152,584 100.00%
======= ======== ====== ====== ======== ====== ====== ======== ======
<CAPTION>
1995 1994
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 $180 $ 85,533 67.88% $ 145 $ 76,082 70.04%
Multi-family 50 2,029 1.61 45 1,621 1.49
Commercial real estate 100 11,742 9.32 75 8,835 8.13
Construction or
development 200 6,359 5.05 200 7,033 6.47
Consumer 65 14,550 11.55 50 12,318 11.34
Commercial business 100 5,783 4.59 40 2,745 2.53
Unallocated 186 --- --- 139 --- ---
Total $881 $125,996 100.00% $ 694 $108,634 100.00%
==== ======== ====== ===== ======== ======
</TABLE>
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses activity.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,194 $1,027 $ 881 $ 694 $ 457
Charge-offs:
One- to four-family 47 2 3 -- --
Commercial -- 1 -- 9 --
Consumer 99 133 131 65 33
------ ------ ------ ------ ------
146 136 134 74 33
------ ------ ------ ------ ------
Recoveries:
One- to four-family 3 -- -- -- --
Consumer 42 38 45 10 7
Commercial 1 -- -- -- --
------ ------ ------ ------
46 38 45 10 7
------ ------ ------ ------ ------
Net charge-offs 100 98 89 64 26
Additions charged to operations 360 265 235 251 263
------ ------ ------ ------ ------
Balance at end of period $1,454 $1,194 $1,027 $ 881 $ 694
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.06% 0.06% 0.07% 0.06% 0.03%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average non-performing loans 12.99% 13.07% 20.23% 16.41% 9.92%
====== ====== ====== ====== ======
</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,
1998, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 8.85%.
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, 1998,
First Federal's interest-earning deposits with other financial institutions
totaled $4.18 million, or 1.97% of total assets, and its securities, consisting
of obligations of states and political subdivisions, money market mutual funds,
and other securities totaled $14.19 million, or 6.68% 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, 1998, the Bank had $528,000 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
$13.66 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>
1998 1997 1996
Carrying % of Carrying % Carrying % of
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Obligations of states and political $ 612 4.31% $ 639 4.15% $ 703 5.67%
Mortgage-backed securities 5,354 37.74 6,599 42.89 6,162 49.73
Federal agency obligations 4,080 28.76 4,044 26.29 1,787 14.43
Corporate bonds 116 0.82 118 0.77 189 1.53
-------- ------ --------- -------- -------- -------
Total debt securities 10,162 71.63 11,400 74.10 8,841 71.36
Equity securities:
Mutual funds 775 5.46 735 4.78 697 5.63
FHLB stock 3,250 22.91 3,250 21.12 2,850 23.01
-------- -------- --------- ------- -------- -------
Total securities $14,187 100.00% $15,385 100.00% $12,388 100.00%
======= ====== ======= ====== ======= ======
</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, 1998, the Bank had total FHLB
advances of $62.10 million with the capacity to borrow as of December 31, 1998
an additional $11.90 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.
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $107,550 $ 85,346 $ 68,203
Deposits 336,345 303,686 260,248
Withdrawals 326,471 286,040 246,610
Interest credited 5,912 4,558 3,505
-------- -------- --------
Ending balance $123,336 $107,550 $ 85,346
======== ======== ========
Net increase (decrease) $ 15,786 $ 22,204 $ 17,143
======== ======== ========
Percent increase (decrease) 14.68 % 26.02% 25.14%
======== ======== ========
</TABLE>
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,
1998 1997 1996
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts 2.75% $ 9,812 7.96% $ 9,336 8.68% $10,147 11.89%
Demand and NOW Accounts 1.19% 13,905 11.27 12,037 11.19 10,295 12.06
Money Market Accounts 5.10% 20,508 16.63 17,098 15.90 11,680 13.69
---------- -------- --------- ----- ------- ------
Total Non-Time Deposits 44,225 35.86 38,471 35.77 32,122 37.64
---------- --------- --------- ----- ------- ------
Time Deposits:
2.00 - 3.99% 939 0.76 1,045 .97 1,286 1.51
4.00 - 5.99% 72,690 58.94 38,467 35.77 39,177 45.90
6.00 - 7.99% 5,482 4.44 29,567 27.49 12,761 14.95
----------- --------- --------- ------ -------- ------
Total Time Deposits 79,111 64.14 69,079 64.23 53,224 62.36
---------- --------- --------- ------ ------- ------
Total Deposits $123,336 100.00% $107,550 100.00% $85,346 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Bank's
time deposit accounts as of December 31, 1998.
<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, 1999 $ 410 $ 15,950 $ 510 $ 16,870 21.32%
June 30, 1999 517 9,004 100 9,621 12.16
September 30, 1999 12 16,203 522 16,737 21.16
December 31, 1999 --- 12,567 1,014 13,581 17.17
March 31, 2000 --- 7,578 1,524 9,102 11.51
June 30, 2000 --- 4,796 213 5,009 6.33
September 30, 2000 --- 1,947 168 2,115 2.67
December 31, 2000 --- 1,241 233 1,474 1.86
March 31, 2001 --- 319 1,097 1,416 1.79
June 30, 2001 --- 610 --- 610 0.77
September 30, 2001 --- 957 100 1,057 1.34
December 31, 2001 --- 848 1 849 1.07
Thereafter --- 670 --- 670 0.85
---------- --------- ---------- ---------- ------
Total $ 939 $ 72,690 $ 5,482 $ 79,111 100.00%
========== ========= ========== ========== ======
Percent of total 1.19% 91.88% 6.93% 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, 1998.
<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 $ 6,801 $ 6,745 $ 14,286 $14,427 $ 42,259
Time deposit accounts of $100,000 or more 8,894 2,876 14,410 7,875 34,055
Public funds (1) 1,175 --- 1,622 --- 2,797
-------- ------------ -------- ------------ --------
Total time deposit accounts $ 16,870 $ 9,621 $30,318 $22,302 $ 79,111
======== ========== ======= ======= ========
</TABLE>
- - ------------------
(1) Deposits from governmental and other public entities.
<PAGE>
Borrowings. First Federal's borrowings historically have consisted of
advances from the FHLB of Indianapolis. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At December 31, 1998, 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,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $62,100 $63,000 $57,000
Average Balance:
FHLB advances $54,841 $58,859 $46,128
</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 $4.25 million
at December 31, 1998, 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, 1998,
First Federal had one subsidiary, Northeast Indiana Financial, Inc., an Indiana
corporation, but it was still in the formation stage and First Federal Savings
Bank had not yet capitalized the entity.
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.
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. All savings association are subject to a
<PAGE>
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. The Bank's OTS assessment for the fiscal year
ended December 31, 1998, was approximately $56,000.
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 the Bank is prohibited from engaging in
any activities not permitted by such laws. 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, 1998, the Bank's lending limit under this restriction was $3.44
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, asset quality, earnings standards, 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 compliance plan.
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 SAIF or the BIF. 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 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
<PAGE>
highest premium. Risk classification of all insured institutions is 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.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
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 for calculating compliance with
the requirement. At December 31, 1998, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. 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 one subsidiary established as an Indiana
corporation but not active at December 31, 1998.
At December 31, 1998, the Bank had tangible capital of $21.6 million,
or 10.2% of adjusted total assets, which is approximately $18.4 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. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions
<PAGE>
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, 1998, the Bank had no intangibles which were subject to these tests.
At December 31, 1998, the Bank had core capital equal to $21.6 million,
or 10.2% of adjusted total assets, which is $15.2 million above the minimum
leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1998, the Bank had
$1.34 million of general loss reserves, which was less than 0.97% 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, 1998.
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.
OTS regulations may in the future require that savings associations
with more than normal interest rate risk exposure 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 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 risk-based capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
On December 31, 1998, the Bank had total risk-based capital of $23.0
million (including approximately $21.6 million in core capital and $1.4 million
in qualifying supplementary capital) and risk-weighted assets of $138.5 million;
or total capital of 16.57% of risk-weighted assets. This amount was $11.9
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based
<PAGE>
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 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 on savings associations
with respect to their ability to make distributions of capital which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings 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.
Generally, savings associations, who must meet their capital
requirements, before and after the proposed distribution 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 capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however,
<PAGE>
must obtain OTS approval prior to making such distribution. 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. 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 of supervisory
concern, 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
average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. 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 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At December 31, 1998, the Bank was in compliance with
the requirement, with an overall liquid asset ratio of 8.85%.
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. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(9) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1998, the Bank met the test and has always met
the test since its effectiveness.
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
<PAGE>
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 holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1996 and received a rating of outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Bank include the Holding 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 holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
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 generally be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding 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 holding company, and the activities of the
<PAGE>
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 holding 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, 1998, 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.
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
<PAGE>
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, 1998, 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 7.49% and were 8.01% for calendar
1998.
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, 1998, dividends paid by the FHLB of
Indianapolis to the Bank totaled $260,000, which constituted a $16,000 increase
from the amount of dividends received in calendar year 1997. The $65,500
dividend received for the quarter ended December 31, 1998 reflects an annualized
rate of 8.00%, which was the same rate for the corresponding period in 1997.
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 is computed under the experience method. Under the experience
method, the bad debt reserve deduction is an amount determined under a formula
based generally upon the bad debts actually sustained by the savings association
over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method 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 was delayed, however, until the
tax year ended December 31, 1998, because the Bank met certain residential
lending requirements. The Bank previously established, and will continue to
maintain, a deferred tax liability with respect to its federal tax bad debt
reserves in excess of the base-year balances; accordingly, the legislative
changes will have no effect on total income tax expense for financial reporting
purposes.
<PAGE>
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.
Beginning with 1998, the Company filed consolidated federal tax returns
including the Bank on a calendar year basis using the accrual method of
accounting.
The Bank has not been audited by the IRS recently with respect to
federal income tax returns. In the opinion of management, any examination of
still open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on
the net income of financial (including thrift) institutions, exempting them from
the current gross income, supplemental net income and intangible taxes. Net
income for franchise tax purposes will constitute federal taxable income before
net operating loss deductions and special deductions, adjusted for certain
items, including Indiana income taxes, tax exempt interest and bad debts. Other
applicable Indiana taxes include sales, use and property taxes.
Delaware Taxation. As a Delaware Company, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
Competition
First Federal faces strong competition, both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, credit unions and savings institutions
located in the Bank's market area. Commercial banks, savings institutions and
credit unions provide vigorous competition in consumer lending. The Bank
competes for real estate and other loans principally on the basis of the quality
of services it provides to borrowers, the interest rates and loan fees it
charges, and the types of loans it originates. See "-
Lending Activities."
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
retail brokerage offices, commercial banks, savings institutions and credit
unions located in these communities. The Bank competes for these deposits by
offering a
<PAGE>
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 27% and its share of the residential mortgage market is
approximately 32%.
Employees
At December 31, 1998, the Bank had a total of 44 full-time, 4 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,
1998. 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, 1998 was approximately $2.26 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, 1998
-------- -------- ------- -----------------
<S> <C> <C> <C>
Main Office:
648 North Jefferson Street 1974 5,200 $ 846
Huntington, Indiana 46750
Branch Offices:
1240 South Jefferson Street 1981 1,700 241
Huntington, Indiana 46750
100 Frontage Road 1995 5,000(1) 1,178
Huntington, Indiana 46750
</TABLE>
(1) Includes addition completed in early 1999.
There was a 2,000 square foot addition to the office located at 100
Frontage Road which was completed during the first quarter 1999. This addition
provides space for the financial services subsidiary, the Trust Department and
future growth.
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 database 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
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, 1998, 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, 1998 and 1997 17
Consolidated Statements of Income for the Years Ended December 31, 18
1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the 19
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 20
1998, 1997 and 1996
Notes to Consolidated Financial Statements 21
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1998, 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 1999, 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 45 Senior Vice President, Treasurer and
Chief Financial Officer
Dee Ann Hammel 46 Senior Vice President and Chief Operating
Officer
Joseph A. Byers 46 Vice President and Senior Trust Officer
(1) At December 31, 1998
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.
Joseph A. Byers is Vice President and Senior Trust Officer of the Bank,
a position he has held since August 1998. Mr. Byers first joined the Bank in
July 1998 to help establish and manage the Trust Department. Mr. Byers is
responsible for management of the Trust Department and the financial services
subsidiary. Mr. Byers came to us with 28 years in banking experience, including
20 years of Trust experience.
<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, 1999, 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 1999, 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 1999, 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 hereinby reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999, 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
Page Number
Where Attached
Exhibits Are
Located in
This
Form 10-KSB
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 [___]
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27 [___]
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, 1998, the Company filed the following:
(i) Form 8-K dated January, 30, 1998, regarding Fourth Quarter
Earnings for 1997 and Cash Dividend.
(ii) Form 8-K dated April 15, 1998, regarding First Quarter
earnings.
(iii) Form 8-K dated April 24, 1998, regarding Cash Dividend and
results of Shareholder Meeting.
(iv) Form 8-K dated July 8, 1998, regarding Stock Repurchase
Program.
(v) Form 8-K dated July 20, 1998, regarding Second Quarter
Earnings.
(vi) Form 8-K dated July 30, 1998, regarding Declaration of Cash
Dividend.
(vii) Form 8-K dated October 20, 1998, regarding Third Quarter
Earnings.
(viii) Form 8-K dated October 28, 1998, regarding a Stock 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, 1999 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, 1999 Date: March 31, 1999
By: /s/ Dan L. Stephan By: /s/ Samuel Preston, Jr.
------------------ -----------------------
Dan L. Stephan, Director Samuel Preston, Jr., Director
Date: March 31, 1999 Date: March 31, 1999
By: /s/ J. David Carnes
-------------------
J. David Carnes, Director
Date: March 31, 1999
By: /s/ Randall C. Rider
--------------------
Randall C. Rider, Director
Date: March 31, 1999
</TABLE>
43
NOW MORE THAN EVER...FIRST IN HOMETOWN BANKING
1998
ANNUAL REPORT
[GRAPHIC-COMPANY LOGO]
[GRAPHIC-COMPANY LOGO]
NORTHEAST
INDIANA
Bancorp, Inc.
<PAGE>
Table of Contents
PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS 1
FINANCIAL HIGHLIGHTS 3
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
DIRECTORS AND OFFICERS 38
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. In order to serve additional financial needs of area
residents, First Federal established a Trust Department during 1998, and made
plans to provide brokerage services via its new wholly owned subsidiary,
Northeast Indiana Financial, Inc. First Federal has been serving the Huntington
community since 1912.
2
<PAGE>
Financial Highlights
[GRAPHIC-GRAPH DEPICTING TOTAL ASSETS]
[GRAPHIC-GRAPH DEPICTING NET INCOME]
[GRAPHIC-GRAPH DEPICTING RETURN ON ASSETS]
[GRAPHIC-GRAPH DEPICTING RETURN ON EQUITY]
[GRAPHIC-GRAPH DEPICTING EARNINGS PER SHARE]
[GRAPHIC-GRAPH DEPICTING DIVIDENDS PAID]
[GRAPHIC-GRAPH DEPICTING PER SHARE MARKET VALUE]
- - --------------------------------------------------------------------------------
1 End of period
2 All share information restated to reflect the November 1998 10% Stock Dividend
3
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Information
December 31
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets $212,425 $199,369 $169,544 $137,569 $115,095
Loans receivable, net 185,906 174,539 146,855 122,641 104,402
Securities 14,187 15,385 12,388 6,882 5,395
Deposits 123,336 107,550 85,346 68,203 68,533
Total borrowings 63,080 63,522 56,000 37,500 35,500
Shareholders' equity 25,005 27,293 26,529 31,033 10,238
SELECTED OPERATIONS DATA:
Total interest income $ 16,139 $ 14,316 $ 11,767 $ 9,644 $ 8,102
Total interest expense 9,061 7,950 6,197 5,307 4,072
-------- -------- -------- -------- --------
Net interest income 7,078 6,366 5,570 4,337 4,030
Provision for loan losses 360 265 235 251 263
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 6,718 6,101 5,335 4,086 3,767
Total noninterest income 731 565 402 347 384
Total noninterest expense 3,691 3,062 3,208 2,364 1,938
-------- -------- -------- -------- --------
Income before income taxes 3,758 3,604 2,529 2,069 2,213
Income tax expense 1,369 1,411 962 750 876
Net income $ 2,389 $ 2,193 $ 1,567 $ 1,319 $ 1,337
======== ======== ======== ======== ========
Basic earnings per common share (2)(3) $ 1.50 $ 1.28 $ 0.80 $ 0.35 N/A
Diluted earnings per common share (2)(3) $ 1.41 $ 1.24 $ 0.79 $ 0.35 N/A
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on assets
(ratio of net income to average total assets) 1.17% 1.21% 1.03% 1.04% 1.22%
Return on equity
(ratio of net income to average total equity) 9.15 8.12 5.43 6.55 13.77
Interest rate spread information:
Average during period 2.95 2.91 2.90 2.80 3.51
End of period 3.11 2.95 2.70 2.77 2.83
Net interest margin (1) 3.57 3.63 3.81 3.57 3.82
Ratio of operating expense to average total
assets 1.81 1.69 2.12 .87 1.81
Ratio of average interest-earning assets to
average interest-bearing liabilities 113.66 115.97 121.48 117.70 107.93
Quality Ratios:
Non-performing assets to total assets at end
of period .56 .58 .42 .21 .29
Allowance for loan losses to non-performing
loans 122.53 102.50 144.00 310.21 205.93
Allowance for loan losses to loans receivable, net .78 .68 .70 .72 .66
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Capital Ratios:
Shareholders' equity to total assets at
end of period 11.77 13.69 15.65 22.56 8.90
Average shareholders' equity to average total
assets 12.80 14.89 19.03 15.92 8.89
Other Data:
Number of full-service offices 3 3 3 3 2
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) 1995 earnings per share amounts are subsequent to conversion.
(3) All share and per share amounts have been restated to reflect the 10% stock
dividend paid on November 23, 1998 to shareholders of record November 6,
1998.
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.
During the year of 1998, First Federal established a trust department which
began operations in the fourth quarter. At the end of 1998, $4.1 million was
held under asset management. In February 1999, the Company announced the
establishment of Northeast Indiana Financial, Inc., a wholly-owned subsidiary of
the Bank. Northeast Indiana Financial, Inc. will provide brokerage services
through the purchase of mutual funds, annuities, stocks and bonds for its
customers. Until these operations are well established, management expects a
slight negative impact to net income.
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 1998 ended with inflation continuing to stay in
check. The Federal Reserve lowered short term rates three times for a total of
75 basis points to help the United States economy offset the effect of the Asian
economic downturn. The economy has stayed relatively stable during 1998 overall.
Although we have had fluctuations throughout 1998, in general the economy was
favorable to First Federal's lending growth. This volume increase, however,
included more refinances than normal caused by the decline in rates. As these
loans refinanced, we received lower interest income. In addition, there can be
no assurance 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>
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 advises
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.
Impact of the Year 2000
The Company relies heavily on computer technology to provide its products and
services and is well aware of all the issues involved with the Year 2000
including how operations could be impacted if a potential problem would arise.
An overall plan developed by the Year 2000 Committee was approved by the Board
of Directors and put into effect in 1998. This plan is a step by step process of
assessment, remediation and testing of hardware, software, embedded systems as
well as a customer awareness program, contingency and business continuity
planning and budgeting.
A test was performed on all computer systems to make sure they were able to
recognize year 2000 dates and hold these dates when powered off and on. Any new
computer equipment purchased will go through the same testing process. All
embedded systems have been assessed and will continue to be functional in the
year 2000.
The Company has no software that is internally developed. The various types of
software utilized by the Company are purchased through third party vendors and
our service bureau. Our service bureau has kept us informed of the Year 2000
status of the software products. Testing of all data file interfaces began in
the fourth quarter of 1998 and will continue through the first quarter of 1999.
<PAGE>
The Company recognizes the importance of customer awareness and has brochures
that are readily available as well as information on its website. Year 2000
customer awareness also includes assessing our current commercial borrowers on
their status. There are also risk assessments and Year 2000 disclosure
requirements for any new commercial borrower.
The Company is currently preparing the Year 2000 Business Continuity Plan. It
will address the resumption of business in the case of power failure,
telecommunication problems or the inability of our service bureau to perform.
This plan will be completed and validated by the end of the second quarter of
1999.
6
<PAGE>
IMPACT OF THE YEAR 2000 (continued)
The overall cost of the Company's Year 2000 project has not had a significant
impact on income in 1998 nor will it be likely in 1999. The costs in 1998 of
less than $100,000 are the result of software upgrades, new computer equipment
associated with the software upgrades as well as the support of our service
bureau.
The Company is progressing towards Year 2000 readiness in accordance with the
guidelines set forth by the regulators. The Year 2000 Committee regularly
reports to the Board of Directors, Senior Management, and Staff to keep everyone
informed, as well as involved, in our Year 2000 efforts.
Financial Condition
First Federal's total assets increased from $199.4 million at December 31, 1997
to $212.4 million at December 31, 1998, an increase of $13.0 million, or 6.5%.
The increase was due primarily to the increases in loans, net of $11.4 million
or 6.5% and cash and cash equivalents of $1.5 million or 30.6%. This growth was
funded by a $15.8 million increase in deposits.
The increase in the loan portfolio was partially attributable to mortgage loans,
which increased $5.7 million. Mortgage loans secured by one-to-four family
residences increased $4.8 million to $113.9 million at December 31, 1998 and
represent 61.3% of First Federal's loan portfolio. The increase in one to
four-family mortgage loans was comprised of a $5.8 million increase in fixed
rate loans offset by a $1.0 million decrease in adjustable rate loans. Mortgage
loans secured by multi-family and commercial real estate increased $100,000 to
$19.4 million at December 31, 1998 and construction loans secured by residential
and non-residential real estate increased $770,000 to $11.4 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 $5.1 million to $46.3 million at
December 31, 1998. Automobile loans comprise $12.2 million of total consumer
loans while home equity and second mortgage loans represent another $5.9 million
at December 31, 1998.
Future loan growth is dependent on the economy. First Federal currently
anticipates slower growth in mortgages compared to the last few years. First
Federal will continue to expand its commercial lending and anticipates
commercial lending to increase as a percentage of total loans.
Total deposits increased $15.8 million to $123.3 million at December 31, 1998.
The 14.7% growth in 1998 was due to aggressive advertising, pricing of selected
products for a limited time slightly above local market competitors, and
accepting jumbo deposits competitively priced from time to time during the year.
Jumbo deposit growth contributed $9.5 million of the total deposit increase and
came from both inside and outside of our market area.
<PAGE>
Total borrowed funds decreased $441,000, from $63.5 million to $63.1 million at
December 31, 1998. Borrowed funds include advances from the FHLB with variable
interest rates and stated maturities ranging through 2008. Management plans to
continue to utilize FHLB advances in conjunction with efforts to increase our
deposit base to provide the necessary funding for loan demand. First Federal's
borrowing limit at the FHLB as of December 31, 1998, was $74 million. Borrowings
also include two demand notes totaling $781,000 for investments in two low
income housing limited liability partnerships as well as various repurchase
agreements that started being offered in 1998.
7
<PAGE>
Results of Operations
COMPARISON OF YEARS ENDED
DECEMBER 31, 1998 AND 1997
General. Net income for the year ended December 31, 1998 provided another record
year of $2.39 million in earnings, an increase of $196,000 over net income of
$2.19 million for 1997. This improvement was primarily a result of increased net
interest income after provision for loan losses of $618,000, non-interest income
improvements of $165,000 and a decrease in income tax expense of $42,000. These
increases were partially offset by increases in non-interest operating expenses
of $629,000. Further details regarding the changes in the income and expenses
are discussed below.
Interest Income. Interest income increased $1.82 million or 12.73% to $16.14
million for the year ended December 31, 1998. The increase in interest income
was primarily the result of mortgage loan interest income increasing $777,000 to
$10.89 million and an increase of $903,000 to $3.90 million in consumer and
other loan interest income. The average yield for the year on the loan portfolio
increased by just one basis point to 8.29% in 1998 compared to 8.28% in 1997.
The increase in loan interest income was largely due to higher average balances
of loans outstanding in 1998 compared to 1997.
Interest Expense. Interest expense for 1998 rose $1.11 million or 13.97% over
1997 interest expense. The majority of the increase was due to higher balances
in time deposits which averaged $19.42 million more in 1998 compared to 1997.
The average rate for time deposits decreased 2 basis points from 1997 to 1998.
Average money market account balances increased in 1998 by $ 6.50 million or
45.7%. The average rate for money market accounts decreased by 16 basis points
to 4.89% for 1998. Interest expense for borrowed funds decreased by $260,000
primarily due to lower average FHLB advance balances during 1998.
Net interest income. Net interest income increased $712,000 or 11.20% from $6.37
million to $7.08 million for the year ended December 31, 1998. The average
spread increased by 4 basis points to 2.95%. Average loan yields increased
slightly to 8.29% due to a higher percentage of new commercial, consumer and
other installment loans being added in 1998 offsetting the general drop in rates
during 1998 by product type.
Provision for Loan Losses. The provision for loan losses for 1998 was $360,000
compared to $265,000 in 1997, an increase of $95,000. The provision for loan
losses less net charge-offs for the year resulted in a $260,000 increase in the
allowance for loan losses. The allowance for loan losses of $1.45 million at
December 31, 1998 was a 21.78% increase compared to December 31, 1997.
Management will continue to maintain the allowance for loan losses at a level
deemed adequate by management based on its quarterly analysis. This analysis
includes looking at our mix of loans by major product lines. We continue to
increase our allowance for loan losses because of our growth in commercial and
consumer lending as well as overall loan growth.
Noninterest income. Noninterest income increased from $566,000 in 1997 to
$731,000 in 1998. The majority of this increase is due to the increases in fees
from mortgage loans refinanced and growth in commercial lending. Loan
modification fees increased to $273,000 compared to $178,000 in 1997 a $95,000
increase. Due to our deposit growth, service charges and fees on deposit
accounts also increased to $287,000 in 1998 compared to $245,000 for 1997, which
was a $42,000 increase.
<PAGE>
Noninterest expense. Noninterest expense increased from $3.06 million to $3.69
million or $629,000. Salaries and employee benefits increased $311,000 in 1998
over 1997, the result of higher ESOP costs, additional staff and salary
increases. During 1998 data processing increased $125,000. These costs are
primarily associated with the installation of a wide area network, communication
upgrades, imaging equipment and new software which will enable increased
efficiencies of operations. Correspondent bank charges and other expenses
increased mainly due to increased volume in deposits and loans.
Income tax expense. Income tax expense decreased from $1.41 million to $1.37
million. This reduction was mainly the result of the tax benefits in 1998 from
the investment in the low income housing limited liability partnership.
8
<PAGE>
RESULTS OF OPERATIONS (continued)
COMPARISON OF YEARS ENDED
DECEMBER 31, 1997 AND 1996
General. Net income for the year ended December 31, 1997 was $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 and increases in net interest income before provision for
loan losses of $795,000, a decrease in non-interest expenses of $146,000,
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 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.
9
<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 (oOTSo)
regulations provide a Net Portfolio Value (oNPVo) 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, 1998, adjustable rate loans comprised 47.68% 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 when possible and review
longer term funding sources. Management also considers the current capital
position of the Bank and the composition of the loan portfolio and monitors
these factors in conjunction with its strategic plan of offering various
mortgage loan products to customers in the Bank's market area. Nonetheless, the
Bank's interest rate exposure, particularly in a rising interest rate
environment, will grow, especially to the extent that loan demand produces
increases in balance sheet growth.
Presented below, as of December 31, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
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 $ 22,263 $ (4,155) (16) 10.92 (130)
+200 24,243 (2,176) (8) 11.64 (58)
+100 25,697 (721) (3) 12.09 (13)
0 26,418 - - 12.22 -
-100 26,388 (31) (0) 11.68 (19)
-200 25,988 (430) (2) 11.37 (54)
-300 25,698 (721) (3) 10.99 (86)
</TABLE>
10
<PAGE>
ASSET/LIABILITY MANAGEMENT (continued)
In the event of a 300 basis point change in interest rate based upon estimates
as of December 31, 1998, the Bank would experience a 3% decrease in NPV in a
declining rate environment and a 16% 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 deposits
and FHLB advances to fund its investment in loans with substantially longer
maturities 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 1998. 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.
11
<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,
--------------------------------------------------------------------------------------------
1998 1997 1996
Average Interest Average Interest Average Interest
Oustanding 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) $179,114 $ 14,848 8.29% $159,095 $ 13,167 8.28% $133,508 $ 10,897 8.16%
Securities 11,692 785 6.71 10,659 709 6.66 8,479 551 6.50
FHLB stock 3,250 260 8.00 3,054 244 7.99 2,411 189 7.84
Other interest-earning
assets 4,006 246 6.14 2,670 195 7.29 1,632 130 7.97
-------- -------- -------- -------- -------- --------
Total interest
earning assets(1) 198,062 16,139 8.15 175,478 14,315 8.16 146,030 11,767 8.06
-------- -------- -------- -------- -------- --------
Non-interest earning assets 6,086 6,001 5,587
Total assets $204,148 $181,479 $151,617
======== ======== ========
Interest-Bearing Liabilities:
Savings $ 9,577 235 2.45 $ 9,655 265 2.75 $ 10,465 288 2.75
Money market 20,732 1,014 4.89 14,232 719 5.05 8,793 437 4.97
Demand and NOW 9,947 148 1.49 8,960 148 1.65 8,276 184 2.22
Time deposit accounts 79,156 4,516 5.71 59,608 3,416 5.73 46,549 2,685 5.77
Borrowings 54,841 3,148 5.74 58,859 3,402 5.78 46,128 2,603 5.64
-------- -------- -------- -------- -------- --------
Total interest
bearing liabilities 174,253 9,061 5.20 151,314 7,950 5.25 120,211 6,197 5.16
-------- -------- -------- -------- -------- --------
Non-interest bearing
liabilities 3,774 3,142 2,539
-------- -------- --------
Total liabilities 178,027 154,456 122,750
Total equity 26,121 27,023 28,867
-------- -------- --------
Total liabilities and
equity $204,148 $181,479 $151,617
======== ======== ========
Net interest income $ 7,078 $ 6,365 $ 5,570
======= ======== ========
Net interest rate spread 2.95% 2.91% 2.90%
Net interest earning assets $ 23,809 $ 24,164 $ 25,819
======== ======== ========
Net yield on average
interest-earning assets 3.57% 3.63% 3.81%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.14x 1.16x 1.21x
==== ==== ====
</TABLE>
- - ---------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
12
<PAGE>
Interest Rate Spread
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,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.17% 8.38% 8.15%
Investment securities 6.68 6.90 6.64
Other interest-earning assets 4.68 5.65 7.01
Combined weighted average yield on
interest-earning assets 8.00 8.26 8.01
Weighted average rate on:
Savings deposits 2.00 2.75 2.75
Money market 4.29 5.10 5.01
NOW deposits 1.49 1.53 2.23
Time deposit accounts 5.48 5.76 5.69
Borrowings 5.40 5.83 5.84
Repurchase agreements 4.53 0.00 0.00
Combined weighted average rate on interest-
bearing liabilities 4.89 5.31 5.31
Spread 3.11 2.95 2.70
</TABLE>
The loans receivable yield, which is the largest portion of interest income,
dropped 21 basis points to 8.17%, a 2.5% drop at the end of period 1998 yield
compared to 8.38% at the end of 1997. The other significant rate drop was in
other interest earning assets. This is composed of mostly short term and
overnight investments. This yield drop of 97 basis points reflects the short
term and overnight investments. This yield drop of 97 basis points reflects the
short term rate changes during 1998. The overall weighted average yield dropped
26 basis points to 8.00% at the end of 1998 down from 8.26% at the end of 1997,
a 3.15% decrease. Interest-bearing liabilities rates dropped on all major
liability products. Time deposits dropped to 5.48% at the end of 1998 compared
<PAGE>
to 5.76% at the end of 1997, a 28 basis point drop. Money market accounts
dropped 81 basis points to 4.29% at the end of 1998 compared to 5.10% at the end
of 1997, a 15.9% drop, again reflecting the drop in short term rates during
1998. Borrowings rates dropped 43 basis points in 1998 to 5.40% compared to
5.83% at the end of 1997. The repurchase agreements reflect the end of period
rates paid on our sweep accounts which were introduced in 1998 for commercial
customers. The combined interest-bearing liabilities weighted average rates
dropped to 4.89% at the end of 1998 compared to 5.31% at the end of 1997. This
42 basis point reduction in interest costs compared to the earning assets yields
reduction of 26 basis points caused the spread to improve to 3.11% at the end of
1998 compared to 2.95% at the end of 1997, a 16 basis point improvement over
1997.
13
<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,
----------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------------- ---------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 1,659 $ 22 $ 1,681 $ 2,116 $ 154 $ 2,270
Securities 69 7 76 145 13 158
FHLB stock 16 - 16 51 4 55
Other interest-
earning assets 86 (35) 51 77 (12) 65
------- -------- -------- -------- -------- --------
Total interest-
earning assets $ 1,830 $ (6) $ 1,824 $ 2,389 $ 159 $ 2,548
======= ======== ======== ======== ======== ========
Interest-bearing
liabilities:
Savings $ (2) $ (28) $ (30) $ (22) $ (1) $ (23)
Money market 319 (24) 295 275 7 282
NOW 15 (15) - 14 (50) (36)
Time deposit
accounts 1,115 (15) 1,100 748 (17) 731
Repurchase
agreements 6 - 6
Other borrowings (230) (30) (260) 734 65 799
------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities $ 1,223 $ (112) $ 1,111 $ 1,749 $ 4 $ 1,753
======= ======== ======== ======== ======== ========
Net interest income $ 713 $ 795
======== ========
</TABLE>
14
<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, 1998, First Federal's
average liquidity ratio was 8.85%, of which 40.9% was comprised of short-term
investments.
During the year ended December 31, 1998, there was a net increase in cash and
cash equivalents of $1.5 million. The major source of funds during the year
included an increase in deposits of $15.8 million which were used to fund a net
increase of $11.4 million in loans and $4.9 million to purchase treasury stock.
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.
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, 1998,
First Federal's tangible capital ratio was 10.2%, its core capital ratio was
10.2% and its risk-based capital to risk weighted assets ratio was 16.6%.
Therefore, First Federal's capital significantly exceeds all capital
requirements currently in effect.
During 1998 the Company completed its fourth stock repurchase program which
began in July 1997. The Company also received approval from the OTS to begin its
fifth stock repurchase program. As the stock is repurchased, it becomes treasury
stock and can be used for general corporate purposes. The fifth repurchase
program was approved in July 1998 for 10% of the outstanding shares or 180,648
shares. The Company had repurchased 140,200 of these shares at the end of
December 1998. At December 31, 1998 the Company had 728,049 shares of treasury
stock and 1,672,417 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.
15
<PAGE>
[GRAPHIC- LOGO FOR CROWE CHIZEK LETTERHEAD]
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. and Subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Indiana
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for the years ended December 31, 1998,
1997 and 1996 in conformity with generally accepted accounting principles.
/S/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
February 11, 1999
16
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Interest earning cash and cash equivalents $ 4,079,792 $ 3,036,847
Noninterest earning cash and cash equivalents 2,215,845 1,782,839
------------- -------------
Total cash and cash equivalents 6,295,637 4,819,686
Interest-earning deposits in financial institutions 100,000 100,000
Securities available for sale 13,658,691 14,628,590
Securities held to maturity (fair value: 1998 - $528,424;
1997 - $756,846) 528,424 756,846
Loans receivable, net of allowance for loan losses of
$1,454,000 in 1998 and $1,194,000 in 1997 185,906,309 174,538,907
Accrued interest receivable 487,393 511,950
Premises and equipment, net 2,265,347 1,964,374
Investments in limited liability partnerships 1,400,000 750,000
Other assets 1,782,791 1,298,244
------------- -------------
Total assets $ 212,424,592 $ 199,368,597
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 3,058,581 $ 2,502,911
Savings 9,811,696 9,335,489
NOW and MMDA 31,354,647 26,632,568
Time deposits 79,110,658 69,078,818
------------- -------------
Total deposits 123,335,582 107,549,786
Borrowed funds 63,080,275 63,521,682
Accrued expenses and other liabilities 1,004,099 1,004,495
------------- -------------
Total liabilities 187,419,956 172,075,963
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
------------- -------------
<S> <C> <C>
Shareholders' equity
Preferred stock, no par value: 500,000 shares
authorized, 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares
authorized; 1998: 2,400,466 shares issued, 1,672,417
shares outstanding; 1997: 2,182,125 shares issued,
1,732,327 outstanding 24,005 21,821
Additional paid in capital 25,128,717 21,350,326
Retained earnings, substantially restricted 12,166,794 13,956,340
Unearned employee stock ownership plan shares (1,163,800) (1,309,275)
Unearned recognition and retention plan shares (433,672) (621,817)
Net unrealized appreciation on securities available
for sale, net of tax 44,105 41,672
Treasury stock, 728,049 and 449,798 common shares, at
cost, at December 31, 1998 and 1997 (10,761,513) (6,146,433)
------------- -------------
Total shareholders'equity 25,004,636 27,292,634
------------- -------------
Total liabilities and shareholders'equity $ 212,424,592 $ 199,368,597
============= =============
</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, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans, including fees $14,848,080 $13,167,279 $10,897,032
Taxable securities 1,025,151 921,263 707,048
Non-taxable securities 19,706 32,587 33,394
Deposits with banks 246,175 194,647 129,581
----------- ----------- -----------
Total interest income 16,139,112 14,315,776 11,767,055
Interest expense
Deposits 5,912,572 4,547,834 3,593,583
Borrowed funds 3,148,229 3,402,363 2,603,092
----------- ----------- -----------
Total interest expense 9,060,801 7,950,197 6,196,675
----------- ----------- -----------
Net interest income 7,078,311 6,365,579 5,570,380
Provision for loan losses 359,988 265,300 235,155
----------- ----------- -----------
Net interest income after provision for loan
losses 6,718,323 6,100,279 5,335,225
Noninterest income
Service charges on deposit accounts 287,480 245,304 151,666
Loan servicing fees 273,263 177,584 122,190
Net realized gain on sale of securities -- -- 348
Other 170,112 142,698 128,363
----------- ----------- -----------
Total noninterest income 730,855 565,586 402,567
Noninterest expense
Salaries and employee benefits 1,841,998 1,530,579 1,340,887
Occupancy 357,133 318,945 279,894
Data processing 436,757 311,537 274,985
Deposit insurance premium 67,637 54,829 605,593
Professional fees 143,960 147,319 137,080
Correspondent bank charges 144,637 142,466 143,398
Other expense 699,176 556,648 426,320
----------- ----------- -----------
Total noninterest expense 3,691,298 3,062,323 3,208,157
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income before income taxes 3,757,880 3,603,542 2,529,635
Income tax expense 1,368,526 1,410,563 962,090
----------- ----------- -----------
Net income $ 2,389,354 $ 2,192,979 $ 1,567,545
=========== =========== ===========
Basic earnings per common share $ 1.50 $ 1.28 $ .80
=========== =========== ===========
Diluted earnings per common share $ 1.41 $ 1.24 $ .79
=========== =========== ===========
</TABLE>
- - ------------
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
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, 1996 $ 21,821 $21,215,284 $11,393,893 $(1,600,225) $ -
Net income - - 1,567,545 - -
Other comprehensive income:
Unrealized gains on securities - - - - -
Reclassifications for
realized (gains) losses - - - - -
Total tax effect - - - - -
Total other comprehensive
income - - - - -
Comprehensive income
Cash dividends ($.28 per share) - - (622,519) - -
Purchase of 408,693 shares of treasury stock - - - - -
16,002 shares committed to be released
under the ESOP - 38,174 - 145,475 -
Purchase of 83,530 shares for RRP - - - - (1,025,136)
Amortization of RRP contributions - - - - 205,027
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1996 21,821 21,253,458 12,338,919 (1,454,750) (820,109)
Net income - - 2,192,979 - -
Other comprehensive income:
Unrealized gains on securities - - - - -
Total tax effect - - - - -
Total other comprehensive income - - - - -
Comprehensive income
Cash dividends ($.30 per share) - - (575,558) - -
Purchase of 86,745 shares of treasury stock - - - - -
Sale of 660 shares of treasury stock - 1,000 - - -
16,002 shares committed to be released
under the ESOP - 95,868 - 145,475 -
Purchase of 550 shares for RRP - - - - (7,625)
Amortization of RRP contributions - - - - 205,917
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1997 21,821 21,350,326 13,956,340 (1,309,275) (621,817)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
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>
Net income $ - $ - $2,389,354 $ - $ -
Other comprehensive income:
Unrealized gains on securities - - - - -
Total tax effect - - - - -
Total other comprehensive income - - - - -
Comprehensive income - - - - -
Cash dividends ($.32 per share) - - (576,273) - -
Purchase of 257,591 shares of treasury stock - - - - -
Sale of 23,220 shares of treasury stock- (31,234) - - - -
Tax effect on stock plans - 50,762 - - -
16,002 shares committed to be released
under the ESOP - 149,764 - 145,475 -
Purchase of 1,100 shares for RRP - 8,656 - - (21,843)
Amortization of RRP contributions - - - - 209,988
Issuance of 218,341 common shares from
declaration of 10% stock dividend 2,184 3,600,443 (3,602,627) - -
---------- ----------- ----------- ----------- ----------
Balance, December 31, 1998 $ 24,005 $25,128,717 $12,166,794 $(1,163,800) $ (433,672)
========== =========== =========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
on Securities Total
Available For Treasury Shareholders'
Sale, Net of Tax Stock Equity
---------------- ----- ------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 2,272 $ - $31,033,045
Net income - - 1,567,545
Other comprehensive income:
Unrealized gains on securities 22,742
Reclassifications for
realized (gains) losses (348) - -
Total tax effect (8,867) - -
Total other comprehensive
income 13,527 - 13,527
Comprehensive income 1,581,072
Cash dividends ($.28 per share) - (622,519)
Purchase of 408,693 shares of treasury stock - (4,826,022) (4,826,022)
16,002 shares committed to be released
under the ESOP - - 183,649
Purchase of 83,530 shares for RRP - - (1,025,136)
Amortization of RRP contributions - 205,027
--------- ------------ ------------
Balance, December 31, 1996 15,799 (4,826,022) 26,529,116
Net income - - 2,192,979
Other comprehensive income:
Unrealized gains on securities 42,836
Total tax effect (16,963) - -
Total other comprehensive income 25,873 - 25,873
Comprehensive income 2,218,852
Cash dividends ($.30 per share) - (575,558)
Purchase of 86,745 shares of treasury stock - (1,328,211) (1,328,211)
Sale of 660 shares of treasury stock - 7,800 8,800
16,002 shares committed to be released
under the ESOP - - 241,343
Purchase of 550 shares for RRP - (7,625)
Amortization of RRP contributions - 205,917
--------- ------------ ------------
Balance, December 31, 1997 41,672 (6,146,433) 27,292,634
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
on Securities Total
Available For Treasury Shareholders'
Sale, Net of Tax Stock Equity
---------------- ----- ------
<S> <C> <C> <C>
Net income $ - $ - $2,389,354
Other comprehensive income:
Unrealized gains on securities 5,996
Total tax effect (3,563) - -
Total other comprehensive income 2,433 2,433
Comprehensive income - - 2,391,787
Cash dividends ($.32 per share) - (576,273)
Purchase of 257,591 shares of treasury stock - (4,907,522) (4,907,522)
Sale of 23,220 shares of treasury stock- 279,255 248,021
Tax effect on stock plans - - 50,762
16,002 shares committed to be released
under the ESOP - - 295,239
Purchase of 1,100 shares for RRP - 13,187 -
Amortization of RRP contributions - 209,988
Issuance of 218,341 common shares from
declaration of 10% stock dividend - - -
--------- ------------ ------------
Balance, December 31, 1998 $ 44,105 $(10,761,513) $ 25,004,636
========= ============ ============
</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, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,389,354 $ 2,192,979 $ 1,567,545
Adjustments to reconcile net income
to net cash from operating activities
Net (gain) loss on sale of premises and equipment (8,481) (152) 421
Gain on sale of securities -- -- (348)
Gain on sale of foreclosed real estate (10,387) (1,335) (6,879)
Provision for loan losses 359,988 265,300 235,155
Depreciation and amortization 161,240 144,898 186,555
Reduction of obligation under ESOP 295,239 241,343 183,649
Amortization of RRP 209,988 205,917 205,027
Net change in:
Other assets (326,636) (381,807) (247,136)
Accrued interest receivable 24,557 (148,387) (130,639)
Accrued expenses and other liabilities (396) (668,619) 823,528
------------ ------------ ------------
Total adjustments 705,112 (342,842) 1,249,333
------------ ------------ ------------
Net cash from operating activities 3,094,466 1,850,137 2,816,878
Cash flows from investing activities
Proceeds from maturities and principal payments
of securities held to maturity 228,422 135,190 93,870
Proceeds from maturities and principal payments
of securities available for sale 6,328,978 1,716,890 2,600,000
Proceeds from sale of securities available for sale -- -- 2,100,348
Purchases of securities available for sale (5,334,188) (4,803,829) (10,316,095)
Proceeds from sale of loans 2,430,541 351,500 --
Purchases of loans (3,045,695) (3,261,911) --
Net change in loans (11,390,311) (25,136,614) (24,469,186)
Expenditures on premises and equipment (481,452) (110,826) (22,455)
Proceeds from sale of premises and equipment 8,825 5,948 50
Proceeds from sale of foreclosed real estate 177,750 98,843 26,990
------------ ------------ ------------
Net cash from investing activities (11,077,130) (31,004,809) (29,986,478)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Advances from FHLB 67,000,000 56,000,000 58,000,000
Repayment of FHLB advances (67,898,967) (48,998,968) (39,500,000)
Payments of demand notes (393,750)
Net change in other borrowed funds 201,310 -- --
Dividends paid (576,273) (575,558) (622,519)
Purchase of stock (4,907,522) (1,335,836) (5,851,158)
Sale of treasury stock 248,021 8,800 --
Net change in deposits 15,785,796 22,203,546 17,143,310
------------ ------------ ------------
Net cash from financing activities 9,458,615 27,301,984 29,169,633
------------ ------------ ------------
Net change in cash and cash equivalents 1,475,951 (1,852,688) 2,000,033
Cash and cash equivalents at beginning of year 4,819,686 6,672,374 4,672,341
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,295,637 $ 4,819,686 $ 6,672,374
============ ============ ============
Cash paid for:
Interest $ 9,093,839 $ 7,909,627 $ 6,154,009
Income taxes 1,637,000 1,573,308 1,034,925
Non-cash transactions:
Investment in obligation relative to
a limited partnership $ 650,000 $ 525,000 $ --
Transfer from loans to other real estate 278,075 97,508 20,112
</TABLE>
- - --------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Nature of Operations 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. Intercompany
transactions and balances have been eliminated in consolidation.
The primary source of income for the Company is the origination of commercial
and residential real estate loans in northeastern Indiana. Loans secured by real
estate mortgages comprise approximately 82% and 77% of the loan portfolio at
December 31, 1998 and 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 and fair values of financial
instruments 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 securities sold under agreements to
repurchase.
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 in other comprehensive income.
Trading securities are carried at fair value, with changes in unrealized holding
gains and losses included in income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an 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 the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
<PAGE>
balance required using past loan loss experience, known and inherent risks in
the nature and volume of 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.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over asset useful lives on
the straight line basis.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
21
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No.123 to measure expense for options granted after 1994, using
an option pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and dividends through the date of issue
of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
<PAGE>
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
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.
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 - 1998
U.S. Government agencies $ 4,057,809 $ 21,658 $ -- $ 4,079,467
Mutual funds 775,412 -- -- 775,412
Mortgage-backed 5,300,481 60,362 (7,031) 5,353,812
States and political
subdivisions 200,000 -- -- 200,000
Equity securities 3,250,000 -- -- 3,250,000
------------ ------------ ------------ ------------
$ 13,583,702 $ 82,020 $ (7,031) $ 13,658,691
============ ============ ============ ============
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
============ ============ ============ ============
Held to maturity - 1998
States and political
subdivisions $ 412,000 $ -- $ -- $ 412,000
Other debt securities 116,424 -- -- 116,424
------------ ------------ ------------ ------------
$ 528,424 $ -- $ -- $ 528,424
============ ======== ======== ============
Held to maturity - 1997
States and political
subdivisions $ 639,000 $ -- $ -- $ 639,000
Other debt securities 117,846 -- -- 117,846
------------ ------------ ------------ ------------
$ 756,846 $ -- $ -- $ 756,846
============ ======== ======== ============
</TABLE>
Contractual maturities of debt securities at year-end 1998 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
23
<PAGE>
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due from one to five years 1,999,242 2,004,763 1,424 1,424
Due from five to ten years 2,258,567 2,274,704 527,000 527,000
Mortgage backed securities 5,300,481 5,353,812 - -
--------------- -------------- --------------- --------------
$ 9,558,290 $ 9,633,279 $ 528,424 $ 528,424
=============== ============== =============== ==============
</TABLE>
Sales of securities available for sale were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds $ -- $ -- $2,100,348
Gross gains -- -- 348
Gross losses -- -- --
</TABLE>
<PAGE>
NOTE 3 - Loans Receivable, Net
Year-end loans were as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Mortgage
Secured by one-to-four family residences $ 113,919,222 $ 109,079,816
Secured by other properties 19,421,609 19,339,654
Construction - residential 6,065,036 8,661,893
Construction - nonresidential 5,300,066 1,934,354
Automobile 12,247,990 11,572,940
Credit card 1,365,708 1,297,424
Commercial 21,392,663 14,579,936
Home equity and second mortgage 5,948,157 6,162,479
Mobile home -- 2,945,635
Other consumer 5,301,984 4,619,695
------------- -------------
Subtotal 190,962,435 180,193,826
Less:
Loans in process (663,499) (355,314)
Undisbursed portion of construction loans (2,799,621) (3,980,594)
Net deferred loan origination fees (139,006) (125,011)
Allowance for loan losses (1,454,000) (1,194,000)
------------- -------------
Loans receivable, net $ 185,906,309 $ 174,538,907
============= =============
</TABLE>
24
<PAGE>
NOTE 3 - Loans Receivable, Net (Continued)
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,194,000 $ 1,027,300 $ 880,566
Provision charged to income 359,988 265,300 235,155
Charge-offs (145,989) (136,601) (133,561)
Recoveries 46,001 38,001 45,140
----------- ----------- -----------
Balance at end of year $ 1,454,000 $ 1,194,000 $ 1,027,300
=========== =========== ===========
</TABLE>
Impaired loans were not material in 1998 and 1997.
NOTE 4 - Premises and Equipment, Net
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 458,331 $ 458,331
Buildings and leasehold improvements 1,665,995 1,625,036
Furniture, fixtures and equipment 1,114,069 718,310
Total costs 3,238,395 2,801,677
Accumulated depreciation and amortization (973,048) (837,303)
----------- -----------
$ 2,265,347 $ 1,964,374
=========== ===========
</TABLE>
NOTE 5 - Deposits
Time deposits of $100,000 or more were $36,827,000 and $27,358,000 at year-end
1998 and 1997.
Scheduled maturities of time deposits for the next five years were as follows:
1999 $ 56,809,274
2000 17,700,232
2001 3,931,438
2002 361,195
2003 308,519
--------------
$ 79,110,658
==============
25
<PAGE>
NOTE 6 - Borrowed Funds
Year-end borrowed funds were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Federal Home Loan Bank advances $62,097,715 $62,996,682
Demand notes 781,250 525,000
Securities sold under repurchase agreements 201,310 --
----------- -----------
$63,080,275 $63,521,682
=========== ===========
</TABLE>
The majority of the FHLB advances have variable interest rates ranging from
4.60% to 6.54%. Scheduled maturities at year-end 1998 were as follows:
1999 $ 18,099,170
2000 11,599,170
2001 399,375
2002 2,000,000
2003 17,000,000
Thereafter 13,000,000
--------------
$ 62,097,715
==============
Advances are required, under a blanket agreement, to be collateralized by
securities and loans in an amount at least equal to 160% of the total advances
outstanding. In addition to Federal Home Loan Bank stock of $3.3 million,
approximately $111.3 million in eligible mortgage loans and $8.9 in eligible
securities were available in connection with these borrowings. The Bank may
borrow up to an aggregate of $74 million from the Federal Home Loan Bank.
Approximately $564,000 in securities were pledged in connection with the
securities sold under repurchase agreements.
The demand notes relate to investments in limited partner interests in
partnerships formed for the construction, ownership and management of affordable
housing projects. The total original amount of the notes was $1,400,000 and
$750,000 for 1998 and 1997, with $618,750 and $225,000 funded at year-end 1998
and 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. Expense for 1998, 1997 and 1996 was approximately
$23,000, $30,000, and $52,000.
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 for 1998, 1997 and 1996 was
approximately $32,000, $23,000 and $18,000.
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 $200,000 and $182,000 at year-end 1998 and 1997. The cost of the
plans charged to expense was approximately $61,000, $48,000 and $64,000 for
1998, 1997 and 1996.
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
$887,000 and $847,000 at year-end 1998 and 1997. The income derived from the
investment in life insurance included in other income was approximately $40,000,
$38,000 and $40,000 for 1998, 1997 and 1996.
Employee Stock Ownership Plan (ESOP): An ESOP exists for the benefit of
substantially all employees. Contributions to the ESOP are made by the Company
and are determined by the 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 192,042 shares of stock at $9.09 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.
Shares are allocated among participants each December 31 on the basis of
principal repayments made by the ESOP on the loan from the Company, according to
each participant's relative compensation.
During 1998 and 1997, contributions, including dividends on unearned ESOP
shares, were approximately $99,000 and $98,000. ESOP compensation expense was
approximately $249,000, $194,000, and $134,000 for 1998, 1997 and 1996.
<PAGE>
Shares held by the ESOP at year-end are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Allocated shares 47,717 31,715
Shares released for allocation 16,002 16,002
Unreleased shares 128,018 144,020
Shares vested and withdrawn 305 305
---------- ----------
Total ESOP shares 192,042 192,042
========== ==========
Fair value of unreleased shares $2,144,302 $2,896,760
========== ==========
</TABLE>
Recognition and Retention Plan (RRP): The RRP provides for issue of shares to
directors, officers and employees. The maximum total shares available under the
RRP are 96,014. During 1996, 83,530 shares were awarded to RRP participants at
$12.27 per share. In 1997, an additional 550 shares were awarded at $13.86; in
1998, there were an additional 1,100 shares awarded at 19.86. The expense
associated with the RRP was approximately $210,000, $206,000 and $205,000 in
1998, 1997 and 1996.
27
<PAGE>
NOTE 8 - Income Taxes
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current federal $ 1,147,495 $ 1,154,613 $ 850,741
Deferred federal (95,097) (55,894) (100,203)
Current state 329,538 327,116 239,901
Deferred state (13,410) (15,272) (28,349)
----------- ----------- -----------
Income tax expense $ 1,368,526 $ 1,410,563 $ 962,090
=========== =========== ===========
</TABLE>
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Income taxes at statutory rate $ 1,277,679 $ 1,225,204 $ 860,076
Tax effect of:
State tax, net of federal income tax effect 208,644 205,817 139,624
Low income housing credit (72,372) (14,000) -
Other, net (45,425) (6,458) (37,610)
Income tax expense $ 1,368,526 $ 1,410,563 $ 962,090
-------------- --------------- --------------
Effective tax rate 36.4% 39.1% 38.0%
==== ==== ====
</TABLE>
The components of the net deferred tax asset recorded in the balance sheet at
year end are as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 79,080 $ 72,055
Bad debts 325,901 196,844
Deferred loan fees 55,047 49,517
Unearned compensation 68,957 81,564
Other 15,752 9,698
--------- ---------
544,737 409,678
Deferred tax liabilities
Depreciation (118,533) (120,333)
Other (73,099) (41,185)
--------- ---------
(191,632) (161,518)
Valuation allowance -- --
--------- ---------
Net deferred tax asset $ 353,105 $ 248,160
========= =========
</TABLE>
Retained earnings at December 31, 1998 and 1997 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, 1998 and 1997.
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.
28
<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.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
under-capitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
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
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital
(to risk weighted assets) $ 23.0 16.6% $ 11.1 8.0% $ 13.9 10.0%
Tier 1 (core) capital
(to risk weighted assets) 21.6 15.6 5.5 4.0 8.3 6.0
Tier 1 (core) capital
(to adjusted total assets) 21.6 10.2 6.4 3.0 N/A N/A
Tangible capital
(to adjusted total assets) 21.6 10.2 3.2 1.5 N/A N/A
Tier 1 (core) capital
(to average assets) 21.6 10.6 8.2 4.0 10.2 5.0
1997
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
</TABLE>
<PAGE>
The Bank was categorized as well capitalized at year end 1998 and 1997.
Regulations of the Office of Thrift Supervision limit capital distributions by
savings institutions. 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 up to one-half the capital in excess of the most stringent capital
requirement at the beginning of the calendar year. At year end 1998,
approximately $4.8 million of the Bank's retained earnings is potentially
available for distribution to the Company.
29
<PAGE>
NOTE 10 - Commitments and Contingencies and
Financial Instruments with Off-Balance-Sheet Risk
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These agreements to provide credit or to support the credit of others, as long
as conditions established in the contract are met, usually have expiration
dates. Commitments may expire without being used. Off-balance-sheet risk to
credit loss exists up to the face amount of these instruments, although material
losses are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.
Financial instruments with off-balance-sheet risk were as follows at year end.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Fixed rate commitments $ 8,525,000 $ 4,159,000
Variable rate commitments 13,628,000 14,916,000
Credit card arrangements 2,835,000 2,636,000
Letters of credit 770,000 760,000
</TABLE>
Most loan commitments have terms up to 60 days. At year-end 1998, fixed
commitments have contractual rates ranging from 6.50% to 8.875%. Credit cards
are fixed at 14.9%. Most variable rate arrangements are tied either to national
monthly median cost of funds, prime or the U.S. Treasury bill rate and have
spreads between 0% and 5%.
NOTE 11 - Stock Options
Options to buy stock are granted to directors, officers and employees under the
stock option and incentive plan. Exercise price is the market price at date of
grant. The maximum option term is ten years and options vest over five years. At
year end 1998, 25,056 shares were authorized for future grants.
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 1998, 1997 and 1996.
30
<PAGE>
NOTE 11 - Stock Options (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- --------------
<S> <C> <C> <C>
Net income as reported $ 2,389,354 $ 2,192,979 $ 1,567,545
Pro forma net income 2,215,835 2,022,367 1,398,379
Basic earnings per common share as reported $ 1.50 $ 1.28 $ .80
Diluted earnings per common share as reported 1.41 1.24 .79
Pro forma basic earnings per common share 1.39 1.18 .71
Pro forma diluted earnings per common share 1.31 1.15 .71
</TABLE>
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
Information about option grants follows:
<TABLE>
<CAPTION>
Number Exercise Fair Value
of Options Price of Grants
---------- ----- ---------
<S> <C> <C> <C>
Outstanding, beginning of 1997 210,027
Granted 1,650 $ 13.86 $ 4.38
Exercised (110) 10.68
Outstanding, end of 1997 211,567
Granted, January 1, 1998 1,650 19.38 4.27
Granted, June 16, 1998 1,650 20.34 4.54
Exercised (23,220) 10.68
Outstanding, end of 1998 191,647
</TABLE>
The fair value of options granted during 1998 is estimated using the following
weighted-average information: risk-free interest rate of 5.46% and 5.52%,
expected life of 7 years, expected volatility of stock price of 17.5%, and
expected dividends of 1.47% per year.
Options outstanding at year-end were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Number of options 191,647 211,567
Minimum exercise price $ 10.68 $ 10.68
Maximum exercise price $ 20.34 $ 13.86
Weighted-average exercise price $ 10.87 $ 10.71
Weighted-average remaining option life 7.1 years 8.0 years
</TABLE>
There are 68,209 options exerciseable at year-end 1998.
31
<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, 1998 $ 2,538,569
New loans 634,500
Repayments (312,447)
-------------
Balance - December 31, 1998 $ 2,860,622
=============
Related party deposits were $418,000 at year-end 1998.
NOTE 13 - Fair Values of Financial Instruments
Following are carrying amounts and estimated fair values at year end:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
- - ----------------------------------------------------------------------------------------------------------
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 $ 6,395,637 $ 6,395,637 $ 4,919,686 $ 4,919,686
Securities available for sale 13,658,691 13,658,691 14,628,590 14,628,590
Securities held to maturity 528,424 528,424 756,846 756,846
Loans receivable, net 185,906,309 189,539,000 174,538,907 176,470,000
Accrued interest receivable 487,393 487,393 511,950 511,950
Financial liabilities:
Deposits (123,335,582) (124,152,000) (107,549,786) (107,866,000)
Borrowed funds (63,080,275) (63,463,000) (63,521,682) (63,469,000)
Accrued interest payable (250,389) (250,389) (283,427) (283,427)
</TABLE>
32
<PAGE>
NOTE 13 - Fair Values of Financial Instruments (Continued)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents
and interest-earning deposits in financial institutions and accrued interest is
considered to approximate cost. The estimated fair value for securities is based
on quoted market values for the individual securities or equivalent securities.
The estimated fair value for loans is based on estimates of the rate the Company
would charge for similar such loans at December 31, 1998 and 1997, applied for
the time period until estimated repayment. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair value
for time deposits and borrowed funds is based on estimates of the rate the
Company would pay on such deposits or for such borrowings at December 31, 1998
and 1997, applied for the time period until maturity. The estimated fair value
of other financial instruments and off-balance sheet loan commitments
approximates cost and is 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, 1998 or 1997, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1998 and 1997 should not necessarily be considered to apply at subsequent
dates.
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, 1998 and 1997
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,875,884 $ 225,944
Securities available for sale 200,000 --
Loan receivable from Employee Stock Ownership Plan 1,163,800 1,309,275
Loan receivable from subsidiary bank -- 2,000,000
Investment in subsidiary bank 21,649,524 23,757,476
Other assets 119,229 8,899
----------- -----------
Total assets $25,008,437 $27,301,594
=========== ===========
LIABILITIES
Accrued expenses $ 3,801 $ 8,960
SHAREHOLDERS' EQUITY 25,004,636 27,292,634
----------- -----------
Total liabilities and shareholders' equity $25,008,437 $27,301,594
=========== ===========
</TABLE>
33
<PAGE>
NOTE 14 - Parent Company Only Condensed
Financial Information (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 118,569 $ 263,767 $ 497,921
Dividend from subsidiary 5,000,000 -- --
----------- ----------- -----------
Total income 5,118,569 263,767 497,921
Operating expenses 189,742 166,532 176,014
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 4,928,827 97,235 321,907
Income tax expense/(benefit) (54,297) 11,774 100,391
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary bank 4,983,124 85,461 221,516
Equity in undistributed earnings of
subsidiary bank (2,593,770) 2,107,518 1,346,029
----------- ----------- -----------
Net income $ 2,389,354 $ 2,192,979 $ 1,567,545
=========== =========== ===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASHFLOWS For the years ended December 31, 1998, 1997
and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,389,354 $ 2,192,979 $ 1,567,545
Adjustments to reconcile net income to cash
provided by operations
Equity in undistributed earnings of
subsidiary bank 2,593,770 (2,107,518) (1,346,029)
Change in
Other assets (59,569) 57,050 73,466
Accrued expenses (5,159) (288,197) 229,806
----------- ----------- -----------
Net cash from operating activities 4,918,396 (145,686) 524,788
Cash flows from investing activities
Repayments on loan receivable from
subsidiary bank 2,000,000 1,750,000 4,850,000
Repayments on loan receivable from ESOP 145,475 145,475 145,475
Purchase of securities available for sale (200,000) -- --
----------- ----------- -----------
Net cash from investing activities 1,945,475 1,895,475 4,995,475
Cash flows from financing activities
Dividends paid (576,273) (575,558) (622,519)
Purchase of stock (4,907,522) (1,328,211) (4,826,022)
Proceeds from sales of stock 269,864 8,800 --
----------- ----------- -----------
Net cash from financing activities (5,213,931) (1,894,969) (5,448,541)
----------- ----------- -----------
Net change in cash and cash equivalents 1,649,940 (145,180) 71,722
Cash and cash equivalents at beginning of period 225,944 371,124 299,402
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,875,884 $ 225,944 $ 371,124
=========== =========== ===========
</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, 1998, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Earnings Per Share
Net income available to common
shareholders $2,389,354 $2,192,979 $1,567,545
========== ========== ==========
Weighted average common shares
outstanding before adjustment 1,790,450 1,942,723 2,225,544
Less: unallocated ESOP shares 144,019 160,021 176,024
Less: non-vested RRP shares 48,788 67,368 83,530
---------- ---------- ----------
Weighted average common shares
outstanding for basic earnings per share 1,597,643 1,715,334 1,965,990
---------- ---------- ----------
Earnings Per Share $ 1.50 $ 1.28 $ .80
========== ========== ==========
Earnings Per Share Assuming Dilution
Net income available to common
shareholders, per above $2,389,354 $2,192,979 $1,567,545
========== ========== ==========
Weighted average common shares
outstanding 1,597,643 1,715,334 1,965,990
Add: dilutive effects of assumed conversions
and exercises of stock options 92,008 47,034 12,066
---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 1,689,651 1,762,368 1,978,056
========== ========== ==========
Earnings Per Share Assuming Dilution $ 1.41 $ 1.24 $ .79
========== ========== ==========
</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.
<TABLE>
<CAPTION>
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
<S> <C> <C> <C>
March 31, 1997 $14.32 $12.27 $.073
June 30, 1997 $14.55 $11.36 $.073
September 30, 1997 $18.41 $13.41 $.073
December 31, 1997 $20.12 $16.59 $.077
March 31, 1998 $20.68 $19.09 $.077
June 30, 1998 $21.02 $18.97 $.077
September 30, 1998 $20.91 $15.00 $.077
December 31, 1998 $18.00 $14.89 $.090
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
As of February 11, 1999, there were approximately 555 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Corporate Office Special Counsel Independent Auditor
Northeast Indiana Bancorp, Inc. Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
648 North Jefferson Street 1100 New York Avenue, N.W. 330 E. Jefferson Blvd., P.O. Box 7
Huntington, Indiana 46750 Washington, D.C. 20005 South Bend, Indiana 46624
(219) 356-3311
</TABLE>
37
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
Northeast Indiana First Federal 100% Federal
Bancorp, Inc. Savings Bank
First Federal Northeast Indiana 100% Indiana
Savings Bank Financial, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated
February 11, 1999 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, 1998) 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, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31,1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,215,845
<INT-BEARING-DEPOSITS> 4,179,792
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,658,691
<INVESTMENTS-CARRYING> 528,424
<INVESTMENTS-MARKET> 0
<LOANS> 187,360,309
<ALLOWANCE> 1,454,000
<TOTAL-ASSETS> 212,424,592
<DEPOSITS> 123,335,582
<SHORT-TERM> 19,081,730
<LIABILITIES-OTHER> 1,004,099
<LONG-TERM> 43,998,545
0
0
<COMMON> 24,005
<OTHER-SE> 24,980,631
<TOTAL-LIABILITIES-AND-EQUITY> 212,424,592
<INTEREST-LOAN> 14,848,080
<INTEREST-INVEST> 1,044,857
<INTEREST-OTHER> 246,175
<INTEREST-TOTAL> 16,139,112
<INTEREST-DEPOSIT> 5,912,572
<INTEREST-EXPENSE> 9,060,801
<INTEREST-INCOME-NET> 7,078,311
<LOAN-LOSSES> 359,988
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,691,298
<INCOME-PRETAX> 3,757,880
<INCOME-PRE-EXTRAORDINARY> 2,389,354
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,389,354
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 0
<LOANS-NON> 1,208,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,194,000
<CHARGE-OFFS> 146,000
<RECOVERIES> 46,000
<ALLOWANCE-CLOSE> 1,454,000
<ALLOWANCE-DOMESTIC> 109,800
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,344,200
</TABLE>
