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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission file number 0-26128
NORTHWEST INDIANA BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1927981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9204 COLUMBIA AVENUE 46321
MUNSTER, INDIANA (Zip Code)
(Address of principal executive offices)
(219) 836-9690
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the average bid and ask prices for the registrant's Common Stock at
February 28, 1998, at that date, the aggregate market value of the registrant's
Common Stock held by nonaffiliates of the registrant (assuming solely for the
purposes of this calculation that all directors and executive officers of the
registrant are "affiliates") was $35,997,822.
There were 1,381,512 shares of the registrant's Common Stock, without par value,
outstanding at February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K:
1. 1997 Annual Report to Shareholders. (Parts II and IV)
2. Definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders. (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
NorthWest Indiana Bancorp, an Indiana corporation (the "Bancorp"), was
incorporated on January 31, 1994, and is the holding company for Peoples Bank SB
(the "Bank"), the resulting Indiana savings bank in the conversion of Peoples
Bank from a federal stock savings bank to an Indiana stock savings bank.
Pursuant to the conversion, on July 31, 1994, all of the outstanding stock of
Peoples Bank was converted into shares of Common Stock, without par value, of
the Bancorp. As a result, Peoples Bank SB is a wholly owned subsidiary of the
Bancorp. The Bancorp has no other business activity other than being the holding
company for Peoples Bank SB.
The Bank is primarily engaged in the business of attracting deposits
from the general public and the origination of loans, mostly upon the security
of single family residences, and to a lesser extent commercial real estate and
construction loans, as well as various types of consumer loans and commercial
business loans, within its primary market area of Lake County, in northwest
Indiana. In addition, the Bank's trust department provides estate planning,
guardianships, land trusts, retirement planning, self-directed IRA and Keogh
accounts, investment agency accounts, and serves as personal representative of
estates and acts as trustee for revocable and irrevocable trusts.
The Bank's deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), an agency of the federal government. As
the holding company for the Bank, the Bancorp is subject to comprehensive
examination, supervision and regulation by the Board of Governors of the Federal
Reserve System ("FRB"), while the Bank is subject to comprehensive examination,
supervision and regulation by both the FDIC and the Indiana Department of
Financial Institutions ("DFI"). The Bank is also subject to regulation by the
FRB governing reserves required to be maintained against certain deposits and
other matters. The Bank is also a member of the Federal Home Loan Bank ("FHLB")
of Indianapolis, which is one of the twelve regional banks comprising the system
of Federal Home Loan Banks ("FHLB System").
The Bancorp maintains its corporate office at 9204 Columbia Avenue,
Munster, Indiana, from which it oversees the operation of its seven branch
locations. For further information, see "Properties."
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FORWARD-LOOKING STATEMENTS
Statements contained in this filing on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. The Bancorp cautions readers that
forward-looking statements, including without limitation those relating to the
Bancorp's future business prospects, interest income and expense, net income,
liquidity, and capital needs are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements, due, among other things, to factors identified in
this filing, including the following:
REGULATORY RISK. The banking industry is heavily regulated. These
regulations are intended to protect depositors, not shareholders. As discussed
above, the Bank and Bancorp are subject to regulation and supervision by the
DFI, FDIC, and FRB. The burden imposed by federal and state regulations puts
banks at a competitive disadvantage compared to less regulated competitors such
as finance companies, mortgage banking companies and leasing companies. The
banking industry continues to lose market share to competitors.
LEGISLATION. Because of concerns relating to the competitiveness and
the safety and soundness of the industry, Congress continues to consider a
number of wide-ranging proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to combine banks and thrifts under a unified charter, to
combine regulatory agencies, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of depository institutions,
bank holding companies, and competitors of depository institutions. Management
cannot predict whether or in what form any of these proposals will be adopted or
the extent to which the business of the Bancorp or the Bank may be affected
thereby.
CREDIT RISK. One of the greatest risks facing lenders is credit risk,
that is, the risk of losing principal and interest due to a borrower's failure
to perform according to the terms of a loan agreement. While management attempts
to provide an allowance for loan losses at a level adequate to cover losses
based on loan portfolio growth, past loss experience, general economic
conditions, information about specific borrower situations, and other factors,
future adjustments to reserves may become necessary, and net income could be
significantly affected, if circumstances differ substantially from assumptions
used with respect to such factors.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. The Bank's primary market area
for deposits and loans encompasses Lake County, in northwest Indiana, where all
of its offices are located. Ninety-five percent of the Bank's business
activities are within this area. This concentration exposes the Bank to risks
resulting from changes in the local economy. A dramatic drop in local real
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estate values would, for example, adversely affect the quality of the Bank's
loan portfolio.
INTEREST RATE RISK. The Bank's earnings depend to a great extent upon
the level of net interest income, which is the difference between interest
income earned on loans and investments and the interest expense paid on deposits
and other borrowings. While the Bank attempts to balance the maturities of the
Bank's assets in relation to maturities of liabilities (gap management), gap
management is not an exact science. Rather, it involves estimates as to how
changes in the general level of interest rates will impact the yields earned on
assets and the rates paid on liabilities. Moreover, rate changes can vary
depending upon the level of rates and competitive factors. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could have an adverse effect on net interest margins
and results of operations of the Bancorp. To moderate unfavorable operating
results in periods of rising or high interest rates, the Bank restructures its
asset-liability mix on an ongoing basis. Increasing the amount of
interest-earning assets that are rate sensitive, extending the maturities of
customer deposits, increasing the balances of NOW/checking accounts and
utilizing cost effective borrowings are all part of management's commitment
toward reducing the Bank's overall vulnerability to interest rate risk. While
these steps may reduce the overall vulnerability to interest rate risk, the Bank
will still be adversely affected by a rising or high interest rate environment,
and is beneficially affected by a falling or low interest rate environment
because rate sensitive liabilities exceed rate sensitive assets within a one
year time period.
At December 31, 1997, the Bank's one year unadjusted GAP; i.e., the
difference between interest-earning assets maturing or repricing during the next
twelve months and interest-bearing liabilities maturing in the same period as a
percentage of total assets, was -41.19%. The GAP position incorporates the
Bank's internal data as related to the maturity/repricing and
repayment/withdrawal of interest-earning assets and interest-bearing
liabilities. The Bank has not experienced material earnings volatility as a
result of the unadjusted GAP, because a significant portion of the Bank's
deposits do not reprice on a contractual basis.
As is common in the banking industry, management makes adjustments to
the timing and magnitude of non-contractual deposit repricing to more accurately
reflect anticipated pricing behavior and exposure to interest rate risk. These
adjustments include assumptions on rate/volume elasticity for checking and
non-interest bearing deposits, NOW accounts, money market accounts and savings
accounts. The table which follows is first presented without adjustment for
expected repricing behavior. Then, as presented in the management adjustment
line, these balances have been distributed over a number of periods to reflect
those portions of such accounts that are expected to reprice over the respective
periods. The distribution of the balances over the repricing periods represents
an aggregation of allocations. A core amount
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of transaction and savings account balances has been calculated by reviewing
historical data on short-term interest rates and account balance activity. The
core balance is considered non-rate sensitive and is classified as due/repricing
between one and five years. Management expects to continue the same methodology
in response to future market rate changes; however, management adjustments may
change as customer preferences and competitive market conditions change. All
management adjustments are reflected in the cumulative management adjusted GAP
line. The cumulative GAP reflects sensitivity to interest rate changes over
time. The Bank's management believes that the Bank's adjusted one year GAP of
- -11.00% has been maintained within an acceptable range in view of the prevailing
interest rate environment. There can be no assurance that the assets and
liabilities will have the projected maturities used in developing this table.
The GAP position is a static indicator and is not a predictor of net interest
income for a dynamic business in a rapidly changing environment. Further
discussion of interest rate risk can be found under the caption "Quantitative
and Qualitative Disclosures about Market Risk" in the Bancorp's 1997 Annual
Report to Shareholders.
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GAP Position at December 31, 1997
- ---------------------------------
0-3 4-12 1-5 Over 5
months months years years Total
------- ------ --------- -------- --------
(dollars in thousands)
Real estate loans....... $ 43,310 $49,165 $107,900 $42,548 $242,923
Consumer loans ......... 1,545 1,358 2,685 73 5,661
Commercial business
loans and other ...... 18,729 2,453 2,436 11 23,629
Securities held-to-
maturity ............. 1,501 6,990 15,715 5,156 29,362
Interest-bearing balances
and federal funds .... 3,570 --- --- --- 3,570
------- ------ --------- -------- --------
Total .............. 68,655 59,967 128,735 47,788 305,145
------- ------ --------- -------- --------
Certificates of deposit. 66,081 79,318 20,456 --- 165,855
Checking and non-interest
bearing deposits .... 16,685 --- --- --- 16,685
NOW accounts ........... 23,656 --- --- --- 23,656
Money market accounts .. 22,235 --- --- --- 22,235
Savings accounts ....... 43,659 --- --- --- 43,659
Borrowed funds ......... 3,208 5,420 6,000 --- 14,628
------- ------- --------- -------- -------
Total .............. 175,524 84,738 26,456 --- 286,718
------- ------- --------- -------- -------
At December 31, 1997:
GAP .................... (106,869) ( 24,771) 102,279 47,788
--------- --------- -------- -------
Cumulative GAP ......... $(106,869) $(131,640) $(29,361) $18,427
========= ========= ======== =======
Cumulative GAP as a per-
cent of total assets.. -33.44% -41.19% -9.19% 5.77%
========= ========= ======== =======
Management adjustments.. $ 102,059 $ 96,476 $ --- $ ---
Cumulative management
adjusted GAP ........ $ (4,810) $ (35,164) $(29,361) $18,427
========== ========== ========= =======
Cumulative management
adjusted GAP/total
assets .............. -1.50% -11.00% -9.19% 5.77%
========== ========== ========= =======
COMPETITION. The activities of the Bancorp and the Bank in the
geographic market served involve competition with other banks as well as with
other financial institutions and enterprises, many of which have substantially
greater resources than those available to the Bancorp. In addition, non-bank
competitors are generally not subject to the extensive regulation applicable to
the Bancorp and the Bank.
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LENDING ACTIVITIES
GENERAL. Over the years, the Bank has directed its lending efforts
toward the origination of loans with adjustable rates and/or shorter terms to
maturity. Product offerings include adjustable rate residential and commercial
mortgages, commercial business loans tied to the prime interest rate, variable
rate home equity lines of credit and consumer loans. It is management's goal
that all programs are marketed aggressively and priced competitively.
The Bank is primarily a portfolio lender. Mortgage banking activities
are limited to the sale of fixed rate mortgage loans with contractual maturities
of thirty years. These loans are sold in the secondary market because of the
additional exposure to interest rate risk associated with this product. All loan
sales are made to the Federal Home Loan Mortgage Corporation ("FHLMC"). Loans
are sold in the secondary market with servicing retained by the Bank. All loans
held for sale are recorded at the lower of cost or market value.
Under Indiana Law, an Indiana stock savings bank generally may not make
any loan to a borrower or its related entities if the total of all such loans by
the savings bank exceeds 15% of its capital and unimpaired surplus (plus up to
an additional 10% of capital and unimpaired surplus, in the case of loans fully
collateralized by readily marketable collateral); provided, however, that
certain specified types of loans are exempted from these limitations or subject
to different limitations. The maximum amount which the Bank could have loaned to
one borrower and the borrower's related entities at December 31, 1997, under the
15% of capital and surplus limitation was approximately $4,883,000. At December
31, 1997, the Bank had no loans which exceeded the regulatory limitations.
At December 31, 1997, there were no concentrations of loans in any type
of industry which exceeded 10% of total loans that were not otherwise disclosed
as a loan category.
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LOAN PORTFOLIO. The following table sets forth selected data relating
to the composition of the Bank's loan portfolio by type of loan and type of
collateral at the end of each of the last five years. The amounts are in
thousands (000's).
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Type of loan:
Conventional real estate loans:
Construction and
development loans $ 21,440 $ 13,248 $ 8,913 $ 8,451 $ 4,893
Loans on existing
properties (1) 221,482 208,601 194,779 196,468 182,571
Consumer loans 5,661 4,890 3,527 3,172 3,833
Commercial business, other(2) 23,630 17,957 15,074 13,839 12,908
-------- -------- -------- -------- --------
Loans receivable(3) $272,213 $244,696 $222,293 $221,930 $204,205
======== ======== ======== ======== ========
Type of collateral:
Real estate:
1-to-4 family $178,091 $164,590 $152,485 $152,208 $136,806
Other dwelling units, land
and commercial real estate 64,831 57,259 51,207 52,711 50,658
Consumer loans 5,410 4,619 3,335 2,960 3,370
Commercial business, other(2) 21,712 16,306 13,893 13,288 12,520
-------- -------- -------- -------- --------
Loans receivable (4) $270,044 242,774 $220,920 $221,167 $203,354
======== ======== ======== ======== ========
Average loans outstanding
during the period (3) $254,219 $232,465 $221,352 $213,349 $202,106
======== ======== ======== ======== ========
(1) Includes construction loans converted to permanent loans and commercial
real estate loans.
(2) Includes government loans and overdrafts to deposit accounts.
(3) Net of unearned income and deferred loan fees.
(4) Net of unearned income and deferred loan fees. Does not include unsecured
loans.
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LOAN ORIGINATIONS, PURCHASES AND SALES. Set forth below is a table
showing loan origination and sale activity for each of the last three years.
The amounts are in thousands (000's).
1997 1996 1995
------- ------- -------
Loans originated:
Conventional real estate loans:
Construction and development loans $ 13,168 $ 16,244 $ 9,434
Loans on existing property 23,461 26,811 12,914
Loans refinanced 14,824 10,253 15,961
------- ------- -------
Total conventional real estate
loans originated 51,453 53,308 38,309
Commercial business loans 60,944 53,580 41,844
Consumer loans 4,591 7,290 4,690
-------- -------- -------
Total loans originated $116,988 $114,178 $84,843
======== ======== =======
Loan participations purchased $ 3,240 $ -- $ 33
======== ======== =======
Whole loans and participations sold $ 1,820 $ 2,011 $ 2,986
======== ======== =======
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1997, regarding the dollar amount of loans in the
Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Contractual principal repayments of
loans do not necessarily reflect the actual term of the loan portfolio. The
average life of mortgage loans is substantially less than their contractual
terms because of loan prepayments and because of enforcement of due-on-sale
clauses, which give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the property
subject to the mortgage and the loan is not repaid. The amounts are stated in
thousand's (000's).
Maturing
-------------------------------------------
After one
Within but within After
one year five years five years Total
-------- ----------- ---------- --------
Real estate loans $ 35,946 $ 63,106 $ 143,870 $242,922
Consumer loans 2,702 2,886 73 5,661
Commercial business loans 16,388 5,707 1,535 23,630
-------- ----------- ---------- --------
Total loans receivable $ 55,036 $ 71,699 $ 145,478 $272,213
======== =========== ========== ========
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The table below sets forth the dollar amount of all loans due after one
year from December 31, 1997, which have predetermined interest rates or have
floating or adjustable interest rates. The amounts are stated in thousands
(000's).
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -----
Real estate loans $72,688 $134,288 $206,976
Consumer loans 2,758 201 2,959
Commercial business loans 1,713 5,529 7,242
------- -------- --------
Total $77,159 $140,018 $217,177
======= ======== ========
LENDING AREA. The primary lending area of the Bank encompasses all of
Lake County in northwest Indiana, where a majority of loan activity is
concentrated. The Bank is also an active lender in Porter, LaPorte, Newton and
Jasper counties in Indiana. During the past 15 years, the communities of
Munster, Highland, Crown Point, Dyer, St. John, Merrillville and Schererville
have experienced rapid growth and, therefore, have provided the greatest lending
opportunities. At December 31, 1997, the housing vacancy rate in the Bank's
primary lending area was below 5%.
LOAN COMMITMENTS. At the present time, residential real estate loan
commitments must be accepted within 14 days by the borrower(s) signing a
commitment acceptance and paying required loan fees. Fixed rate loans must close
within 45 days of the date of the application, while adjustable rate loans must
close within 60 days of the date of the application. Days are measured by
calendar days from the date on the commitment letter. Approximately 90% of all
commitments issued are exercised by borrowers. Loan commitments on commercial
real estate and non-mortgage loans are given under various terms and conditions
as may be warranted by the project.
LOAN ORIGINATION FEES. All loan origination and commitment fees, as
well as incremental direct loan origination costs, are deferred and amortized
into income as yield adjustments over the contractual lives of the related
loans.
LOAN ORIGINATION PROCEDURE. The primary sources for loan originations
are referrals from real estate brokers and builders, solicitations by the Bank's
lending staff, and advertising of loan programs and rates. The Bank employs no
staff appraisers. All appraisals are performed by fee appraisers that have been
approved by the Bank's Board of Directors and who meet all federal guidelines
and state licensing and certification requirements.
Designated officers of the Bank have authorities, established by the
Bank's Board of Directors, to approve loans. Loans from $600,000 to $1,000,000
are approved by the loan officers loan committee. Loans from $1,000,000 to
$1,250,000 are approved by the senior officers loan committee. All loans in
excess of $1,250,000, up to the legal lending limit of the Bank, must be
approved by the Bank's Board of Directors or its Executive Committee.
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(All members of the Bank's Board of Directors and Executive Committee are also
members of the Bancorp's Board of Directors and Executive Committee,
respectively.) Loans to executive officers of the Bank or the Bancorp and their
affiliated parties must be approved by a disinterested majority of the Bank's
Board of Directors. Loans to directors and principal shareholders must be
approved by a disinterested majority of the Bank's Board of Directors when the
extension of credit exceeds $50,000 or, when the aggregated amount of all
extensions of credit exceeds $500,000.
All loans secured by personal property must be covered by insurance in
an amount sufficient to cover the full amount of the loan. All loans secured by
real estate must be covered by insurance in an amount sufficient to cover the
full amount of the loan or restore the property to its original state. First
mortgage loans must be covered by a lenders title insurance policy in the amount
of the loan.
THE CURRENT LENDING PROGRAMS
RESIDENTIAL MORTGAGE LOANS. The primary lending activity of the Bank
has been the granting of conventional mortgage loans to enable borrowers to
purchase existing homes or construct new homes. The residential loan portfolio
also includes loans on two-to-four family dwellings. Conventional loans are made
up to a maximum of 97% of the appraised value of the property, or purchase price
if lower than the appraisal. For loans made in excess of 80% of value, private
mortgage insurance is required in an amount sufficient to reduce the Bank's
exposure to 80% or less of the appraised value of the property. Loans insured by
private mortgage insurance companies can be made for up to 95% of value. During
1997, over 90% of mortgage loans closed were conventional loans with borrowers
having 20% or more equity in the property. This type of loan does not require
private mortgage insurance because of the borrower's level of equity investment.
All fixed-rate loans currently being originated conform to FHLMC
guidelines for loans purchased under the 1-to-4 family program. Loan interest
rates are determined based on secondary market yield requirements and local
market conditions. Thirty year fixed rate mortgage loans have been sold and/or
classified as held for sale to control exposure to interest rate risk.
The Bank has offered Adjustable Rate Mortgage Loans ("ARMs") since
1984. The "Mini-Fixed ARM" has been very popular with Bank customers. The
"Mini-Fixed" mortgage reprices annually after a three, five or seven year
period. ARM originations totaled $23.6 million for 1997, $26.1 million for 1996,
and $19.5 million during 1995. During 1997, ARMs represented 46% of total
mortgage loan originations. The ability of the Bank to successfully market ARM's
depends upon loan demand, prevailing interest rates, volatility of interest
rates, public acceptance of such loans, and terms offered by competitors.
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The 15 year mortgage loan program has gained wide acceptance in the
Bank's primary market area. As a result of the shortened maturity of the 15 year
loan, the product has been priced below the comparable 30 year loan offering.
Mortgage applicants for the 15 year loan tend to have a larger than normal down
payment; this, coupled with the larger principal and interest payment amount,
has caused the 15 year mortgage loan portfolio to consist, to a significant
extent, of second time home buyers whose underwriting qualifications tend to be
above average.
CONSTRUCTION LOANS. Construction loans on residential properties are
made primarily to individuals and residential contractors who are under contract
with individual purchasers. In most cases, these loans are personally guaranteed
by the borrower. The maximum loan to value ratio is 80% of either the current
appraised value or the cost of construction, whichever is less. Residential
construction loans are typically made for periods of six months to one year.
Loans are also made for the construction of commercial properties. All
such loans are made in accordance with well defined underwriting standards,
subject to prior lease of the mortgaged property and a confirmed loan takeout.
In most cases, these loans are personally guaranteed by the borrower. In
general, loans made do not exceed 75% of the appraised value of the property.
Commercial construction loans are typically made for periods of one year.
COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans are
typically made to a maximum of 75% of the appraised value. Such loans are
generally made on an adjustable rate basis. These loans are typically made for
terms of 15 to 20 years. Loans exceeding twenty years have a balloon feature
calling for a full repayment within 7 to 10 years from the date of the loan. The
balloon feature affords the Bank the opportunity to restructure the loan if
economic conditions so warrant. Commercial real estate loans include loans
secured by commercial rental units, apartments, condominium developments, small
shopping centers, commercial/industrial properties, and other retail and
commercial developments.
While commercial real estate lending is generally considered to involve
a higher degree of risk than single-family residential lending due to the
concentration of principal in a limited number of loans and the effects of
general economic conditions on real estate developers and managers, the Bank has
endeavored to reduce this risk in several ways. In originating commercial real
estate loans, the Bank considers the feasibility of the project, the financial
strength of the borrowers and lessees, the managerial ability of the borrowers,
the location of the project and the economic environment. Management evaluates
the debt coverage ratio and analyzes the reliability of cash flows, as well as
the quality of earnings. All such loans are made in accordance with well defined
underwriting standards and are generally supported by personal guarantees which
represent a secondary source of repayment.
Loans for the construction of commercial retail properties and
commercial real estate loans are generally located within an area permitting
physical inspection and regular review of business records. Projects financed
outside of the Bank's primary lending area generally involve borrowers and
guarantors who are or were previous customers of the Bank.
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CONSUMER LOANS. The Bank offers consumer loans to individuals for most
personal, household or family purposes. Consumer loans are either secured by
adequate collateral, or unsecured. Unsecured loans are based on the strength of
the applicant's financial condition. All borrowers must meet current
underwriting standards. The consumer loan program includes both fixed and
variable rate products. The Bank purchases indirect dealer paper from various
well established businesses in its immediate banking area.
HOME EQUITY LINE OF CREDIT. The Bank offers "Prime Line", a revolving
line of credit secured by the equity in the borrower's home. The offering which
is tied to the prime rate of interest requires borrowers to repay 1.5% of their
outstanding balance each month. In most cases, Prime Line loans will require a
second mortgage appraisal and a second mortgage lenders title insurance policy.
Loans are made up to a maximum of 80% of the appraised value of the property
less any outstanding liens.
HOME IMPROVEMENT LOANS AND EQUITY LOANS--FIXED TERM. Home improvement
and equity loans are made up to a maximum of 80% of the appraised value of the
improved property, less any outstanding liens. These loans are offered on both a
fixed and variable rate basis with a maximum term of 120 months. All home equity
loans are made on a direct basis to borrowers.
COMMERCIAL BUSINESS LOANS. Although the Bank's priority in extending
various types of commercial business loans changes from time to time, the basic
considerations in determining the makeup of the commercial business loan
portfolio are economic factors, regulatory requirements and money market
conditions. The Bank seeks commercial loan relationships from the local business
community and from its present customers. Conservative lending policies based
upon sound credit analysis govern the extension of commercial credit. The
following loans, although not inclusive, are considered preferable for the
Bank's commercial loan portfolio: loans collateralized by liquid assets; loans
secured by general use machinery and equipment; secured short-term working
capital loans to established businesses; short-term loans with established
sources of repayment and secured by sufficient equity and real estate; and
unsecured loans to customers whose character and capacity to repay are firmly
established. Although conservative lending policies have been applied to
commercial business loans, the Bank regards the exercise of its commercial
lending authority as vital to its asset restructuring program.
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NON-PERFORMING ASSETS, ASSET CLASSIFICATION AND PROVISION FOR LOAN LOSSES
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when, in the opinion of management, serious doubt exists as
to the collectibility of a loan. Loans are generally placed on non-accrual
status when either principal or interest is 90 days or more past due. Consumer
loans are generally charged off when the loan becomes over 120 days delinquent.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance, tax and insurance reserve, or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.
The Bank's mortgage loan collection procedures provide that, when a
mortgage loan is 15 days or more delinquent, the borrower will be contacted by
mail and payment requested. If the delinquency continues, subsequent efforts
will be made to contact the delinquent borrower. In certain instances, the Bank
will recast the loan or grant a limited moratorium on loan payments to enable
the borrower to reorganize their financial affairs. If the loan continues in a
delinquent status for 60 days, the Bank will generally initiate foreclosure
proceedings. Any property acquired as the result of foreclosure or by voluntary
transfer of property made to avoid foreclosure is classified as foreclosed real
estate until such time as it is sold or otherwise disposed of by the Bank.
Foreclosed real estate is recorded at the lower of cost (the unpaid balance at
date of acquisition plus foreclosure costs, costs related to the sale of the
foreclosed real estate and other related costs) or fair value at the date of
acquisition and carried at the lower of acquisition value or net realizable
value subsequent to the date of acquisition. Any write-down of the property is
charged to the allowance for loan losses. Losses on disposition, including
expenses incurred in connection with the disposition, are charged to operations.
Collection procedures for consumer loans provide that when a consumer loan
becomes 10 days delinquent, the borrower will be contacted by mail and payment
requested. If the delinquency continues, subsequent efforts will be made to
contact the delinquent borrower. In certain instances, the Bank may grant a
payment deferral. If a loan continues delinquent after 90 days and all
collection efforts have been exhausted, the Bank will initiate legal
proceedings. Collection procedures for commercial business loans provide that
when a commercial loan becomes 10 days delinquent, the borrower will be
contacted by mail and payment requested. If the delinquency continues,
subsequent efforts will be made to contact the delinquent borrower pursuant to
the commercial loan collection policy. In certain instances, the Bank may grant
a payment deferral or restructure the loan. Once it has been determined that
collection efforts are unsuccessful, the Bank will initiate legal proceedings.
The table which follows sets forth information with respect to the
Bank's non-performing assets for the periods indicated. During the periods
shown, the Bank had no troubled debt restructurings which involve forgiving a
13
15
portion of interest or principal on any loans or making loans at a rate
materially less than market rates. The amounts are stated in thousands (000's).
At December 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Loans accounted for on
a non-accrual basis:
Real estate:
Residential $ 715 $ 583 $ 361 $ 786 $ 146
Commercial 44 45 --- 82 88
Commercial business 56 111 --- --- ---
Consumer 151 49 11 6 ---
------ ------ ------ ------ ------
Total $ 966 $ 788 $ 372 $ 874 $ 234
====== ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more: Real estate:
Residential $ 220 $ 373 $ 637 $ 575 $ 334
Commercial --- --- --- --- ---
Commercial business --- 5 --- 104 ---
Consumer 6 1 46 6 ---
------ ------ ------ ------ ------
Total $ 226 $ 379 $ 683 $ 685 $ 334
====== ====== ====== ====== ======
Total of non-accrual
and 90 days past due $1,192 $1,167 $1,055 $1,559 $ 568
====== ====== ====== ====== ======
Ratio of non-performing
loans to total assets 0.37% 0.39% 0.38% 0.59% 0.23%
Ratio of non-performing
loans to total loans 0.44% 0.48% 0.47% 0.70% 0.27%
Foreclosed real estate $ 259 $ 189 $ 86 $ 160 $ 183
====== ====== ====== ====== ======
Ratio of foreclosed real
estate to total assets 0.08% 0.06% 0.03% 0.06% 0.07%
During 1997, gross interest income of $111,374 would have been recorded
on loans accounted for on a non-accrual basis if the loans had been current
throughout the period. Interest on such loans included in income during the
period amounted to $53,198.
Federal regulations require savings banks to classify their own loans
and to establish appropriate general and specific allowances, subject to
regulatory review. These regulations are designed to encourage management to
evaluate loans on a case-by-case basis and to discourage automatic
classifications. Loans classified as substandard or doubtful must be evaluated
by management to determine loan loss reserves. Loans classified as loss must
either be written off or reserved for by a specific allowance. Amounts reported
in the general loan loss reserve are included in the calculation of the Bank's
total risk-based capital requirement (to the extent
14
16
that the amount does not exceed 1.25% of total risk-based assets), but are not
included in tier-one leverage ratio calculations, tier-one risk-based capital
requirements, or in capital under Generally Accepted Accounting Principles
("GAAP"). Amounts reserved for by a specific allowance are not counted toward
capital for purposes of any of the regulatory capital requirements. At December
31, 1997, $1.3 million of the Bank's loans were classified as substandard. The
total represents 10 residential real estate loans, 2 commercial real estate
loans, 5 commercial business loans and 6 consumer loans. There was one consumer
loan for $5 thousand classified as doubtful. No loans were classified as loss.
Because some loans may not be repaid in accordance with contractual
agreements, an allowance for loan losses ("ALL") is maintained. Because
estimating the risk of loss and the amount of loss on any loan is necessarily
subjective, the ALL is maintained by management at a level considered adequate
to cover losses based on loan portfolio growth, past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. Although management believes that it uses
the best information available to make such estimations, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial estimations. While management may periodically allocate portions of the
allowance for specific problem loans, the whole allowance is available for any
loan charge-offs that occur. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur. The allocation of the ALL reflects
consideration of the facts and circumstances that affect the repayment of
individual loans, as well as, loans which have been pooled as of the evaluation
date, with particular attention given to loans which have been classified as
substandard, doubtful or loss.
At December 31, 1997, management of the Bancorp is of the opinion that
there are no loans, except those discussed above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in disclosure of such loans as nonaccrual, past due
or restructured loans.
Also, at December 31, 1997, there are no other interest bearing assets
that would be required to be disclosed as nonaccrual, past due, restructured or
potential problem if such assets were loans.
15
17
The table which follows sets forth the allowance for loan losses and
related ratios for the periods indicated. There were no charge-offs or
recoveries of real estate construction loans or commercial real estate loans
during the periods presented. The amounts are in thousands (000's).
At December 31,
----------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
Balance at beginning of period $2,887 $2,830 $2,751 $2,583 $2,317
Loans charged-off:
Real estate - residential (9) (28) - - -
Commercial business (19) - - (7) (30)
Consumer (6) - (2) (3) (28)
------- ------ ------ ------ ------
Total charge-offs (34) (28) (2) (10) (58)
Recoveries:
Real estate - residential - - - - -
Commercial business - - - 1 -
Consumer - - 1 33 5
------- ------ ------ ------ ------
Total recoveries - - 1 34 5
Net (charge-offs)/recoveries (34) (28) (1) 24 (53)
------- ------ ------ ------ ------
Provision for loan losses 221 85 80 144 319
------- ------ ------ ------ ------
Balance at end of period $3,074 $2,887 $2,830 $2,751 $2,583
======= ====== ====== ====== ======
ALL to loans outstanding 1.13% 1.18% 1.27% 1.24% 1.26%
ALL to nonperforming loans 257.8% 247.4% 268.3% 160.0% 454.8%
Net charge-offs/recoveries
to average loans out-
standing during the period 0.01% 0.01% 0.00% 0.01% 0.03%
The table below shows the allocation of the allowance for loan losses
on the dates indicated. The dollar amounts are in thousands (000's). The percent
columns represent the percentage of loans in each category to total loans.
At December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Real estate loans:
Residential 322 57.5 372 61.8 372 64.6 387 64.8 280 64.6
Commercial and
other dwelling 932 23.8 880 23.4 860 23.0 834 23.8 1,225 24.8
Construction and
development 268 7.9 153 5.4 130 4.0 105 3.8 --- 2.4
Consumer loans 153 2.1 110 2.0 110 1.6 111 1.4 132 1.9
Commercial business
and other 630 8.7 650 7.4 650 6.8 626 6.2 946 6.3
Unallocated 769 722 708 688 ---
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 3,074 100.0 2,887 100.0 2,830 100.0 2,751 100.0 2,583 100.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
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INVESTMENT ACTIVITIES
The primary objective of the investment portfolio is to provide for the
liquidity needs of the Bank and to contribute to profitability by providing a
stable flow of dependable earnings. Securities will generally be classified as
held to maturity at the time of purchase, as management has both the positive
intent and the ability to hold securities to maturity. While securities may be
classified as available for sale at the time of purchase, no securities will be
classified as trading investments. At December 31, 1997, all investment
securities were classified as held to maturity. It has been the policy of the
Bank to invest its excess cash in U.S. government securities and federal agency
obligations. In addition, short-term funds are generally invested as
interest-bearing balances in financial institutions and federal funds. At
December 31, 1997, the Bank's investment portfolio totaled $29.4 million. In
addition, the Bank had $3.6 million in interest-bearing balances at the FHLB of
Indianapolis.
The table below shows the carrying values of the components of the
investment securities portfolio at the dates indicated. The amounts are in
thousands (000's).
At December 31,
1997 1996 1995
-------- -------- --------
U.S. government securities $ 6,537 $ 11,549 $ 9,985
U.S. government agencies 19,648 24,934 24,015
Mortgage-backed securities 1,531 1,944 2,404
FHLB stock 1,646 1,597 1,597
-------- -------- --------
Totals $ 29,362 $ 40,024 $ 38,001
======== ======== ========
The contractual maturities and weighted average yields for the U.S.
government securities, agency securities and mortgaged-backed securities at
December 31, 1997, are summarized as follows. The amounts are in thousands
(000's).
Within 1 Year 1-5 Years 5-10 Years After 10 Years
------------ ------------- ------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
U.S. government
securities $1,990 5.68% $ 4,546 6.14% $ -- --% $ -- -- %
U.S. government
agencies 6,501 5.47 11,148 6.25 2,000 7.04 -- --
Mortgaged-backed
securities -- -- 21 7.18 263 7.46 1,247 8.54
------ ---- ------- ---- ------ ---- ------ ----
Totals $8,491 5.52% $15,715 6.22% $2,263 7.09% $1,247 8.54%
====== ==== ======= ==== ====== ==== ====== ====
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SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from maturing investment securities and certificates of deposit, dividend
receipts from the investment portfolio, loan principal repayments, repurchase
agreements, advances from the Federal Home Bank of Indianapolis (FHLBI) and
other borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short term basis
to compensate for reductions in the availability of other sources of funds. They
may also be used on a longer term basis for general business purposes. The Bank
uses repurchase agreements and advances from the FHLBI for borrowings. At
December 31, 1997, the Bank had $4.5 million in repurchase agreements. Other
borrowings totaled $10.1 million, of which $8.0 million represents FHLBI
advances.
DEPOSITS. Retail and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a broad selection
of deposit instruments including savings accounts, NOW and Super NOW accounts,
checking accounts, money market type accounts, certificate accounts currently
ranging in maturity from ten days to 42 months, and retirement savings plans.
Deposit accounts vary as to terms, with the principal differences being the
minimum balance required, the time period the funds must remain on deposit and
the interest rate. The deregulation of federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and to be flexible in
meeting the threat of net deposit outflows. The Bank does not obtain funds
through brokers.
The following table presents the average daily amount of deposits and
rates paid on such for the years indicated. The amounts are in thousands
(000's).
1997 1996 1995
------------------ ------------------ ------------------
Average Average Average
Amount rate % Amount rate % Amount rate %
-------- ------ -------- ------- -------- -------
Demand deposits $ 16,685 0.00 $ 13,122 0.00% $ 10,859 0.00%
NOW accounts 23,656 2.13 23,034 2.29 20,425 2.28
MMDA accounts 22,235 3.30 22,495 3.27 23,294 3.26
Savings accounts 43,659 3.01 43,521 3.02 42,189 3.01
Certificates of deposit 165,855 5.52 153,433 5.53 143,005 5.51
-------- ------ -------- ------- -------- -------
Total deposits $272,090 4.30 $255,605 4.33% $239,772 4.32%
======== ====== ======== ======= ======== =======
18
20
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1997 are summarized as follows. The amounts are
in thousands (000's).
3 months or less $19,533
Over 3 months through 6 months 12,949
Over 6 months through 12 months 5,077
Over 12 months 2,107
-------
Total $39,666
=======
BORROWINGS. Borrowed money is used on a short term basis to compensate
for reductions in the availability of other sources of funds and is generally
accomplished through repurchase agreements, as well as, through a line of credit
and advances from the FHLBI. FHLBI advances with maturities ranging from one to
five years are used to fund securities and loans of comparable duration, as well
as, to reduce the impact that movements in short-term interest rates have on the
Bank's overall cost of funds. Securities sold under agreements to repurchase
mature within one year. Repurchase agreements are generally secured by FHLMC
mortgage-backed securities or U.S. government securities under the Bank's
control. The Bank does not obtain funds through brokers.
The following table sets forth the balances in short-term borrowings on
the dates indicated. The amounts are stated in thousands (000's).
At December 31,
-------------------------
1997 1996 1995
------- ------- -------
Repurchase agreements $ 4,541 $ 3,993 $ 2,403
Federal Home Loan Bank advances 8,000 7,000 --
Other borrowings 2,087 1,268 735
------- ------- -------
Total borrowings $14,628 $12,261 $ 3,138
======= ======= =======
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21
The following table sets forth certain information regarding repurchase
agreements by the Bank at the end of and during the periods indicated. The
amounts are stated in thousands (000's).
At December 31,
-----------------------------
1997 1996 1995
------ ------ -------
Balance $4,541 $3,993 $2,403
Securities underlying the agreements:
Ending book value 7,988 5,572 3,364
Ending market value 8,014 5,559 3,538
Weighted average rate paid (1) 5.54% 5.19% 5.60%
For year ended December 31,
-----------------------------
1997 1996 1995
------ ------ -------
Highest month-end balance $4,975 $5,419 $2,403
Approximate average outstanding balance 4,308 3,599 1,593
Approximate weighted average rate
paid on securities sold under
agreements to repurchase (2) 5.43% 5.27% 5.65%
- ----------
(1) The weighted average rate for each period is calculated by weighting the
principal balances outstanding for the various interest rates.
(2) The weighted average rate is calculated by dividing the interest expense
for the period by the average daily balances of securities sold under
agreements to repurchase outstanding for the period.
TRUST POWERS
The activities of the trust department include the management of
self-directed investments, IRA and Keogh plans, investment agency accounts, land
trusts, serving as court-appointed executor of estates and as guardian or
conservator of estates, and trustee with discretionary investment authority for
revocable and irrevocable trusts. At December 31, 1997, the market value of the
trust department's assets totaled $129.2 million.
20
22
ANALYSIS OF PROFITABILITY AND KEY OPERATING RATIOS
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL.
The net earnings of the Bank depend primarily upon the "spread"
(difference) between (a) the income it receives from its loan portfolio and
other investments and (b) its cost of money, consisting principally of the
interest paid on savings accounts and on other borrowings.
The following table presents the weighted average yields on loans and
investment securities, the weighted average cost of interest-bearing deposits
and other borrowings, and the interest rate spread at December 31, 1997.
Weighted average yield:
Interest-bearing balances in financial institutions 5.70%
Securities held-to-maturity 6.23
Net loans receivable 8.35
Total interest-earning assets 8.11
Weighted average cost:
Interest bearing deposits 4.32
Borrowed funds 5.62
Total interest-bearing liabilities 4.38
Interest rate spread:
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing funds 3.73
FINANCIAL RATIOS AND THE ANALYSIS OF CHANGES IN NET INTEREST INCOME
The tables below set forth certain financial ratios of the Bancorp for
the periods indicated:
Year ended December 31,
----------------------------
1997 1996 1995
------ ------- ------
Return on average assets 1.13% 0.75% 1.14%
Return on average equity 11.87 7.90 11.74
Average equity-to-average
assets ratio 9.49 9.51 9.72
Dividend payout ratio 51.76 72.17 48.92
At December 31,
----------------------------
1997 1996 1995
------ ------- ------
Total stockholders' equity to
total assets 9.22% 9.29% 9.68%
21
23
The average balance sheet amounts, the related interest income or
expense, and average rates earned or paid are presented in the following table.
The amounts are stated in thousands (000's).
--------------------------------------------------------------------------------------------
Year ended December 31, 1997 Year ended December 31, 1996 Year ended December 31, 1995
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------- ----------------------------- -----------------------------
Assets:
Interest bearing balances
in financial institutions $ 2,282 $ 139 6.%9 $ 3,846 $ 266 6.92% $ 4,520 $ 278 6.15%
Federal funds sold 102 5 5.32 1,068 58 5.43 1,131 66 5.84
Securities 33,454 2,155 6.44 42,513 2,605 6.13 35,139 2,055 5.85
----------- --------- ---------- --------- ---------- ---------
Total investments 35,838 2,299 6.42 47,427 2,929 6.18 40,790 2,399 5.88
----------- --------- ---------- --------- ---------- ---------
Loans:*
Real estate mortgage loans 230,420 19,128 8.30 212,161 17,523 8.26 203,709 17,015 8.35
Commercial business loans 18,380 1,780 9.68 16,014 1,522 9.50 14,174 1,412 9.96
Consumer loans 5,419 462 8.52 4,290 363 8.46 3,469 297 8.56
----------- --------- ---------- --------- ---------- ---------
Total loans 254,219 21,370 8.41 232,465 19,408 8.35 221,352 18,724 8.46
----------- --------- ---------- --------- ---------- ---------
Total interest-earning assets 290,057 23,669 8.16 279,892 22,337 7.98 262,142 21,123 8.06
--------- --------- ---------
Allowance for loan losses (2,959) (2,854) (2,792)
Cash and due from banks 6,005 4,994 4,576
Premises and equipment 6,992 6,153 4,662
Other assets 3,220 3,098 3,272
----------- ---------- ----------
Total assets $ 303,315 $ 291,283 $ 271,860
=========== ========== ==========
Liabilities:
Demand deposit $ 14,836 - 0.00% $ 13,122 - 0.00% $ 10,859 - 0.00%
NOW accounts 23,451 500 2.13 23,034 528 2.29 20,425 465 2.28
Money market demand accounts 23,115 762 3.30 22,495 736 3.27 23,294 759 3.26
Savings accounts 43,673 1,315 3.01 43,521 1,315 3.02 42,189 1,269 3.01
Certificates of deposit 158,041 8,730 5.52 153,433 8,487 5.53 143,005 7,874 5.51
----------- --------- ---------- --------- ---------- ---------
Total interest-bearing deposits 263,116 11,307 4.30 255,605 11,066 4.33 239,772 10,367 4.32
Borrowed funds 8,082 414 5.13 4,780 221 4.62 2,479 117 4.72
----------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities 271,198 11,721 4.32 260,385 11,287 4.32 242,251 10,484 4.33
Other liabilities 3,343 3,191 3,192
----------- ---------- ----------
Total liabilities 274,541 263,576 245,443
Stockholders' equity 28,774 27,707 26,417
----------- ---------- ----------
Total liabilities and
stockholders' equity $ 303,315 $ 291,283 $ 271,860
=========== --------- ========== --------- ========== ---------
Net interest income $ 11,948 $ 11,050 $ 10,639
========= ========= =========
Net interest spread 3.84% 3.66% 3.73%
Net interest margin** 3.94% 3.79% 3.91%
- ---------------------------------------------------------------------
* Non-accruing loans have been included in the average balances.
** Net interest income divided by average total assets.
22
24
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bancorp for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (1) changes in volume (
change in volume multiplied by old rate) and (2) changes in rate (change in rate
multiplied by old volume). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate. The amounts are stated in thousands (000's).
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------- -----------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
----------------------------- ----------------------------- ----------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due To Due To Due To
----------------------------- ----------------------------- ----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income:
Loans receivable $ 1,840 $ 122 $ 1,962 $ 947 $ (263) $ 684 $ 657 $ 931 $ 1,588
Securities (578) 128 (450) 448 102 550 154 94 248
Other interest-earning assets (146) (34) (180) (48) 28 (20) 95 69 164
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,116 216 1,332 1,347 (133) 1,214 906 1,094 2,000
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Deposits 289 (48) 241 651 48 699 500 1,856 2,356
Borrowings and Federal Home
Loan Bank Advances 167 26 193 106 (2) 104 36 12 48
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 456 (22) 434 757 46 803 536 1,868 2,404
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income/(expense) $ 660 $ 238 $ 898 $ 590 $ (179) $ 411 $ 370 $ (774) $ (404)
======= ======= ======= ======= ======= ======= ======= ======= =======
23
25
BANK SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries, which are incorporated
under the laws of the State of Indiana. Peoples Service Corporation is inactive.
At December 31, 1997, the Bank had an investment balance of $10,000 in Peoples
Service Corporation. During 1997, PSA Insurance Corporation was dissolved.
The Consolidated Financial Statements of the Bancorp include the
assets, liabilities, net worth and results of operations of the Bank and its
subsidiaries. Significant intercompany transactions have been eliminated in the
consolidation.
COMPETITION
The Bank's primary market area for deposits and mortgage and other
loans encompasses Lake County, in northwest Indiana, where all of its offices
are located. Ninety-five percent of the Bank's business activities are within
this area.
The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The Bank's
most direct competition for deposits has historically come from commercial banks
and from savings and loan associations located in its primary market area.
Particularly in times of high interest rates, the Bank has had significant
competition from money market mutual funds and other firms offering financial
services. The Bank's competition for loans comes principally from savings and
loan associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other institutional lenders.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts,
competitive interest rates, convenient branch locations, drive-up facilities,
automatic teller machines, tax-deferred retirement programs and other
miscellaneous services.
The Bank believes that it has a minority share of the deposits and
residential mortgage loan market within its primary market area.
PERSONNEL
As of December 31, 1997, the Bank had 94 full-time and 21 part-time
employees. The employees are not represented by a collective bargaining
agreement. Management believes its employee relations are good. The Bancorp has
four officers (listed below under "Executive Officers of the Bancorp"),
24
26
but has no other employees. The Bancorp's officers also are full-time employees
of the Bank, and are compensated by the Bank.
REGULATION AND SUPERVISION
BANK HOLDING COMPANY REGULATION. As a registered bank holding company
for the Bank, the Bancorp is subject to the regulation and supervision of the
FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bank
holding companies are required to file periodic reports with and are subject to
periodic examination by the FRB.
Under the BHCA, without the prior approval of the FRB, the Bancorp may
not acquire direct or indirect control of more than 5% of the voting stock or
substantially all of the assets of any company, including a bank, and may not
merge or consolidate with another bank holding company. In addition, the Bancorp
is generally prohibited by the BHCA from engaging in any nonbanking business
unless such business is determined by the FRB to be so closely related to
banking as to be a proper incident thereto. Under the BHCA, the FRB has the
authority to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
Under FRB policy, a bank holding company is expected to serve as a
source of financial and managerial strength to its subsidiary banks. It is the
policy of the FRB that, pursuant to this requirement, a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. This support
may be required by the FRB at times when the Bancorp may not have the resources
to provide it or, for other reasons, would not be inclined to provide it.
Additionally, under the Federal Deposit Insurance Corporation Improvements Act
of 1991 ("FDICIA"), a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become
"undercapitalized" (as defined in the statute) with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
that is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan.
SAVINGS BANK REGULATION. As an Indiana stock savings bank, the Bank is
subject to federal regulation and supervision by the FDIC and to state
regulation and supervision by the Indiana Department of Financial Institutions
(the "DFI"). The Bank's deposit accounts are insured by the SAIF, which is
25
27
administered by the FDIC. The Bank is not a member of the Federal Reserve
System.
Both federal and Indiana law extensively regulate various aspects of
the banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires savings banks, among other things, to make deposited funds
available within specified time periods.
Under FDICIA, insured state chartered banks are prohibited from
engaging as principal in activities that are not permitted for national banks,
unless: (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund, and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. The Board of
Directors does not believe that these restrictions will have a material adverse
effect on the Bank.
DEPOSIT INSURANCE AND THE BANKING INDUSTRY. The Bank's deposits are
insured up to $100,000 per insured account by the SAIF. The Deposit Insurance
Funds Act of 1996 (the "Funds Act") required the FDIC to take steps to
recapitalize the SAIF and to change the basis on which funds are raised to make
the scheduled payments on the FICO bonds issued in 1987 to replenish the Federal
Savings and Loan Insurance Corporation. As part of the SAIF recapitalization,
during 1996 the Bank paid a special assessment of $1.6 million. The Funds Act
generally limited future SAIF assessments to the level required to maintain its
capitalization. Accordingly, periodic SAIF insurance assessments have fallen
toward the level paid by BIF members, thereby reducing a competitive advantage
for BIF members. While SAIF members continue to face higher FICO bond
assessments than BIF members, the disparity is small relative to the former
disparity in insurance assessments.
The Funds Act and recent legislative and regulatory initiatives propose
changes to the regulatory structure of the banking industry, including proposals
to reduce regulatory burdens and expand bank powers. It is not possible to
predict whether, or in what form, the proposed changes will take effect or how
they will affect the Bancorp.
BRANCHES AND AFFILIATES. The establishment of branches by the Bank is
subject to approval of the DFI and FDIC and geographic limits established by
state laws. In 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). This Act facilitates
the interstate expansion and consolidation of banking organizations by
permitting, among other things,(i) bank holding companies that are adequately
capitalized and managed to acquire banks located in states outside their home
state regardless of whether such acquisitions are authorized under the law of
the host state, (ii) the interstate merger of banks after June 1, 1997, subject
to the right of individual states to "opt
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in" or to "opt out" of this authority before that date, and (iii) banks to
establish new branches on an interstate basis provided that such action is
specifically authorized by the law of the host state. During 1996, Indiana
"opted in" to the provisions described in clauses (ii) and (iii) above. The
effect of this new law may be to increase competition in the Bank's market area,
although the extent and timing of this increase cannot be predicted.
TRANSACTIONS WITH AFFILIATES. Under Indiana law, the Bank is subject to
Sections 22(h), 23A and 23B of the Federal Reserve Act which restrict financial
transactions between banks and affiliated companies, such as the Bancorp. The
statute limits credit transactions between a bank and its executive officers and
its affiliates, prescribes terms and conditions for bank affiliate transactions
deemed to be consistent with safe and sound banking practices, and restricts the
types of collateral security permitted in connection with a bank's extension of
credit to an affiliate.
CAPITAL REQUIREMENTS. The FRB and the FDIC have issued substantially
similar risk-based and leverage capital guidelines that are applicable to the
Bancorp and the Bank. These guidelines require a minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the allowance for loan losses.
In addition to the risk-based capital guidelines, the Bancorp and the
Bank are subject to a Tier I (leverage) capital ratio which requires a minimum
level of Tier I capital to average total consolidated assets of 3% in the case
of financial institutions that have the highest regulatory examination ratings
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a ratio of at least 1% to 2% above the
stated minimum.
FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. The FDIC has adopted regulations to implement
the prompt corrective action provisions of FDICIA which, among other things,
define the relevant capital measures for five capital categories. An institution
is deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% of greater, and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
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29
The following table shows that, at December 31, 1997, the Bancorp's
capital exceeded all regulatory capital requirements. At December 31, 1997, the
Bancorp's and the Bank's regulatory capital ratios were substantially the same.
At December 31, 1997, the Bancorp and the Bank were categorized as well
capitalized.
The dollar amounts are in millions.
Required for To be well
Actual adequate capital capitalized
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital
risk-weighted assets $32.2 15.0% $17.1 8.0% $21.4 10.0%
Tier I capital
to risk-weighted assets $29.5 13.8% $ 8.6 4.0% $12.8 6.0%
Tier I capital to
adjusted assets $29.5 9.2% $ 9.6 3.0% $16.0 5.0%
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
The Bancorp is unable to predict whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
DIVIDEND LIMITATIONS. The Bancorp is a legal entity separate and
distinct from the Bank. The primary source of the Bancorp's cash flow, including
cash flow to pay dividends on the Bancorp's Common Stock, is the payment of
dividends to the Bancorp by the Bank. Under Indiana law, the Bank may pay
dividends, no more often than quarterly, to the extent of its undivided profits
(generally, earnings less losses, bad debts, taxes and other operating
expenses). However, DFI approval is required to pay dividends in any year in
excess of the Bank's net profits for the current year and retained net profits
for the prior two years. Also, the FDIC has the authority to prohibit the Bank
from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice in light of the financial condition of
the Bank. In addition, under FRB supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends and (ii) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, assets, quality, and overall financial condition.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), the Bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
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30
consistent with the CRA. The CRA requires the FDIC in connection with its
examination of the Bank, to assess its record of meeting the credit needs of its
community and to take that record into account in its evaluation of certain
applications by the Bank. As of the date of its most recent regulatory
examination, the Bank was rated "outstanding" with respect to its CRA
compliance.
In May 1995, the FDIC and other Federal banking agencies amended their
regulations concerning the CRA. Among other things, the revised regulations
implemented a new evaluation system that rates banks based on their performance
in meeting community financial needs. In particular, the revised system
evaluates the degree to which a bank is performing under tests and standards
judged in the context of information about the institution, its community, its
competitors and its peers with respect to (i) lending, (ii) service delivery
systems and (iii) investments. The regulations also specify that a bank's CRA
performance will be considered in its expansion (e.g., branching) proposals and
may be the basis for approving, denying or conditioning the approval of an
application.
FEDERAL AND STATE TAXATION
Savings institutions such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
The amount of the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) may be computed under
either the experience method or the percentage of taxable income method (based
on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly,
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31
this method has not been available for the Bank for its tax years ending
December 31, 1996 and thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying equals the amount by which
12% of the amount comprising savings accounts at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1995, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of December
31, 1987. Recapture of the excess reserves will occur over a six-year period
which will begin for the Bank for its tax year ending December 31, 1998.
Commencement of the recapture period was delayed for two years 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.
Also, under the August 1996 legislation, the Bank's base-year federal
bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of the greater
of its current or accumulated earnings and profits, redeems any of its stock, or
is liquidated. The Bank has not established a deferred federal tax liability
under SFAS No. 109 for its base-year federal tax bad debt reserves, as it does
not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environment tax equal to 0.12% of the excess
alternative minimum taxable income for the taxable year (determined
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32
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
The tax returns of the Bank or Bancorp have not been examined by the
Internal Revenue Service since its year ended June 30, 1985. In the opinion of
management, any examinations of still open returns would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Bancorp.
For additional information regarding federal taxation, see Notes to
Consolidated Financial Statements included in the 1997 Annual Report to
Stockholders attached hereto as Exhibit 13.
The Bancorp is subject to Indiana's Financial Institutions Franchise
Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income" for purposes of FIT, begins with taxable income tax
defined by Section 63 of the Code and, thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications, the most notable of which is
the required addback of interest that is tax-free for federal income tax
purposes.
ACCOUNTING FOR INCOME TAXES
At December 31, 1997, the Bank's consolidated total deferred tax assets
were $1,068 thousand and the consolidated total deferred tax liabilities were
$274 thousand, resulting in a consolidated net deferred tax asset of $794
thousand. Management believes it is probable that the benefit of the deferred
tax asset will be realized after considering the historical and anticipated
future levels of pretax earnings.
ITEM 2. PROPERTIES
The Bancorp maintains its corporate office at 9204 Columbia Avenue,
Munster, Indiana, from which it oversees the operation of the Bank's seven
banking locations. The Bank owns all of its office properties.
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The table below sets forth additional information with respect to the
Bank's offices as of December 31, 1997. Net book value and total investment
figures are for land, buildings, furniture and fixtures.
Year Approximate
facility Net book square Total
Office location opened value footage investment
- --------------- ------ ----- ------- ----------
9204 Columbia Avenue
Munster, In 46307 1985 $1,331,494 11,640 $2,587,049
141 W. Lincoln Highway
Schererville, In 46375 1990 1,324,643 9,444 2,048,783
7120 Indianapolis Blvd.
Hammond, In 46324 1978 354,969 2,600 741,943
1300 Sheffield
Dyer, In 46311 1976 207,692 2,100 575,479
7915 Taft
Merrillville, In 46410 1968 178,075 2,750 501,080
8600 Broadway
Merrillville, In 46410 1996 1,789,526 4,400 1,956,746
4901 Indianapolis Blvd.
East Chicago, In 46312 1995 1,184,318 4,300 1,437,164
During 1995, the Bancorp replaced its existing East Chicago, Indiana,
office location with a new facility. During 1996, the Bancorp opened a new
full-service branch facility located in Merrillville, Indiana. The facilities
represent the Bancorp's commitment to quality service and community development,
and provide opportunities to expand market share by attracting additional
deposits and loans from surrounding areas. At December 31, 1997, the Bank had
investments totaling $450 thousand in land which has been acquired for future
branch development. The Bank's primary recordkeeping is accomplished through the
use of microcomputer networks linked via data line to M&I Data Services, Inc.,
located in Brown Deer, Wisconsin. M&I provides real time services for mortgage
and installment loans, savings, certificates, NOW accounts and general ledger
transactions. In addition to the M&I System, the Bank utilizes a microcomputer
network for the trust department operations.
The net book value of the Bank's investment in property, premises and
equipment totaled $6.8 million at December 31, 1997. For further information,
see Note 5 of Notes to Consolidated Financial Statements in the Bancorp's
December 31, 1997, Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Bancorp is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to legal
proceedings incident to its business, including foreclosures.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE BANCORP
---------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following
information is included as an unnumbered item in this Part I in lieu of being
included in the Bancorp's Proxy Statement for the 1997 Annual Meeting of
Shareholders:
The executive officers of the Bancorp are as follows:
AGE AT
DECEMBER 31,
1997 POSITION
------------ --------
David A. Bochnowski 52 Chairman and Chief Executive
Officer
Joel Gorelick 50 Vice President and Chief Lending Officer
Edward J. Furticella 50 Vice President, Chief Financial Officer
and Treasurer
Frank J. Bochnowski 59 Senior Vice President and Secretary
The following is a description of the principal occupation and
employment of the executive officers of the Bancorp during at least the past
five years:
David A. Bochnowski is chairman and chief executive officer of the
Bancorp and the Bank, and has held these positions with the Bank since 1981. He
has been a director since 1977 and was the Bank's legal counsel from 1977 to
1981. Mr. Bochnowski is a director of America's Community Bankers (ACB)and
chairman of ACB Partners, Inc., the operating subsidiaries of America's
Community Banker. He is a director of the Northwest Indiana Forum and a trustee
of the Munster Community Hospital. He is a former chairman of the Indiana League
of Savings Institutions and a former director of the Federal Home Loan Bank of
Indianapolis. Mr. Bochnowski serves on the Federal Reserve Thrift Institutions
Advisory Committee. Before joining the Bank, Mr. Bochnowski was an attorney,
self-employed in private practice. He holds a Juris Doctor degree from
Georgetown University and a Masters Degree from Howard University.
Joel Gorelick is vice president of the Bancorp and vice president and
chief lending officer for the Bank. He is responsible for overseeing new
business development and all loan functions of the Bank. Mr. Gorelick joined the
Bank in November, 1983 as vice president of commercial lending. Mr. Gorelick is
involved in many community service organizations and has most
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recently served as president of the Northwest Indiana Boys & Girls Club and
chairman of the board of the Northwest Indiana Regional Development Corporation.
Mr. Gorelick has been appointed as a board member for the United States Selected
Service System. Mr. Gorelick is also a volunteer for numerous youth related
sports activities. He holds a Masters of Business Administration Degree from
Indiana University and is a graduate of the Graduate School of Banking at the
University of Wisconsin at Madison.
Edward J. Furticella is vice president, chief financial officer and
treasurer of the Bancorp and the Bank. He is responsible for managing the Bank's
investment portfolio and daily liquidity, as well as, overseeing the activities
of accounting, systems processing and branch operations. Mr. Furticella has been
with the Bank since 1981. Mr. Furticella holds a Masters of Education, Masters
of Business Administration and a Masters of Science in Accountancy from DePaul
University. Mr. Furticella is a Certified Public Accountant (CPA) and a
Certified Cash Manager (CCM). He is also a part-time finance instructor at
Purdue University Calumet and a member of the Customer Advisory Group for the
Federal Reserve Bank of Chicago.
Frank J. Bochnowski is senior vice president and secretary for the
Bancorp and senior vice president, general counsel, trust officer and corporate
secretary for the Bank. Mr. Bochnowski assumed his current responsibilities with
the Bank as of November, 1984. He has been the Bank's attorney since 1981. Mr.
Bochnowski is a member and past president of the Munster, Indiana Rotary Club
and a former director and officer of the Lake County, Indiana Chapter of the
American Red Cross. He holds a Juris Doctor degree from St. John's University
and a Masters of Business Administration from Fairleigh Dickinson University. He
is a graduate of the United States Military Academy and served for twenty-one
years as an army officer, retiring in 1981 with the rank of lieutenant colonel.
He is the first cousin of the Bancorp's President.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained under the caption "Business" and "Market
Information" in the 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Consolidated
Financial Data" in the 1997 Annual Report to Shareholders is incorporated herein
by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1997 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1997 Annual Report to
Shareholders, which are listed under Item 14 herein, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no items reportable under this caption.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Election of
Directors" and in the final paragraph under the section captioned "Security
Ownership by Certain Beneficial Owners and Management" in the Bancorp's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference. Information regarding the Bancorp's executive
officers is included under the unnumbered item captioned "Executive Officers of
the Bancorp" at the end of Part I hereof and is incorporated herein by
reference, in accordance with General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of a Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Bancorp's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the section captioned "Security Ownership by
Certain Beneficial Owners and Management" in the Bancorp's definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders is incorporated herein by
reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the section captioned "Compensation of
and Transactions with Officers and Directors" in the Bancorp's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders, and in the footnote
captioned "Related Party Transactions" in the 1997 Annual Report to
Shareholders, is incorporated herein by reference. Additional information as
required per Schedule I, "Indebtedness of and to related parties - not current",
is not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
---------------------
The following financial statements of the Bancorp are incorporated
herein by reference to the 1997 Annual Report to Shareholders, filed as Exhibit
13 to this report:
(a) Report of Independent Auditors
(b) Consolidated Balance Sheets, December 31, 1997 and
1996
(c) Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
(d) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1997, 1996
and 1995
(e) Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not present
or not present in amounts sufficient to require submission.
(3) EXHIBITS:
---------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2. Plan of Conversion of Peoples Bank, A Federal Savings Bank, dated
December 18, 1993 (incorporated herein by reference to Exhibit A to the
Bancorp's Definitive Proxy Statement/Prospectus dated March 23, 1994,
as filed pursuant to Rule 424(b) under the 1933 Act on March 28, 1994).
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38
3.i. Articles of Incorporation (incorporated herein by reference to Exhibit
3(i) to the Bancorp's Registration Statement on Form S-4 filed March 3,
1994 (File No. 33-76038)).
3.ii. By-Laws (incorporated herein by reference to Exhibit 3(i) to the
Bancorp's Registration Statement on Form S-4 filed March 3, 1994 (File
No. 33-76038)).
3.iii. Amendment of By-Laws adopted July 27, 1994(incorporated herein by
reference to Exhibit 3.iii to the Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.1. 1994 Stock Option and Incentive Plan (incorporated herein by reference
to Exhibit A to the Bancorp's Definitive Proxy Statement/Prospectus
dated March 23, 1994, as filed pursuant to Rule 424(b) under the 1933
Act on March 28, 1994).
10.2. Employment Agreement, dated March 1, 1988, between Peoples Bank and
David A. Bochnowski (incorporated herein by reference to Exhibit 10.2
to the Bancorp's Annual Report on Form 10-K for the year ended December
31, 1994).
10.3. Amendment, dated January 18, 1993, to the Employment Agreement referred
to in Exhibit 10.2 above (incorporated herein by reference to Exhibit
10.3 to the Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.4. Employee Stock Ownership Plan of Peoples Bank(incorporated herein by
reference to Exhibit 10.4 to the Bancorp's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.5. Unqualified Deferred Compensation Plan of Peoples Bank (incorporated
herein by reference to Exhibit 10.5 to the Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1996).
13. 1997 Annual Report to Shareholders.
21. Subsidiaries of the Bancorp.
27. Financial Data Schedule.
(4) REPORTS ON FORM 8-K:
--------------------
No reports on Form 8-K were filed during the fourth quarter of 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST INDIANA BANCORP
By /s/David A. Bochnowski
-------------------------------
David A. Bochnowski
Chairman of the Board and
Chief Executive Officer
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 18, 1998:
SIGNATURE TITLE
- --------- -----
Principal Executive Officer:
/s/David A. Bochnowski Chairman of the Board and
- ------------------------------- Chief Executive Officer
David A. Bochnowski
Principal Financial Officer and
Principal Accounting Officer:
/s/Edward J. Furticella Vice President, Chief Financial
- ------------------------------- Officer and Treasurer
Edward J. Furticella
The Board of Directors:
/s/Leroy F. Cataldi Director
- -------------------------------
Leroy F. Cataldi
/s/James J. Crandall Director
- -------------------------------
James J. Crandall
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40
/s/Lourdes M. Dennison Director
- -------------------------------
Lourdes M. Dennison
/s/Gloria C. Gray Director
- -------------------------------
Gloria C. Gray
/s/Stanley E. Mize Director
- -------------------------------
Stanley E. Mize
/s/Jerome F. Vrabel Director
- -------------------------------
Jerome F. Vrabel
/s/John J. Wadas, Jr. Director
- -------------------------------
John J. Wadas, Jr.
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EXHIBIT INDEX
Exhibit Description Page
13. 1997 Annual Report to Shareholders
21. Subsidiaries of the Bancorp
27. Financial Data Schedule
40