FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-21765
RIVER VALLEY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1984567
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
303 Clifty Drive
P.O. Box 626
Madison, Indiana 47250
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 273-4949
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
(Title of Class)
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 _____ 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.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 20, 1997 was $14,540,700.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 20, 1997, was 1,190,250 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page ___
Page 1 of ___ Pages
<PAGE>
RIVER VALLEY BANCORP
Form 10-K
INDEX
Page
PART I
Item 1 Business..................................................
Item 2. Properties................................................
Item 3. Legal Proceedings.........................................
Item 4. Submission of Matters to a Vote of Security Holders.......
Item 4.5. Executive Officers of the Registrant......................
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................
Item 6. Selected Financial Data...................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Item 8. Financial Statements and Supplementary Data...............
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................
PART III
Item 10. Directors and Executive Officers of Registrant............
Item 11. Executive Compensation....................................
Item 12. Security Ownership of
Certain Beneficial Owners and Management..............
Item 13. Certain Relationships and Related Transactions............
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...............................
SIGNATURES ......................................................
Item 1. Business
<PAGE>
General
River Valley Bancorp, an Indiana corporation (the "Holding Company"),
was organized in May, 1996. On December 20, 1996, it acquired the common stock
of Madison First Federal Savings and Loan Association ("First Federal") upon the
conversion of First Federal from a federal mutual savings and loan association
to a federal stock savings and loan association (the "Conversion"), and acquired
120,434 shares of common stock, $8.00 par value per share (the "Citizens
Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6%
of the issued and outstanding shares of Citizens' common stock (the
"Acquisition"). First Federal and Citizens together are sometimes hereinafter
referred to as the "Institutions."
The Conversion of First Federal was accounted for in a manner similar
to a pooling of interests. The acquisition of Citizens was accounted for as a
purchase transaction. Under purchase accounting, the acquired assets and
liabilities of Citizens were recorded at fair value as of December 20, 1996.
Because the assets and liabilities of Citizens were recorded at fair value as of
the date of the Acquisition, the financial data prior to December 20, 1996
provided herein do not include information derived from the financial statements
of Citizens. Rather, such financial data provided herein includes only
information derived from the financial statements of First Federal. From and
after December 20, 1996, the operating results of Citizens and Madison are
consolidated with those of the Holding Company.
First Federal was organized as a federally chartered savings and loan
association in 1875. First Federal is the oldest independent financial
institution headquartered in Jefferson County. Prior to the Conversion, First
Federal conducted its business from three full-service offices and one
stand-alone drive-through branch, all located in Jefferson County, Indiana. As a
condition to the Holding Company obtaining the requisite approval from the Board
of Govenors of the Federal Reserve System (the "FRB") for the Acquisition, the
Holding Company committed to cause First Federal to (i) enter into a definitive
agreement to sell First Federal's Hanover, Indiana branch prior to consummation
of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch,
including the physical facilities and deposits originated at that branch, within
180 days of consummation of the Acquisition. On February 28, 1997, First Federal
sold its Hanover, Indiana branch to People's Trust Company based in Brookville,
Indiana, pursuant to that committment. Deposits totaling $6.8 million were
assumed by People's Trust and First Federal recorded an after tax gain of
$125,000 on the transaction.
Citizens was organized as a national bank in 1981. Citizens conducts
its business from four full-service offices, all located in Jefferson County,
Indiana.
The Institutions historically have concentrated their lending
activities on the origination of loans secured by first mortgage liens for the
purchase, construction or refinancing of one- to four- family residential real
property. One- to four-family residential mortgage loans continue to be the
major focus of the Institutions' loan origination activities, representing 65.8%
of the Institutions' total loan portfolio at December 31, 1996. The Institutions
also offer multi-family mortgage loans, non-residential real estate loans, land
loans, construction loans, nonmortgage commercial loans and consumer loans.
Their principal market area is Jefferson County, Indiana.
Loan Portfolio Data. The following table sets forth the composition of
the Holding Company's loan portfolio, including loans held for sale, as of
December 31, 1996, 1995, and 1994 by loan type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for loan losses, deferred loan origination costs and loans in process.
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994
--------------------- ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
TYPE OF LOAN (Dollars in thousands) Residential real estate:
<S> <C> <C> <C> <C> <C> <C>
One-to four-family......................................... $ 68,493 61.4% $44,417 74.7% $46,378 81.5%
Multi-family............................................... 3,416 3.1 1,613 2.7 1,242 2.2
Construction............................................... 4,895 4.4 2,489 4.2 748 1.3
Nonresidential real estate.................................... 14,280 12.8 6,005 10.1 4,740 8.3
Land loans.................................................... 680 .6 1,558 2.6 1,034 1.8
Consumer loans:
Automobile loans........................................... 5,245 4.7 1,392 2.3 1,022 1.8
Loans secured by deposits.................................. 869 .8 590 1.0 527 0.9
Home improvement loans..................................... 271 .2 295 0.5 270 0.5
Other...................................................... 6,963 6.2 1,129 1.9 977 1.7
Commercial loans.............................................. 6,433 5.8 --- --- --- ---
-------- ---- ------- ---- ------- ----
Gross loans receivable........................................ 111,545 100.0 59,488 100.0 56,938 100.0
Add/(Deduct):
Deferred loan orgination costs............................. 226 .2 234 0.4 243 0.4
Undisbursed portions
of loans in process...................................... (1,703) (1.5) (1,370) (2.3) (642) (1.1)
Allowance for loan losses.................................. (1,074) (1.0) (407) (0.7) (252) (0.4)
-------- ---- ------- ---- ------- ----
Net loans receivable.......................................... $108,994 97.7% $57,945 97.4% $56,287 98.9%
======== ==== ======= ==== ======= ====
</TABLE>
The following table sets forth certain information at December 31,
1996, regarding the dollar amount of loans maturing in the Institutions' loan
portfolio based on the contractual terms to maturity. Demand loans, loans having
no stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less. This schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses. Management
expects prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2000 2002 2007 2012
December 31, to to to and
1996 1997 1998 1999 2001 2006 2011 following
(In thousands)
Residential real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family................. $ 68,493 $ 853 $ 292 $ 274 $ 894 $ 9,460 $24,444 $34,276
Multi-family.......................... 3,416 --- --- --- 9 244 970 2,193
Construction....................... 4,895 4,038 396 --- --- --- --- 461
Nonresidential
real estate loans.................. 14,280 476 38 168 401 4,000 3,323 5,874
Land loans ......................... 680 1 5 --- 90 72 512 ---
Consumer loans:
Loans secured by deposits.......... 869 728 44 20 4 73 --- ---
Other loans........................ 12,479 1,070 1,422 2,735 6,172 1,004 76 ---
Commercial loans...................... 6,433 3,203 392 416 1,046 653 521 202
-------- ------- ------ ------ ------ ------- ------- -------
Total............................ $111,545 $10,369 $2,589 $3,613 $8,616 $15,506 $27,846 $43,006
======== ======= ====== ====== ====== ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth, as of December 31, 1996, the dollar
amount of all loans due after one year that have fixed interest rates and
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1997
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Residential real estate loans:
<S> <C> <C> <C>
One-to four-family................................ $14,464 $53,176 $67,640
Multi-family...................................... 662 2,754 3,416
Construction...................................... 348 509 857
Non-residential
real estate loans................................. 817 12,987
13,804
Land loans ........................................ 5 674 679
Consumer loans:
Loans secured by deposits......................... 95 141 236
Other loans....................................... 11,286 28 11,314
Commercial loans..................................... 332 2,898 3,230
------- ------- --------
Total........................................... $28,009 $73,167 $101,176
======= ======= ========
</TABLE>
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $68.5 million, or 61.4% of the Holding
Company's portfolio of loans at December 31, 1996, consisted of one- to
four-family residential loans, of which approximately 71% had adjustable rates.
The Institutions currently offer adjustable-rate one- to four-family
residential mortgage loans ("ARMs") which adjust annually and are indexed to the
one-year U.S. Treasury securities yields adjusted to a constant maturity,
although until late 1995 First Federal's ARMs were indexed to the 11th District
Cost of Funds. First Federal's residential ARMs are originated at a discount or
"teaser" rate which is generally 150 to 175 basis points below the "fully
indexed" rate. These ARMs then adjust annually to maintain a margin above the
applicable index, subject to maximum rate adjustments discussed below. First
Federal's ARMs have a current margin above such index of 2.5% for owner-occupied
properties and 3.75% for non-owner-occupied properties. Citizens' ARMs have an
average margin of 2.5%. A substantial portion of the ARMs in the Institutions'
portfolio at December 31, 1996 provide for maximum rate adjustments per year and
over the life of the loan of 1% and 5%, respectively, although First Federal
recently began originating residential ARMs which provide for maximum rate
adjustments per year and over the life of the loan of 1.5% and 6%, respectively.
Citizens' ARMs provide for interest rate minimums of 1% below the origination
rate. First Federal's residential ARMs are amortized for terms up to 30 years,
and Citizens' residential ARMs are amortized for terms up to 20 years.
Adjustable-rate loans decrease the risk associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payments by the borrowers may rise to the extent permitted by the
terms of the loan, thereby increasing the potential for default. Also,
adjustable-rate loans have features which restrict changes in interest rates on
a short-term basis and over the life of the loan. At the same time, the market
value of the underlying property may be adversely affected by higher interest
rates.
First Federal currently offers fixed-rate one- to four-family
residential mortgage loans which provide for the payment of principal and
interest over periods of 10 to 20 years. Historically, First Federal retained
all of its fixed-rate residential mortgage loans in its portfolio; however,
First Federal will begin to originate its fixed-rate residential mortgage loans
with terms of 15 years and greater for sale to the Federal Home Loan Mortgage
Corporation (the "FHLMC") on a servicing-retained basis during the second
quarter of 1997. At December 31, 1996, approximately 29% of First Federal's
residential mortgage loans had fixed rates.
First Federal's residential mortgage loans historically have not been
originated on terms and conditions and using documentation that conform with the
standard underwriting criteria required to sell such loans on the secondary
market. However, First Federal has been approved to originate and sell its
residential mortgage loans to the FHLMC.
Citizens also currently offers fixed-rate one- to four-family
residential mortgage loans in accordance with the guidelines established by the
FHLMC to facilitate the sale of such loans to the FHLMC in the secondary market.
These loans amortize on a monthly basis with principal and interest due each
month and are written with terms of 15, 20 and 30 years. Citizens retains the
servicing on all loans sold to the FHLMC. At December 30, 1996, the Holding
Company had approximately $26.5 million of fixed-rate residential mortgage loans
which were sold to the FHLMC and for which the Institutions provide servicing.
<PAGE>
First Federal does not currently originate residential mortgage loans
if the ratio of the loan amount to the lesser of the current cost or appraised
value of the property (i.e., the "Loan-to-Value Ratio") exceeds 95%. Citizens
generally does not originate one-to-four-family residential ARMs if the
loan-to-value ratio exceeds 80%. First Federal generally requires private
mortgage insurance on all conventional one- to four-family residential real
estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of
such insurance is factored into the APY on such loans, and is not automatically
eliminated when the principal balance is reduced over the term of the loan.
Substantially all of the one- to four-family residential mortgage loans
that the Institutions originates include "due-on-sale" clauses, which give the
Institutions the right to declare a loan immediately due and payable in the
event that, among other things, the borrower sells or otherwise disposes of the
real property subject to the mortgage and the loan is not repaid. However, First
Federal does permit assumptions of existing residential mortgage loans on a
case-by-case basis.
First Federal also offers indemnification mortgage loans ("ID Mortgage
Loans"), which are typically written as fixed-rate second mortgage loans. First
Federal's ID Mortgage Loans are written for terms of 5 years and generally have
maximum Loan-to-Value Ratios of 80%.
First Federal also offers standard second mortgage loans. First
Federal's second mortgage loans are adjustable-rate loans tied to the U.S.
Treasury securities yields adjusted to a constant maturity and have a current
margin above such index of 4.25%. If another institution holds the first
mortgage, the initial interest rate on the second mortgage loan is set 50 basis
points higher. First Federal's second mortgage loans have maximum rate
adjustments per year and over the terms of the loans equal to 1.5% and 6%,
respectively. First Federal's second mortgage loans have terms of 10 to 20
years.
At December 31, 1996, one- to four-family residential mortgage loans
amounting to $430,000, or .38% of total loans, were included in the Holding
Company's non-performing assets.
Construction Loans. The Institutions offer construction loans with
respect to residential and nonresidential real estate and, in certain cases, to
builders or developers constructing such properties on a speculative basis
(i.e., before the builder/developer obtains a commitment from a buyer).
Generally, construction loans are written as 12 month fixed-rate loans
with interest calculated on the amount disbursed under the loan and payable on a
semi-annual or monthly basis. The Institutions generally require an 80%
Loan-to-Value Ratio for its construction loans, although Citizens permits an 85%
Loan-to-Value Ratio for its one- to four-family residential construction loans.
Inspections are made prior to any disbursement under a construction loan, and
the Institutions do not charge commitment fees for their construction loans.
At December 31, 1996, $4.9 million, or 4.4% of the Holding Company's
total loan portfolio, consisted of construction loans. The largest construction
loan at December 31, 1996, totalled $217,000. No construction loans were
included in non-performing assets on that date.
While providing the Institutions with a comparable, and in some cases
higher, yield than a conventional mortgage loan, construction loans involve a
higher level of risk. For example, if a project is not completed and the
borrower defaults, the Institutions may have to hire another contractor to
complete the project at a higher cost. Also, a project may be completed, but may
not be salable, resulting in the borrower defaulting and the Institutions taking
title to the project.
Nonresidential Real Estate Loans. At December 31, 1996, $14.3 million,
or 12.8% of the Institutions' portfolio consisted of nonresidential real estate
loans. Of this amount, approximately $778,000 constituted participations in
loans secured by nonresidential real estate which were purchased from other
financial institutions. Nonresidential real estate loans are primarily secured
by real estate such as churches, farms and small business properties. The
Institutions each originate nonresidential real estate loans as one-year
adjustable-rate loans indexed to the one-year U.S. Treasury securities yields
adjusted to a constant maturity and are written for maximum terms of 20 years.
First Federal's nonresidential real estate loans generally have a margin above
such index of 4.25%, and maximum adjustments per year and over the life of the
loan of 1.5% and 6%, respectively. Citizens' adjustable-rate nonresidential real
estate loans have maximum adjustments per year and over the life of the loan of
1% and 5%, respectively, and interest rate minimums of 1% below the origination
rate. First Federal generally requires a Loan-to-Value Ratio of 80%, while
Citizens requires Loan-to-Value Ratios of 65% to 85%, depending on the nature of
the real estate collateral, for nonresidential real estate loans.
The Institutions underwrite their nonresidential real estate loans on a
case-by-case basis and, in addition to their normal underwriting criteria,
evaluate the borrower's ability to service the debt from the net operating
income of the property. The Holding Company's largest nonresidential real estate
loan as of December 31, 1996 was $615,000 and was secured by a church in
Madison, Indiana. On the same date, there were no nonresidential real estate
loans included in the Holding Company's non-performing assets.
<PAGE>
Loans secured by nonresidential real estate generally are larger than
one- to four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-family Loans. At December 31, 1996, approximately $3.4 million,
or 3.1% of the Holding Company's total loan portfolio, consisted of mortgage
loans secured by multi-family dwellings (those consisting of more than four
units). The Institutions each write multi-family loans on terms and conditions
similar to their nonresidential real estate loans. The largest multi-family loan
in the Holding Company's portfolio as of December 31, 1996 was $897,000 and was
secured by an apartment building in New Albany, Indiana. On the same date,
neither of the Institutions had any multi-family loans included in
non-performing assets.
Multi-family loans, like nonresidential real estate loans, involve a
greater risk than do residential loans. See "Nonresidential Real Estate Loans"
above. Also, the loans-to-one borrower limitations restrict the ability of the
Institutions to make loans to developers of apartment complexes and other
multi-family units.
Land Loans. At December 31, 1996, approximately $680,000, or .6% of the
Holding Company's total loan portfolio, consisted of mortgage loans secured by
undeveloped real estate. The Holding Company's land loans are generally written
on terms and conditions similar to its nonresidential real estate loans. Some of
the Holding Company's land loans are land development loans; i.e., the proceeds
of the loans are used for improvements to the real estate such as streets and
sewers. At December 31, 1996, the Holding Company's largest land loan totalled
$285,000.
While none of the Holding Company's land development loans were
included in non-performing assets as of December 31, 1996, such loans are more
risky than conventional loans since land development borrowers who are over
budget may divert the loan funds to cover cost-overruns rather than direct them
toward the purpose for which such loans were made. In addition, those loans are
more difficult to monitor than conventional mortgage loans. As such, a
defaulting borrower could cause the Holding Company to take title to partially
improved land that is unmarketable without further capital investment.
Commercial Loans. At December 31, 1996, $6.4 million, or 5.8% of the
Holding Company's total loan portfolio, consisted of nonmortgage commercial
loans. Citizens' commercial loans are written on either a fixed-rate or an
adjustable-rate basis with terms that vary depending on the type of security, if
any. At December 31, 1996, approximately 95% of the Holding Company's commercial
loans were secured by collateral, such as equipment, inventory and crops. The
Holding Company's adjustable-rate commercial loans are generally indexed to the
prime rate with varying margins and terms depending on the type of collateral
securing the loans and the credit quality of the borrowers. At December 31,
1996, the largest commercial loan was $392,000. As of the same date, commercial
loans totalling $317,000 were included in non-performing assets.
Commercial loans tend to bear somewhat greater risk than residential
mortgage loans, depending on the ability of the underlying enterprise to repay
the loan. Further, they are frequently larger in amount than the Holding
Company's average residential mortgage loans.
Consumer Loans. The Institutions' consumer loans, consisting primarily
of auto loans, home improvement loans, unsecured installment loans, loans
secured by deposits, and mobile home loans aggregated approximately $13.4
million at December 31, 1996, or 11.9% of the Holding Company's total loan
portfolio. The Holding Company consistently originates consumer loans to meet
the needs of its customers and to assist in meeting its asset/liability
management goals. All of the Holding Company's consumer loans, except loans
secured by deposits, are fixed-rate loans with terms that vary from six months
(for unsecured installment loans) to 60 months (for home improvement loans and
loans secured by new automobiles) . At December 31, 1996, 88% of the Holding
Company's consumer loans were secured by collateral.
The Holding Company's loans secured by deposits are made up to 100% of
the original account balance and accrue at a rate of 2% over the underlying
passbook or certificate of deposit rate. Interest on loans secured by deposits
is paid semi-annually.
Although First Federal does not offer indirect automobile loans,
Citizens offers both direct and indirect automobile loans. Under Citizens'
indirect automobile program, participating automobile dealers receive loan
applications from prospective purchasers of automobiles at the point of sale and
deliver them to Citizens for immediate processing. The dealer receives a portion
of the interest payable on approved loans.
<PAGE>
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At December 31, 1996, consumer loans amounting to $72,000 were
included in non-performing assets.
Home Equity Loans. At December 31, 1996, the Holding Company had
outstanding approximately $1.9 million of home equity loans, with unused lines
of credit totalling approximately $248,000. No home equity loans were included
in non-performing assets on that date.
In May, 1996, First Federal began offering a new home equity line of
credit. This line of credit is written with a fixed rate of 1% below the prime
rate for the first year. Thereafter, the line is an adjustable-rate line of
credit tied to the prime rate with a margin of positive 1%. First Federal's home
equity loans have interest rate minimums of 7.5% and interest rate maximums of
18%. First Federal's home equity loans are amortized based on a 20 year maturity
and are generally not written in principal amounts of less than $5,000. First
Federal generally allows a maximum Loan-to-Value Ratio of 80% for its home
equity loans (taking into account any other mortgages on the property).
First Federal's previous home equity line of credit was an
adjustable-rate line of credit tied to the prime rate with varying margins up to
3%, depending on the amount committed under the line of credit. These lines of
credit had interest rate minimums of 8.5% and interest rate maximums of 18%.
First Federal's previous home equity lines were not written in amounts less than
$5,000.
Citizens' home equity lines of credit are adjustable-rate lines of
credit tied to the prime rate and are amortized based on a 10 year maturity.
Citizens generally allows a maximum 90% Loan-to-Value Ratio for its home equity
loans (taking into account any other mortgages on the property). Payments on
such home equity loans equal 1.5% of the outstanding principal balance per
month.
Origination, Purchase and Sale of Loans. The Institutions historically
have originated their ARMs pursuant to their own underwriting standards which
were not in conformity with the standard criteria of the FHLMC or Federal
National Mortgage Association ("FNMA"). The Institutions' ARMs vary from
secondary market criteria because, among other things, the Institutions did not
require current property surveys in most cases and do not permit the conversion
of those loans to fixed rate loans in the first three years of their term. If
the Institutions desired to sell their non-conforming ARMs, they may experience
difficulty in selling such loans quickly in the secondary market.
First Federal recently was approved to begin originating fixed-rate
residential mortgage loans for sale to the FHLMC on a servicing-retained basis.
First Federal will begin this fixed-rate program during the second quarter of
1997. Loans originated for sale to the FHLMC in the secondary market are
originated in accordance with the guidelines established by the FHLMC and will
be sold promptly after they are originated. First Federal will receive a
servicing fee of one-fourth of 1% of the principal balance of all loans
serviced. Citizens also participates in the secondary market as a seller of its
fixed-rate residential mortgage loans to FHLMC. The loans sold by Citizens to
the FHLMC are designated for sale when originated. Citizens retains the
servicing rights on the loans it originates and sells for a servicing fee of
one-fourth of 1% of the principal balance of all loans serviced. During the 12
months ended December 31, 1996, Citizens sold $9.3 million in fixed-rate
residential mortgage loans to FHLMC. At December 31, 1996, Citizens serviced
$26.5 million in loans sold to FHLMC.
The Institutions confine their loan origination activities primarily to
Jefferson County. At December 31, 1996, the Institutions held loans totalling
approximately $4.1 million that were secured by property located outside of
Indiana. The Institution's loan originations are generated from referrals from
existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten at any of the Institutions' six
full-service offices and are processed at the First Federal's downtown office
and Citizens' four full-service offices.
The Institutions' loan approval processes are intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. To assess the borrower's
ability to repay, the Institutions study the employment and credit history and
information on the historical and projected income and expenses of their
mortgagors. First Federal requires that all mortgage loans be approved by its
Loan Committee. Consumer loans up to $15,000 may be approved by a Loan Officer.
Consumer loans for more than $15,000 must be approved by the President. First
Federal qualifies all residential ARM loan borrowers based upon a fully-indexed
interest rate rather than the initial discounted or teaser rate.
<PAGE>
Citizens' lending policy provides that mortgage loans up to $100,000
may be approved by Citizens' Senior Loan Officer, and mortgage loans up to
$200,000 may be approved by the President. All other mortgage loans are approved
by at least three members of Citizens' Board of Directors. Loans secured by
collateral other than real estate up to $300,000 may be approved by Citizens'
President and loans secured by collateral other than real estate up to $100,000
may be approved by the Senior Loan Officer. All other loans secured by
collateral other than real estate are approved by the Board of Directors.
Citizens' President and Senior Loan Officer have lending authority of up to
$50,000 and $25,000, respectively, for unsecured loans.
The Institutions generally require appraisals on all real property
securing their loans and require an attorney's opinion or title insurance and a
valid lien on the mortgaged real estate. Appraisals for all real property
securing mortgage loans are performed by independent appraisers who are
state-licensed. The Institutions require fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan and also require
flood insurance to protect the property securing their interest if the property
is in a flood plain. First Federal also generally requires private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. The Institutions do not require escrow accounts for insurance
premiums or taxes.
The Institutions' underwriting standards for consumer and commercial
loans are intended to protect against some of the risks inherent in making such
loans. Borrower character, paying habits and financial strengths are important
considerations.
The Institutions occasionally purchase participations in commercial
loans, nonresidential real estate and multi-family loans from other financial
institutions. At December 31, 1996, the Institutions held in their loan
portfolios participations in nonresidential real estate mortgage and
multi-family loans aggregating approximately $778,000 that they had purchased,
all of which were serviced by others. The Institutions generally do not sell
participations in any loans that they originate.
The following table shows loan origination and repayment activity for
the Institutions during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1995 1994
------- -------- --------
(In thousands)
Loans Originated:
<S> <C> <C> <C>
Residential real estate loans (1).................... $12,452 $ 8,023 $12,097
Multi-family loans................................... 1,032 --- 758
Construction loans................................... 782 3,027 2,415
Non-residential real estate loans.................... 1,095 1,805 1,031
Land loans........................................... 391 333 981
Consumer loans....................................... 2,896 2,412 2,137
Commercial loans..................................... --- --- ---
------- -------- --------
Total originations............................... 18,648 15,600 19,419
Purchases................................................. --- --- ---
------- -------- --------
Total loans originated and purchased............. 18,648 15,600 19,419
Loans Acquired through merger........................ 49,620 --- ---
Reductions:
Sales................................................ --- --- ---
Principal loan repayments............................ 17,114 13,708 14,973
Transfers from loans to real estate owned............ --- --- 15
------- -------- --------
Total reductions................................. 17,114 13,708 14,988
Decrease in other items (2).......................... (105) (234) (114)
------- -------- --------
Net increase ........................................ $51,049 $ 1,658 $ 4,317
======= ======== ========
</TABLE>
(1) Includes loans originated for sale in the secondary market.
(2) Other items consist of amortization of deferred loan origination costs and
the provision for losses on loans.
<PAGE>
Origination and Other Fees. The Holding Company realizes income from
loan origination fees, loan servicing fees, late charges, checking account
service charges, and fees for other miscellaneous services. Late charges are
generally assessed if payment is not received within a specified number of days
after it is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Institutions on a regular basis and
are placed on a non-accrual status when management determines that the
collectability of the interest is less than probable or collection of any amount
of principal is in doubt. Generally, when loans are placed on non-accrual
status, unpaid accrued interest is written off, and further income is recognized
only to the extent received. First Federal delivers delinquency notices with
respect to all mortgage loans contractually past due 15 days. When loans are 45
days in default, additional delinquency notices are sent and personal contact is
made with the borrowers to establish acceptable repayment schedules. When loans
are 60 days in default, contact is again made with the borrowers to establish
acceptable repayment schedules. Citizens delivers delinquency notices with
respect to all mortgage loans contractually past due 5 to 10 days. When loans
are 30 days in default, personal contact is made with the borrower to establish
an acceptable repayment schedule. Management of both Institutions is authorized
to commence foreclosure proceedings for any loan upon making a determination
that it is prudent to do so.
Commercial and Consumer loans are treated similarly. Interest income on
consumer, commercial and other nonmortgage loans is accrued over the term of the
loan except when serious doubt exists as to the collectibility of a loan, in
which case accrual of interest is discontinued and the loan is written-off, or
written down to the fair value of the collateral securing the loan. It is the
Institutions' policy to recognize losses on these loans as soon as they become
apparent.
Non-performing Assets. At December 31, 1996, $819,000, or .56% of the
Holding Company's total assets, were non-performing assets (non-performing loans
and non-accruing loans) compared to $8,000, or .01%, of First Federal's total
assets at December 31, 1995. At December 31, 1996, residential loans and
consumer loans accounted for $430,000 and $72,000, respectively, of
non-performing assets. There were no REO or non-accruing investments at December
31, 1996.
The table below sets forth the amounts and categories of the Holding
Company's non-performing assets (non-performing loans, foreclosed real estate
and troubled debt restructurings) for the last three years. It is the policy of
the Holding Company that all earned but uncollected interest on all loans be
reviewed monthly to determine if any portion thereof should be classified as
uncollectible for any loan past due in excess of 90 days.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing assets:
Non-performing loans.............................. $819 $ 8 $ 13
Troubled debt restructurings...................... --- --- ---
---- ---- ----
Total non-performing loans...................... 819 8 13
Foreclosed real estate............................ --- --- ---
---- ---- ----
Total non-performing assets..................... $819 $ 8 $ 13
==== ==== ====
Non-performing loans to total loans.................. 0.73% 0.01% 0.02%
==== ==== ====
Non-performing assets to total assets................ 0.56% 0.01% 0.01%
==== ==== ====
</TABLE>
At December 31, 1996, the Holding Company held loans delinquent from 30
to 89 days totalling $1.7 million. The Holding Company was not aware of any
other loans, the borrowers of which were experiencing financial difficulties. In
addition there were no other assets that would need to be disclosed as
non-performing assets.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
December 31, 1996, 1995, and 1994, relating to delinquencies in the Holding
Company's portfolio. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ------------------------- ----------------------- -----------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans of
-------- ----- -------- ----- -------- ----- -------- ----- --
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans......... 13 $415 9 $430 5 $102 1 $ 1
Multi-family loans...... --- --- --- --- --- --- --- ---
Construction loans...... --- --- --- --- --- --- --- ---
Land loans.............. --- --- --- --- --- --- --- ---
Non-residential
real estate loans.... --- --- --- --- 1 23 --- ---
Consumer loans.......... 25 116 18 72 1 3 4 7
Commercial loans........ 8 86 6 317 --- --- --- ---
--- ---- --- ---- --- ---- --- ----
Total................ 46 $617 33 $819 7 $128 5 $ 8
=== ==== === ==== === ==== === ====
Delinquent loans to
total loans.......... 1.30% 0.23%
==== ====
</TABLE>
At December 31, 1994
-------------------------------------------------
60-89 Days 90 Days or More
-------------------- -------------------------
Principal Principal
Number Balance of Number Balance of
of Loans Loans of Loans Loans
-------- ----- -------- ----------
Residential real
estate loans......... 1 $ 4 2 $13
Multi-family loans...... --- --- --- ---
Construction loans...... --- --- --- ---
Land loans.............. --- --- --- ---
Non-residential
real estate loans.... -- --- --- ---
Consumer loans.......... 6 13 --- ---
Commercial loans........ --- --- --- ---
Total................ 7 $17 2 $13
Delinquent loans to
total loans.......... 0.05%
<PAGE>
Classified assets. Federal regulations and the Institutions' Asset
Classification Policies provide for the classification of loans and other assets
such as debt and equity securities to be of lesser quality as "substandard,"
"doubtful" or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the institution will sustain
"some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the Institution's federal regulator which can
order the establishment of additional general or specific loss allowances.
At December 31, 1996, the aggregate amount of the Holding Company's
classified assets, and of the Holding Company's general and specific loss
allowances were as follows:
At December 31, 1996
(In thousands)
Substandard assets.................................. $ 846
Doubtful assets..................................... ---
Loss assets......................................... 3
-------
Total classified assets......................... $ 849
=======
General loss allowances............................. $1,071
Specific loss allowances............................ 3
-------
Total allowances................................ $1,074
======
The Institutions regularly review their loan portfolios to determine
whether any loans require classification in accordance with applicable
regulations. Not all of the Institutions' classified assets constitute
non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Holding Company's lending area),
changes in the character and size of the loan portfolio, loan delinquencies
(current status as well as past and anticipated trends) and adequacy of
collateral securing loan delinquencies, historical and estimated net
charge-offs, and other pertinent information derived from a review of the loan
portfolio. In management's opinion, the Holding Company's allowance for loan
losses is adequate to absorb probable losses from loans at December 31, 1996.
However, there can be no assurance that regulators, when reviewing the Holding
Company's loan portfolio in the future, will not require increases in its
allowances for loan losses or that changes in economic conditions will not
adversely affect the Holding Company's loan portfolio.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the five years ended December 31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $ 407 $252 $227 $262 $227
Charge-offs:
Single-family residential................... --- --- --- (75) (3)
Consumer.................................... (3) --- (4) (25) ---
------ ---- ---- ---- ----
Total charge-offs......................... (3) --- (4) (100) (3)
Recoveries....................................... --- 5 --- 10 1
------ ---- ---- ---- ----
Net charge-offs............................... (3) 5 (4) (90) (2)
Provision for losses on loans.................... 22 150 29 55 37
Increase due to Acquisition...................... 648 --- --- --- ---
------ ---- ---- ---- ----
Balance at end of period...................... $1,074 $407 $252 $227 $262
====== ==== ==== ==== ====
Allowance for loan losses as a percent of
total loans outstanding....................... 0.99% 0.70% 0.45% 0.44% 0.49%
====== ==== ==== ==== ====
Ratio of net charge-offs to average
loans outstanding............................. 0.01% 0.01% 0.01% 0.17% 0.00%
====== ==== ==== ==== ====
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Holding Company's allowance for loans losses
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ---------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------- --------- ------ --------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Residential real estate............ $ 414 68.9% $157 81.6% $152 85.0%
Nonresidential real estate......... 264 13.4 100 12.7 --- 10.1
Consumer loans..................... 132 11.9 50 5.7 50 4.9
Commercial loans................... 200 5.8 --- --- --- ---
Unallocated........................ 64 --- 100 --- 50 ---
------ ----- ---- ----- ---- -----
Total............................ $1,074 100.0% $407 100.0% $252 100.0%
====== ===== ==== ===== ==== =====
</TABLE>
Investments and Mortgage-Backed Securities
Investments. The Holding Company's investment portfolio consists of
U.S. government and agency obligations, municipal securities, asset management
funds, FHLB stock and FRB stock. At December 31, 1996, approximately $10.0
million, or 6.9%, of the Holding Company's total assets consisted of such
investments.
<PAGE>
The following table sets forth the amortized cost and the market value
of the Holding Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and
agency obligations............... $5,500 $5,434 $ 8,000 $ 7,930 $13,996 $13,120
Available for Sale:
U.S. Government and
agency obligations............... 2,997 2,980 5,000 5,018 --- ---
Asset management funds............. --- --- --- --- 101 101
Muncipal securities................ 474 468 --- --- --- ---
FHLB stock............................ 943 943 610 610 610 610
FRB stock............................. 80 80 --- --- --- ---
------ ------ ------- ------- ------- -------
Total available for sale........... 4,494 4,471 5,610 5,628 711 711
------ ------ ------- ------- ------- -------
Total investments................ $9,994 $9,905 $13,610 $13,558 $14,707 $13,831
====== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth the amount of investment securities
(excluding FHLB and FRB stock) which mature during each of the periods indicated
and the weighted average yields for each range of maturities at December 31,
1996.
<TABLE>
<CAPTION>
Amount at December 31, 1996 which matures in
-----------------------------------------------------------------------------------
One Year One Year Five Years After
or Less to Five Years to Ten Years Ten Years
------------------- ------------------ ------------------ ------------------
Amortized Average Amoritzed Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
-------- ------- -------- ------- --------- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency obligations.......... $2,000 4.53% $6,497 5.56% $--- ---% $--- ---%
Municipal securities............................ --- --- --- --- 474 4.77 --- ---
</TABLE>
Mortgage-Backed Securities. The Holding Company maintains a portfolio
of mortgage-backed pass-through securities in the form of FHLMC, FNMA and
Government National Mortgage Association ("GNMA") participation certificates.
Mortgage-backed pass-through securities generally entitle the Holding Company to
receive a portion of the cash flows from an identified pool of mortgages and
gives the Holding Company an interest in that pool of mortgages. FHLMC, FNMA and
GNMA securities are each guaranteed by their respective agencies as to principal
and interest. Except for a $32,000 investment in FHLMC interest-only strips, the
Holding Company does not invest in any derivative products.
Although mortgage-backed securities generally yield less than
individual loans originated by the Holding Company, they present less credit
risk. Because mortgage-backed securities have a lower yield relative to current
market rates, retention of such investments could adversely affect the Holding
Company's earnings, particularly in a rising interest rate environment. The
mortgage-backed securities portfolio is generally considered to have very low
credit risk because they are guaranteed as to principal repayment by the issuing
agency.
In addition, the Holding Company has purchased adjustable-rate
mortgage-backed securities as part of its effort to reduce its interest rate
risk. In a period of declining interest rates, the Holding Company is subject to
prepayment risk on such adjustable rate mortgage-backed securities. The Holding
Company attempts to mitigate this prepayment risk by purchasing mortgage-backed
securities at or near par. If interest rates rise in general, the interest rates
on the loans backing the mortgage-backed securities will also adjust upward,
subject to the interest rate caps in the underlying mortgage loans. However, the
Holding Company is still subject to interest rate risk on such securities if
interest rates rise faster than 1% to 2% maximum annual interest rate
adjustments on the underlying loans.
At December 31, 1996, the Holding Company had $12.8 million of
mortgage-backed securities outstanding, $7.8 million of which were classified as
held to maturity, and $5.0 million of which were classified as available for
<PAGE>
sale. These mortgage-backed securities may be used as collateral for borrowings
and through repayments, as a source of liquidity.
The following table sets forth the carrying value and market value of
the Holding Company's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Mortgage-backed
securities....................... $ 7,805 $ 7,794 $9,917 $9,941 $11,328 $10,715
Available for Sale:
Government
agency securities................ 4,466 4,439 --- --- --- ---
Collateralized mortgage
obligations...................... 628 602 --- --- --- ---
------- ------- ------ ------ ------- -------
Total mortgage-backed
securities................... $12,899 $12,835 $9,917 $9,941 $11,328 $10,715
======= ======= ====== ====== ======= =======
</TABLE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1996.
<TABLE>
<CAPTION>
Amount at December 31, 1996 which matures in
-------------------------------------------------------------------------------
One Year One Year to After
or Less Five Years Five Years
------------------------ ----------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities
<S> <C> <C> <C> <C> <C> <C>
held to maturity............................. $1,518 6.06% $3,774 5.78% $2,513 7.22%
Mortgage-backed securities
available for sale........................... --- --- 335 8.26% 4,759 7.55
------ ------ ------
Total...................................... $1,518 $4,109 $7,272
====== ====== ======
</TABLE>
The following table sets forth the changes in the Holding Company's
mortgage-backed securities portfolio for the years ended December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................................... $ 9,917 $11,328 $13,925
Purchases............................................ 729 --- ---
Sales .............................................. --- --- ---
Repayments........................................... (2,110) (1,417) (2,576)
Premium and discount
amortization, net................................. 2 6 (1)
Mortgage-backed securities
received in Acquisition........................... 4,312 --- ---
Unrealized losses on securities
available for sale................................ (4) --- ---
Provision for other than temporary
decline........................................... --- --- (20)
------- -------- -------
Ending balance....................................... $12,846 $ 9,917 $11,328
======= ======== =======
</TABLE>
Sources of Funds
General. Deposits have traditionally been the Holding Company's primary
source of funds for use in lending and investment activities. In addition to
deposits, the Holding Company derives funds from scheduled loan payments,
investment maturities, loan prepayments, retained earnings, income on earning
assets and borrowings. While scheduled loan payments and income on earning
assets are relatively stable sources of funds, deposit inflows and outflows can
vary widely and are influenced by prevailing interest rates, market conditions
and levels of competition. Borrowings from the FHLB of Indianapolis may be used
in the short-term to compensate for reductions in deposits or deposit inflows at
less than projected levels.
<PAGE>
Deposits. Deposits are attracted, principally from within Jefferson County,
through the offering of a broad selection of deposit instruments including
fixed-rate certificates of deposit, NOW, MMDAs and other transaction accounts,
individual retirement accounts and savings accounts. The Holding Company does
not actively solicit or advertise for deposits outside of Jefferson County.
Substantially all of the Holding Company's depositors are residents of that
county. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. The Holding Company does not pay a fee for any deposits it
receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Institutions on a periodic basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, and applicable regulations. The Holding
Company relies, in part, on customer service and long-standing relationships
with customers to attract and retain its deposits, but also closely prices its
deposits in relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Holding Company has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Holding Company has become more susceptible
to short-term fluctuations in deposit flows as customers have become more
interest rate conscious. The Holding Company manages the pricing of its deposits
in keeping with its asset/liability management and profitability objectives.
Based on its experience, the Holding Company believes that its NOW and MMDAs are
relatively stable sources of deposits. However, the ability of the Holding
Company to attract and maintain certificates of deposit, and the rates paid on
these deposits, have been and will continue to be significantly affected by
market conditions.
An analysis of deposit accounts by type, maturity, and rate of the Holding
Company at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1996 Deposits Rate
- --------------- ------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Non-interest bearing accounts.............................. $ 100 $ 5,951 4.7% ---%
Passbook accounts.......................................... 10 21,718 17.3 3.36
MMDA...................................................... 100 9,623 7.7 2.94
NOW accounts............................................... 100 16,683 13.3 2.54
Super NOW accounts......................................... 1,000 4,406 3.5 2.62
-------- -----
Total withdrawable....................................... 58,381 46.5 2.66
Certificates (original terms):
I.R.A...................................................... 100 8,083 6.4
3 months................................................... 2,500 207 .2
6 months................................................... 500 6,288 5.0
9 months................................................... 500 1,168 .9
12 months.................................................. 500 18,003 14.4
15 months.................................................. 500 6,247 5.0
18 months.................................................. 500 3,212 2.6
24 months.................................................. 500 805 .6
30 months ................................................. 500 6,935 5.5
36 months.................................................. 500 2,774 2.2
48 months.................................................. 500 811 .6
60 months.................................................. 500 3,398 2.7
72 months ................................................. 500 10 ---
96 months.................................................. 500 155 .1
120 months................................................. 500 4 ---
Jumbo certificates............................................ 99,000 9,175 7.3
-------- -----
Total certificates......................................... 67,275 53.5 5.54
-------- -----
Total deposits................................................ $125,656 100.0% 4.30%
======== ===== ====
</TABLE>
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Holding Company at the dates indicated:
At December 31,
1996 1995 1994
------- ------- -------
(In thousands)
3.00 to 3.99%......... $ --- $ --- $ 443
4.00 to 4.99%......... 11,647 98 30,882
5.00 to 5.99%......... 41,560 30,116 5,276
6.00 to 6.99%......... 11,144 10,731 3,365
7.00 to 7.99%......... 2,923 232 267
8.00 to 8.99%......... 1 --- ---
------- ------- -------
Total.............. $67,275 $41,177 $40,233
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1996. Matured certificates, which have not been renewed as of
December 31, 1996, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at December 31, 1996
--------------------------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
<S> <C> <C> <C> <C>
3.00 to 3.99%............................... $ --- $ --- $ --- $ ---
4.00 to 4.99%............................... 10,972 1 2 1
5.00 to 5.99%............................... 32,152 7,297 2,685 1,266
6.00 to 6.99%............................... 4,737 4,626 260 1,326
7.00 to 7.99%............................... 86 1,672 20 171
8.00 to 8.99%............................... 1 --- --- ---
------- ------- ------ ------
Total.................................... $47,948 $13,596 $2,967 $2,764
======= ======= ====== ======
</TABLE>
The following table indicates the amount of the Holding Company's jumbo and
other certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 1996.
At December 31, 1996
Maturity Period (In thousands)
Three months or less............................. $4,515
Greater than three months through six months..... 1,100
Greater than six months through twelve months.... 2,363
Over twelve months............................... 1,710
------
Total....................................... $9,688
======
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposits offered by the Holding Company at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance Increase
at (Decrease) at (Decrease)
December 31, % of from December 31, % of from
1996 Deposits 1995 1995 Deposits 1994
-------- ----- ------- ------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Withdrawable:
Non-interest bearing accounts.................$ 5,951 4.7% $5,951 $ --- ---% $ ---
Passbook accounts............................. 21,718 17.3 3,807 17,911 23.8 (1,518)
MMDA ........................................ 9,623 7.7 2,482 7,141 9.5 (511)
NOW accounts.................................. 16,683 13.3 8,742 7,941 10.6 529
Super NOW accounts............................ 4,406 3.5 3,343 1,063 1.4 332
-------- ----- ------- ------- ----- --------
Total withdrawable.......................... 58,381 46.5 24,325 34,056 45.3 (1,168)
Certificates (original terms):
I.R.A......................................... 8,083 6.4 2,300 5,783 7.7 (293)
3 months...................................... 207 .2 112 95 0.1 (348)
6 months...................................... 6,288 5.0 900 5,388 7.1 (2,086)
9 months...................................... 1,168 .9 1,168 --- --- ---
12 months..................................... 18,003 14.4 10,657 7,346 9.8 (1,473)
15 months..................................... 6,247 5.0 277 5,970 7.9 5,970
18 months..................................... 3,212 2.6 (73) 3,285 4.4 840
24 months..................................... 805 .6 805 --- --- ---
30 months .................................... 6,935 5.5 1,669 5,266 7.0 (802)
36 months..................................... 2,774 2.2 2,774 --- --- ---
48 months..................................... 811 .6 755 56 0.1 ---
60 months..................................... 3,398 2.7 349 3,049 4.1 (305)
72 months .................................... 10 --- --- 10 --- ---
96 months..................................... 155 .1 (10) 165 0.2 (35)
120 months.................................... 4 --- --- 4 --- (7)
Jumbo certificates............................... 9,175 7.3 4,415 4,760 6.3 (517)
-------- ----- ------- ------- ----- --------
Total certificates............................ 67,275 53.5 26,098 41,177 54.7 944
-------- ----- ------- ------- ----- --------
Total deposits................................... $125,656 100.0% $50,423 $75,233 100.0% $ (224)
======== ===== ======= ======= ===== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance
at (Decrease) at
December 31, % of from December 31, % of
1994 Deposits 1993 1993 Deposits
------- ----- ------- ------- -----
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C>
Passbook accounts............................. $19,429 25.8% $(3,714) $23,143 29.6%
MMDA ........................................ 7,652 10.1 (635) 8,287 10.6
NOW accounts.................................. 7,412 9.8 821 6,591 8.5
Super NOW accounts............................ 731 1.0 (128) 859 1.1
------- ----- ------- ------- -----
Total withdrawable.......................... 35,225 46.7 (3,656) 38,880 49.8
Certificates (original terms):
I.R.A......................................... 6,076 8.1 (207) 6,283 8.0
3 months...................................... 443 0.6 (25) 468 0.6
6 months...................................... 7,474 9.9 (828) 8,302 10.6
9 months...................................... --- --- --- --- ---
12 months..................................... 8,819 11.7 2,288 6,531 8.4
15 months..................................... --- --- --- --- ---
18 months..................................... 2,445 3.2 (707) 3,152 4.0
24 months..................................... --- --- --- --- ---
30 months .................................... 6,068 8.0 (662) 6,730 8.6
48 months..................................... 56 0.1 --- 56 0.1
36 months..................................... --- --- --- --- ---
60 months..................................... 3,354 4.4 (196) 3,550 4.6
72 months .................................... 10 --- --- 10 ---
96 months..................................... 200 0.3 (36) 236 0.3
120 months.................................... 11 --- (4) 15 --
Jumbo certificates............................... 5,277 7.0 1,409 3,868 5.0
------- ----- ------- ------- -----
Total certificates............................ 40,233 53.3 1,032 39,201 50.2
------- ----- ------- ------- -----
Total deposits................................... $75,458 100.0% $(2,624) $78,081 100.0%
======= ===== ======= ======= =====
</TABLE>
Borrowings. The Holding Company focuses on generating high quality
loans and then seeks the best source of funding from deposits, investments or
borrowings. At December 31, 1996, the Institutions had $1.1 million in
borrowings from the FHLB of Indianapolis. The Holding Company does not
anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future.
The following table presents certain information relating to the
Holding Company's borrowings at or for the years ended December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period............................... $1,100 $4,471 $4,986
Average balance outstanding for period..................... 1,221 2,967 228
Maximum amount outstanding at any
month-end during the period.............................. 2,000 4,471 4,986
Weighted average interest rate
during the period........................................ 5.16% 5.90% 5.26%
Weighted average interest rate
at end of period......................................... 7.35% 5.76% 6.26%
</TABLE>
<PAGE>
Service Corporation Subsidiaries
Prior to the Acquisition and Conversion, First Federal had two
subsidiaries: Madison First Service Corporation ("First Service") and McCauley
Insurance Agency, Inc. ("McCauley"). First Service was incorporated under the
laws of the State of Indiana on July 3, 1973 and owned all of the outstanding
capital stock of McCauley. First Service had no other operations. McCauley was
organized under the laws of the State of Indiana under the name Builders
Insurance Agency, Inc. on August 2, 1957 and changed its name to McCauley
Insurance Agency, Inc. on August 29, 1957. McCauley engaged in the sale of
general fire and accident, car, home and life insurance to the general public.
During the period ended December 31, 1996, McCauley received approximately
$200,000 in commissions.
Upon consummation of the Acquisition, the Holding Company became a bank
holding company, subject to the Bank Holding Company Act of 1956, as amended
(the "BHCA"). At that time, the insurance operations of McCauley were not
permitted under the BHCA, and First Federal was required to divest its ownership
of McCauley. On December 17, 1996, First Federal sold McCauley to the Madison
Insurance Agency, Inc. for a gain of $141,000. It continues to hold First
Service as a shell corporation which is not currently conducting any business.
The historic consolidated statements of income of First Federal and its
subsidiaries included elsewhere herein include the operations of First Service
and McCauley, prior to McCauley's sale. All intercompany balances and
transactions have been eliminated in the consolidation.
Employees
As of December 31, 1996, the Holding Company employed 58 persons on a
full-time basis and 8 persons on a part-time basis. None of the employees is
represented by a collective bargaining group. Management considers its employee
relations to be good.
COMPETITION
The Institutions originate most of their loans to and accept most of
their deposits from residents of Jefferson County, Indiana. The Institutions are
subject to competition from various financial institutions, including state and
national banks, state and federal savings associations, credit unions, and
certain nonbanking consumer lenders that provide similar services in Jefferson
County with significantly larger resources than the Institutions. In total,
there are 11 financial institutions located in Jefferson County, Indiana,
including the Institutions. The Institutions also compete with money market
funds with respect to deposit accounts and with insurance companies with respect
to individual retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of savings associations and
savings association acquisitions of banks in Indiana have been completed.
Affiliations between banks and savings associations based in Indiana may also
increase the competition faced by the Holding Company and the Institutions.
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion and authorizes out-of-state banks meeting certain requirements
to branch into Indiana by merger or de novo expansion. The Indiana Branching Law
became effective March 15, 1996, provided that interstate mergers and de novo
branches are not permitted to out-of-state banks unless the laws of their home
states permit Indiana banks to merge or establish de novo branches on a
reciprocal basis. This new legislation may also result in increased competition
for the Holding Company and the Institutions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
<PAGE>
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings associations holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
Because of recent changes in federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings and loan
associations have certain powers to acquire savings associations based in other
states, and Indiana law expressly permits reciprocal acquisitions of Indiana
savings assocations in the Region. In addition, federal savings associations are
permitted to branch on an interstate basis. See "Regulation--Acquisitions or
Dispositions and Branching."
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Institutions compete for
loan originations primarily through the efficiency and quality of services they
provide borrowers and through interest rates and loan fees charged. Competition
is affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels, and other
factors that are not readily predictable.
REGULATION
General
First Federal, as a federally chartered savings and loan association,
is a member of the Federal Home Loan Bank System ("FHLB System"), its deposits
are insured by the Federal Deposit Insurance Corporation (the "FDIC") through
the Savings Association Insurance Fund (the "SAIF"). First Federal is subject to
extensive regulation by the Office of Thrift Supervision ("OTS"). Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval, and must file reports
with the OTS about their activities and their financial condition. Periodic
examinations of First Federal are conducted by the OTS which has, in conjunction
with the FDIC in certain situations, examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and federal deposit insurance funds. First Federal is also subject to
certain reserve requirements under regulations of the FRB.
An OTS regulation establishes a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS. The regulation
also establishes a schedule establishing fees for the various types of
applications and filings made by savings associations with the OTS. The general
assessment, to be paid on a semiannual basis, is based upon the savings
association's total assets, including consolidated subsidiaries, as reported in
a recent quarterly thrift financial report. Currently, the assessment rates
range from .0172761% of assets for associations with assets of $67 million or
less to .0045864% for associations with assets in excess of $35 billion. First
Federal's semiannual assessment under this method of assessment, based upon
assets at December 31, 1996, is approximately $14,000.
Citizens, as a national bank, is regulated by the Office of the
Comptroller of the Curency ("OCC") and its deposits are insured by the FDIC
through the Bank Insurance Fund ("BIF"). Periodic examinations of Citizens are
conducted by the OCC which has, in conjunction with the FDIC in certain
situations, examination and enforcement powers with respect to Citizens.
Each of First Federal and Citizens is also subject to federal and state
regulation as to such matters as loans to officers, directors, or principal
shareholders, required reserves, limitations as to the nature and amount of its
loans and investments, regulatory approval of any merger or consolidation,
issuance or retirements of their own securities, and limitations upon other
aspects of banking operations. In addition, the activities and operations of
First Federal and Citizens are subject to a number of additional detailed,
complex and sometimes overlapping federal and state laws and regulations. These
include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal
Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as First Federal, to either
convert to a national bank or a state-chartered financial institution by a
specified date to be determined. The OTS would also be abolished and its
functions transferred among the other federal banking regulators. Certain
aspects of the legislation remain to be resolved and therefore no assurance can
be given as to whether or in what form the legislation will be enacted or its
effect on the Holding Company and First Federal.
Bank Holding Company Regulation
As the holding company for Citizens, the Holding Company is registered
as a bank holding company, and is subject to the regulations of the FRB under
the BHCA. Bank holding companies are required to file periodic reports with, and
are subject to periodic examination by, the FRB. The FRB has issued regulations
under the BHCA requiring a bank holding company 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
<PAGE>
ready to use its resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity. Additionally, under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA"), 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. 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 the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
Prior to September 29, 1995, the BHCA prohibited the FRB from approving
any direct or indirect acquisition by a bank holding company of more than 5% of
the voting shares, or of all or substantially all of the assets, of a bank
located outside of the state in which the operations of the bank holding
company's banking subsidiaries are principally located unless the laws of the
state in which the bank to be acquired is located specifically authorize such an
acquisition. Pursuant to amendments to the BHCA which took effect September 29,
1995, the FRB may now allow a bank holding company to acquire banks located in
any state of the United States without regard to geographic restriction or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates and state law provisions requiring the target bank to
have existed for some period of time (not exceeding five years) prior to the
date of acquisition.
The BHCA also prohibits the Holding Company, with certain exceptions
noted below, from acquiring direct of indirect ownership or control of more than
5% of the voting shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries, except that bank holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the FRB to be "so closely related to banking . . . as to be
a proper incident thereto." Under current regulations of the FRB, the Holding
Company and any non-bank subsidiaries it may control are permitted to engage in,
among other activities, such banking-related businesses as the operation of a
thrift, the operation of a trust company, sales, and consumer finance, equipment
leasing, the operation of a computer service bureau, including software
development, and mortgage banking and brokerage. The BHCA does not place
territorial restrictions on the activities of non-bank subsidiaries of bank
holding companies.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB is the federal regulatory and examining authority for bank
holding companies. The FRB has adopted capital adequacy guidelines for bank
holding companies.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which 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 general loan loss allowance. In addition to the risk-based capital
guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which
the bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of 3% in the case of bank holding companies
which have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
The Holding Company has satisfied these requirements following the
Conversion and the Acquisition.
<PAGE>
Federal Home Loan Bank System
First Federal and Citizens are members of the FHLB System, which
consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System including the FHLB of Indianapolis.
The FHLB System provides a central credit facility primarily for member savings
and loan associations and savings banks and other member financial institutions.
Each of First Federal and Citizens are required to hold shares of capital stock
in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the end of each calendar year,
0.3% of its assets or 1/20 (or such greater fraction established by the FHLB) of
outstanding FHLB advances, commitments, lines of credit and letters of credit.
First Federal and Citizens are currently in compliance with this requirement. At
December 31, 1996, the Institutions' investment in stock of the FHLB of
Indianapolis was $943,000.
In past years, First Federal and Citizens have received dividends on
their FHLB stock. All 12 FHLBs are required by law to provide funds for the
resolution of troubled savings associations and to establish affordable housing
programs through direct loans or interest subsidies on advances to members to be
used for lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations could adversely affect
the FHLBs' ability to pay dividends and the value of FHLB stock in the future.
For the year ended December 31, 1996, dividends paid to First Federal and
Citizens by the FHLB of Indianapolis totaled $49,000 for an annual rate of 7.9%.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 90 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
such as Citizens and state savings banks and the SAIF for savings associations
such as First Federal and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. As of September 30, 1996, the reserves of the SAIF were below the
level required by law, primarily because a significant portion of the
assessments paid into the SAIF have been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May,
1995. However, on September 30, 1996, provisions designed to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF were signed
into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
<PAGE>
First Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. This one-time assessment was
recognized as a non-recurring operating expense during the three-month period
ending September 30, 1996, was paid November 27, 1996 and was fully deductible
for both federal and state income tax purposes. For the impact on First Federal
of this assessment, see "Recent Developments." Beginning January 1, 1997, the
annual deposit insurance premium for First Federal was reduced from .23% to
.0644% of total assessable deposits. Citizens pays $2,000 of deposit insurance
premiums on an annual basis. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
being paid by SAIF institutions on their deposits with respect to obligations
issued by the federally-chartered corporation which provided financing to
resolve the thrift crisis in the 1980's ("FICO"). The new 1996 law also provides
for the merger of the SAIF and the BIF by 1999, but not until such time as bank
and thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments.
Bank Regulatory Capital
The OCC has adopted risk-based capital ratio guidelines to which
Citizens generally is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
Like the capital guidelines established by the FRB for the Holding
Company, these guidelines divide a bank's capital into two tiers. The first tier
("Tier I") includes common shareholders' equity, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term
limited-life preferred stock, mandatory convertible securities, certain hybrid
capital instruments, term subordinated debt and the allowance for loan and lease
losses, subject to certain limitations, less required deductions. Banks are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. The OCC may, however, set higher capital requirements when a
bank's particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Citizens currently exceeds the regulatory capital requirements imposed
by the OCC regulatory capital scheme.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights (which may be included
in an amount up to 50% of core capital, but which are to be reported on an
association's balance sheet at the lesser of 90% of their fair market value, 90%
of their original purchase price, or 100% of their unamortized book value), and
purchased credit card relationships (which may be included in an amount up to
25% of core capital) less nonqualifying intangibles. Under the tangible capital
requirement, a savings association must maintain tangible capital (core capital
less all intangible assets except purchased mortgage servicing rights which may
be included after making the above-noted adjustment in an amount up to 100% of
tangible capital) of at least 1.5% of total assets. Under the risk-based capital
requirements, a minimum amount of capital must be maintained by a savings
association to account for the relative risks inherent in the type and amount of
assets held by the savings association. The risk-based capital requirement
requires a savings association to maintain capital (defined generally for these
purposes as core capital plus general valuation allowances and permanent or
maturing capital instruments such as preferred stock and subordinated debt less
<PAGE>
assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets
are ranked as to risk in one of four categories (0-100%) with a credit risk-free
asset such as cash requiring no risk-based capital and an asset with a
significant credit risk such as a non-accrual loan being assigned a factor of
100%. At December 31, 1996, First Federal was in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be incorporated into the OTS
regulatory capital rule, although it has delayed the implementation of this
rule. Under the new rule, only savings associations with "above normal" interest
rate risk (institutions whose portfolio equity would decline in value by more
than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) will be required to maintain additional capital for interest
rate risk under the risk-based capital framework. In addition, most institutions
with less than $300 million in assets and a risk-based capital ratio in excess
of 12%, such as First Federal, are subject to less stringent reporting
requirements and are exempt from the interest rate component of the new rule.
Although the OTS has delayed implementation of this rule, it has stated that it
will closely monitor the level of interest rate risk at savings institutions and
it has retained the authority on a case-by-case basis, to impose additional
capital requirements for individual institutions with significant interest rate
risk.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution.
Prompt Corrective Regulatory Action
FedICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to institutions that
do not meet minimum capital requirements. For these purposes, FedICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 1996, First Federal and Citizens were
categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4%
or greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by any company that controls the
undercapitalized institution as described above. See "-- Bank Holding Company
Regulation." If an "undercapitalized" institution fails to submit, or fails to
implement in a material respect, an acceptable plan, it is treated as if it is
"significantly undercapitalized." "Significantly undercapitalized" institutions
are subject to one or more of a number of requirements and restrictions,
including an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks, and restrictions on compensation of executive
officers. "Critically undercapitalized" institutions may not, beginning 60 days
after becoming "critically undercapitalized," make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject to
appointment of a receiver or conservator.
Dividend Limitations
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,
asset quality, and overall financial condition. The FDIC also has authority
under the Financial Institutions Supervisory Act to prohibit a bank from paying
<PAGE>
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.
Under Indiana law, the Holding Company is precluded from paying cash dividends
if, after giving effect to such dividends, the Holding Company would be unable
to pay its debts as they become due or the Holding Company's total assets would
be less than its liabilities and obligations to preferential shareholders.
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." First Federal is currently a Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of 100% of its net income to date during the calendar year, plus an amount that
would reduce by one-half its "surplus capital ratio" (the smallest excess over
its capital requirements) at the beginning of the calendar year or 75% of its
net income over the most recent four-quarter period. Any additional amount of
capital distributions would require prior regulatory approval. Accordingly, at
December 31, 1996, First Federal had available approximately $4.3 million for
distribution.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Pursuant to the Plan of Conversion, First Federal has established a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. First Federal is not permitted to pay dividends to the
Holding Company if its net worth would be reduced below the amount required for
the liquidation account. First Federal must file a notice with the OTS 30 days
before any declaration by it of a dividend to the Holding Company.
Citizens is subject to OCC limits on its dividends. The approval of the
OCC is required for any dividend by a national bank if the total of all
dividends, including any proposed dividend declared by the national bank in any
calendar year, exceeds the total of its net profits (as defined by the OCC) for
that year combined with its retained net profits for the preceding two years,
less any required transfers to surplus. Moreover, a national bank may not pay a
dividend on its common stock if the dividend would exceed net undivided profits
then on hand. In certain cases, even if prior approval of the OCC is not
required, the OCC may find a dividend payment to be an unsafe and unsound
practice.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations,
"well-capitalized" depository institutions may accept, renew or roll such
deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FedICIA. First Federal and Citizens do not believe that these
regulations will have a materially adverse effect on their current operations.
Federal Reserve System
FRB regulations require member institutions to maintain reserves
against their transaction accounts (primarily NOW accounts) and certain
nonpersonal time deposits. The reserve requirements are subject to adjustment by
the FRB. As of December 31, 1996, First Federal and Citizens were in compliance
with the applicable reserve requirements of the FRB.
<PAGE>
Liquidity
For each calendar month, First Federal is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The monthly average liquidity of First Federal for December, 1996
was 28% which exceeded the then applicable 5% liquidity requirement. Its average
short-term liquidity for December, 1996 was 14%. First Federal has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. The federal banking agencies have also published for comment
proposed asset quality and earning standards which, if adopted, would be added
to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions. Similar standards
apply to national banks under OCC regulations.
Loans to One Borrower
Under regulations, a federally-chartered savings association, including
First Federal, may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the association's unimpaired capital and
surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily-marketable collateral, including certain debt and equity securities but
not including real estate. Similar loans-to-one borrower limits apply to
national banks, including Citizens. At December 31, 1996, neither of the
Institutions had loans or extensions of credit to a single or related group of
borrowers in excess of its lending limits.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test consist primarily of housing
related loans and investments.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
<PAGE>
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At December 31, 1996, approximately 89.9% of First Federal's portfolio
assets (as defined on that date) were invested in qualified thrift investments
(as defined on that date), and First Federal met this standard in each of the
prior twelve months. Therefore First Federal's asset composition was in excess
of the amount required to qualify First Federal as a QTL. First Federal does not
expect to significantly change its lending or investment activities in the near
future, and therefore expects to continue to qualify as a QTL, although there
can be no such assurance.
Acquisitions or Dispositions and Branching
The BHCA specifically authorizes a bank holding company, upon receipt
of appropriate approvals from the FRB and the Director of the OTS, to acquire
control of any savings association or holding company thereof wherever located.
Similarly, a savings and loan holding company may now acquire control of a bank.
Moreover, subject to the moratorium provisions concerning conversions of SAIF to
BIF members and vice versa, federal savings associations may acquire or be
acquired by any insured depository institution. Pursuant to rules promulgated by
the FRB, a savings association acquired by a bank holding company (i) may, so
long as the savings association continues to meet the QTL test, continue to
branch to the same extent as permitted to other non-affiliated savings
associations similarly chartered in the state, and (ii) cannot continue any
non-banking activities not authorized for bank holding companies. Saving
associations acquired by a bank holding company may, if located in a state where
the bank holding company is legally authorized to acquire a bank, be converted
to the status of a bank but deposit insurance assessments and payments continue
to be paid by the association to the SAIF. A savings association so converted to
a bank becomes subject to the branching restrictions applicable to banks. Also
any insured depository institution may merge with, acquire the assets of, or
assume the liabilities of any other insured depository institution with the
appropriate regularity approvals if (i) continued payments of deposit insurance
are made on the acquired depository institution's deposits (including an assumed
rate of growth in such deposits) to SAIF (if the acquired institution was a SAIF
member) or to BIF (if the acquired institution was a BIF member), and (ii) the
acquiring institution and any holding company in control thereof meet all
applicable capital requirements at the time of the transaction.
A bank or savings association may sell branches and transfer deposit
liabilities to a savings association or bank that is a member of an insurance
fund which differs from the fund of the transferor without violating the
moratorium on switching insurance funds that is described above in "--Insurance
of Deposits." To be permitted, the transfer must be approved by the FDIC and the
amount for deposits transferred must not exceed 35% of the lesser of (a) the
transferor's deposits as of May 1, 1989 (plus net interest on those accounts) or
(b) the transferor's total deposits on the date of transfer. Exit and entrance
fees are payable in connection with such dispositions. There are also special
entrance and exit fees for insured deposits transfers in failed savings
association resolutions. The resulting or acquiring institution is liable for
the fees.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
<PAGE>
Moreover, Indiana banks and savings associations are permitted to
acquire other Indiana banks and savings associations and to establish branches
throughout Indiana.
In addition, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana recently passed a law establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion. The Indiana Branching Law became effective March 15, 1996,
provided that prior to June 1, 1997 interstate mergers and de novo branches are
not permitted to out-of-state banks unless the laws of their home states permit
Indiana banks to merge or establish de novo branches on a reciprocal basis.
Transactions with Affiliates
First Federal and Citizens are subject to Sections 22(h), 23A and 23B
of the Federal Reserve Act, which restrict financial transactions between banks
and affiliated companies. 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.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the 1934 Act. The Holding Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder. After three years following First
Federal's conversion to stock form, if the Holding Company has fewer than 300
shareholders, it may deregister its shares under the 1934 Act and cease to be
subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the Securities Act of 1933, as
amended (the "1933 Act"). If the Holding Company meets the current public
information requirements under Rule 144, each affiliate of the Holding Company
who complies with the other conditions of Rule 144 (including conditions that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Limitations on Repurchase of Common Stock of Holding Company
OTS regulations currently provide that the Holding Company is
prohibited from repurchasing any of its shares within one year of the
Conversion, which occurred on December 20, 1996. So long as the Bank continues
to meet certain capitalization requirements, the Holding Company may repurchase
shares in an open-market repurchase program (which cannot exceed 5% of its
outstanding shares in a twelve-month period) during the second and third years
following its Conversion by giving appropriate prior notice to the OTS. The OTS
has the authority to waive these restrictions under certain circumstances.
Unless repurchases are permitted under the foregoing regulations, the Holding
Company may not, for a period of three years from the date of the Conversion,
repurchase any of its capital stock from any person, except in the event of an
offer to purchase by the Holding Company on a pro rata basis from all of its
shareholders which is approved in advance by the OTS or except in exceptional
circumstances established to the satisfaction of the OTS.
Regulations promulgated by the FRB provide that a bank holding company
must file written notice with the FRB prior to any repurchase of its equity
securities if the gross consideration for the purchase, when aggregated with the
net consideration paid by the bank holding company for all repurchases during
the preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank holding company that exceeds the thresholds established for a well
capitalized state member bank and that satisfies certain other regulatory
requirements.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders. Community Reinvestment Act Matters
<PAGE>
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of each
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The examiners have determined that First Federal and Citizens have a
satisfactory record of meeting community credit needs.
TAXATION
Federal Taxation
Historically, savings associations, such as First Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, First Federal will no longer be able to use the percentage of
taxable income method of computing its allowable tax bad debt deduction. First
Federal will be required to compute its allowable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
for which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) First Federal no longer qualifies as a bank under the
Code, or (ii) excess dividends or distributions are paid out by First Federal.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid can be
credited against regular tax due in later years.
For federal income tax purposes, First Federal has been reporting its
income and expenses on the accrual method of accounting. First Federal's federal
income tax returns have not been audited in recent years.
Citizens, as a national banking association, is ineligible to use the
percentage of taxable income method of accounting for its bad debts, and instead
must use the bank experience method described above. The bank experience method
is not available to "large" banks, as defined by the Code. Large banks are not
permitted to deduct a reserve for bad debts, and instead must use the specific
charge-off method. Citizens does not expect to be classified as a large bank in
the foreseeable future. Citizens could also be subject to the AMTI described
above.
For federal income tax purposes, Citizens has been reporting its income
and expenses on the accrual method of accounting. Citizens' federal income tax
returns have not been audited in recent years.
The Holding Company, First Federal and Citizens do not anticipate
electing to file a consolidated federal income tax return for 1996 or 1997.
Accordingly, the Holding Company will be taxed separtely on its earnings.
The Holding Company is taxed as an ordinary corporation.
State Taxation
First Federal, Citizens and the Holding Company are subject to
Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of
8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT,
begins with taxable income as defined by Section 63 of the Code and, thus,
incorporates federal tax law to the extent that it affects the computation of
taxable income. Federal taxable income is then adjusted by several Indiana
modifications. Other applicable state taxes include generally applicable sales
and use taxes plus real and personal property taxes.
<PAGE>
Neither First Federal's nor Citizens' state income tax returns have been
audited in recent years. For further information relating to the tax
consequences of the Conversion, see "The Conversion -- Principal Effects of
Conversion -- Tax Effects."
Current Accounting Issues
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," which amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. SFAS No.114, as
amended by SFAS No. 118 as to certain income recognition provisions and
financial statement disclosure requirements, is applicable to all creditors and
to all loans that are individually and specifically evaluated for impairment,
uncollateralized as well as collateralized, except those loans that are
accounted for at fair value or at the lower of cost or fair value. This
Statement requires that the expected loss of interest income on nonperforming
loans be taken into account when calculating loan loss reserves and that
specified impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral if the loan is collateral dependent. The Holding Company's loans
which may be affected are collateral dependent, and the Holding Company's
current procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value. Management adopted SFAS No. 114 on January
1, 1995, without a significant detrimental effect on the Holding Company's
overall consolidated financial position or results of operations.
In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Institutions recognize as separate
assets, rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost of
the loans to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be
accounted for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing rights be assessed for
impairment. Impairment is measured based on value.
SFAS No. 122 was effective for years beginning after December 15, 1995
(January 1, 1996, as to the Holding Company), for transactions in which an
entity acquires mortgage servicing rights and to impairment evaluations of all
capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited, and
earlier adoption is encouraged. The provisions of SFAS No.
122 were adopted without material effect.
In October, 1995, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost of those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statement pro
forma net earnings and, if presented, earnings per share, as if SFAS No. 123 had
been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years beginning after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. Management has
determined that the Company will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore the disclosure provisions of SFAS No. 123 will have no effect on its
consolidation financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
<PAGE>
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse. An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract (unless related to a securitization of assets, and all the
securitized assets are retained and classified as held-to-maturity). A servicing
asset or liability that is purchased or assumed is initially recognized at its
fair value. Servicing assets and liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value. SFAS No.
125 provides that a liability is removed from the balance sheet only if the
debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1997, and is to be applied
prospectively. Earlier or retroactive application is not permitted. Management
does not believe that adoption of SFAS No. 125 will have a material adverse
effect on the Holding Company's financial position or results of operations.
Item 2. Properties.
The following table provides certain information with respect to the
Institutions' offices as of December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value
of Property
Year Furniture, Approximate
Opened or Fixtures and Square
Description and Address Acquired Equipment Footage
(Dollars in thousands)
Locations in Madison, Indiana
Downtown Offices:
<S> <C> <C> <C>
233 E. Main Street............................ 1952 $290 9,110
307 W. Main Street............................ 1986 13 1,500
Drive-Through Branch:
401 E. Main Street............................ 1984 61 375
Hilltop Locations:
303 Clifty Drive.............................. 1973 200 3,250
430 Clifty Drive.............................. 1983 171 6,084
Wal-mart Banking Center
567 Ivy Tech Drive............................ 1995 127 517
Locations in Hanover, Indiana
10 Medical Plaza Drive........................ 1995 481 656
136 Thornton Road (1)......................... 1980 276 2,584
</TABLE>
(1) As a condition to obtaining regulatory aproval for the Acquisition from the
FRB, the Holding Company commited itself to divest its branch at 136
Thornton Road in Hanover. Pursuant to this commitment, the Holding Company
sold this branch to Peoples's Trust Company based in Brookville, Indiana on
February 28, 1997.
<PAGE>
The following table provides certain information with respect to real
estate owned by First Federal and rented to other entities as of December 31,
1996. Except as otherwise provided below, all real estate listed in the table
below is rented on a month-to-month basis, and none of the parcels is subject to
any written lease agreement. This property was acquired by First Federal for
future expansion of its banking operations.
Address Tenant
223 E. Main Street
Madison, Indiana 47250 Vicarious of Madison
(became tenant in July, 1996 and
subject to a two-year lease)
225 E. Main Street
Madison, Indiana 47250 Madison Gallery of Fine Art
227 E. Main Street
Madison, Indiana 47250 Heitz Photo
407 E. Jefferson
Madison, Indiana 47250 MIDCOR, Community Foundation
The Institutions own computer and data processing equipment which is
used for transaction processing, loan origination, and accounting. The net book
value of electronic data processing equipment owned by the Holding Company was
approximately $148,000 at December 31, 1996.
The Institutions operate six automated teller machines ("ATMs"), one at
each office location other than its locations at 233 E. Main Street and 307 W.
Main Street. First Federal's ATMs participate in the PLUS(R) and MagicLine(R)
networks. Citizens' ATMs participate in the PLUS(R) and MAC(R) networks.
First Federal has also contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $13,000 per month.
Citizens has entered into an agreement with Jack Henry and Associates,
Inc. of Monett, Missouri for the annual maintenance of its data processing
software at a cost to Citizens of $13,000 per year.
Item 3. Legal Proceedings.
Neither the Holding Company, First Federal nor Citizens is a party to
any pending legal proceedings, other than routine litigation incidental to the
Holding Company's or the Institutions' business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1996.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Position with Position with
Name Holding Company First Federal Position
with Citizens
James E. Fritz President and Chief President and Chief Director
Executive Officer Executive Officer
Lonnie D. Collins Secretary Secretary
John Wayne Deveary Treasurer Vice President and
Treasurer
James E. Fritz (age 34) has served as First Federal's President and
Chief Executive Officer since August, 1995, as the Holding Company's President
and Chief Executive Officer since 1996, and as a director of Citizens since
1997. Prior to that Mr. Fritz served as the Chief Financial Officer of First
Federal Savings Bank of Kokomo until January, 1995, and as a consultant to
National City Corporation from January, 1995 to August, 1995.
<PAGE>
Lonnie D. Collins (age 48) has served as Secretary of First Federal
since September, 1994, and as Secretary of the Holding Company since 1996. Mr.
Collins has also practiced law since October, 1975 and has served as First
Federal's outside counsel since 1980.
John Wayne Deveary (age 42) has served as a Vice President of First
Federal since January, 1996 and as Treasurer since January, 1978. He became
Treasurer of the Holding Company in 1996. Mr. Deveary has been employed with
First Federal since 1976.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Holding Company's common stock, without par value ("Common Stock"),
is quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), Small Cap Market, under the symbol "RIVR." The Holding
Company shares began to trade on December 20, 1996. The high and low bid prices
for the period December 20, 1996 to December 31, 1996, were $14.25 and $12.25,
respectively. Since the Holding Company has no independent operation or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependent upon the
ability of the Institutions to pay dividends to the Holding Company from First
Federal and upon the earnings on its investment securities.
Under current federal income tax law, dividend distributions to the
Holding Company, to the extent that such dividends paid are from the current or
accumulated earnings and profits of First Federal (as calculated for federal
income tax purposes), will be taxable as ordinary income to the Holding Company
and will not be deductible by First Federal. Because the Holding Company and
First Federal do not file a consolidated federal income tax return however, the
dividends will be eligible for a 100% dividends-received deduction by the
Holding Company. Any dividend distributions in excess of current or accumulated
earnings and profits will be treated for federal income tax purposes as a
distribution from First Federal's accumulated bad debt reserves, which could
result in increased federal income tax liability for First Federal. Moreover,
First Federal may not pay dividends to the Holding Company if such dividends
would result in the impairment of the liquidation account established in
connection with the Conversion.
Citizens is subject to OCC limits on its dividends. The approval of the
OCC is required for any dividend by a national bank subsidiary if the total of
all dividends, including any proposed dividends by the national bank in any
calendar year, exceeds the total of its net profits (as defined by the OCC) for
that year combined with its retained net profits for the preceding two years,
less any required transfers to surplus. Moreover, a national bank may not pay a
dividend on its common stock if the dividend would exceed net undivided profits
then on hand. In certain cases, even if prior approval of the OCC is not
required, the OCC may find a dividend payment to be an unsafe and unsound
practice. Citizens may decide not to pay dividends to the Holding Company until
the Holding Company acquires the shares held by its minority shareholders
through a transaction in which holders of those shareholders receive fair value,
most likely in the form of cash, Common Stock or a combination thereof. In the
event Citizens paid a dividend on its shares of common stock before such time,
its minority holders would receive the same per share amount as the Holding
Company. Citizens does not anticipate paying dividends on its common stock in
the foreseeable future.
Generally, there is no OTS regulatory restriction on the payment of
dividends by the Holding Company unless there is a determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of First Federal. 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, asset quality, and overall financial condition.
The FDIC also has authority under current law to prohibit a 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
Institutions. Indiana law, however, would prohibit the Holding Company from
paying a dividend, if, after giving effect to the payment of that dividend, the
Holding Company would not be able to pay its debts as they become due in the
usual course of business or the Holding Company's total assets would be less
than the sum of its total liabilities plus preferential rights of holders of
preferred stock, if any.
The Holding Company paid no dividends to its shareholders in 1996.
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data of the Holding Company is
qualified in its entirety, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Form 10-K.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(In thousands)
Summary of Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets................................... $145,541 $86,604 $87,072 $84,086 $82,157
Loans receivable, net.......................... 108,994 57,945 56,287 51,970 53,685
Mortgage-backed and related securities......... 12,846 9,917 11,328 13,925 13,548
Cash and cash equivalents (1).................. 8,785 2,689 2,416 5,803 7,070
Investment securities (2)...................... 8,948 13,018 14,097 9,491 5,485
FHLB advances.................................. 1,100 4,471 4,986 --- ---
Deposits....................................... 125,656 75,233 75,458 78,081 76,688
Shareholders' equity, net...................... 16,805 6,574 6,304 5,668 4,950
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(In thousands)
Summary of Operating Data:
<S> <C> <C> <C> <C> <C>
Total interest income.......................... $5,875 $5,794 $5,419 $5,684 $6,174
Total interest expense......................... 3,412 3,594 2,854 3,042 3,645
--------- ------- ------- ------- -------
Net interest income......................... 2,463 2,200 2,565 2,642 2,529
Provision for losses on loans.................. 22 150 29 55 37
--------- ------- ------- ------- -------
Net interest income after provision
for losses on loans....................... 2,441 2,050 2,536 2,587 2,492
Other income:
Insurance commissions....................... 200 175 181 182 180
Service fees, charges, and
other operating income.................... 246 187 189 182 129
Gain on sale of subsidiary.................. 141 --- --- --- ---
Loss on sale of investments................. (9) --- --- --- ---
--------- ------- ------- ------- -------
Total other income........................ 578 362 370 364 309
General, admisistrative and other expense:
Employee compensation and benefits.......... 1,203 998 888 869 811
Data processing............................. 282 237 243 234 157
Federal deposit insurance premiums.......... 684 177 178 117 149
Occupancy and equipment..................... 284 212 193 212 373
Other....................................... 417 342 356 370 375
--------- ------- ------- ------- -------
Total general, admisistrative and
other expenses....................... 2,870 1,966 1,858 1,802 1,865
--------- ------- ------- ------- -------
Earnings before income tax expense and cumulative
effect of change in accounting method....... 149 446 1,048 1,149 936
Income taxes................................... 76 188 412 456 305
Cumulative effect of change in accounting
for income tax expense...................... --- --- --- 25 ---
--------- ------- ------- ------- -------
Net earnings................................$ 73 $ 258 $ 636 $ 718 $ 631
========= ======= ======= ======= =======
Earnings per share............................. N/A N/A N/A N/A N/A
Supplemental Data:
Interest rate spread during period............. 2.79% 2.36% 3.00% 3.24% 3.23%
Net yield on interest-earning assets (3)....... 2.98 2.61 3.15 3.32 3.35
Return on assets (4)........................... .08 0.30 0.74 0.86 0.80
Return on equity (5)........................... 1.05 4.01 10.62 13.52 13.84
Equity to assets (6)........................... 11.55 7.59 7.24 6.74 6.03
Average interest-earning assets to average
interest-bearing liabilities................ 104.64 105.62 104.43 101.96 102.39
Non-performing assets to total assets (6)...... .56 0.01 0.01 0.01 0.18
Allowance for loan losses to total loans
outstanding (6)............................. .96 0.70 0.45 0.44 0.49
Allowance for loan losses to
non-performing loans (6).................... 131.14 5,087.50 1,938.46 3,242.86 166.88
Net charge-offs to average
total loans outstanding .................... .01 0.01 0.01 0.17 ---
Other expenses to
average assets (7).......................... 3.33 2.26 2.20 2.15 2.36
Number of full service offices (6)............. 6 3 3 3 3
</TABLE>
- ---------------
(1) Includes certificates of deposit in other financial institutions.
(2) Includes investment securities designated as available for sale.
(3) Net interest income divided by average interest-earning assets.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) At end of period.
(7) Other expenses divided by average total assets.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of First Federal and 95.6% of the outstanding shares of
Citizens. As a result, the discussion that follows focuses on the Institutions'
financial condition and results of operations prior to December 20, 1996, the
date of the Acquisition and Conversion. The following discussion and analysis of
the financial condition as of December 31, 1996 and First Federal's results of
operations for periods prior to that date should be read in conjunction with and
with reference to the consolidated financial statements and the notes thereto
included in the Annual Report.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Holding Company's operations and the Holding Company's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Holding Company's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount of loan loss
allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift
charter and the separate federal regulation of thrifts.
Asset/ Liability Management
The Institutions are subject to interest rate risk to the degree that
their interest-bearing liabilities, primarily deposits with short- and
medium-term maturities, mature or reprice at different rates than their
interest-earning assets. As part of its effort to monitor and manage interest
rate risk, the Holding Company uses the net portfolio value ("NPV") methodology
recently proposed by the OTS as part of the OTS' proposed capital regulations.
Although this methodology has not been implemented by the OTS , the application
of the NPV methodology assists the Holding Company in monitoring its interest
rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning assets and other assets and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If, under the OTS' proposed NPV methodology, an increase or a
decrease in market rates would result in a decrease of more than 2% in the NPV
as a percentage of the present value of an institution's assets and such
institution is required to comply with the NPV regulation, the institution would
be required to deduct 50% of the amount of the decrease in excess of such 2% in
the calculation of the institution's risk based capital.
Presented below, as of December 31, 1996, is an analysis prepared by
Baxter Capital Management of the Institutions' interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts of 200 basis
point increments in market interest rates.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 200 bp* 19,138 (708) (3.57)% 13.26% (19) bp*
0 bp* 19,846 --- --- % 13.45% --- bp
- 200 bp* 19,561 (285) (1.44)% 13.07% (39) bp
</TABLE>
- ---------
* Basis points.
<PAGE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the methods of analysis presented above. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Average Balances and Interest Rates and Yields
The following tables present at December 31, 1996 the balance of each
category of the Holding Company's interest-earning assets and interest-bearing
liabilities and their yield/cost at the date, and for the years ended December
31, 1996, 1995 and 1994, the average daily balances, of each category of the
Holding Company's interest-earning assets and interest-bearing liabilities, and
the interest earned or paid on such amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
At December 31, ----------------------------------------------------------------------
1996 1996 1995
--------------------- ----------------------------------- --------------------------------
Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
deposits and other............ $5,599 5.13% $ 3,291 $ 188 5.71% $ 2,610 $ 107 4.10%
Investment securities (1)....... 8,948 5.29 10,295 562 5.46 13,925 777 5.58
Mortgage-backed and
related securities............ 12,846 6.81 9,176 574 6.26 10,989 670 6.10
Loans receivable, net (2)....... 108,994 7.73 59,828 4,551 7.61 56,916 4,240 7.45
------- ------ ----- ------ -----
Total interest-
earning assets................ 136,387 7.38 82,590 5,875 7.11 84,440 5,794 6.86
Interest-bearing liabilities:
Deposits........................ 125,656 4.20 77,710 3,349 4.31 76,983 3,419 4.44
FHLB advances................... 1,100 7.35 1,221 63 5.16 2,967 175 5.90
------- ------ ----- ------ -----
Total interest-bearing
liabilities.............. 126,756 4.23 78,931 3,412 4.32 79,950 3,594 4.50
------- ------ ----- ------ -----
Net interest-earning assets........ $ 9,631 $3,659 $4,490
======= ====== ======
Net interest income................ $2,463 $2,200
====== ======
Interest rate spread (3)........... 3.15% 2.79% 2.36%
====== ====== ======
Net yield on weighted average
interest-earning assets (4)..... --- 2.98% 2.61%
====== ====== ======
Average interest-earning assets
to average interest-bearing
liabilities................... 107.60% 104.64% 105.62%
====== ====== ======
</TABLE>
1994
-------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
Interest-earning assets:
Interest-earning
deposits and other............ $ 2,288 $ 112 4.90%
Investment securities (1)....... 13,685 713 5.21
Mortgage-backed and
related securities............ 12,702 743 5.85
Loans receivable, net (2)....... 52,708 3,851 7.31
-------- -----
Total interest-
earning assets................ 81,383 5,419 6.66
Interest-bearing liabilities:
Deposits........................ 77,703 2,842 3.66
FHLB advances................... 228 12 5.26
-------- -----
Total interest-bearing
liabilities.............. 77,931 2,854 3.66
-------- -----
Net interest-earning assets........ $ 3,452
========
Net interest income................ $2,565
======
Interest rate spread (3)........... 3.00%
======
Net yield on weighted average
interest-earning assets (4)..... 3.15%
======
Average interest-earning assets
to average interest-bearing
liabilities................... 104.43%
======
- ---------------
(1) Includes securities available for sale at amortized cost prior to SFAS
No. 115 adjustments.
(2) Total loans less loans in process plus loans held for sale.
(3) Interest rate spread is calculated by subtracting weighted average
interest rate cost from weighted average interest rate yield for the
period indicated.
(4) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
<PAGE>
Interest Rate Spread
The Holding Company's results of operations have been determined
primarily by net interest income and, to a lesser extent, fee income,
miscellaneous income and general and administrative expenses. Net interest
income is determined by the interest rate spread between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities and
by the relative amounts of interest-earning assets and interest-bearing
liabilities.
The following table sets forth the weighted average effective interest
rate earned by the Holding Company on its loan and investment portfolios, the
weighted average effective cost of the Holding Company's deposits and advances,
the interest rate spread of the Holding Company, and the net yield on weighted
average interest-earning assets for the periods and as of the dates shown.
Average balances are based on average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-earning deposits and other............... 5.71% 4.10% 4.90%
Investment securities............................. 5.46 5.58 5.21
Mortgage-backed and related securities............ 6.26 6.10 5.85
Loans receivable, net............................. 7.61 7.45 7.31
Total interest-earning assets................... 7.11 6.86 6.66
Weighted average interest rate cost of:
Deposits.......................................... 4.31 4.44 3.66
FHLB advances..................................... 5.16 5.90 5.26
Total interest-bearing liabilities.............. 4.32 4.50 3.66
Interest rate spread (1)............................. 2.79% 2.36% 3.00%
Net yield on weighted average
interest-earning assets (2)....................... 2.98% 2.61% 3.15%
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
<PAGE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Holding Company's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
rate (changes in rate multiplied by old volume) and (2) changes in volume
(changes in volume multiplied by old rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionally to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
----------------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
Year ended December 31, 1996 compared
to year ended December 31, 1995
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits and other........................ $ 51 $ 30 $ 81
Investment securities...................................... (17) (198) (215)
Mortgage-backed and related securities..................... (13) (83) (96)
Loans receivable, net...................................... 105 206 311
---- ------- -----
Total.................................................... 126 (45) 81
Interest-bearing liabilities:
Deposits................................................... (100) 30 (70)
FHLB advances.............................................. (20) (92) (112)
---- ------- -----
Total.................................................... (120) (62) (182)
---- ------- -----
Net change in net interest income............................ $246 $ 17 $ 263
==== ======= =====
Year ended December 31, 1995 compared
to year ended December 31, 1994
Interest-earning assets:
Interest-earning deposits and other........................ $ (16) $ 11 $ (5)
Investment securities...................................... 52 12 64
Mortgage-backed and related securities..................... 32 (105) (73)
Loans receivable, net...................................... 77 312 389
---- ------- -----
Total.................................................... 145 230 375
Interest-bearing liabilities:
Deposits................................................... 614 (37) 577
FHLB advances.............................................. 16 147 163
---- ------- -----
Total.................................................... 630 110 740
---- ------- -----
Net change in net interest income............................ $(485) $ 120 $(365)
==== ======= =====
Year ended December 31, 1994 compared
to year ended December 31, 1993
Interest-earning assets:
Interest-earning deposits and other........................ $ 1 $ (64) $ (63)
Investment securities...................................... (20) 239 219
Mortgage-backed and related securities..................... (7) (116) (123)
Loans receivable, net...................................... (297) (1) (298)
---- ------- -----
Total.................................................... (323) 58 (265)
Interest-bearing liabilities:
Deposits................................................... (186) (13) (199)
FHLB advances.............................................. 0 11 11
---- ------- -----
Total.................................................... (186) (2) (188)
---- ------- -----
Net change in net interest income............................ $(137) $ 60 $ (77)
==== ======= =====
</TABLE>
<PAGE>
Financial Condition at December 31, 1996 Compared to Financial Condition at
December 31, 1995.
Changes in Financial Condition
The Holding Company's total assets amounted to $145.5 million as of
December 31, 1996, an increase of $58.9 million, or 68.1%, over the $86.6
million total as of December 31, 1995. The increase in 1996 was due primarily to
the Acquisition of Citizens, which resulted in net asset growth of approximately
$63.8 million, coupled with proceeds from the Corporation's common stock
offering totaling $11.2 million. These increases in total assets were partially
offset by a decrease, net of the Acquisition, in deposits of $6.2 million, and a
decline in advances from the Federal Home Loan Bank of $3.4 million.
Cash, interest-bearing deposits and certificates of deposit in other
financial institutions totaled $8.8 million at December 31, 1996, an increase of
$6.1 million over the 1995 total. Investment securities totaled $8.9 million at
December 31, 1996, a decrease of $4.1 million, or 31.3%, from 1995 levels. The
decrease resulted primarily from maturities totaling $3.5 million and sales of
$2.2 million, which were partially offset by securities resulting from the
Acquisition totaling $1.6 million. Mortgage-backed securities increased by $2.9
million, or 29.5%, to a total of $12.8 million at December 31, 1996, primarily
as a result of securities received in the Acquisition of $4.3 million, coupled
with purchases of $729,000, which were partially offset by principal repayments
during the year totaling $2.1 million.
Loans receivable totaled $109.0 million at December 31, 1996, an
increase of $51.0 million, or 88.1%, over the $57.9 million total at December
31, 1995. The increase resulted primarily from loans received in the Acquisition
totaling $49.6 million, coupled with loan originations during 1996 of $18.7
million, which were partially offset by principal repayments of $17.1 million.
Loan origination volume increased during 1996 by $3.0 million, or 19.6%, as
compared to 1995.
The Holding Company's consolidated allowance for loan losses totaled
$1.1 million and $407,000 at December 31, 1996 and 1995, respectively, which
represented .96% and .70% of total loans at those dates. The allowance for loan
losses was increased during 1996 by $648,000, which represented the allowance
maintained by Citizens. Nonperforming loans (defined as loans delinquent greater
than ninety days and loans on nonaccrual status) totaled $819,000 and $8,000 at
December 31, 1996 and 1995, respectively. The increase in nonperforming loans
year to year was primarily due to Citizens' loans resulting from the
Acquisition. The provision for loan losses for the year ended December 31, 1996
was primarily attributable to the increase in nonperforming loans during the
year. Although management believes that its allowance for loan losses at
December 31, 1996, was adequate based upon the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect the Holding
Company's results of operations.
Deposits increased by $50.4 million, or 67.0%, during 1996, to a total
of $125.7 million, compared to the $75.2 million total at December 31, 1995. The
increase resulted primarily from deposits assumed in the Acquisition totaling
$56.6 million, which was partially offset by net withdrawals of deposits during
the year of $6.2 million. The decline in total deposits, before consideration of
the effects of the Acquisition, can be attributable to customers' use of deposit
funds to purchase stock in the Holding Company's common stock offering which was
completed in December 1996 and a decrease in public funds on deposit.
Advances from the Federal Home Loan Bank totaled $1.1 million at
December 31, 1996, a decrease of $3.4 million, or 75.4%, from the $4.5 million
total at December 31, 1995. The decrease was due primarily to net current period
repayments totaling $6.4 million, which were partially offset by borrowings
assumed in the Acquisition totaling $3.0 million.
Stockholders' equity totaled $16.8 million at December 31, 1996, an
increase of $10.2 million, or 155.6%, over the $6.6 million total at December
31, 1995. The increase resulted primarily from the Holding Company's common
stock offering which was completed in December 1996 and which resulted in net
capital proceeds totaling $10.2 million.
Financial Condition at December 31, 1995 Compared to Financial Condition at
December 31, 1994
First Federal's total assets amounted to $86.6 million at December 31,
1995, a decrease of $468,000, or 0.5%, from December 31, 1994. The decline in
assets resulted primarily from a reduction in deposits of $225,000, and a
decline in advances from the FHLB of Indianapolis of $515,000, which were
partially offset by an increase in retained earnings of $270,000.
Liquid assets (cash and due from banks, certificates of deposit and
investment securities) totaled $15.7 million at December 31, 1995, which
represented a reduction of $806,000, or 4.9%, from 1994 levels. During 1995,
<PAGE>
management elected to fund net deposit outflows and repayments of advances from
the FHLB of Indianapolis with excess liquidity. Mortgage-backed securities
declined by $1.4 million, or 12.5%, to a total of $9.9 million in 1995, as a
result of principal repayments during the year.
Loans receivable totaled $57.9 million at December 31, 1995, an
increase of $1.7 million, or 2.9%, over the 1994 total. The increase resulted
primarily from loan disbursements of $15.6 million in excess of principal
repayments of $13.7 million. First Federal's allowance for losses on loans
amounted to $407,000 at December 31, 1995, an increase of $155,000, or 61.5%,
over the $252,000 total maintained as of December 31, 1994. The allowance
represented 0.7% and 0.45% of total loans as of December 31, 1995 and 1994,
respectively. The 1995 provision was heavily influenced by $1.6 million of
growth in nonresidential and multi-family loans during the period. Although
management intends to place more emphasis on nonresidental real estate lending
following the Conversion, it does not anticipate further significant increases
in the nonresidential loan portfolio that would necessitate material additions
to the allowance. Non-performing loans totaled $8,000 and $13,000 as of December
31, 1995 and 1994, respectively.
Deposits totaled $75.2 million at December 31, 1995, a decrease of
$225,000, or 0.3%, from the total in 1994. Certificates of deposit increased by
$944,000 during 1995, while transaction and demand accounts declined by
approximately $1.2 million. The decline in passbook deposits resulted from
increased competition from financial institutions and other entities offering
investments with more attractive rates as customers became more rate conscious.
Certificates of deposits increased because of more competitive rates offered by
First Federal.
Advances from the FHLB of Indianapolis declined by $515,000, or 10.3%,
during 1995 to a total of $4.5 million. Management elected to utilize excess
liquidity to repay such advances in 1995.
Comparison of Operating Results For Years Ended December 31, 1996 and 1995
The Holding Company's net earnings for 1996 totaled $73,000, a decrease
of $185,000, or 71.7%, from the $258,000 in net earnings recorded for the year
ended December 31, 1995. The decrease resulted primarily from a $904,000
increase in general, administrative and other expense, which was partially
offset by a $263,000 increase in net interest income, a $128,000 decrease in the
provision for losses on loans, a $216,000 increase in other income and a
$112,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income for 1996, amounted to $5.9 million, an increase
of $81,000, or 1.4%, over the $5.8 million recorded in 1995. Interest income on
loans and mortgage-backed and related securities increased by $215,000, or 4.4%.
The increase resulted primarily from a $1.1 million increase in the average
portfolio outstanding, coupled with a 20 basis point increase in the average
yield, from 7.23% in 1995 to 7.43% in 1996. Interest income on investment
securities and interest-bearing deposits decreased by $134,000, or 15.2%, to a
total of $750,000 in 1996. The decrease was due primarily to a $2.9 million
decrease in the average portfolio balance outstanding. The decline in the
average portfolio balance during the year reflects management's decision to
redeploy excess liquidity to partially fund loan originations, thereby obtaining
a more favorable yield.
Interest expense decreased during 1996 by $182,000, or 5.1%, to a total
of $3.4 million, compared to the $3.6 million total recorded in 1995. Interest
expense on deposits decreased by $70,000, or 2.0%, to a total of $3.3 million in
1996. The decrease resulted primarily from a decrease in the average rate paid
on deposits of 13 basis points, from 4.44% in 1995 to 4.31% in 1996, which was
partially offset by a $727,000, or .9%, increase in the average balance
outstanding. Interest expense on borrowings decreased by $112,000, or 64.0%, to
a total of $63,000 in 1996. The decrease was due primarily to a $1.7 million
decrease in the average balance of borrowings outstanding, coupled with a 74
basis point decline in the average rate paid on such advances, from 5.90% in
1995 to 5.16% in 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by approximately $263,000, or 12.0%, to a
total of $2.5 million for 1996. The net interest rate spread increased by 43
basis points during the year, from 2.36% in 1995 to 2.79% in 1996, while the net
interest margin increased by 37 basis points, from 2.61% in 1995 to 2.98% in
1996.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
<PAGE>
Institutions, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Institutions'
market areas and other factors related to the collectibility of the Institutions
loan portfolio. As a result of such analysis, management recorded a provision
for losses on loans totaling $22,000 for 1996, a decrease of $128,000, or 85.3%,
from the $150,000 total recorded in 1995. As stated previously, the current year
provision was primarily attributable to an increase in nonperforming loans at
December 31,1996. There can be no assurance that the allowance for loan losses
of the Institutions will be adequate to cover losses on nonperforming assets in
the future.
Other Income
Other income totaled $578,000 for 1996, an increase of $216,000, or
59.7%, over the $362,000 total for 1995. The increase resulted primarily from a
$141,000 gain on the sale of a subsidiary, a $25,000 increase in insurance
commissions and a $59,000, or 31.6% increase in service fees, charges and other
operating income. The gain on the sale of a subsidiary resulted from First
Federal's sale of its insurance agency subsidiary, McCauley Insurance Agency.
The sale of McCauley was required by the FRB in connection with the Acquisition.
The increase in other operating income was due primarily to increased service
fees and charges on deposit accounts. General, Administrative and Other Expense
General, administrative and other expense totaled $2.9 million for
1996, an increase of $904,000, or 46.0%, over the $2.0 million total recorded in
1995. The increase resulted primarily from a $507,000, or 286.4%, increase in
federal deposit insurance premiums, which resulted from the legislation enacted
to recapitalize the SAIF, coupled with a $205,000, or 20.5%, increase in
employee compensation and benefits, a $72,000, or 34.0%, increase in occupancy
and equipment, a $45,000, or 19.0%, increase in data processing and a $75,000,
or 22.4%, increase in other operating expense.
During 1996 legislation was enacted to recapitalize the SAIF which
mandated payment of a special one-time assessment for all savings associations,
including the First Federal. The assessment was computed based upon the First
Federal's deposits as of March 31, 1995. The assessment rate was finalized at
$.657 per $100 of deposits, which resulted in a pre-tax charge to 1996
consolidated operations of approximately $503,000. The legislation reduces
federal deposit insurance premiums from $.23 per $100 in deposits to $.065 per
$100 in deposits, effective January 1, 1997.
The increase in employee compensation and benefits resulted primarily
from normal merit increases and increased costs associated with employee benefit
plans. The increase in data processing resulted primarily from increased costs
associated with automated teller machine transaction processing. The increase in
other operating expense was primarily attributable to an increase in office
supplies as a result of the formation of the Holding Company and nonrecurring
consulting fees which were partially offset by a reduction in advertising costs
year to year. Income Taxes
The provision for federal income taxes totaled $76,000 for 1996, a
decrease of $112,000, or 59.6%, from the $188,000 total recorded in 1995. The
decrease resulted primarily from the decrease in net earnings before taxes of
$297,000, or 66.6%. The Holding Company's effective tax rates were 51.0% and
42.2% for the years ended December 31, 1996 and 1995, respectively. Comparison
of Operating Results For Fiscal Years Ended December 31, 1995 and 1994
Net income for the year ended December 31, 1995, amounted to $258,000,
a decrease of $378,000, or 59.4%, from the $636,000 in net income recorded in
1994. The decline in net income resulted primarily from a $365,000 decline in
net interest income, a $121,000 increase in the provision for losses on loans,
an $8,000 decline in other income and a $108,000 increase in other expenses,
which were partially offset by a decrease of $224,000 in the provision for
income taxes. The reduction in 1995 earnings is generally reflective of, and
attributable to, the rise in the general level of interest rates in the economy
over the year, as well as additional provisions for loan losses brought on by
increased nonresidential lending. Management does not anticipate either trend to
have a continuing material adverse impact on operations due to (i) the
beneficial effects of favorable rate adjustments in the adjustable-rate segment
of First Federal's portfolio and (ii) management's belief that any decision to
increase the size of the nonresidential portfolio will not result in material
increases in the provision for loan losses.
Total interest income amounted to $5.8 million for the year ended
December 31, 1995, an increase of $375,000, or 6.9%, over 1994. Interest income
on loans totaled $4.2 million, an increase of $389,000 over the 1994 total. This
increase resulted primarily from growth of $4.2 million in the weighted average
<PAGE>
balance outstanding, coupled with an increase in the weighted average yield of
14 basis points to 7.45% in 1995. Interest income on mortgage-backed securities
declined by $73,000, or 9.8%, from the 1994 amount, due to a $1.7 million
decline in the weighted average balance outstanding, which was partially offset
by a 25 basis point increase in yield to 6.10% in 1995. Interest income on
investment securities and interest-bearing deposits increased by $59,000, or
7.2%, over 1994 due to an increase in yield and an increase in the weighted
average balance outstanding.
Interest expense on deposits increased for the year ended December 31,
1995, by $577,000, or 20.3%, to a total of $3.4 million, compared to $2.8
million in 1994. The increase resulted primarily from a 78 basis point increase
in the weighted average cost of deposits from 3.66% in 1994 to 4.44% in 1995.
The increase in cost of deposits was partially offset by a $720,000 decline in
the weighted average balance outstanding year-to-year. Interest expense on
borrowings increased by $163,000 during 1995 to a total of $175,000. This
increase was due primarily to a $2.7 million increase in average borrowings
outstanding during 1995, coupled with a 64 basis point increase in the weighted
average cost of borrowings to 5.90% in 1995. The increases in rates paid on
First Federal's deposit and borrowing portfolios generally reflect the increase
in interest rates in the overall economy during 1995.
As a result of the foregoing changes in interest income and interest
expense, net interest income declined during 1995 by $365,000, or 14.2%, to a
total of $2.2 million. The interest rate spread declined by 64 basis points
during 1995 from 3.00% in 1994 to 2.36% in 1995, while the net interest margin
declined by 54 basis points, from 3.15% in 1994 to 2.61% in 1995.
Other income amounted to $362,000 during the year ended December 31,
1995, a decrease of $8,000, or 2.2%, from 1994 due primarily to a decline in
insurance commissions year-to-year.
Other expense totaled approximately $2.0 million for the year ended
December 31, 1995, an increase of $108,000, or 5.8%, over the amount recorded
for 1994. The increase resulted primarily from a $110,000, or 12.4%, increase in
employee compensation and benefits, a $19,000, or 9.8%, increase in occupancy
and equipment and a $6,000, or 1.8%, increase in other operating expense, which
were partially offset by a $20,000 decrease in the provision for valuation
decline in mortgage-related securities. The increase in employee compensation
and benefits resulted primarily from an increase in staffing levels and normal
merit salary increases, coupled with a reduction in deferred loan origination
costs, as loan origination volume declined by $3.8 million year-to-year. The
increase in occupancy and equipment expense resulted generally from increases in
the cost of equipment maintenance contracts, while the increase in other
operating expense was due to pro-rata increases in various operating costs
year-to-year.
The provision for income taxes totaled $188,000 for the year ended
December 31, 1995, a decline of $224,000, or 54.4%, from the 1994 amount. The
decline resulted primarily from a $602,000, or 57.4%, decrease in earnings
before taxes. First Federal's effective tax rates were 42.2% and 39.3% for the
years ended December 31, 1995 and 1994, respectively. Liquidity and Capital
Resources
The Holding Company's primary sources of funds are deposits,
borrowings, proceeds from principal and interest payments on loans and proceeds
from maturing securities. While maturities and scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The primary investing activity of the Holding Company is the
origination of loans. During the years ended December 31, 1996, 1995 and 1994,
the Holding Company originated total loans in the amounts of $18.6 million,
$15.6 million and $19.4 million, respectively. Loan principal repayments totaled
$17.1 million, $13.7 million, and $15.0 million during the respective periods.
During the year ended December 31, 1996, the Holding Company purchased
$729,000 in mortgage-backed securities and in the year ended December 31, 1994
purchased $4.6 million in investment securities.
The Holding Company had outstanding loan commitments of $1.3 million
and unused lines of credit of $5.3 million at December 31, 1996. The Holding
Company anticipates that it will have sufficient funds from loan repayments to
meet its current commitments without having to borrow additional funds from the
FHLB of Indianapolis. Certificates of deposit scheduled to mature in one year or
less at December 31, 1996 totaled $47.9 million. Management believes that a
significant portion of such deposits will remain with the Holding Company based
upon historical deposit flow data and the Holding Company's competitive pricing
in its market area.
Liquidity management is both a daily and long-term function of the
Holding Company's management strategy. In the event that the Holding Company
should require funds beyond its ability to generate them internally, additional
funds are available through the use of FHLB advances and through sales of
securities. The Holding Company had no outstanding FHLB advances at December 31,
1996.
<PAGE>
The following is a summary of cash flows for the Holding Company, which
are of three major types. Cash flows from operating activities consist primarily
of net income generated by cash. Investing activities generate cash flows
through the origination and principal collection on loans as well as purchases
and sales of securities. Investing activities will generally result in negative
cash flows when the Holding Company is experiencing loan growth. Cash flows from
financing activities include savings deposits, withdrawals and maturities and
changes in borrowings. The following table summarizes cash flows for each of the
three years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
------ -------- -------
(In thousands)
<S> <C> <C> <C>
Operating activities............................. $ (194) $ 459 $ 774
Investing activities: 774
Investment purchases.......................... --- --- (4,592)
Investment maturities/sales................... 5,653 1,101 ---
Mortgage-backed
securities purchases........................ (729) --- ---
Mortgage-backed
securities repayments....................... 2,110 1,417 2,576
Changes in loans.............................. (458) (1,892) (4,446)
Other......................................... 2,279 (22) (108)
Financing activities:
Deposit increase/(decrease)................... (6,222) (224) (2,624)
Borrowings increase/(decrease)................ (6,371) (515) 4,986
Net proceeds from issuance
of common stock............................. 10,221 --- ---
Other......................................... 7 (1) (3)
------ -------- -------
Net increase/(decrease) in cash
and cash equivalents.......................... $6,296 $ 323 $(3,437)
====== ======== =======
</TABLE>
Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%. Also,
a savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings. Monetary penalties may be imposed for
failure to meet these liquidity requirements. As of December 31, 1996, First
Federal had liquid assets of $19 million, and a regulatory liquidity ratio of
28%, of which 14% constituted short-term investments.
Pursuant to OTS capital regulations, savings associations must
currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core
capital) requirement, and a total risk-based capital to risk-weighted assets
ratio of 8%. At December 31, 1996, First Federal's tangible capital ratio was
14.0%, its core capital ratio was 14.0%, and its risk-based capital to
risk-weighted assets ratio was 27.6%. Therefore, at December 31, 1996, First
Federal's capital exceeded all of its capital requirements currently in effect.
The following table provides the minimum regulatory capital requirements and
First Federal's capital ratios as of December 31, 1996:
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
OTS Requirement First Federal's Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital............................ 1.5% $1,252 14.0% $11,713 $10,461
Core capital (2)............................ 3.0 2,503 14.0 11,713 9,210
Risk-based capital.......................... 8.0 3,515 27.6 12,136 8,621
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) The OTS has proposed and is expected to adopt a core capital
requirement for savings associations comparable to that recently
adopted by the OCC for national banks. The new regulation, as proposed,
would require at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety
and soundness, and 4% to 5% for all other savings associations. The
final form of such new OTS core capital requirement may differ from
that which has been proposed. First Federal expects to be in compliance
with such new requirements. See "Regulation -- Regulatory Capital."
(3) First Federal's risk-based capital includes $423,000 of general
valuation allowances.
<TABLE>
<CAPTION>
At December 31, 1996
FDIC Requirement Citizens Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tier 1 leverage............................. 4.0% $3,122 7.2% $4,512 $1,390
Tier 1 capital to risk-based................ 4.0 1,818 9.9 4,512 2,694
Risk-based capital.......................... 8.0 3,635 11.4 5,160 1,525
</TABLE>
- --------------
(1) Tier I leverage capital is shown as a percentage of total assets. Tier I
capital to risk based and total capital to risk based are shown as a
percentage of risk-weighted assets.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Holding Company are monetary
in nature. As a result, interest rates have a more significant impact on the
Holding Company's performance than the effects of general levels of inflation.
Interest rates, however, do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturities structures of the Holding Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Holding Company. The Holding Company is unable to
determine the extent, if any, to which properties securing the Holding Company's
loans have appreciated in dollar value due to inflation.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
[GRANT THORNTON LETTERHEAD]
Report of Independent Certified Public Accountants
Board of Directors
River Valley Bancorp
We have audited the accompanying consolidated statements of financial condition
of River Valley Bancorp (formerly Madison First Federal Savings and Loan
Association) as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of river Valley
Bancorp as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in he period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 27, 1997 (except for Note O, as to which the date is February 28, 1997)
42
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------- -------
<S> <C> <C>
Cash and due from banks $ 4,209 $ 2,389
Interest bearing deposits in other financial institutions 4,476 -
-------- -------
Cash and cash equivalents 8,685 2,389
Certificates of deposit in other financial institutions 100 300
Investment securities designated as available for sale - at market 3,448 5,018
Investment securities - at amortized cost, approximate market value of
$5,434 and $7,930 as of December 31, 1996 and 1995 5,500 8,000
Mortgage-backed securities designated as available
for sale - at market 5,041 -
Mortgage-backed and related securities - at cost, approximate market
value of $7,794 and $9,941 as of December 31, 1996 and 1995 7,805 9,917
Loans receivable - net 107,918 57,945
Loans held for sale - at lower of cost or market 1,076 -
Office premises and equipment - at depreciated cost 2,057 966
Federal Home Loan Bank stock - at cost 943 610
Federal Reserve Bank stock - at cost 80 -
Accrued interest receivable on loans 819 313
Accrued interest receivable on mortgage-backed securities 78 51
Accrued interest receivable on investments and interest-bearing deposits 171 241
Goodwill, net of accumulated amortization 272 148
Cash surrender value of life insurance 747 535
Prepaid expenses and other assets 169 124
Prepaid federal income taxes 4 26
Deferred tax asset 628 21
-------- -------
Total assets $145,541 $86,604
======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
-------- -------
<S> <C> <C>
Deposits $125,656 $75,233
Advances from the Federal Home Loan Bank 1,100 4,471
Advances by borrowers for taxes and insurance 70 63
Accrued interest payable 279 68
Other liabilities 1,422 195
Minority interest in consolidated subsidiary 209 -
Total liabilities 128,736 80,030
Commitments - -
Stockholders' equity
Preferred stock - 2,000,000 shares without par value
authorized; no shares issued - -
Common stock - 5,000,000 shares without par value authorized;
1,190,250 shares issued and outstanding in 1996 - -
Additional paid in capital 11,173 -
Retained earnings - substantially restricted 6,635 6,562
Shares acquired by Employee Stock Ownership Plan (ESOP) (952) -
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (51) 12
-------- -------
Total stockholders' equity 16,805 6,574
-------- -------
Total liabilities and stockholders' equity $145,541 $86,604
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Interest income
Loans $4,551 $4,240 $3,851
Mortgage-backed and related securities 574 670 743
Investment securities 562 777 713
Interest-bearing deposits and other 188 107 112
-------- ------- -------
Total interest income 5,875 5,794 5,419
Interest expense
Deposits 3,349 3,419 2,842
Borrowings 63 175 12
-------- ------- -------
Total interest expense 3,412 3,594 2,854
-------- ------- -------
Net interest income 2,463 2,200 2,565
Provision for losses on loans 22 150 29
-------- ------- -------
Net interest income after provision for losses on loans 2,441 2,050 2,536
Other income
Insurance commissions 200 175 181
Loss on sale of investment securities (9) - -
Gain on sale of subsidiary 141 - -
Service fees, charges and other operating 246 187 189
-------- ------- -------
Total other income 578 362 370
General, administrative and other expense
Employee compensation and benefits 1,203 998 888
Occupancy and equipment 284 212 193
Federal deposit insurance premiums 684 177 178
Amortization of goodwill 7 7 7
Data processing 282 237 243
Other operating 410 335 329
Provision for valuation decline on mortgage-related securities - - 20
-------- ------- -------
Total general, administrative and other expense 2,870 1,966 1,858
-------- ------- -------
Earnings before income taxes 149 446 1,048
Income taxes
Current 124 245 411
Deferred (48) (57) 1
-------- ------- -------
Total income taxes 76 188 412
-------- ------- -------
NET EARNINGS $ 73 $ 258 $ 636
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Unrealized
gains losses on
Additional Shares securities
Common Paid-in- acquired designated as Retained
Stock Capital by ESOP available for-Sale earnings Total
----- ------- ------- ------------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ - $ - $ - $ - $5,668 $ 5,668
Net earnings for the year ended
December 31, 1994 - - - - 636 636
--- ------- ----- ------ ------ -------
Balance at December 31, 1994 - - - - 6,304 6,304
Net earnings for the year ended
December 31, 1995 - - - - 258 258
Unrealized gains on securities
designated as available for sale,
net of related tax effects - - - 12 - 12
--- ------- ----- ------ ------ -------
Balance at December 31, 1995 - - - 12 6,562 6,574
Reorganization to common stock
form and issuance of shares in
connection therewith - net - 11,173 (952) - - 10,221
Net earnings for the year ended
December 31, 1996 - - - - 73 73
Unrealized losses on securities
designated as available for sale,
net of related tax effects - - - (63) - (63)
--- ------- ----- ------ ------ -------
Balance at December 31, 1996 $ - $11,173 $(952) $ (51) $6,635 $16,805
=== ======= ===== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- -------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year $ 73 $ 258 $ 636
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization (accretion) of premiums and discounts on
investments and mortgage-backed securities - net 2 (9) (14)
Loss on sale of investment securities designated as available for sale 9 - -
Provision for valuation decline on mortgage-related securities - - 20
Loans originated for sale in the secondary market (1,076) - -
Amortization of deferred loan origination costs 83 85 86
Provision for losses on loans 22 150 29
Depreciation and amortization 91 68 67
Amortization of goodwill 7 7 7
Gain on sale of subsidiary (141) - -
Increase (decrease) in cash, net of acquisition of Citizens National Bank,
due to changes in:
Accrued interest receivable on loans 29 (67) (4)
Accrued interest receivable on mortgage-backed securities (1) 7 14
Accrued interest receivable on investments and interest-bearing deposits 100 (4) (54)
Prepaid expenses and other assets 262 (6) 19
Accrued interest payable (41) 6 1
Other liabilities 413 26 17
Income taxes
Current 22 (5) (51)
Deferred (48) (57) 1
------- ------- -------
Net cash provided by (used in) operating activities (194) 459 774
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 3,500 1,000 -
Purchase of investment securities - - (4,592)
Proceeds from sale of investment securities designated
as available for sale 2,153 101 -
Purchase of mortgage-backed securities (729) - -
Principal repayments on mortgage-backed securities 2,110 1,417 2,576
Loan principal repayments 17,114 13,708 14,973
Loan disbursements (17,572) (15,600) (19,419)
Proceeds from sale of real estate acquired through foreclosure - - 17
Purchase of real estate held for investment - - (10)
Purchase of office equipment (9) (46) (40)
(Increase) decrease in certificates of deposit in
other financial institutions - net 200 50 (50)
Purchase of single premium life insurance (188) - -
Increase in cash surrender value of life insurance (24) (26) (25)
Proceeds from sale of subsidiary - net 282 - -
Acquisition of Citizens National Bank common stock - net 2,018 - -
------- ------- -------
Net cash provided by (used in) investing activities 8,855 604 (6,570)
------- ------- -------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) 8,661 1,063 (5,796)
======= ======= =======
</TABLE>
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ 8,661 $ 1,063 $ (5,796)
Cash flows provided by (used in) financing activities:
Decrease in deposit accounts (6,222) (224) (2,624)
Proceeds from Federal Home Loan Bank advances -- 2,000 4,986
Repayment of Federal Home Loan Bank advances (6,371) (2,515) --
Advances by borrowers for taxes and insurance 7 (1) (3)
Proceeds from issuance of common stock 11,173 -- --
Acquisition of common stock by ESOP (952) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (2,365) (740) 2,359
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,296 323 (3,437)
Cash and cash equivalents at beginning of year 2,389 2,066 5,503
-------- -------- --------
Cash and cash equivalents at end of year $ 8,685 $ 2,389 $ 2,066
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 84 $ 191 $ 377
-------- -------- --------
Interest on deposits and borrowings $ 3,201 $ 3,588 $ 2,853
-------- -------- --------
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ -- $ -- $ 15
-------- -------- --------
Transfer of investment securities to an available for sale
classification in accordance with SFAS No. 115 $ -- $ 5,000 $ --
-------- -------- --------
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (63) $ 12 $ --
-------- -------- --------
Liabilities assumed and cash paid in acquisition of
Citizens National Bank $ 64,055 $ -- $ --
Less: Fair value of assets received 63,783 -- --
-------- -------- --------
Amount assigned to goodwill $ 272 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On March 5, 1996, the Board of Directors of Madison First Federal
Savings and Loan Association (the "Association") adopted an overall
plan of conversion and reorganization (the "Plan") whereby the
Association would convert to the stock form of ownership, followed by
the issuance of all of the Association's outstanding stock to a newly
formed holding company, River Valley Bancorp (the "Corporation").
Pursuant to the Plan, the Corporation offered for sale up to
1,190,250 common shares to certain depositors of the Association and
members of the community. The conversion was completed on December
20, 1996, and resulted in the issuance of 1,190,250 common shares of
the Corporation which, after consideration of offering and
acquisition expenses totaling approximately $730,000, and shares
purchased by the ESOP totaling $952,000, resulted in net capital
proceeds of $10.2 million. Condensed financial statements of the
Corporation are presented in Note K.
The Corporation is a financial institution holding company whose
activities are primarily limited to holding the stock of the
Association and Citizens National Bank of Madison (the "Bank"). The
Association and the Bank conduct a general banking business in
southeastern Indiana which consists of attracting deposits from the
general public and applying those funds to the origination of loans
for consumer, residential and commercial purposes. The Association's
and the Bank's profitability is significantly dependent on net
interest income, which is the difference between interest income
generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is
affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on
these balances. The level of interest rates paid or received by the
Association and the Bank can be significantly influenced by a number
of competitive factors, such as governmental monetary policy, that
are outside of management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles
("GAAP") and general accounting practices within the financial
services industry. In preparing financial statements in accordance
with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which
have been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, the Bank and the Association and
its subsidiary, Madison First Service Corporation ("First Service").
All significant intercompany balances and transactions have been
eliminated in the accompanying consolidated financial statements.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed and Related Securities
The Corporation accounts for investment securities and
mortgage-backed and related securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity,
trading, or available for sale. Securities classified as
held-to-maturity are carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity.
Trading securities and securities available for sale are carried at
market value with resulting unrealized gains or losses recorded to
operations or stockholders' equity, respectively. In November 1995,
the Financial Accounting Standards Board (the "FASB") issued a
"Special Report on the Implementation of SFAS No. 115", which
permitted the reclassification of securities between held-to-maturity
and available-for-sale without calling into question management's
prior intent with respect to such securities. The Association
transferred approximately $5.0 million of investment securities
previously identified as held-to-maturity to an available for sale
classification. At December 31, 1996, the Corporation's stockholders'
equity included unrealized losses on securities designated as
available for sale, net of related tax effects, of $51,000. Realized
gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for deferred loan origination costs and the
allowance for loan losses. Interest is accrued as earned unless the
collectibility of the loan is in doubt. Uncollectible interest on
loans that are contractually past due is charged off, or an allowance
is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized
only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic
interest and principal payments has returned to normal, in which case
the loan is returned to accrual status. If the ultimate
collectibility of the loan is in doubt, in whole or in part, all
payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. In computing cost, deferred loan
origination costs are added to the principal balances of the related
loans. At December 31, 1996, loans held for sale were carried at
cost. There were no loans identified as held for sale at December 31,
1995.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Corporation retains the servicing on loans sold and agrees to
remit to the investor loan principal and interest at agreed-upon
rates. Loans sold and serviced for others totaled approximately $26.5
million at December 31, 1996. In June 1994, the FASB issued SFAS No.
122 "Accounting for Mortgage Servicing Rights," which requires that
the Corporation recognize as separate assets, rights to service
mortgage loans for others, regardless of how those servicing rights
are acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and
sells those loans with servicing rights retained would allocate some
of the cost of the loans to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be
accounted for as sales of mortgage loans and acquisitions of
mortgage-backed securities. Additionally, SFAS No. 122 requires that
capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment is
measured based on fair value.
SFAS No. 122 was effective for fiscal years beginning after December
15, 1995, (January 1, 1996, as to the Corporation) to transactions in
which an entity acquires mortgage servicing rights and to impairment
evaluations of all capitalized mortgage servicing rights and
capitalized excess servicing receivables whenever acquired.
Retroactive application was prohibited, and earlier adoption was
encouraged. Management adopted SFAS No. 122 as of January 1, 1996,
without material effect on the Corporation's consolidated financial
condition or results of operations.
4. Loan Origination Fees and Costs
The Corporation accounts for loan origination fees and costs in
accordance with the provisions of SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases". Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of direct
origination costs, are deferred and amortized to interest income
using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable
to originating a loan, i.e., principally actual personnel costs. Fees
received for loan commitments that are expected to be drawn upon,
based on the Corporation's experience with similar commitments, are
deferred and amortized over the life of the related loan using the
interest method. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line basis.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans
It is the Corporation's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, current
trends in the level of delinquent and specific problem loans, loan
concentrations to single borrowers, changes in the composition of the
loan portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral
and current and anticipated economic conditions in its primary
lending areas. When the collection of a loan becomes doubtful, or
otherwise troubled, the Corporation records a loan loss provision
equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Major loans and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased
by charges to earnings and decreased by charge-offs (net of
recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan". SFAS No. 114, which was amended by SFAS
No. 118 as to certain income recognition and financial statement
disclosure provisions, requires that impaired loans be measured based
upon the present value of expected future cash flows discounted at
the loan's effective interest rate or, as an alternative, at the
loans observable market price or fair value of the collateral if the
loan is collateral dependent. The Association adopted the SFAS No.
114 effective January 1, 1995, without material effect on
consolidated financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on
current information and events, it is probable that a creditor will
be unable to collect all amounts due according to the contractual
terms of the loan agreement. In applying the provisions of SFAS No.
114, the Corporation considers its investment in one-to-four family
residential loans and consumer installment loans to be homogeneous
and therefore excluded from separate identification for evaluation of
impairment. With respect to the Corporation's investment in
nonresidential, commercial, and multifamily residential real estate
loans, and its evaluation of impairment thereof, such loans are
generally collateral dependent and, as a result, are carried as a
practical expedient at the lower of cost or fair value.
It is generally the Corporation's policy to charge off unsecured
credits that are more than ninety days delinquent. Similarly,
collateral dependent loans which are more than ninety days delinquent
are considered to constitute more than a minimum delay in repayment
and are evaluated for impairment under SFAS No. 114 at that time.
At December 31, 1996 and 1995, the Corporation had no loans that
would be defined as impaired under SFAS No. 114.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of
the loan's unpaid principal balance (cost) or fair value less
estimated selling expenses at the date of acquisition. Real estate
loss provisions are recorded if the property's fair value
subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are
considered. Costs relating to holding real estate acquired through
foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include
expenditures which extend the useful lives of existing assets.
Maintenance, repairs and minor renewals are expensed as incurred. For
financial reporting, depreciation and amortization are provided on
the straight-line method over the useful lives of the assets,
estimated to be thirty to forty-five years for buildings, three to
ten years for furniture and equipment, and three years for
automobiles. An accelerated depreciation method is used for tax
reporting purposes.
8. Amortization of Goodwill
Amortization of goodwill arising from the Corporation's acquisition
of the Bank is provided using the straight-line method over an
estimated life of ten years.
Management periodically evaluates the carrying value of these
intangible assets in relation to the continuing earnings capacity of
the acquired assets and assumed liabilities.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 121 provides guidance on when to recognize and
how to measure impairment losses of long-lived assets and certain
identifiable intangibles and how to value long-lived assets to be
disposed of. The Corporation adopted SFAS No. 121 effective January
1, 1996, as required, without material effect on consolidated
financial condition or results of operations.
9. Income Taxes
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes
that result from the Corporation's activities within the current and
previous years. In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its
reported amount in the consolidated financial statements that will
result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount
of net deductible temporary differences or carryforward attributes
may be utilized against current
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Income Taxes (continued)
period earnings, carried back against prior years' earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes
payable on future taxable income. Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in
the future.
Deferral of income taxes results primarily from different methods of
accounting for deferred loan origination costs, the allowance for
valuation decline on mortgage-related securities, the general loan
loss allowance, the percentage of earnings bad debt deduction and
certain components of retirement expense. Additionally, a temporary
difference is recognized for depreciation utilizing accelerated
methods for federal income tax purposes.
10. Retirement and Incentive Plans
Qualified employees of the Association are covered by noncontributory
retirement plans. There were no unfunded past service liabilities at
December 31, 1996 and 1995. First Service has no qualified employees.
Employees of the Association are covered by the Pentegra Group,
previously the Financial Institutions Retirement Fund (the "Fund"),
which is a defined benefit pension plan to which contributions are
made for the benefit of the employees. Contributions are determined
to cover the normal cost of pension benefits, the one-year cost of
the pre-retirement death and disability benefits and the amortization
of any unfunded accrued liabilities.
The Fund had previously advised the Association that the pension plan
meets the criteria of a multi-employer pension plan as defined in
SFAS No. 87, "Employers' Accounting for Pensions". In accordance with
SFAS No. 87, net pension cost is recognized for any required
contribution for the period. A liability is recognized for any
contributions due and unpaid. During 1993, the Association acquired
additional benefits for all qualified employees covered by the Fund
which were paid for by reducing the overfunded amount. Because of the
overfunded status, no contributions were made to the pension plan
during the years ended December 31, 1996, 1995 and 1994. The
provision for pension expense was computed by the Fund's actuaries
utilizing the projected unit credit cost method and assuming a 7.5%
return on Fund assets.
In addition to providing employees with noncontributory retirement
plans, the Association undertook a supplemental retirement plan in
1993, which provides retirement benefits to all directors. The
Association's obligations under the plan have been funded via the
purchase of key man life insurance policies, of which the Association
is the beneficiary. Costs of the purchase of the single premium life
insurance policies amounted to $668,000. Expense under the
supplemental retirement plan totaled approximately $3,000, $3,000 and
$2,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans (continued)
In conjunction with its reorganization to stock form, the Corporation
implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP
provides retirement benefits for substantially all employees who have
completed one year of service and have attained the age of 21. The
Corporation accounts for the ESOP in accordance with Statement of
Position (SOP) 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." SOP 93-6 requires the measure of compensation
expense recorded by employers to equal the fair value of ESOP shares
allocated to participants during the fiscal year. Expense recognized
related to the ESOP totaled approximately $65,000 for the year ended
December 31, 1996.
11. Earnings Per Share
The provisions of Accounting Principles Board Opinion No. 15,
"Earnings Per Share," is not applicable for the years ended December
31, 1996, 1995 and 1994, as the Corporation completed its conversion
to stock form in December 1996.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
includes cash and due from banks and interest-bearing deposits in
other financial institutions with original maturities of less than
ninety days.
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the
1996 consolidated financial statement presentation.
14. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of the fair value of financial
instruments, both assets and liabilities whether or not recognized in
the consolidated statement of financial condition, for which it is
practicable to estimate that value. For financial instruments where
quoted market prices are not available, fair values are based on
estimates using present value and other valuation methods.
The present value methods utilized are greatly affected by the
assumptions applied, including the discount rate and estimates of
future cash flows. Therefore, the fair values presented may not
represent amounts that could be realized in an exchange for certain
financial instruments.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at
December 31, 1996 and 1995:
Cash and cash equivalents and certificates of deposit in other
financial institutions: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents and certificates of deposit in other financial
institutions are deemed to approximate fair value.
Investment and mortgage-backed and related securities: For
investment and mortgage-backed and related securities, fair
value is deemed to equal the quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics for underlying
collateral, such as one-to-four family residential, multi-family
residential and nonresidential real estate. These categories
were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to borrowers
of similar credit quality. For loans on deposit accounts, and
consumer and other loans, fair values were deemed to equal the
historic carrying values. The historical carrying amount of
accrued interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statement of financial condition is deemed to
approximate fair value.
Federal Reserve Bank stock: The carrying amount presented in the
consolidated statement of financial condition is deemed to
approximate fair value.
Deposits: The fair value of NOW and super NOW accounts, passbook
accounts, money market demand accounts and advances by borrowers
for taxes and insurance are deemed to approximate the amount
payable on demand. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for
deposits of similar remaining maturities.
Federal Home Loan Bank advances: The fair value of these
advances is estimated using the interest rates currently offered
for advances of similar remaining maturities or, when available,
quoted market prices.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
Commitments to extend credit: For fixed-rate and adjustable-rate
loan commitments, the fair value estimate considers the
difference between current levels of interest rates and
committed rates. The difference between the fair value and
notional amount of outstanding loan commitments at December 31,
1996 and 1995, was not material.
Based on the foregoing methods and assumptions, the carrying
value and fair value of the Corporation's financial instruments
are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
Carrying Fair Carrying Fair
value value value value
-------- -------- ------- -------
(In thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,685 $ 8,685 $ 2,389 $ 2,389
Certificates of deposit in other financial institutions 100 100 300 300
Investment securities designated as available for sale 3,448 3,448 5,018 5,018
Investment securities - at cost 5,500 5,434 8,000 7,930
Mortgage-backed securities designated as available
for sale 5,041 5,041 - -
Mortgage-backed and related securities - at cost 7,805 7,794 9,917 9,941
Loans receivable - net 108,994 108,775 57,945 58,756
Federal Home Loan Bank stock 943 943 610 610
Federal Reserve Bank stock 80 80 - -
-------- -------- ------- -------
$140,596 $140,300 $84,179 $84,944
-------- -------- ------- -------
Financial liabilities
Deposits $125,656 $123,716 $75,233 $72,375
Advances from the Federal Home Loan Bank 1,100 1,099 4,471 4,483
Advances by borrowers for taxes and insurance 70 70 63 63
-------- -------- ------- -------
$126,826 $124,885 $79,767 $76,921
======== ======== ======= =======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
---- ----- ---- -----
(In thousands)
Held to maturity:
<S> <C> <C> <C> <C>
U.S. Government agency obligations $5,500 $5,434 $ 8,000 $ 7,930
Available for sale:
U.S. Government agency obligations 2,997 2,980 5,000 5,018
Municipal obligations 474 468 - -
3,471 3,448 5,000 5,018
----- ----- ----- -----
Total investment securities $8,971 $8,882 $13,000 $12,948
====== ====== ======= =======
</TABLE>
At December 31, 1996 and 1995, the cost carrying value of the
Corporation's investment securities held to maturity exceeded fair
value by $66,000 and $70,000, respectively, comprised solely of gross
unrealized losses.
The amortized cost and estimated fair value of U. S. Government
agency obligations designated as held to maturity at December 31 by
term to maturity are shown below. Maturity dates do not reflect
effects of call provisions inherent in the bonds' contractual terms.
<TABLE>
<CAPTION>
1996 1995
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $2,000 $1,998 $ 500 $ 497
Due in one to three years 2,500 2,474 4,500 4,468
Due in three to five years 1,000 962 3,000 2,965
----- --- ----- -----
$5,500 $5,434 $8,000 $7,930
====== ====== ====== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of U.S. Government agency
obligations and municipal bonds designated as available for sale at
December 31, 1996, by term to maturity are shown below.
Estimated
Amortized fair
cost value
(In thousands)
Due in one to three years $2,000 $1,999
Due in three to five years 997 981
Due in five to ten years 474 468
------ -------
$3,471 $3,448
====== ======
The amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of mortgage-backed securities designated as
held to maturity at December 31, 1996 and 1995 are shown below.
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
------ ----- ----- ------
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $4,852 $ 3 $ (32) $4,823
Government National Mortgage Association
participation certificates 1,805 24 (8) 1,821
Federal National Mortgage Association
participation certificates 1,116 2 - 1,118
Interest-only certificates 32 - - 32
------ ----- ----- ------
$7,805 $ 29 $ (40) $7,794
====== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
------ ----- ----- ------
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $6,330 $ 44 $ (49) $6,325
Government National Mortgage Association
participation certificates 2,121 43 (10) 2,154
Federal National Mortgage Association
participation certificates 1,426 9 (13) 1,422
Interest-only certificates 40 - - 40
------ ----- ----- ------
$9,917 $ 96 $ (72) $9,941
====== ===== ===== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities held to maturity at
December 31, 1996, by contractual terms to maturity are shown below.
Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment
penalties.
Amortized cost
(In thousands)
Due within one year $1,518
Due after one to three years 2,324
Due after three to five years 1,450
Due after ten to twenty years 411
Due after twenty years 2,102
-----
$7,805
======
The amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of mortgage-backed securities designated as
available for sale at December 31, 1996 are shown below.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage Corporation
<S> <C> <C> <C> <C>
participation certificates $ 988 $ 11 $ (1) $ 998
Government National Mortgage Association
participation certificates 1,368 4 - 1,372
Federal National Mortgage Association
participation certificates 2,110 1 (42) 2,069
Collateralized mortgage obligations 628 - (26) 602
------ ----- ----- ------
$5,094 $ 16 $ (69) $5,041
====== ===== ===== ======
</TABLE>
The amortized cost of mortgage-backed securities designated as
available for sale at December 31, 1996, by contractual terms to
maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
Amortized cost
(In thousands)
Due within one year $ -
Due after one to three years 174
Due after three to five years 161
Due after five to ten years 413
Due after ten to twenty years 3,169
Due after twenty years 1,177
------
$5,094
======
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The market value of the Corporation's investment in Federal National
Mortgage Association interest-only certificates is adversely affected
by the level of actual prepayments on the loans collateralizing such
securities, as well as the market's perception as to the future level
of such prepayments. During 1994, these prepayment factors resulted
in market value declines which management viewed as other than
temporary. Accordingly, the Corporation charged operations in 1994
for $20,000, representing management's estimate as to the amount of
such declines deemed to be other than temporary.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1996 1995
-------- -------
(In thousands)
Residential real estate
One-to-four family residential $ 67,417 $44,417
Multi-family residential 3,416 1,613
Construction 4,895 2,489
Nonresidential real estate and land 14,960 7,563
Consumer and other 19,781 3,406
Deferred loan origination costs 226 234
-------- -------
110,695 59,722
Less:
Undisbursed portion of loans in process 1,703 1,370
Allowance for loan losses 1,074 407
-------- -------
$107,918 $57,945
======== =======
As depicted above, the Corporation's lending efforts have
historically focused on one-to-four family residential real estate
loans, multi-family residential real estate loans and construction
real estate loans, which comprise approximately $74.3 million, or
69%, of the total loan portfolio at December 31, 1996 and
approximately $47.4 million, or 82%, of the total loan portfolio at
December 31, 1995. Generally, such loans have been underwritten on
the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Corporation with adequate collateral
coverage in the event of default. Nevertheless, the Corporation, as
with any lending institution, is subject to the risk that residential
real estate values could deteriorate in its primary lending areas of
southeastern Indiana and northwestern Kentucky, thereby impairing
collateral values. However, management is of the belief that
residential real estate values in the Corporation's primary lending
areas are presently stable.
In the ordinary course of business, the Corporation has granted loans
to some of the officers, directors and their related business
interests. Related party loans are made on the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve
more than the normal risk of collectibility. The aggregate dollar
amount of loans outstanding to related parties was approximately
$541,000 and $571,000 at December 31, 1996 and 1995.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as
follows for the years ended December 31:
1996 1995 1994
(In thousands)
Balance at beginning of year $ 407 $252 $227
Provision for losses on loans 22 150 29
Allowance for loan losses of Citizens
National Bank 648 - -
Charge-offs of loans (3) - (4)
Recoveries of loan losses - 5 -
------ ---- ----
Balance at end of year $1,074 $407 $252
====== ==== ====
As of December 31, 1996, the Corporation's allowance for loan losses
was comprised of a general loan loss allowance of approximately
$1,071,000, which is includible as a component of regulatory
risk-based capital, and a specific loan loss allowance of
approximately $3,000.
The Corporation had nonperforming loans totaling $819,000, $8,000 and
$13,000 at December 31, 1996, 1995 and 1994, respectively.
The Corporation had no loss of interest income related to such
nonperforming loans during the years ended December 31, 1996, 1995
and 1994.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 are comprised of the
following:
1996 1995
------ ------
(In thousands)
Land and improvements $ 718 $ 377
Office buildings and improvements 2,107 1,242
Leasehold improvements 115 6
Furniture, fixtures and equipment 1,742 623
Automobiles 16 4
------ ------
4,698 2,252
Less accumulated depreciation (2,641) (1,286)
------ ------
$2,057 $ 966
====== =======
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December
31:
<TABLE>
<CAPTION>
Deposit type and 1996 1995
weighted-average interest rate Amount % Amount %
-------- ----- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 5,951 4.7 $ - -
NOW accounts
1996 - 2.54% 16,683 13.3
1995 - 2.24% 7,941 10.6
Super NOW accounts
1996 - 2.62% 4,406 3.5
1995 - 2.65% 1,063 1.4
Money market demand accounts
1996 - 2.94% 9,623 7.7
1995 - 3.00% 7,141 9.5
Passbook accounts
1996 - 3.36% 21,718 17.3
1995 - 3.04% 17,911 23.8
Total demand, transaction and
passbook deposits 58,381 46.5 34,056 45.3
Certificates of deposit
4.00 - 4.99%
4.80% in 1996 11,647 9.3
4.21% in 1995 98 .1
5.00 - 5.99%
5.41% in 1996 41,560 33.1
5.65% in 1995 30,116 40.0
6.00 - 6.99%
6.28% in 1996 11,144 8.9
6.38% in 1995 10,731 14.3
7.00 - 7.99%
7.49% in 1996 2,923 2.3
7.86% in 1995 232 .3
8.00 - 8.99%
8.25% in 1996 1 - - -
-------- ----- ------- -----
Total certificates of deposit 67,275 53.5 41,177 54.7
-------- ----- ------- -----
Total deposit accounts $125,656 100.0 $75,233 100.0
======== ===== ======= =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 totaled approximately $9.7 million and $4.8 million at December 31,
1996 and 1995, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is
summarized as follows:
1996 1995 1994
------ ------ ------
(In thousands)
Passbook $ 539 $ 524 $ 634
NOW accounts 206 176 170
Money market deposit accounts 234 243 259
Certificates of deposit 2,370 2,476 1,779
------ ------ ------
$3,349 $3,419 $2,842
====== ====== ======
Maturities of outstanding certificates of deposit are summarized as
follows at December 31:
1996 1995
------- -------
(In thousands)
Less than one year $47,948 $29,578
One year to three years 16,563 10,425
More than three years 2,764 1,174
------- -------
$67,275 $41,177
======= =======
NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1996, Federal Home Loan Bank advances consisted of a
$1.1 million, 7.35% advance maturing on January 29, 1997. The advance
was collateralized by certain residential mortgage loans totaling
$1.8 million and the Bank's investment in Federal Home Loan Bank
stock.
NOTE H - INCOME TAXES
The provision for income taxes on earnings differs from that computed
at the expected statutory corporate tax rate at December 31 as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
the 34% expected statutory rate $51 $152 $356
State taxes, net of federal benefits 9 39 56
Increase (decrease) in taxes resulting from:
Amortization of goodwill 2 2 2
Other (primarily related to the acquisition and
sale of subsidiaries in 1996) 14 (5) (2)
Income tax provision per consolidated
financial statements $76 $188 $412
---- ---- ----
Effective tax rate 51.0% 42.2% 39.3%
==== ==== ====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE H - INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset at
December 31 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1996 1995
------- -------
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination costs $ (77) $ (80)
Difference between book and tax depreciation (71) (32)
Percentage of earnings bad debt deduction (121) (116)
Unrealized gain on securities designated
as available for sale --- (6)
---- -----
Total deferred tax liabilities (269) (234)
Deferred tax assets:
Deferred compensation 42 28
Allowance for valuation decline on
mortgage-related securities 90 90
General loan loss allowance 282 135
Unrealized loss on securities designated as
available for sale 25 -
Purchase accounting adjustments related to asset
valuation adjustments 458 -
Other - 2
---- -----
Total deferred tax assets 897 255
---- -----
Net deferred tax asset $628 $ 21
==== =====
</TABLE>
The Association was allowed a special bad debt deduction based on a
percentage of earnings generally limited to 8% of otherwise taxable
income, or the amount of qualifying and nonqualifying loans outstanding
and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. Retained earnings at December
31, 1996 includes approximately $2.4 million for which federal income
taxes have not been provided. If the amounts that qualify as deductions
for federal income tax purposes are later used for purposes other than
for bad debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then
current corporate income tax rate. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $705,000 at December 31, 1996. See Note M
for additional information regarding future percentage of earnings bad
debt deductions.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE I - COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers including commitments to extend
credit. Such commitments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in
the consolidated statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the
Corporation's involvement in such financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual
notional amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as
those utilized for on-balance-sheet instruments.
At December 31, 1996, the Corporation had outstanding commitments of
approximately $1.3 million to originate residential one-to-four
family real estate loans, of which $728,000 were comprised of 7.08%
to 8.25% fixed-rate loans and $526,000 were comprised of 7.75% to
9.50% variable rate loans. Additionally, the Corporation had unused
lines of credit under home equity loans of approximately $5.3 million
at December 31, 1996. In the opinion of management, all loan
commitments equaled or exceeded prevalent market interest rates as of
December 31, 1996, and such commitments have been underwritten on the
same basis as that of the existing loan portfolio. Management
believes that all loan commitments are able to be funded through cash
flow from operations and existing excess liquidity. Fees received in
connection with these commitments have not been recognized in
earnings.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Corporation, upon
extension of credit, is based on management's credit evaluation of
the counterparty. Collateral on loans may vary but the preponderance
of loans granted generally include a mortgage interest in real estate
as security.
NOTE J - LEASES
In connection with the acquisition of the Bank, the Corporation
assumed leases of branch banking facilities and an automobile. For
the lease of the banking facility in the Wal-Mart Supercenter in
Madison, the Corporation is to make annual payments of approximately
$23,000 in 1997 and 1998, and approximately $17,000 in 1999. The
original lease expires in September 1999, but does contain two
renewable five year options at a maximum lease payment of
approximately $29,000 per year. The Bank also leases its downtown
office with annual payments of $6,000 for 1997 under a year-to-year
lease agreement. Finally, the Bank leases an automobile which expires
December 31, 1997, with minimum lease payments of approximately
$8,300.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE K - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP
The following condensed financial statements summarize the financial
position of River Valley Bancorp at December 31, 1996, and the
results of its operations for the period ended December 31, 1996.
<PAGE>
River Valley Bancorp
STATEMENT OF FINANCIAL CONDITION
December 31, 1996
(In thousands)
ASSETS
Cash and interest-bearing deposits $ 655
Investment in subsidiaries 16,453
------
Total assets $17,108
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 94
Minority interest in consolidated subsidiary 209
-------
303
Stockholders' equity
Preferred stock -
Common stock -
Additional paid in capital 17,806
Retained earnings 2
Shares acquired by employee stock ownership plan (952)
Unrealized losses on securities designated as available
for sale, net of related tax effects (51)
Total stockholders' equity 16,805
Total liabilities and stockholders' equity $17,108
=======
River Valley Bancorp
STATEMENT OF EARNINGS
Period ended December 31, 1996
(In thousands)
Revenue
Equity in earnings of subsidiaries $2
---
NET EARNINGS $2
===
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE L - REGULATORY CAPITAL REQUIREMENTS
The Association is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). The Bank
is subject to the regulatory capital requirements of the Federal
Deposit Insurance Corporation ("FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on each of the
banking subsidiaries' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
financial institutions must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The banking subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. The
OTS's minimum capital standards generally require the maintenance of
regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core
capital requirement and the risk-based capital requirement. The
tangible capital requirement provides for minimum tangible capital
(defined as stockholders' equity less all intangible assets) equal to
1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. An OTS proposal, if adopted in present
form, would increase the core capital requirement to a range of 4.0%
- 5.0% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to the
Association's excess regulatory capital position as a result of this
change in the regulatory capital requirement. The risk-based capital
requirement currently provides for the maintenance of core capital
plus general loss allowances equal to 8.0% of risk-weighted assets.
In computing risk-weighted assets, the Association multiplies the
value of each asset on its statement of financial condition by a
defined risk-weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
At December 31, 1996, management believes that the Association meets
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
Regulatory capital
Tangible Core Risk-based
capital Percent capital Percent capital Percent
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $11,712 $11,712 $11,712
Nonallowable assets:
Unrealized losses on securities
designated as available for sale 1 1 1
Additional capital items:
General valuation allowances - - 423
------- ---- -------- ---- -------- ----
Regulatory capital - computed 11,713 14.0 11,713 14.0 12,136 27.6
Minimum capital requirement 1,252 1.5 2,503 3.0 3,515 8.0
------- ---- -------- ---- -------- ----
Regulatory capital - excess $10,461 12.5 $ 9,210 11.0 $ 8,621 19.6
======= ==== ======== ==== ======== ====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE L - REGULATORY CAPITAL REQUIREMENTS (continued)
At December 31, 1996, the Association met all regulatory requirements
for classification as a "well-capitalized" institution. A
"well-capitalized" institution must have risk-based capital of 10.0%,
and core capital of 5.0%. The Association's capital exceeded the
minimum required amounts for classification as a "well-capitalized"
institution by $7.7 million and $7.5 million, respectively.
The FDIC has adopted risk-based capital ratio guidelines to which the
Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations.
Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet commitments to four risk-weighting
categories, with higher levels of capital being required for
categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority
interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets (except mortgage
servicing rights and purchased credit card relationships, subject to
certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid
capital instruments, term subordinated debt and the allowance for
loan losses, subject to certain limitations, less required
deductions. Banks are required to maintain a total risk-based capital
ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may,
however, set higher capital requirements when particular
circumstances warrant. Banks experiencing or anticipating significant
growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as
specified in the guidelines). These guidelines provide for a minimum
Tier 1 leverage ratio of 3% for banks that meet certain specified
criteria, including that they have the highest regulatory rating and
are not experiencing or anticipating significant growth. All other
banks are required to maintain a Tier 1 leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE L - REGULATORY CAPITAL REQUIREMENTS (continued)
At December 31, 1996, management believes that the Bank meets all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
Regulatory capital
Tier 1 Total
Tier 1 capital to capital to
leverage Percent risk-based Percent risk-based Percent
-------- ------- ---------- ------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $4,741 $4,741 $4,741
Nonallowable assets
Goodwill (272) (272) (272)
Mortgage servicing rights (7) (7) (7)
Additional capital items
Unrealized losses on securities
designated as available for sale 50 50 50
General valuation allowances - - 648
Regulatory capital computed 4,512 7.2 4,512 9.9 5,160 11.4
------ --- ------ --- ------ ---
Maximum range of capital requirement 3,122 4.0 1,818 4.0 3,635 8.0
------ --- ------ --- ------ ---
Regulatory capital - excess $1,390 3.2 $2,694 5.9 $1,525 3.4
====== === ====== === ====== ===
</TABLE>
At December 31, 1996, the Bank met all regulatory requirements for
classification as a "well-capitalized" institution. The Bank's
capital exceeded the minimum required amounts for classification as a
"well-capitalized" institution by $616,000 and $2.2 million,
respectively.
The Association and the Bank are both subject to limitations on the
payment of dividends by the banking regulatory authorities.
Under OTS regulations, a savings association that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed
capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS
approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions during a calendar
year in the amount of (i) up to 100% of its net earnings to date
during the year plus an amount equal to one-half of the amount by
which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year (ii) or 75% of
its net earnings for the most recent four quarters. Pursuant to such
OTS dividend regulations, the Association had the ability to pay
dividends of approximately $4.3 million to the Corporation at
December 31, 1996.
The Corporation has no intention to seek dividend payments from the
Bank in the foreseeable future.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE M - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and of other savings
associations are insured by the FDIC through the Savings Association
Insurance Fund ("SAIF"). The reserves of the SAIF were below the
level required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured
by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the
BIF met the level required by law in May 1995. As a result of the
respective reserve levels of the funds, deposit insurance assessments
paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments were required for healthy commercial
banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a
special assessment totaling $.657 per $100 of SAIF deposits held at
March 31, 1995, in order to increase SAIF reserves to the level
required by law. The Association had $76.6 million in deposits at
March 31, 1995, resulting in an assessment of approximately $503,000,
or $289,000 after tax, which was charged to operations in 1996.
A component of the recapitalization plan provides for the merger of
the SAIF and BIF on January 1, 1999. However, the SAIF
recapitalization legislation currently provides for an elimination of
the thrift charter or of the separate federal regulation of thrifts
prior to the merger of the deposit insurance funds. As a result, the
Association would be regulated as a bank under federal laws which
would subject it to the more restrictive activity limits imposed on
national banks. Under separate legislation related to the
recapitalization plan, the Association is required to recapture as
taxable income approximately $360,000 of its bad debt reserve, which
represents the post-1987 additions to the reserve, and will be unable
to utilize the percentage of earnings method to compute the reserve
in the future. The Association has provided deferred taxes for this
amount and will be permitted to amortize the recapture of the bad
debt reserve over six years.
NOTE N - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION
On March 5, 1996, the Association's Board of Directors adopted an
overall plan of conversion and reorganization (the "Plan") whereby
the Association would convert to the stock form of ownership,
followed by the issuance of all of the Association's outstanding
stock to a newly formed holding company, River Valley Bancorp.
Pursuant to the Plan, the Association offered for sale up to
1,190,250 common shares to its depositors and members of the
community. The offering was completed in December 1996, resulting in
net proceeds of $10.2 million.
At the date of the conversion, the Association established a
liquidation account in an amount equal to retained earnings reflected
in the statement of financial condition used in the conversion
offering circular. The liquidation account will be maintained for the
benefit of eligible deposit account holders who maintained deposit
accounts in the Association after conversion.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE N - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)
In the event of a complete liquidation (and only in such event), each
eligible deposit account holder will be entitled to receive a
liquidation distribution from the liquidation account in the amount
of the then current adjusted balance of deposit accounts held, before
any liquidation distribution may be made with respect to the common
shares. Except for the repurchase of stock and payment of dividends
by the Association, the existence of the liquidation account will not
restrict the use or further application of such retained earnings.
The Association may not declare or pay a cash dividend on, or
repurchase any of its common shares if the effect thereof would cause
the Association's stockholders' equity to be reduced below either the
amount required for the liquidation account or the regulatory capital
requirements for insured institutions.
In December 1995, the Association had entered into a purchase
agreement (the "Agreement") with the majority shareholder of the
Bank. The Agreement, as subsequently amended, stated that the
Corporation would purchase approximately 120,000 shares, representing
95.6% of the Bank's outstanding common stock, for total cash
consideration of approximately $3.0 million. The acquisition was
consummated on December 20, 1996, and was accounted for using the
purchase method of accounting.
Presented below are pro-forma condensed consolidated statements of
earnings which have been prepared as if the acquisition had been
consummated as of the beginning of each of the years ended December
31, 1996 and 1995.
1996 1995
--------- -------
(In thousands)
(Unaudited)
Total interest income $10,211 $9,489
Total interest expense 5,640 5,414
--------- -------
Net interest income 4,571 4,075
Provision for losses on loans 252 254
Other income 1,164 925
General, administrative and other expense 5,049 3,451
--------- -------
Earnings before income taxes 434 1,295
Federal income taxes 150 443
--------- -------
Net earnings $ 284 $ 852
========= =======
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, 1995 and 1994
NOTE N - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)
The Association owns 100% of the outstanding capital stock of First
Service which owned 100% of the outstanding capital stock of McCauley
Insurance Agency ("McCauley").
As mandated by the regulatory authorities during the approval process
of the Plan, First Service had to divest its interest in McCauley.
The sale of McCauley was consummated on December 17, 1996, resulting
in a gain on sale totaling $141,000.
NOTE O - SUBSEQUENT EVENT
As a result of the Corporation's acquisition of the Bank, regulatory
authorities required the sale of one of the Association's retail
branches. A definitive agreement was reached as of November 14, 1996,
which provided for the purchaser to acquire the branch facility for a
price approximating book value, while assuming the branch deposits
for a premium on core deposits. The transaction was consummated on
February 28, 1997, and resulted in an after-tax gain of $125,000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Holding Company's executive officers is
included in Item 4.5 in Part I of this report. Section 16(a) of the Securities
Exchange Act of 1934 ("1934 Act") requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended December 31, 1996, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were complied with.
<PAGE>
Presented below is certain information concerning the directors of the
Holding Company:
<TABLE>
<CAPTION>
Director of the Director of Position Position
Holding Madison with the with Position
Company First Expiration Holding Madison with
Director Since Since of Term Company First Citizens
- -------- ----- ----- ------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Anger 1996 1981 1997 Director Director and
Vice President--
Lending
Jonnie L. Davis 1997 1997 1998 Director
Director
Cecil L. Dorten 1996 1990 1998 Vice Chairman
James E. Fritz 1996 1995 1997 Director, President Director,
President Director
and Chief Executive and Chief
Executive
Officer Officer
Michael J. Hensley 1996 1995 1999 Director
Earl W. Johann 1996 1987 1998 Director
Fred W. Koehler 1996 1988 1999 Chairman
Director
</TABLE>
Presented below is certain information concerning the directors of the Holding
Company:
Robert W. Anger (age 58) has served as First Federal's Vice President
- -- Lending since August, 1995. Prior to that, Mr. Anger served as First
Federal's President and Chief Executive Officer. Mr. Anger also serves as a
director of First Service.
Jonnie L. Davis (age 61). From July, 1995 to August 1996, she served as
an administrative assistant with Fewel, Pettitt and Bender, a surveying firm in
Madison, Indiana. From July 1994 to July 1995, Ms. Davis served as an accounting
clerk for Stockdale Motors, an automobile retailer in Madison, Indiana. From
April 1984 to December 1994, Ms. Davis served as a bookkeeping clerk for D&B
Enterprises, a partnership involved in owning and operating apartment complexes
and other nonresidential real estate ventures. From September 1991 to June 1993,
Ms. Davis served as a Vice President and Assistant to the President and
performed all accounting and financial functions for the Gust. K. Newberg
Company, a general construction contractor in Madison, Indiana.
Cecil L. Dorten (age 52) has served as the President of Ohio Valley
Contractors, Inc., a highway and utility contracting firm, since 1983, and is a
Major General in the Indiana National Guard. Mr. Dorten also serves as a
director of First Service.
James E. Fritz (age 34) has served as First Federal's President and
Chief Executive Officer since August, 1995. Prior to that Mr. Fritz served as
the Chief Financial Officer of First Federal Savings Bank of Kokomo until
January, 1995, and as a consultant to National City Corporation from January,
1995 to August, 1995.
Michael J. Hensley (age 41) has practiced law since January, 1989.
Prior to that, Mr. Hensley served as a Compliance Officer, Assistant Trust
Officer and the General Counsel to The Madison Bank & Trust Company from 1980 to
January, 1989. Mr. Hensley also serves as a director of First Service.
Earl W. Johann (age 64) has served as the President and Chairman of the
Board of Madison Distributing Co. since 1979. Mr. Johann also serves as a
director of First Service.
Fred W. Koehler (age 56) is the former owner of Koehler Tire Co., a
tire and automotive parts store in Madison, Indiana, and is the Auditor for
Jefferson County. Mr. Koehler also serves as a director of First Service.
Item 11. Executive Compensation.
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by First Federal or
Citizens, as the case may be.
<PAGE>
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company for the two fiscal years ended December
31, 1995 and 1996, and to the President and Chief Executive Officer of Citizens.
There were no executive officers of the Holding Company, as of December 31,
1996, who earned over $100,000 in salary and bonuses during that fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
------------------------------------------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation(3) Compensation
-------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C>
James E. Fritz, President and 1996(1) $ 72,200 (2)3) $3,900 --
Chief Executive Officer 1995(1) $ 28,388 (2) $2,539 --
Robert D. Hoban, President and 1996(1) $100,000 ____ -- $6,000 (4)
Chief Executive Officer 1995(1) $100,000 ____ -- $6,000 (4)
</TABLE>
(1) Mr. Fritz joined First Federal as President and Chief Executive Officer
in August, 1995.
(2) Includes directors fees.
(3) Each of Mr. Fritz and Mr. Hoban received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the
lesser of $50,000 or 10% of his salary and bonus.
(4) Constitutes matching contributions made by Citizens to the 401(k) Plan.
Employment Contracts
Effective January 1, 1996, First Federal entered into an employment
agreement with James E. Fritz, First Federal's President and Chief Executive
Officer, and Citizens entered into an employment agreement with Robert D. Hoban,
Citizens' President and Chief Executive Officer. The agreements are for a
three-year term and extend annually for an additional one-year term to maintain
their three-year term if the employer's Board of Directors determines to so
extend it. Under the agreements, the employees receive an initial annual salary
equal to their current salary subject to increases approved by the Board of
Directors. The agreements also provide, among other things, for the employees'
participation in other bonus and fringe benefit plans available to other
employees. The employees may terminate their employment upon ninety (90) days'
prior written notice to their employer. The employers may discharge the
employees for just cause (as defined in the agreement) at any time or in certain
events specified by applicable law or regulations. If the employers terminate
the employees' employment for other than just cause or the employees are
constructively discharged and such termination does not occur within twelve
months after a change in control of the employers or the Holding Company, the
agreement provides for the employees' receipt of a lump-sum or periodic payment
of an amount equal to the sum of (A) their base salary through the end of the
then-current term, plus (B) their base salary for an additional twelve-month
period, plus (C) in the employees' sole discretion and in lieu of continued
participation in their employers' fringe benefit plans, cash in an amount equal
to the cost of obtaining all health, life, disability and other benefits in
which the employees would otherwise be eligible to participate. In the event the
employers terminate the employees' employment for other than just cause or the
employee is constructively discharged within twelve months following a change in
control of the employer or the Holding Company, the agreement provides for the
employee's receipt of a lump-sum payment of an amount equal to the difference
between (A) the product of 2.99 times his "base amount" (as defined in Section
280G(b)(3) of the Code) and (B) the sum of any other parachute payments, as
determined under Section 280G(b)(2) of the Code. If the payments provided for
under the agreement, together with any other payments made to the employees by
the employer, are determined to be payments in violation of the "golden
parachute" rules of the Code, such payments will be reduced to the largest
amount which would not cause the employer to lose a tax deduction for such
payments under those rules. As of the date hereof, the cash compensation that
would be paid to the employees under the agreements if such agreements were
terminated after a change in control of the employers would be $194,000 for Mr.
Fritz and $300,000 for Mr. Hoban.
Special Termination Agreements
Effective as of the date of the Conversion, First Federal and Citizens
entered into Termination Agreements with certain of their employees (the
"Covered Employees"). The Termination Agreements have terms of one year, subject
to annual extension by the Board of Directors of First Federal or Citizens, and
provide that upon the termination of a Covered Employee's employment by the
employer for other than cause or by the Covered Employee for constructive
termination, within 18 months after the Conversion or within 12 months following
a "change in control" (as defined in the Termination Agreements) which occurs
during the term of the applicable Termination Agreement, such Covered Employee
shall be entitled to a lump sum payment of 100% of his or her base amount of
<PAGE>
compensation, as determined pursuant to Section 280G(b)(3) of the Code (the
"Termination Benefit"). Covered Employees may elect to receive the Termination
Benefit in semi-monthly payments over a twelve month period. The Termination
Agreements also provide for continued life, health and disability coverage for
Covered Employees until the expiration of twelve months following the
termination of employment or until the Covered Employee obtains coverage from
another employer, whichever occurs first. If a Covered Employee obtains coverage
from another employer, and does not have substantially identical life, health
and disability coverage, First Federal or Citizens shall maintain substantially
identical coverage on behalf of the Covered Employee for a period of twelve
months.
Compensation of Directors
As of January, 1997, Directors of the Holding Company are paid
directors' fees of $250 for each meeting attended.
All directors of First Federal are entitled to receive monthly director
fees in the amount of $600 for their services. Jerry Allen also receives $600
per month as a Director Emeritus of First Federal. Outside directors of First
Federal also receive fees in the amount of $150 for each special meeting of the
Board. Total fees paid to directors of First Federal and Mr. Allen for the year
ended December 31, 1995 were approximately $56,000.
First Federal's directors and directors emeritus may, pursuant to
deferred compensation agreements, defer payment of some or all of such monthly
directors' fees or salary for a maximum period of five years. Upon reaching the
retirement age specified in their respective joinder agreements, directors who
participate in the deferred compensation plan receive fixed monthly payments for
a specific period ranging from 60 to 180 months, depending on the specific
director's election in his joinder agreement, but may also elect to receive
their benefits in a lump sum in the event of financial hardship. The agreements
also provide for death and disability benefits.
First Federal has purchased paid-up life insurance on the lives of
directors and directors emeritus participating in the deferred compensation plan
to fund benefits payable thereunder. The insurance is provided by Pacific Mutual
and Transamerica. At December 31, 1996, the cash surrender value of the policies
was carried on the books of First Federal at an amount equal to $747,000. First
Federal expensed $10,000 in connection with these agreements for the year ended
December 31, 1996.
All outside directors of Citizens are entitled to receive monthly
director fees in the amount of $125 for their services. Total fees paid to
directors of Citizens for the year ended December 31, 1996 were approximately
$6,000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 20, 1997, by each person
who is known by the Holding Company to own beneficially 5% or more of the Common
Stock. Unless otherwise indicated, the named beneficial owner has sole voting
and dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class(3)
---------------------- ------------------ -----------
Jeffrey L. Gendell
Tontine Partners, L.P.
31 West 52nd Street, 17th Floor
New York, NY 10017 118,000(1)(2) 9.9%
First Bankers Trust Company
1201 Broadway
Quincy, IL 62301 95,220(3) 8.0%
(1) The information in this chart is based on Schedule 13D and 13G
Report(s) filed by the above-listed person(s) with the Securities and
Exchange Commission (the "SEC") containing information concerning
shares held by them. It does not reflect any changes in those
shareholdings which may have occurred since the date of such filings.
(2) These shares are held by Tontine Partners, L.P., a Delaware limited
partnership. Tontine Management, L.L.C. is its general partner and Mr.
Gendell is the managing member of the general partner. These persons
share voting and investment power with respect to the shares.
<PAGE>
(3) These shares are held by the Trustee of the River Valley Bancorp
Employee Stock Ownership Plan and Trust. The Employees participating in
that Plan are entitled to instruct the Trustee how to vote shares held
in their accounts under the Plan. Unallocated shares held in a suspense
account under the Plan are required under the Plan terms to be voted by
the Trustee in the same proportion as allocated shares are voted.
The following table sets forth certain information regarding the
nominees for the position of director of the Holding Company, including the
number and percent of shares of Common Stock beneficially owned by such persons
as of March 20, 1997. Unless otherwise indicated, each nominee has sole
investment and/or voting power with respect to the shares shown as beneficially
owned by him. The table also sets forth the number of shares of Holding Company
Common Stock beneficially owned by all directors and executive officers of the
Holding Company as a group.
<TABLE>
<CAPTION>
Common Stock
Expiration of Director of the Beneficially
Term as Holding Owned as of Percentage
Name Director Company Since March 20, 1997 of Class(1)
---- -------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Robert W. Anger 1997 1996 2,800 (2) .23%
Jonnie L. Davis 1998 1997 500 (3) .04%
Cecil L. Dorten 1998 1996 20,000 (3) 1.70%
James E. Fritz 1997 1996 7,800 .65%
Michael J. Hensley 1999 1996 5,000 (3) .42%
Earl W. Johann 1998 1996 8,828 .74%
Fred W. Koehler 1999 1996 20,000 1.70%
All directors and
executive officers
as a group (17 persons) 96,527 8.11%
</TABLE>
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not she has any
economic power with respect to the shares. Includes shares beneficially
owned by members of the immediate familites of the directors residing
in their homes.
(2) Of these shares, 1,000 are held jointly by Mr. Anger and his spouse.
(3) These shares are held jointly by the director and his or her spouse.
Item 13. Certain Relationships and Related Transactions.
The Institutions have followed a policy of offering to their directors,
officers, and employees real estate mortgage loans secured by their principal
residence and other loans. These loans are made in the ordinary course of
business with the same collateral, interest rates and underwriting criteria as
those of comparable transactions prevailing at the time and do not involve more
than the normal risk of collectibility or present other unfavorable features.
Lonnie D. Collins, Secretary of the Holding Company and First Federal,
serves as counsel to and provides routine legal work for First Federal. In
connection with his services in such capacity, Mr. Collins is paid an annual
retainer of $3,000. Mr. Collins received no other fees for his legal work for
First Federal for the year ended December 31, 1996. Mr. Collins also receives
$600 per month for his service as Secretary to First Federal's Board of
Directors. First Federal intend to continue using Mr. Collins' services for
routine legal work during 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Consolidated Statements of Financial Condition at December 31, 1996,
and 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
<PAGE>
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits are
executive compensation plans and arrangements which are identified as
Exhibits 10(5) through 10(21).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
RIVER VALLEY BANCORP
Date: March 31, 1997 By: /s/ James E. Fritz
James E. Fritz, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 31st day of March, 1997.
Signatures Title Date
(1) Principal Executive Officer:
/s/ James E. Fritz )
James E. Fritz President and )
Chief Executive Officer )
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
/s/ John Wayne Deveary Treasurer )
John Wayne Deveary )
)
) March 31, 1997
)
(3) The Board of Directors: )
)
)
/s/ Robert W. Anger Director )
Robert W. Anger )
)
)
/s/ Jonnie L. Davis Director )
Jonnie L. Davis )
)
)
/s/ Cecil L. Dorten Director )
Cecil L. Dorten )
)
)
<PAGE>
/s/ James E. Fritz )
James E. Fritz Director )
)
)
/s/ Michael J. Hensley Director )
Michael J. Hensley )
)
)
/s/ Earl W. Johann Director ) March 31, 1997
Earl W. Johann )
)
)
/s/ Fred W. Koehler Director )
Fred W. Koehler )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3(1) Registrant's Articles of Incorporation are incorporated
by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 333-05121) (the
"Registration Statement")
(2) Registrant's Code of By-Laws are incorporated by
reference to Exhibit 3(2) to the Registration Statement.
10(5) Employment Agreement between Madison First Federal
Savings and Loan Association and James E. Fritz is
incorporated by reference to Exhibit 10(5) to the
Registration Statement
(6) Employment Agreement between Citizens National Bank of
Madison and Robert D. Hoban is incorporated by reference
to Exhibit 10(6) to the Registration Statement (8)
Director Deferred Compensation Master Agreement is
incorporated by reference to Exhibit 10(8) to the
Registration Statement
(9) Director Deferred Compensation Joinder Agreement --
Jerry D. Allen is incorporated by reference to Exhibit
10(9) to the Registration Statement
(10) Director Deferred Compensation Joinder Agreement --
Robert W. Anger is incorporated by reference to Exhibit
10(10) to the Registration Statement
(11) Director Deferred Compensation Joinder Agreement --
Cecil L. Dorten is incorporated by reference to Exhibit
10(11) to the Registration Statement
(12) Director Deferred Compensation Joinder Agreement -- Earl
W. Johann is incorporated by reference to Exhibit 10(12)
to the Registration Statement
(13) Director Deferred Compensation Joinder Agreement --
Frederick W. Koehler is incorporated by reference to
Exhibit 10(13) to the Registration Statement
(14) Director Deferred Compensation Joinder Agreement --
James E. Fritz is incorporated by reference to Exhibit
10(14) to the Registration Statement
(15) Director Deferred Compensation Joinder Agreement --
Michael Hensley is incorporated by reference to Exhibit
10(15) to the Registration Statement
(16) Special Termination Agreement between Madison First
Federal Savings and Loan Association and Traci A.
Bridgford is incorporated by reference to Exhibit 10(16)
to the Registration Statement
(17) Special Termination Agreement between Madison First
Federal Savings and Loan Association and John Wayne
Deveary is incorporated by reference to Exhibit 10(17)
to the Registration Statement
(18) Special Termination Agreement between Madison First
Federal Savings and Loan Association and Robert W. Anger
is incorporated by reference to Exhibit 10(18) to the
Registration Statement
(19) Special Termination Agreement between Citizens National
Bank of Madison and Carolyn Flowers is incorporated by
reference to Exhibit 10(19) to the Registration
Statement
(20) Special Termination Agreement between Citizens National
Bank of Madison and Larry Fouse is incorporated by
reference to Exhibit 10(20) to the Registration
Statement
(21) Special Termination Agreement between Citizens National
Bank of Madison and Mark Goley is incorporated by
reference to Exhibit 10(21) to the Registration
Statement
(22) Exempt Loan and Share Purchase Agreement between Trust
under River Valley Bancorp Employee Stock Ownership Plan
and Trust Agreement and River Valley Bancorp is
incorporated by reference to Exhibit 10(22) to the
Registration Statement
21 Subsidiaries of the Registrant
27 Financial Data Schedule
Exhibit 21
SUBSIDIARIES OF RIVER VALLEY BANCORP
Subsidiaries of River Valley Bancorp:
Name Jurisdiction of Incorporation
Madison First Federal Savings and Loan Federal
Association
Citizens National Bank of Madison Federal
Madison First Service Corporation Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001015593
<NAME> River Valley Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 8,685
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,489
<INVESTMENTS-CARRYING> 13,305
<INVESTMENTS-MARKET> 13,228
<LOANS> 110,068
<ALLOWANCE> 1,074
<TOTAL-ASSETS> 145,541
<DEPOSITS> 125,656
<SHORT-TERM> 1,100
<LIABILITIES-OTHER> 1,980
<LONG-TERM> 0
<COMMON> 0
0
0
<OTHER-SE> 16,805
<TOTAL-LIABILITIES-AND-EQUITY> 145,541
<INTEREST-LOAN> 4,551
<INTEREST-INVEST> 1,136
<INTEREST-OTHER> 188
<INTEREST-TOTAL> 5,875
<INTEREST-DEPOSIT> 3,349
<INTEREST-EXPENSE> 3,412
<INTEREST-INCOME-NET> 2,463
<LOAN-LOSSES> 22
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 2,870
<INCOME-PRETAX> 149
<INCOME-PRE-EXTRAORDINARY> 149
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.98
<LOANS-NON> 0
<LOANS-PAST> 819
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 407
<CHARGE-OFFS> 3
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,074
<ALLOWANCE-DOMESTIC> 3
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,071
</TABLE>
