FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 2-47541
RIVER VALLEY BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1984567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
303 Clifty Drive
Madison, Indiana 47250
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (812) 265-3421
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
As of November 12, 1998, the latest practicable date 1,191,440 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 20 pages
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River Valley Bancorp
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
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River Valley Bancorp
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 3,849 $ 3,542
Federal funds sold 800 300
Interest earning deposits in other financial institutions 1,551 1,026
------- -------
Cash and cash equivalents 6,200 4,868
Certificates of deposit in other financial institutions 100 897
Investment securities designated as available for sale - at market 783 772
Investment securities - at amortized cost, approximate market value of
$981 and $3,444 as of September 30, 1998 and December 31, 1997 966 3,500
Mortgage-backed securities designated as available for sale - at market 2,906 3,604
Mortgage-backed and related securities - at cost, approximate market
value of $3,451 and $5,432 as of September 30, 1998 and December 31, 1997 3,516 5,374
Loans receivable - net 113,059 111,319
Loans held for sale - at lower of cost or market 2,406 684
Office premises and equipment - at depreciated cost 2,054 2,065
Real estate acquired through foreclosure 82 82
Federal Home Loan Bank stock - at cost 943 943
Accrued interest receivable on loans 1,062 916
Accrued interest receivable on mortgage-backed and related securities 71 117
Accrued interest receivable on investments and interest-earning deposits 31 65
Goodwill, net of accumulated amortization 225 245
Cash surrender value of life insurance 809 776
Prepaid expenses and other assets 200 141
Prepaid federal income taxes 137 -
Deferred tax asset 765 681
------- -------
Total assets $136,315 $137,049
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $111,152 $114,955
Advances from the Federal Home Loan Bank 5,000 2,000
Advances by borrowers for taxes and insurance 52 53
Accrued interest payable 414 463
Other liabilities 1,255 1,524
Dividends payable 65 60
Accrued federal income taxes - 5
------- -------
Total liabilities 117,938 119,060
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;
1,191,440 and 1,190,250 shares issued and outstanding at
September 30, 1998 and December 31, 1997 - -
Additional paid in capital 11,247 11,229
Retained earnings - substantially restricted 8,579 7,797
Shares acquired by stock benefit plans (1,434) (1,005)
Unrealized losses on securities designated as available for sale,
net of related tax effects (15) (32)
------- -------
Total stockholders' equity 18,377 17,989
------- -------
Total liabilities and stockholders' equity $136,315 $137,049
======= =======
</TABLE>
3
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<TABLE>
River Valley Bancorp
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $7,012 $6,834 $2,436 $2,347
Mortgage-backed and related securities 368 564 119 180
Investment securities 131 220 27 64
Interest-earning deposits and other 181 261 53 65
----- ----- ----- -----
Total interest income 7,692 7,879 2,635 2,656
Interest expense
Deposits 3,505 3,654 1,159 1,203
Borrowings 137 93 81 59
----- ----- ----- -----
Total interest expense 3,642 3,747 1,240 1,262
----- ----- ----- -----
Net interest income 4,050 4,132 1,395 1,394
Provision for losses on loans 215 238 65 68
----- ----- ----- -----
Net interest income after provision for losses on loans 3,835 3,894 1,330 1,326
Other income
Insurance commissions - 10 - 3
Loss on sale of investment and mortgage-backed securities - (4) - (7)
Gain on sale of loans 202 73 75 59
Gain (loss) on sale of office premises and equipment 57 202 57 (1)
Service fees, charges and other operating 634 589 223 192
----- ----- ----- -----
Total other income 893 870 355 246
General, administrative and other expense
Employee compensation and benefits 1,815 1,663 647 581
Occupancy and equipment 348 376 125 128
Federal deposit insurance premiums 32 27 12 12
Amortization of goodwill 20 20 7 6
Data processing 86 189 30 56
Other operating 813 849 296 281
----- ----- ----- -----
Total general, administrative and other expense 3,114 3,124 1,117 1,064
----- ----- ----- -----
Earnings before income taxes 1,614 1,640 568 508
Income taxes
Current 734 685 424 197
Deferred (93) (25) (195) (4)
----- ----- ----- -----
Total income taxes 641 660 229 193
----- ----- ----- -----
NET EARNINGS $ 973 $ 980 $ 339 $ 315
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.88 $.90 $.31 $.29
=== === === ===
Diluted $.86 $.89 $.30 $.29
=== === === ===
</TABLE>
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<TABLE>
River Valley Bancorp
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Net earnings $973 $980
Unrealized holding gains (losses) during the period, net of tax (17) -
Reclassification adjustment for losses on sale of securities included
in net earnings, net of related taxes - 2
--- ---
Comprehensive income $956 $982
=== ===
Accumulated other comprehensive losses $(15) $(49)
=== ===
</TABLE>
5
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<TABLE>
River Valley Bancorp
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 973 $ 980
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization of premiums and discounts on investments and
mortgage-backed securities - net 13 (5)
Loss on sale of investment and mortgage-backed securities designated
as available for sale - 4
Loans originated for sale in the secondary market (12,763) (5,415)
Proceeds from sale of loans in the secondary market 11,144 6,521
Gain on sale of loans (103) (30)
Amortization of deferred loan origination costs 75 5
Provision for losses on loans 215 238
Depreciation and amortization 170 147
Amortization of goodwill 20 20
Gain on sale of office premises and equipment (57) (202)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (146) (159)
Accrued interest receivable on mortgage-backed securities 46 16
Accrued interest receivable on investments and interest-bearing deposits 34 115
Prepaid expenses and other assets (59) 77
Accrued interest payable (49) (41)
Other liabilities (264) 231
Income taxes
Current (142) (35)
Deferred (93) (25)
------ ------
Net cash provided by (used in) operating activities (986) 2,442
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 2,500 2,000
Proceeds from sale of investment securities designated as available for sale - 2,698
Proceeds from sale of mortgage-backed securities designated as available for sale - 1,473
Purchase of mortgage-backed securities - (1,010)
Principal repayments on mortgage-backed securities 2,570 1,886
Loan principal repayments 28,621 24,034
Loan disbursements (30,640) (28,966)
Purchase of Federal Reserve Bank stock - (64)
Purchase of office equipment (159) (107)
Proceeds from sale of office premises and equipment 68 407
(Increase) decrease in certificates of deposit in other financial institutions - net 797 (796)
Increase in cash surrender value of life insurance (33) (26)
------ ------
Net cash provided by investing activities 3,724 1,529
------ ------
Net cash provided by operating and investing
activities (subtotal carried forward) 2,738 3,971
------ ------
</TABLE>
6
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<TABLE>
River Valley Bancorp
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Net cash provided by operating and investing
activities (subtotal brought forward) $ 2,738 $3,971
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (3,803) (9,980)
Proceeds from Federal Home Loan Bank advances 12,221 5,000
Repayment of Federal Home Loan Bank advances (9,221) (3,100)
Advances by borrowers for taxes and insurance (1) 4
Dividends on common stock (191) (95)
Purchase of shares for stock benefit plans (429) (81)
Proceeds from exercise of stock options 18 -
------ -----
Net cash used in financing activities (1,406) (8,252)
------ -----
Net increase (decrease) in cash and cash equivalents 1,332 (4,281)
Cash and cash equivalents at beginning of period 4,868 8,685
------ -----
Cash and cash equivalents at end of period $ 6,200 $4,404
====== =====
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 516 $ 438
====== =====
Interest on deposits and borrowings $ 3,691 $3,788
====== =====
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ - $ 82
====== =====
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 17 $ 2
====== =====
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 99 $ 43
====== =====
</TABLE>
7
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River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 1998 and 1997
River Valley Bancorp (the "Corporation") is a financial institution holding
company whose activities are primarily limited to holding the stock of River
Valley Financial Bank ("River Valley" or the "Bank"). The Bank conducts 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. River Valley
Financial'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 Bank can be
significantly influenced by a number of competitive factors, such as
governmental monetary policy, that are outside of management's control.
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto of the Corporation included in the Annual Report on Form 10-KSB for the
year ended December 31, 1997. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) which are necessary
for a fair presentation of the financial statements have been included. The
results of operations for the nine and three month periods ended September 30,
1998 are not necessarily indicative of the results which may be expected for the
entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its subsidiary, the Bank and the Bank's subsidiary, Madison First Service
Corporation ("First Service"). All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
3. Effect of Recent Accounting Pronouncements
In September 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments 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, referred to
as the financial components approach, provides that the carrying
8
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River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
3. Effect of Recent Accounting Pronouncements (continued)
amount of the 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 adopted SFAS No. 125 effective January 1, 1998, as required, without
material effect on River Valley's consolidated financial position or results of
operations.
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective January 1, 1998, as required, without material effect on the
Corporation's financial statements.
9
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River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
3. Effect of Recent Accounting Pronouncements (continued)
In September 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Corporation's financial
statements.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding, which
gives effect to 83,124 and 95,220 unallocated ESOP shares at September 30, 1998
and 1997, respectively, totaled 1,107,261 and 1,095,090 for the nine month
periods ended September 30, 1998 and 1997, respectively. Weighted-average shares
outstanding totaled 1,107,527 and 1,095,090 for the three month periods ended
September 30, 1998 and 1997, respectively.
10
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River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
4. Earnings Per Share (continued)
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under the
Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,126,345 and 1,101,428 for the nine month periods ended September 30, 1998 and
1997, respectively. Weighted-average common shares deemed outstanding for
purposes of computing diluted earnings per share totaled 1,113,865 and 1,101,428
for the three month periods ended September 30, 1998 and 1997, respectively.
5. Reclassifications
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the September 30, 1998 presentation.
11
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River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine and three month periods ended September 30, 1998 and 1997
Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Corporation's operations and the Corporation'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 Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for losses on loans, the effect of the year 2000 on information technology
systems and the effect of certain recent accounting pronouncements.
Discussion of Financial Condition Changes from December 31, 1997 to
September 30, 1998
At September 30, 1998, River Valley's consolidated assets totaled $136.3
million, a decrease of $734,000, or .5%, from the December 31, 1997 total of
$137.0 million. The decrease in assets resulted primarily from a decrease in the
deposit portfolio of $3.8 million, which was partially offset by an increase in
advances from the Federal Home Loan Bank of $3.0 million.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and
certificates of deposit) increased by $535,000 from December 31, 1997 levels, to
a total of $6.3 million at September 30, 1998. Mortgage-backed and investment
securities decreased by $5.1 million, or 38.3%, to a total of $8.2 million at
September 30, 1998, primarily due to maturities of investments of $2.5 million
and principal repayments on mortgage-backed and related securities totaling $2.6
million.
Loans receivable, including loans held for sale, totaled $115.5 million at
September 30, 1998, an increase of $3.5 million, or 3.1%, from the $112.0
million total at December 31, 1997. The increase resulted primarily from loan
originations during the period of $43.4 million, which were partially offset by
principal repayments of $28.6 million and sales of $11.0 million. Loan
origination volume during the current period exceeded that of the 1997 period by
$9.0 million, or 26.2%.
The Corporation's consolidated allowance for loan losses totaled $1.3 million at
September 30, 1998 and $1.2 million at December 31, 1997, which represented 1.0%
of total loans at those dates. Nonperforming loans (defined as loans delinquent
greater than 90 days and loans on nonaccrual status) totaled $1.3 million and
$718,000 at September 30, 1998 and December 31, 1997, respectively. Although
management believes that its allowance for loan losses at September 30, 1998,
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 negatively affect the Corporation's results of operations.
12
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River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Discussion of Financial Condition Changes from December 31, 1997 to September
30, 1998 (continued)
Deposits decreased by $3.8 million, or 3.3%, to a total of $111.2 million,
compared to the $115.0 million total at December 31, 1997. The decrease is
primarily attributed to increased competition from other local institutions and
other deposit alternatives.
Advances from the Federal Home Loan Bank increased by $3.0 million, or 150%, to
a total of $5.0 million at September 30, 1998, compared to the $2.0 million
balance outstanding at December 31, 1997. The increase was due to current period
borrowings of $12.2 million, which were partially offset by repayments of $9.2
million.
Management deployed the advances primarily to fund loan originations.
Stockholders' equity totaled $18.4 million at September 30, 1998, an increase of
$388,000, or 2.2%, over the $18.0 million total at December 31, 1997. The
increase resulted primarily from current period earnings of $973,000 and a
$17,000 decrease in unrealized losses on securities designated as available for
sale, which were partially offset by purchases of shares for stock benefit plans
totaling $429,000, coupled with the declaration and payment of dividends
totaling $191,000.
The Bank is required to maintain minimum regulatory capital pursuant to federal
regulations. At September 30, 1998, the Bank's regulatory capital exceeded all
applicable regulatory capital requirements.
Comparison of Results of Operations for the Nine Months Ended September 30, 1998
and 1997
General
River Valley's net earnings for the nine months ended September 30, 1998,
totaled $973,000, a decrease of $7,000, or .7%, from the $980,000 of net
earnings reported in the comparable 1997 period. The decrease in earnings in the
1998 period is primarily attributable to a non-recurring gain on sale of office
premises and equipment of $202,000 recorded in the 1997 period, coupled with a
decrease in net interest income of $82,000, which were partially offset by a
$23,000 decrease in the provision for losses on loans, an increase of $129,000
in the gain on sale of loans, a decrease of $10,000 in general, administrative
and other expense and a $19,000 decrease in the provision for income taxes.
Net Interest Income
Total interest income for the nine months ended September 30, 1998, amounted to
$7.7 million, a decrease of $187,000, or 2.4%, from the comparable period in
1997, reflecting the effects of decline in average interest-earning assets
outstanding, partially offset by an increase in yield year to year. Interest
income on loans and mortgage-backed securities totaled $7.4 million at each of
the nine month periods ended September 30, 1998 and 1997, as the
weighted-average balances declined by approximately $1.7 million, while the
yields increased by nine basis points year to year. Interest income on
investments and interest-earning deposits decreased by $169,000, or 35.1%, due
to a decrease in the average balance outstanding of approximately $3.3 million
and an approximate 23 basis point decrease in yield from the comparable 1997
period.
13
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River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Nine Months Ended September 30, 1998
and 1997 (continued)
Net Interest Income (continued)
Interest expense on deposits decreased by $149,000, or 4.1%, to a total of $3.5
million for the nine months ended September 30, 1998, due primarily to a
decrease in the average balance of deposits outstanding of approximately $6.5
million, which was partially offset by an increase in the weighted-average cost
of deposits of approximately six basis points, to 4.15% in 1998. Interest
expense on borrowings totaled $137,000 for the nine months ended September 30,
1998, an increase of $44,000 over the comparable period in 1997. The increase
resulted primarily from an increase in average borrowings outstanding year to
year, coupled with an increase in average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $82,000, or 2.0%, for the nine months ended
September 30, 1998, compared to the comparable period in 1997. The interest rate
spread increased by approximately four basis points for the nine months ended
September 30, 1998, to 3.85% from 3.81% in the 1997 period, while the net
interest margin amounted to approximately 4.24% in 1998 and 4.16% in 1997.
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
upon historical experience, the volume and type of lending conducted by the
Bank, the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market area,
and other factors related to the collectibility of the Bank's loan portfolio. As
a result of such analysis, management recorded a $215,000 provision for losses
on loans for the nine months ended September 30, 1998, compared to the $238,000
amount recorded in the 1997 period. While management believes that the allowance
for losses on loans is adequate at September 30, 1998, based upon the available
facts and circumstances, there can be no assurance that the loan loss allowance
will be adequate to cover losses on nonperforming assets in the future.
Other Income
Other income increased by $23,000, or 2.6%, for the nine months ended September
30, 1998, as compared to the same period in 1997, due primarily to a $129,000
increase in gain on sale of loans, a $45,000 increase in service fees, charges,
and other operating income and an increase of $57,000 in gain on sale of office
premises, which were partially offset by a $202,000 gain on sale of office
premises and equipment recorded during the nine months ended September 30, 1997,
coupled with a $10,000 decrease in insurance commissions. The 1997 gain on sale
of office premises resulted from River Valley's sale of a branch office
facility, located in Hanover, Indiana, which was consummated on February 28,
1997, as required in accordance with the terms of regulatory approval of River
Valley's acquisition of Citizens National Bank of Madison. The decline in
insurance commissions resulted from River Valley's sale of its insurance agency
subsidiary.
14
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Nine Months Ended September 30, 1998
and 1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense decreased by $10,000, or .3%, during
the nine months ended September 30, 1998, compared to the same period in 1997.
This decrease resulted primarily from a $103,000, or 54.5%, decrease in data
processing expense and a $36,000, or 4.2%, decrease in other operating expense,
which were partially offset by a $152,000, or 9.1%, increase in employee
compensation and benefits. The decreases in data processing and other operating
expenses generally reflect economies resulting from the merger of River Valley
Financial Bank and Citizens National Bank of Madison in November 1997. The
increase in employee compensation and benefits was due primarily to normal merit
increases and increased costs associated with stock benefit plans.
Income Taxes
The provision for income taxes decreased by $19,000, or 2.9%, for the nine
months ended September 30, 1998, as compared to the same period in 1997. This
decrease resulted primarily from a decrease in net earnings before taxes of
$26,000, or 1.6%. The effective tax rates were 39.7% and 40.2% for the nine
months ended September 30, 1998 and 1997, respectively.
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997
General
River Valley's net earnings for the three months ended September 30, 1998,
totaled $339,000, an increase of $24,000, or 7.6%, over the $315,000 of net
earnings reported in the comparable 1997 period. The increase in earnings in the
1998 period is primarily attributable to an increase in net interest income of
$1,000 and an increase in other income of $109,000, which were partially offset
by an increase in general, administrative and other expense of $53,000, and an
increase in the provision for income taxes of $36,000.
Net Interest Income
Total interest income for the three months ended September 30, 1998 amounted to
$2.6 million, a decrease of $21,000, or .8%, from the comparable quarter in
1997, reflecting the effects of a decline in average interest-earning assets
outstanding, coupled with a decrease in the yield year-to-year. Interest income
on loans and mortgage-backed securities totaled $2.6 million for the three
months ended September 30, 1998, an increase of $28,000, or 1.1%, over the
comparable 1997 quarter. The increase resulted primarily from a $1.2 million, or
1.0%, increase in the average balance outstanding year-to-year. Interest income
on investments and interest-earning deposits decreased by $49,000, or 38.0%, due
to a decrease in the average balance outstanding of $2.4 million.
15
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997 (continued)
Net Interest Income (continued)
Interest expense on deposits decreased by $44,000, or 3.7%, to a total of $1.2
million for the quarter ended September 30, 1998, due primarily to an
approximate $5.0 million decrease in the average balance of deposits
outstanding. Interest expense on borrowings totaled $81,000 for the three months
ended September 30, 1998, an increase of $22,000, or 37.3%, from the comparable
quarter in 1997. The increase resulted primarily from an increase in average
borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1,000, or .1%, for the three months ended
September 30, 1998, as compared to the comparable quarter in 1997. The interest
rate spread amounted to approximately 3.97% for the 1998 quarter, compared to
3.87% in 1997, while the net interest margin totaled approximately 4.37% in the
1998 quarter, compared to 4.24% in 1997.
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
upon historical experience, the volume and type of lending conducted by the
Bank, the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market area,
and other factors related to the collectibility of the Bank's loan portfolio. As
a result of such analysis, management recorded a $65,000 provision for losses on
loans for the three months ended September 30, 1998, compared to the $68,000
amount recorded in the 1997 period. While management believes that the allowance
for losses on loans is adequate at September 30, 1998, based upon the available
facts and circumstances, there can be no assurance that the loan loss allowance
will be adequate to cover losses on nonperforming assets in the future.
Other Income
Other income increased by $109,000, or 44.3%, for the three months ended
September 30, 1998, as compared to the same period in 1997, due primarily to a
$57,000 gain on sale of office premises, a $31,000 increase in service fees,
charges, and other operating income, coupled with increase of $16,000 in gain on
sale of loans.
General, Administrative and Other Expense
General, administrative and other expense increased by $53,000, or 5.0%, during
the three months ended September 30, 1998, compared to the same period in 1997.
This increase resulted primarily from a $66,000, or 11.4%, increase in employee
compensation and benefits and a $15,000, or 5.3%, increase in other operating
expense, which were partially offset by a $26,000, or 46.4%, decrease in data
processing expense.
16
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997 (continued)
Income Taxes
The provision for income taxes increased by $36,000, or 18.7%, for the three
months ended September 30, 1998, as compared to the same period in 1997. This
increase resulted primarily from an increase in net earnings before taxes of
$60,000, or 11.8%. The effective tax rates amounted to 40.3% and 38.0% for the
three months ended September 30, 1998 and 1997, respectively.
Year 2000 Compliance Matters
As with all providers of financial services, the Bank's operations are heavily
dependent on information technology systems. The Bank is addressing the
potential problems associated with the possibility that the computers that
control or operate the Bank's information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. The Bank is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
The Bank's core data processing relative to customer loan and deposit accounts,
as well as the general ledger, is performed in-house through use of a purchased
software product. Management has been advised, and certain testing has been
performed to verify, that the system will continue to function upon arrival of
the year 2000.
As of the date of this Form 10-QSB, the Bank has identified certain expenses
that will be incurred by the Bank in connection with this issue. Such expenses
total approximately $15,000. The Bank has established a budget of approximately
$65,000 for year 2000 related costs. From a review of the systems and vendors,
management believes the budgeted amount should be sufficient. No assurance can
be given, however, that significant expense will not be incurred in future
periods. In the event that the Bank is ultimately required to purchase
replacement computer systems, programs and equipment, or incur substantial
expense to make the Bank's current systems, programs and equipment year 2000
compliant, the Bank's net earnings and financial condition could be adversely
affected.
17
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine and three month periods ended September 30, 1998 and 1997
Year 2000 Compliance Matters (continued)
In the event that the Bank is unable to process transactions as normal upon
arrival of the year 2000, the Bank has access to a third-party contingency site
with its software vendor. Additionally, the Bank could conduct transactions
manually for a period of time, if necessary.
In addition to possible expense related to its own systems, the Bank could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in the Bank's primary market area. The Bank has contacted, in
person or by mail, most of its larger loan customers to make them aware of the
year 2000 issues. A brochure has also been distributed to customers by mail and
in person. Because the Bank's loan portfolio is highly diversified with regard
to individual borrowers and types of businesses and the Bank's primary market
area is not significantly dependent upon one employer or industry, the Bank does
not expect any significant or prolonged difficulties that will affect net
earnings or cash flow.
18
<PAGE>
River Valley Bancorp
PART II
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: On September 3, 1998, the Corporation
filed a Form 8-K disclosing its
intention to repurchase up to 5%, or
59,512 shares, of its stock on the
open market.
Exhibit 27.1: Financial Data Schedule for the nine
month period ended September 30, 1998
Exhibit 27.2: Restated Financial Data Schedule for the
nine month period ended September 30, 1997
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998 By: /s/James E. Fritz
--------------------------------- -----------------------------
James E. Fritz
CEO/President
Date: November 12, 1998 By: /s/Larry C. Fouse
--------------------------------- -----------------------------
Larry C. Fouse
Chief Financial Officer
20
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