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, 1997
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 1590
Madison, Indiana 47250-0590
(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 __X___ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. N/A
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 20, 1998 was $21,431,846.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 20, 1998, was 1,190,250 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 35 Pages
<PAGE>
RIVER VALLEY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................. 3
PART I
Item 1 Business................................................ 3
Item 2. Properties.............................................. 29
Item 3. Legal Proceedings....................................... 30
Item 4. Submission of Matters to a Vote of Security Holders..... 30
Item 4.5. Executive Officers of the Registrant.................... 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 30
Item 6. Selected Consolidated Financial Data.................... 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 31
Item 7A. Quantitative and Qualitative Analysis of
Financial Condition and Results of Operation........ 31
Item 8. Financial Statements and Supplementary Data............. 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 32
PART III
Item 10. Directors and Executive Officers of Registrant.......... 33
Item 11. Executive Compensation.................................. 33
Item 12. Security Ownership of Certain
Beneficial Owners and Management................... 33
Item 13. Certain Relationships and Related Transactions.......... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................ 33
SIGNATURES ...................................................... 34
<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
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").
On November 22, 1997, Citizens merged with and into First Federal (the
"Merger") pursuant to an Agreement and Plan of Reorganization entered into among
the Holding Company, First Federal and Citizens dated September 26, 1997 (the
"Agreement"). Pursuant to the Agreement, each outstanding share of Citizens
common stock held by shareholders other than the Holding Company was converted
into the right to receive $30 cash, payable by the Holding Company, and shares
of Citizens held by the Holding Company and its subsidiaries were cancelled.
Also, pursuant to the Agreement, First Federal changed its corporate title to
River Valley Financial Bank (the "Bank"). Following the effective time of the
Merger, the Holding Company remained as the sole shareholder of the Bank, and
Citizens' status as a national banking association terminated. For ease of
reference, First Federal will be referred to as the "Bank" hereinafter both with
respect to historical information concerning events and results of operation
prior to the Merger and with respect to information relating to events occurring
after the Merger.
The Conversion of the Bank was accounted for in a manner similar to a
pooling of interests, and 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 the Bank 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 the Bank. From and after
December 20, 1996, the operating results of Citizens and the Bank are
consolidated with those of the Holding Company. The Merger was accounted for in
a manner similar to a pooling of interests.
<PAGE>
The Bank was organized as a federally chartered savings and loan
association in 1875. The Bank is the oldest independent financial institution
headquartered in Jefferson County, Indiana. Citizens was organized as a national
bank in 1981 and, until the Merger, conducted its business from four
full-service offices, all located in Jefferson County, Indiana. Following the
Merger, these offices became branch offices of the Bank. Prior to the
Conversion, the Bank conducted its business from three full-service offices and
one stand-alone drive-through branch, all located in Jefferson County, Indiana.
As a result of the Acquisition, the Holding Company became subject to
regulation as a bank holding company by the Board of Governors of the Federal
Reserve System (the "FRB"). As a condition to the Holding Company obtaining the
requisite approval from the FRB for the Acquisition, the Holding Company
committed to cause the Bank to (i) enter into a definitive agreement to sell the
Bank'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, the Bank sold its
Hanover, Indiana branch to People's Trust Company based in Brookville, Indiana
("People's Trust"), pursuant to that commitment. Deposits totaling $6.8 million
were assumed by People's Trust, and the Bank recorded an after tax gain of
$125,000 on the transaction. As a result of the Merger and the resulting
termination of Citizens' status as a national banking association, the Holding
Company is no longer subject to regulation by the FRB as a bank holding company
and is instead regulated by the Office of Thrift Supervision (the "OTS") as a
savings and loan holding company.
The Bank historically has concentrated its 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 Bank's loan origination activities, representing 63.7% of the Bank's total
loan portfolio at December 31, 1997. The Bank also offers multi-family mortgage
loans, non-residential real estate loans, land loans, construction loans,
nonmortgage commercial loans and consumer loans. Its principal market area is
Jefferson County, Indiana and adjoining counties.
Loan Portfolio Data. The following table sets forth the composition of
the Bank's loan portfolio, including loans held for sale, as of December 31,
1997, 1996 and 1995 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.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
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......................... $72,072 63.7% $ 68,493 61.4% $44,417 74.7%
Multi-family............................... 2,781 2.5 3,416 3.1 1,613 2.7
Construction............................... 3,652 3.2 4,895 4.4 2,489 4.2
Nonresidential real estate.................... 8,379 7.4 14,280 12.8 6,005 10.1
Land loans.................................... 6,324 5.6 680 .6 1,558 2.6
Consumer loans:
Automobile loans........................... 8,028 7.1 5,245 4.7 1,392 2.3
Loans secured by deposits.................. 1,041 .9 869 .8 590 1.0
Home improvement loans..................... 205 .2 271 .2 295 0.5
Other...................................... 5,707 5.1 6,963 6.2 1,129 1.9
Commercial loans.............................. 4,871 4.3 6,433 5.8 --- ---
-------- ---- -------- ---- ------- ----
Gross loans receivable........................ 113,060 100.0 111,545 100.0 59,488 100.0
Add/(Deduct):
Deferred loan origination costs............ 202 .2 226 .2 234 0.4
Undisbursed portions
of loans in process...................... (99) (.1) (1,703) (1.5) (1,370) (2.3)
Allowance for loan losses.................. (1,160) (1.0) (1,074) (1.0) (407) (0.7)
-------- ---- -------- ---- ------- ----
Net loans receivable.......................... $112,003 99.1% $108,994 97.7% $57,945 97.4%
======== ==== ======== ==== ======= ====
</TABLE>
<PAGE>
The following table sets forth certain information at December 31,
1997, regarding the dollar amount of loans maturing in the Bank's 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 2001 2003 2008 2013
December 31, to to to and
1997 1998 1999 2000 2002 2007 2012 following
(In thousands)
Residential real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family................. $ 72,072 $ 773 $ 312 $ 265 $2,410 $10,113 $22,382 $35,817
Multi-family.......................... 2,781 --- 8 --- 8 395 612 1,758
Construction....................... 3,652 3,613 --- 15 --- --- --- 24
Nonresidential
real estate loans.................. 8,379 479 47 139 434 2,768 2,270 2,242
Land loans ......................... 6,324 899 8 25 456 698 973 3,265
Consumer loans:
Loans secured by deposits.......... 1,041 635 80 39 237 50 --- ---
Other loans........................ 13,940 3,659 1,805 2,573 5,326 343 234 ---
Commercial loans...................... 4,871 2,129 213 227 883 563 306 550
-------- ------- ------ ------ ------ ------- ------- -------
Total............................ $113,060 $12,187 $2,473 $3,283 $9,754 $14,930 $26,777 $43,656
======== ======= ====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1997, 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, 1998
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Residential real estate loans:
<S> <C> <C> <C>
One-to four-family............ $16,377 $55,093 $71,470
Multi-family.................. 171 2,610 2,781
Construction.................. --- 38 38
Non-residential
real estate loans............. 811 7,089 7,900
Land loans .................... 541 4,713 5,254
Consumer loans:
Loans secured by deposits..... 257 149 406
Other loans................... 9,723 575 10,298
Commercial loans................. 682 2,044 2,726
------- ------- --------
Total....................... $28,562 $72,311 $100,873
======= ======= ========
</TABLE>
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $72.1 million, or 63.7% of the Bank's portfolio
of loans at December 31, 1997, consisted of one- to four-family residential
loans, of which approximately 81% had adjustable rates.
<PAGE>
The Bank currently offers 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, the Bank's ARMs were indexed to the 11th District Cost
of Funds. Some of the Bank'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. The
Bank's ARMs have a current margin above such index of 2.5% for owner-occupied
properties and 3.0% for non-owner-occupied properties. A substantial portion of
the ARMs in the Bank's portfolio at December 31, 1997 provide for maximum rate
adjustments per year and over the life of the loan of 1% and 5%, respectively,
although the Bank also originates residential ARMs which provide for maximum
rate adjustments per year and over the life of the loan of 1.5% and 6%,
respectively. The Bank's ARMs generally provide for interest rate minimums of 1%
below the origination rate. The Bank's residential ARMs are amortized for terms
up to 30 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.
The Bank 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 30 years. Prior to the Merger, the Bank retained all of its
fixed-rate residential mortgage loans in its portfolio; however, after the
effective date of the Merger, the Bank began underwriting its fixed-rate
residential mortgage loans for potential sale to the Federal Home Loan Mortgage
Corporation (the "FHLMC") on a servicing-retained basis. At December 31, 1997,
approximately 19% of the Bank's residential mortgage loans had fixed rates.
The Bank'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.
Before the Merger, Citizens offered 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 amortized on a monthly basis with principal and interest due each
month and were written with terms of 15, 20 and 30 years. Citizens retained the
servicing on all loans sold to the FHLMC. At December 31, 1997, the Bank had
approximately $28.6 million of fixed-rate residential mortgage loans which were
sold to the FHLMC and for which the Bank provides servicing.
The Bank generally does not originate one- to four-family 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%
and generally does not originate one- to four-family residential ARMs if the
Loan-to-Value Ratio exceeds 80%. The Bank 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 Bank originates include "due-on-sale" clauses, which give the Bank 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, the Bank does
permit assumptions of existing residential mortgage loans on a case-by-case
basis.
<PAGE>
The Bank also offers indemnification mortgage loans ("ID Mortgage
Loans"), which are typically written as fixed-rate second mortgage loans. The
Bank's ID Mortgage Loans are written for terms of 5 years and generally have
maximum Loan-to-Value Ratios of 80%.
The Bank also offers standard second mortgage loans, which are
adjustable-rate loans tied to the U.S. Treasury securities yields adjusted to a
constant maturity with a current margin above such index of 3.0%. The Bank's
second mortgage loans have maximum rate adjustments per year and over the terms
of the loans equal to 1.0% and 4.0%, respectively. The Bank's second mortgage
loans have terms of 10 to 30 years.
At December 31, 1997, one- to four-family residential mortgage loans
amounting to $431,000, or 0.4% of total loans, were included in the Bank's
non-performing assets.
Construction Loans. The Bank offers 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 Bank generally requires an 80% Loan-to-Value
Ratio for its construction loans, although the Bank may permit an 85%
Loan-to-Value Ratio for one- to four-family residential construction loans.
Inspections are generally made prior to any disbursement under a construction
loan, and the Bank does not charge commitment fees for its construction loans.
At December 31, 1997, $3.7 million, or 3.2% of the Bank's total loan
portfolio, consisted of construction loans. The largest construction loan at
December 31, 1997, totalled $434,000. No construction loans were included in
non-performing assets on that date.
While providing the Bank 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 Bank 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 Bank taking title to the project.
Nonresidential Real Estate Loans. At December 31, 1997, $8.4 million,
or 7.4% of the Bank's portfolio consisted of nonresidential real estate loans.
Of this amount, approximately $343,000 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 Bank
originates 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, written for maximum terms of 30 years. The Bank's adjustable-rate
nonresidential real estate loans have maximum adjustments per year and over the
life of the loan of 1% and 4%, respectively, and interest rate minimums of 1%
below the origination rate. The Bank generally requires a Loan-to-Value Ratio of
up to 80%, depending on the nature of the real estate collateral.
The Bank underwrites its nonresidential real estate loans on a
case-by-case basis and, in addition to its normal underwriting criteria,
evaluates the borrower's ability to service the debt from the net operating
income of the property. The Bank's largest nonresidential real estate loan as of
December 31, 1997 was $183,000 and was secured by a church in Madison, Indiana.
No nonresidential real estate loans were included in non-performing assets at
December 31, 1997.
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.
<PAGE>
Multi-family Loans. At December 31, 1997, approximately $2.8 million,
or 2.5% of the Bank's total loan portfolio, consisted of mortgage loans secured
by multi-family dwellings (those consisting of more than four units). The Bank
writes multi-family loans on terms and conditions similar to its nonresidential
real estate loans. The largest multi-family loan in the Bank's portfolio as of
December 31, 1997 was $880,000 and was secured by an apartment building in New
Albany, Indiana. No multi-family loans were included in non-performing assets on
that date.
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
Bank to make loans to developers of apartment complexes and other multi-family
units.
Land Loans. At December 31, 1997, approximately $6.3 million, or 5.6%
of the Bank's total loan portfolio, consisted of mortgage loans secured by
undeveloped real estate. The Bank's land loans are generally written on terms
and conditions similar to its nonresidential real estate loans. Some of the
Bank'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, 1997, the Bank's largest land loan totalled $182,000.
While only $107,000, or 1.7% of the Bank's land development loans were
included in non-performing assets as of December 31, 1997, 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 Bank to take title to partially improved
land that is unmarketable without further capital investment.
Commercial Loans. At December 31, 1997, $4.9 million, or 4.3% of the
Bank's total loan portfolio, consisted of nonmortgage commercial loans. The
Bank's 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, 1997, approximately 92% of the Bank's commercial loans were secured
by collateral, such as equipment, inventory and crops. The Bank'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, 1997, the largest
commercial loan was $265,000. As of the same date, commercial loans totalling
$28,000 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 Bank's average
residential mortgage loans.
Consumer Loans. The Bank's consumer loans, consisting primarily of auto
loans, home improvement loans, unsecured installment loans, loans secured by
deposits, and mobile home loans aggregated approximately $ 15.0 million at
December 31, 1997, or 13.3% of the Bank's total loan portfolio. The Bank
consistently originates consumer loans to meet the needs of its customers and to
assist in meeting its asset/liability management goals. All of the Bank'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, 1997, 85% of the Bank's consumer loans were secured by collateral.
The Bank's loans secured by deposits are made up to 90% of the current
account balance and accrue at a rate of 2% over the underlying passbook or
certificate of deposit rate.
The Bank offers both direct and indirect automobile loans. Under the
Bank's indirect automobile program, participating automobile dealers receive
loan applications from prospective purchasers of automobiles at the point of
sale and deliver them to the Bank for 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 depend upon the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
December 31, 1997, consumer loans amounting to $152,000 were included in
non-performing assets.
Home Equity Loans. At December 31, 1997, the Bank had outstanding
approximately $2.7 million of home equity loans, with unused lines of credit
totalling approximately $1.4 million. No home equity loans were included in
non-performing assets on that date.
The Bank's home equity lines of credit are adjustable-rate lines of
credit tied to the prime rate and are amortized based on a 10- to 20-year
maturity. The Bank 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 Bank historically has
originated its ARMs pursuant to its own underwriting standards which did not
conform with the standard criteria of the FHLMC or Federal National Mortgage
Association ("FNMA"). The Bank's ARMs varied from secondary market criteria
because, among other things, the Bank did not require current property surveys
in most cases and did not permit the conversion of those loans to fixed rate
loans in the first three years of its term. If the Bank desired to sell its
non-conforming ARMs, it may experience difficulty in selling such loans quickly
in the secondary market.
The Bank began underwriting fixed-rate residential mortgage loans for
potential sale to the FHLMC on a servicing-retained basis after the Merger.
Prior to the Merger, Citizens also originated loans for sale to the FHLMC and
retained servicing rights for a fee of one-fourth of 1% of the principal balance
of all loans serviced. Loans originated for sale to the FHLMC in the secondary
market are originated in accordance with the guidelines established by the FHLMC
and are sold promptly after they are originated. The Bank receives a servicing
fee of one-fourth of 1% of the principal balance of all loans serviced. At
December 31, 1997, the Bank serviced $28.6 million in loans sold to the FHLMC.
The Bank confines its loan origination activities primarily to
Jefferson County and surrounding counties. At December 31, 1997, the Bank held
loans totalling approximately $7.0 million that were secured by property located
outside of Indiana. The Bank's loan originations are generated from referrals
from existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are taken at any of the Bank's six full-service
offices.
The Bank's 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 Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors.
Under the Bank's lending policy, a loan officer may approve mortgage
loans up to $75,000, a Senior Loan Officer may approve mortgage loans up to
$150,000, and the Executive Vice President and President may approve mortgage
loans up to $220,000. All other mortgage loans must be approved by at least four
members of the Bank's Board of Directors. The lending policy further provides
that loans secured by readily marketable collateral, such as stock, bonds and
certificates of deposit may be approved by a Loan Officer for up to $75,000, by
a Senior Loan Officer for up to $150,000 and by the Executive Vice President or
President up to $300,000. Loans secured by other non-real estate collateral may
be approved by a Loan Officer for up to $25,000, by a Senior Loan Officer up to
$75,000, and by the Executive Vice President and President up to $150,000.
<PAGE>
Finally, the lending policy provides that unsecured loans may be approved by a
Loan Officer up to $10,000, or by a Senior Loan Officer, the Executive Vice
President or the President up to $25,000. All other unsecured loans or loans
secured by non-real estate collateral must be approved by at least four members
of the Bank's Board of Directors.
The Bank generally requires appraisals on all real property securing
its loans and requires 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 Bank
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing its interest if the property is in a flood plain. The Bank
also generally requires private mortgage insurance for all residential mortgage
loans with Loan-to-Value Ratios of greater than 80%. The Bank does not require
escrow accounts for insurance premiums or taxes.
The Bank's 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 Bank occasionally purchases participations in commercial loans,
nonresidential real estate and multi-family loans from other financial
institutions. At December 31, 1997, the Bank held in its loan portfolio
participations in commercial loans aggregating approximately $343,000 that it
had purchased, all of which were serviced by others. The Bank generally does not
sell participations in any loans that it originates.
The following table shows loan origination and repayment activity for
the Bank during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
Loans Originated:
<S> <C> <C> <C>
Residential real estate loans (1).................... $28,123 $12,452 $ 8,023
Multi-family loans................................... --- 1,032 ---
Construction loans................................... 5,740 782 3,027
Non-residential real estate loans.................... 3,516 1,095 1,805
Land loans........................................... 3,473 391 333
Consumer loans....................................... 8,276 2,896 2,412
Commercial loans..................................... 4,489 --- ---
-------- ------- --------
Total loans originated........................... 53,617 18,648 15,600
Loans acquired through merger........................ --- 49,620 ---
Reductions:
Sales................................................ 6,930 --- ---
Principal loan repayments............................ 43,220 17,114 13,708
Transfers from loans to real estate owned............ 81 --- ---
-------- ------- --------
Total reductions................................. 50,231 17,114 13,708
Decrease in other items (2).......................... (377) (105) (234)
-------- ------- --------
Net increase ........................................ $ 3,009 $51,049 $ 1,658
======== ======= ========
</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.
Origination and Other Fees. The Bank 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.
<PAGE>
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are
placed on a non-accrual status when management determines that the
collectibility 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. The Bank 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 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
Bank's policy to recognize losses on these loans as soon as they become
apparent.
Non-performing Assets. At December 31, 1997, $718,000, or .52% of the
Bank's total assets, were non-performing loans and non-accruing loans compared
to $819,000, or .56%, of the Bank's total assets at December 31, 1996. At
December 31, 1997, residential loans and consumer loans accounted for $431,000
and $152,000, respectively, of non-performing assets. The Bank had REO in the
amount of $82,000 at December 31, 1997.
The table below sets forth the amounts and categories of the Bank'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 Bank 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,
1997 1996 1995
----- ------ ------
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-performing loans.................. $718 $819 $ 8
Troubled debt restructurings.......... --- --- ---
---- ---- ---
Total non-performing loans.......... 718 819 8
Foreclosed real estate................ 82 --- ---
---- ---- ---
Total non-performing assets......... $800 $819 $ 8
==== ==== ===
Non-performing loans to total loans...... .64% 0.73% 0.01%
==== ==== ===
Non-performing assets to total assets.... .58% 0.56% 0.01%
==== ==== ===
</TABLE>
At December 31, 1997, the Bank held loans delinquent from 30 to 89 days
totalling $4.1 million. Other than in connection with these loans and other
delinquent loans disclosed in this section, management was not aware of any
other borrowers who 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, 1997, 1996 and 1995, relating to delinquencies in the Bank's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
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
-------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Residential real
<S> <C> <C> <C> <C> <C> <C> <C> <C>
estate loans............ 16 $673 12 $431 13 $415 9 $430
Multi-family loans......... --- --- --- --- --- --- --- ---
Construction loans......... --- --- --- --- --- --- --- ---
Land loans................. --- --- 2 107 --- --- --- ---
Non-residential
real estate loans....... --- --- --- --- --- --- --- ---
Consumer loans............. 24 160 22 152 25 116 18 72
Commercial loans........... 2 113 1 28 8 86 6 317
- --- - -- - -- - ---
Total................... 42 $946 37 $718 46 $617 33 $819
== ==== == ==== == ==== == ====
Delinquent loans to
total loans............. 1.47% 1.29%
==== ====
</TABLE>
At December 31, 1995
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.......... 5 $102 1 ---
Multi-family loans....... --- --- --- ---
Construction loans....... --- --- --- ---
Land loans............... --- --- --- ---
Non-residential
real estate loans..... 1 23 --- ---
Consumer loans........... 1 3 4 7
Commercial loans......... --- --- --- ---
Total................. 7 $128 5 $ 8
= ==== = ====
Delinquent loans to
total loans........... 0.23%
====
<PAGE>
Classified assets. Federal regulations and the Bank's Asset
Classification Policy 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 Bank 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 OTS, which can order the establishment of
additional general or specific loss allowances.
<PAGE>
At December 31, 1997, the aggregate amount of the Bank's classified
assets and general and specific loss allowances were as follows:
At December 31, 1997
(In thousands)
Substandard assets......................... $ 1,097
Doubtful assets............................ ---
Loss assets................................ 23
------
Total classified assets................ $1,120
======
General loss allowances.................... $1,137
Specific loss allowances................... 23
------
Total allowances....................... $1,160
======
The Bank regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
of the Bank's 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 Bank'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 Bank's allowance for loan losses is adequate to absorb probable
losses from loans at December 31, 1997. However, there can be no assurance that
regulators, when reviewing the Bank'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 Bank's loan portfolio.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the five years ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $1,074 $ 407 $252 $227 $262
Charge-offs:
Single-family residential................... --- --- --- --- (75)
Consumer.................................... (254) (3) --- (4) (25)
Commercial.................................. (15) --- --- --- ---
------ ------ ---- ---- ----
Total charge-offs......................... (269) (3) --- (4) (100)
Recoveries....................................... 51 --- 5 --- 10
------ ------ ---- ---- ----
Net (charge-offs) recoveries.................. (218) (3) 5 (4) (90)
Provision for losses on loans.................... 304 22 150 29 55
Increase due to Acquisition...................... --- 648 --- --- ---
------ ------ ---- ---- ----
Balance at end of period...................... $1,160 $1,074 $407 $252 $227
===== ===== ==== ===== =====
Allowance for loan losses as a percent of
total loans outstanding....................... 1.04% 0.99% 0.70% 0.45% 0.44%
===== ===== ==== ===== =====
Ratio of net (charge-offs) recoveries to average
loans outstanding............................. (0.20)% (0.01)% 0.01% (0.01)% (0.17)%
===== ===== ==== ===== =====
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Bank's allowance for loans losses at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
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)
Balance at end of
period applicable to:
<S> <C> <C> <C> <C> <C> <C>
Residential real estate............ $ 11 69.4% $ 414 68.9% $157 81.6%
Nonresidential real estate......... --- 13.0 264 13.4 100 12.7
Consumer loans..................... 12 13.3 132 11.9 50 5.7
Commercial loans................... --- 4.3 200 5.8 --- ---
Unallocated........................ 1,137 --- 64 --- 100 ---
----- -- ---
Total............................ $1,160 100.0% $1,074 100.0% $407 100.0%
====== ===== ====== ===== ==== =====
</TABLE>
Investments and Mortgage-Backed Securities
Investments. The Bank's investment portfolio consists of U.S.
government and agency obligations, municipal securities, and Federal Home Loan
Bank ("FHLB") stock. At December 31, 1997, approximately $5.2 million, or 3.8%,
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 Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Held to Maturity:
U.S. Government and
<S> <C> <C> <C> <C> <C> <C>
agency obligations............... $3,500 $3,444 $5,500 $5,434 $ 8,000 $ 7,930
Available for Sale:
U.S. Government and
agency obligations............... 498 494 2,997 2,980 5,000 5,018
Muncipal securities................ 276 278 474 468 --- ---
FHLB stock............................ 943 943 943 943 610 610
FRB stock............................. --- --- 80 80 --- ---
Total available for sale........... 1,717 1,715 4,494 4,471 5,610 5,628
----- ----- ----- ----- ----- -----
Total investments................ $5,217 $5,159 $9,994 $9,905 $13,610 $13,558
====== ====== ====== ====== ======= =======
</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,
1997.
<TABLE>
<CAPTION>
Amount at December 31, 1997 which matures in
One Year One Year Five Years After
or Less to Five Years to Ten Years Ten Years
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency obligations.......... $2,500 5.26% $1,498 5.29% $ --- ---% $--- ---%
Municipal securities............................ --- --- --- --- 276 4.63 --- ---
</TABLE>
Mortgage-Backed Securities. The Bank 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 Bank to receive a
portion of the cash flows from an identified pool of mortgages and gives the
Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are
each guaranteed by its respective agencies as to principal and interest. Except
for an $18,000 investment in collateralized mortgage obligations, the Bank does
not invest in any derivative products.
Although mortgage-backed securities generally yield less than
individual loans originated by the Bank, 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 Bank'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.
<PAGE>
In addition, the Bank 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 Bank is subject to prepayment risk on such
adjustable rate mortgage-backed securities. The Bank 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 Bank 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, 1997, the Bank had $9.0 million of mortgage-backed
securities outstanding, $5.4 million of which were classified as held to
maturity, and $3.6 million of which were classified as available for 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 Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
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....................... $5,374 $5,432 $ 7,805 $ 7,794 $9,917 $9,941
Available for Sale:
Government
agency securities................ 3,023 2,992 4,466 4,439 --- ---
Collateralized mortgage
obligations...................... 627 612 628 602 --- ---
------ ------ ------- ------- ------ ------
Total mortgage-backed
securities................... $9,024 $9,036 $12,899 $12,835 $9,917 $9,941
====== ====== ======= ======= ====== ======
</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, 1997.
<TABLE>
<CAPTION>
Amount at December 31, 1997 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............................. $981 4.75% $2,308 6.05% $2,085 7.47%
Mortgage-backed securities
available for sale........................... --- --- 565 6.67 3,085 6.86
Total...................................... $981 $2,873 $5,170
</TABLE>
<PAGE>
The following table sets forth the changes in the Bank's
mortgage-backed securities portfolio for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance.......................... $12,846 $ 9,917 $11,328
Purchases.................................. 1,350 729 ---
Sales .................................... (2,150) --- ---
Repayments................................. (3,072) (2,110) (1,417)
Premium and discount
amortization, net....................... (1) 2 6
Mortgage-backed securities
received in Acquisition................. --- 4,312 ---
Unrealized gains (losses) on securities
available for sale...................... 5 (4) ---
------ ------- --------
Ending balance............................. $8,978 $12,846 $ 9,917
====== ======= ========
</TABLE>
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Bank 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.
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 Bank does not actively
solicit or advertise for deposits outside of Jefferson County. Substantially all
of the Bank'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 Bank does
not pay a fee for any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank 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 Bank 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 Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its NOW and MMDAs are relatively stable
sources of deposits. However, the ability of the Bank 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.
<PAGE>
An analysis of the Bank's deposit accounts by type, maturity and rate at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1997 Deposits Rate
- --------------- ---------- ------------- --------- ----------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Non-interest bearing accounts.............................. $ 100 $ 5,628 4.9% ---%
Passbook accounts.......................................... 10 21,411 18.7 3.42
MMDA...................................................... 100 8,257 7.2 2.93
NOW accounts............................................... 100 15,424 13.4 2.57
Total withdrawable....................................... 50,720 44.2 2.70
-------- ----- ----
Certificates (original terms):
I.R.A...................................................... 100 7,747 6.7 5.88
3 months................................................... 2,500 684 .6 4.24
6 months................................................... 500 6,324 5.5 4.96
9 months................................................... 500 1,132 1.0 5.20
12 months.................................................. 500 8,792 7.6 5.19
15 months.................................................. 500 18,159 15.8 5.75
18 months.................................................. 500 1,525 1.3 5.26
24 months.................................................. 500 618 .5 5.40
30 months ................................................. 500 4,935 4.3 5.64
36 months.................................................. 500 2,836 2.5 7.17
48 months.................................................. 500 758 .7 6.17
60 months.................................................. 500 2,902 2.5 5.75
72 months ................................................. 500 --- --- ---
96 months.................................................. 500 --- --- ---
120 months................................................. 500 --- --- ---
Jumbo certificates............................................ 99,000 7,823 6.8 5.45
-------- ----- ----
Total certificates......................................... 64,235 55.8 5.60
-------- ----- ----
Total deposits................................................ $114,955 100.0% 4.32%
======== ===== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At December 31,
1997 1996 1995
------------------------------------------
(In thousands)
4.00 to 4.99%........ $13,016 $11,647 $ 98
5.00 to 5.99%........ 36,010 41,560 30,116
6.00 to 6.99%........ 12,312 11,144 10,731
7.00 to 7.99%........ 2,896 2,923 232
8.00 to 8.99%........ 1 1 ---
------- ------- -------
Total............. $64,235 $67,275 $41,177
======= ======= =======
<PAGE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1997. Matured certificates, which have not been renewed as of
December 31, 1997, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at December 31, 1997
One Year Two Three Greater Than
or Less Years Years Three Years
(In thousands)
<C> <C> <C> <C> <C>
4.00 to 4.99%.................. $13,012 $ 2 $ 2 $ 2
5.00 to 5.99%.................. 26,091 5,740 1,233 1,411
6.00 to 6.99%.................. 3,872 8,705 1,258 ---
7.00 to 7.99%.................. 2,866 20 10 10
8.00 to 8.99%.................. 1 --- --- ---
------- ------- ------ ------
Total....................... $45,842 $14,467 $2,503 $1,423
======= ======= ====== ======
</TABLE>
The following table indicates the amount of the Bank's jumbo and other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1997.
At December 31, 1997
Maturity Period (In thousands)
Three months or less................................... $ 418
Greater than three months through six months........... 2,042
Greater than six months through twelve months.......... 4,200
Over twelve months..................................... 1,140
-----
Total............................................. $7,800
======
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposits offered by the Bank 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
1997 Deposits 1996 1996 Deposits 1995
---------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts................. $ 5,628 4.9% $ (323) $ 5,951 4.7% $5,951
Passbook accounts............................. 21,411 18.7 (307) 21,718 17.3 3,807
MMDA.......................................... 8,257 7.2 (1,366) 9,623 7.7 2,482
NOW accounts.................................. 15,424 13.4 (5,665) 21,089 16.8 12,085
-------- ----- -------- -------- ----- -------
Total withdrawable.......................... 50,720 44.2 (7,661) 58,381 46.5 24,325
Certificates (original terms):
I.R.A......................................... 7,747 6.7 (336) 8,083 6.4 2,300
3 months...................................... 684 .6 477 207 .2 112
6 months...................................... 6,324 5.5 36 6,288 5.0 900
9 months...................................... 1,132 1.0 (36) 1,168 .9 1,168
12 months..................................... 8,792 7.6 (9,211) 18,003 14.4 10,657
15 months..................................... 18,159 15.8 11,912 6,247 5.0 277
18 months..................................... 1,525 1.3 (1,687) 3,212 2.6 (73)
24 months..................................... 618 .5 (187) 805 .6 805
30 months .................................... 4,935 4.3 (2,000) 6,935 5.5 1,669
36 months..................................... 2,836 2.5 62 2,774 2.2 2,774
48 months..................................... 758 .7 (53) 811 .6 755
60 months..................................... 2,902 2.5 (496) 3,398 2.7 349
72 months .................................... --- --- (10) 10 --- ---
96 months..................................... --- --- (155) 155 .1 (10)
120 months.................................... --- --- (4) 4 --- ---
Jumbo certificates............................... 7,823 6.8 (1,352) 9,175 7.3 4,415
-------- ----- -------- -------- ----- -------
Total certificates............................ 64,235 55.8 (3,040) 67,275 53.5 26,098
-------- ----- -------- -------- ----- -------
Total deposits................................... $114,955 100.0% $(10,701) $125,656 100.0% $50,423
======== ===== ======== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance
at (Decrease) at
December 31, % of from December 31, % of
1995 Deposits 1994 1994 Deposits
----------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C>
Passbook accounts............................. $17,911 23.8% $(1,518) $19,429 25.8%
MMDA.......................................... 7,141 9.5 (511) 7,652 10.1
NOW accounts.................................. 7,941 10.6 529 7,412 9.8
Super NOW accounts............................ 1,063 1.4 332 731 1.0
------- ----- -------- ------- -----
Total withdrawable.......................... 34,056 45.3 (1,168) 35,225 46.7
Certificates (original terms):
I.R.A......................................... 5,783 7.7 (293) 6,076 8.1
3 months...................................... 95 0.1 (348) 443 0.6
6 months...................................... 5,388 7.1 (2,086) 7,474 9.9
9 months...................................... --- --- --- --- ---
12 months..................................... 7,346 9.8 (1,473) 8,819 11.7
15 months..................................... 5,970 7.9 5,970 --- ---
18 months..................................... 3,285 4.4 840 2,445 3.2
24 months..................................... --- --- --- --- ---
30 months .................................... --- --- --- 6,068 8.0
36 months..................................... 5,266 7.0 (802) --- ---
48 months..................................... 56 0.1 --- 56 0.1
60 months..................................... 3,049 4.1 (305) 3,354 4.4
72 months .................................... 10 --- --- 10 ---
96 months..................................... 165 0.2 (35) 200 0.3
120 months.................................... 4 --- (7) 11 ---
Jumbo certificates............................... 4,760 6.3 (517) 5,277 7.0
------- ----- -------- ------- -----
Total certificates............................ 41,177 54.7 944 40,233 53.3
------- ----- -------- ------- -----
Total deposits................................... $75,233 100.0% $ (224) $75,458 100.0%
======= ===== ======== ======= =====
</TABLE>
<PAGE>
Borrowings. The Bank focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings. At
December 31, 1997, the Bank had $2.0 million in borrowings from the FHLB of
Indianapolis. The Bank 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 Bank's
borrowings at or for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
1997 1996 1995
-------------------------------------------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period....................... $2,000 $1,100 $4,471
Average balance outstanding for period............. 2,244 1,221 2,967
Maximum amount outstanding at any
month-end during the period...................... 5,000 2,000 4,471
Weighted average interest rate
during the period................................ 6.02% 5.16% 5.90%
Weighted average interest rate
at end of period................................. 6.12% 7.35% 5.76%
</TABLE>
Service Corporation Subsidiaries
Prior to the Acquisition and Conversion, the Bank 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 Bank 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 the Bank was required to divest its ownership of McCauley.
On December 17, 1996, the Bank sold McCauley to the Madison Insurance Agency,
Inc. for a gain of $141,000. The Bank continues to hold First Service which
currently holds rental property but does not otherwise engage in significant
business activities.
The historic consolidated statements of earnings of the Bank and its
subsidiaries included elsewhere herein include the operations of First Service
and McCauley for the periods prior to the Holding Company's divestment of its
ownership of McCauley. All intercompany balances and transactions have been
eliminated in the consolidation.
Employees
As of December 31, 1997, the Bank employed 56 persons on a full-time
basis and 7 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.
<PAGE>
COMPETITION
The Bank originates most of its loans to and accepts most of its
deposits from residents of Jefferson County, Indiana. The Bank is 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
and which have significantly larger resources available to them than does the
Bank. In total, there are 10 financial institutions located in Jefferson County,
Indiana, including the Bank. The Bank also competes with money market funds with
respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes 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
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the FDIC. For example, the Bank
must obtain OTS approval before it may engage in certain activities and must
file reports with the OTS regarding its activities and financial condition. The
OTS periodically examines the Bank's books and records and, in conjunction with
the FDIC in certain situations, has examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and the federal deposit insurance funds. The Bank's semi-annual
assessment owed to the OTS, which is based upon a specified percentage of
assets, is approximately $12,000.
The Bank 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
its securities, and limitations upon other aspects of banking operations. In
addition, the Bank's activities and operations 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 the Bank, to convert either to
a national bank or a state-chartered bank by a specified date to be determined.
In addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions 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 what its effect
may be on the Holding Company and the Bank.
Savings and Loan Holding Company Regulation
As the holding company for the Bank, the Holding Company is regulated
as a "non-diversified savings and loan holding company" within the meaning of
the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory
oversight of the Director of the OTS. As such, the Holding Company is registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Holding
Company and with other companies affiliated with the Holding Company.
<PAGE>
In general, the HOLA prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from acquiring control of
another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company's Board of Directors operates the Holding Company
as a unitary savings and loan holding company. There are generally no
restrictions on the permissible business activities of a unitary savings and
loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At December 31, 1997, the Bank's asset composition was in excess
of that required to qualify as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS before a multiple holding
company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
<PAGE>
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
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board, an independent
agency, controls the FHLB System, including the FHLB of Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At December 31, 1997, the Bank's investment in stock
of the FHLB of Indianapolis was $943,000. The FHLB imposes various limitations
on advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. For the fiscal year ended December 31, 1997, dividends paid by the FHLB
of Indianapolis to the Bank totaled approximately $76,000, for an annual rate of
8.1%.
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
and state savings banks and the SAIF for savings associations such as the Bank,
and for 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
had 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.
<PAGE>
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 these rates if the 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. An institution's risk level is
determined based on its 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,
the Bank was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. The Bank recognized this one-time
assessment as a non-recurring operating expense during the three-month period
ending September 30, 1996, and paid this assessment on November 27, 1996. The
assessment was fully deductible for both federal and state income tax purposes.
Beginning January 1, 1997, the Bank's annual deposit insurance premium was
reduced from .23% to .0644% of total assessable deposits. BIF institutions pay
lower assessments than comparable SAIF institutions because BIF institutions pay
only 20% of the rate paid by SAIF institutions on their deposits with respect to
obligations issued by the federally-chartered corporation which provided some of
the financing to resolve the thrift crisis in the 1980's ("FICO"). The 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. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
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 shareholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) 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 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%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At December 31, 1997, the Bank was in compliance with all
capital requirements imposed by law.
<PAGE>
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with either "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) to maintain additional capital for interest rate risk
under the risk-based capital framework. If the OTS were to implement this
regulation, the Bank would be exempt from its provisions because it has less
than $300 million in assets and its risk-based capital ratio exceeds 12%. The
Bank nevertheless measures its interest rate risk in conformity with the OTS
regulation and, as of September 30, 1997 would not have been required to deduct
any amounts from its total capital available to calculate its risk-based capital
requirement.
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. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities 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,
1997, the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association 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 associations. 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 association that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in 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." The Bank currently is
a Tier 1 Institution.
<PAGE>
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
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, 1997, the Bank had available approximately $4.3
million for distribution, without consideration of the restrictions on its
capital distributions as a result of the establishment of a liquidation account
in connection with the Conversion. See "The Conversion --Effect on Liquidation
Rights."
The OTS has proposed revisions to these regulations which would permit
a savings association, without filing a prior notice or application with the
OTS, to make a capital distribution to its shareholders in a maximum amount that
does not exceed the association's undistributed net income for the prior two
years plus the amount of its undistributed income from the current year. This
proposed rule would require a savings association, such as the Bank, that is a
subsidiary of a savings and loan holding company to file a notice with the OTS
before making a capital distribution up to the "maximum amount" described above.
The proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for expedited
processing under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
Pursuant to the Plan of Conversion, the Bank has established a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The Bank will not be permitted to pay dividends to the
Holding Company if its net worth would be reduced below the amount required for
the liquidation account. The Bank must also must file a notice with the OTS 30
days before declaring a dividend to the Holding Company.
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 the
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. Management
does not believe that these regulations will have a materially adverse effect on
the Bank's current operations.
Liquidity
Federal law requires that savings associations maintain an average
daily balance of liquid assets in an amount not less than 4% or more than 10% of
their withdrawable accounts 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. The OTS recently
amended its regulation that implements this statutory liquidity requirement to
reduce the amount of liquid assets a savings association must hold from 5% of
net withdrawable accounts and short-term borrowings to 4%. The OTS also
eliminated the requirement that savings associations maintain short-term liquid
assets constituting at least 1% of their average daily balance of net
<PAGE>
withdrawable deposit accounts and current borrowings. The revised OTS rule also
permits savings associations to calculate compliance with the liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month, as was required under the prior rule. The
OTS may impose monetary penalties on savings associations that fail to meet
these liquidity requirements. As of December 31, 1997, the Bank had liquid
assets of $5.8 million, and a regulatory liquidity ratio of 19.9%.
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. On August 27, 1996, the federal banking agencies added asset
quality and earning standards 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.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its 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. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 1997, the
Bank did not have any loans or extensions of credit to a single or related group
of borrowers in excess of its lending limits. Management does not believe that
the loans-to-one-borrower limits will have a significant impact on the Bank's
business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If the Bank maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, it will continue to
enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
<PAGE>
every twelve months. As of December 31, 1997, the Bank was in compliance with
its QTL requirement, with approximately 91% of its portfolio assets invested in
QTIs.
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 the 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 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).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
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. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, 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 enacted legislation 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, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal basis. The Indiana Branching
Law became effective March 15, 1996.
<PAGE>
Transactions with Affiliates
The Bank is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between financial
institutions and affiliated companies. The statute limits credit transactions
between a bank or savings association and its executive officers and its
affiliates, prescribes terms and conditions deemed to be consistent with safe
and sound banking practices for transactions between a financial institution and
its affiliates, and restricts the types of collateral security permitted in
connection with a financial institution's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been 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 the Bank'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 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 those 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.
Community Reinvestment Act Matters
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 an
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 OTS has designated the Bank's record of meeting community credit
needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as the Bank, 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, the Bank can no longer use the percentage of taxable income
method of computing its allowable tax bad debt deduction and instead must
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) the Bank no
longer qualifies as a bank under the Code, or (ii) excess dividends or
distributions are paid out by the Bank.
<PAGE>
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, the Bank has been reporting its income
and expenses on the accrual method of accounting. The Bank's federal income tax
returns have not been audited in recent years.
The Holding Company and the Bank do not anticipate electing to file a
consolidated federal income tax return for 1997. Accordingly, the Bank will be
taxed separately on its earnings.
The Holding Company is taxed as an ordinary corporation.
State Taxation
The Bank and the Holding Company are subject to Indiana's Financial
Bank 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. The Bank's state income tax returns have not
been audited in recent years.
Current Accounting Issues
In June 1996, the FASB issued 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, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on its 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.
<PAGE>
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 the Holding Company's consolidated
financial position or results of operations.
In June 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. SFAS No. 130 is not expected to
have a material impact on the Holding Company's consolidated financial
statements.
In June 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 Holding Company's consolidated financial statements.
<PAGE>
Item 2. Properties.
The following table provides certain information with respect to the
Bank's offices as of December 31, 1997.
<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 $372 9,110
307 W. Main Street.................. 1986 20 1,500
Drive-Through Branch:
401 E. Main Street.................. 1984 73 375
Hilltop Locations:
303 Clifty Drive.................... 1973 620 3,250
430 Clifty Drive.................... 1983 349 6,084
Wal-mart Banking Center
567 Ivy Tech Drive.................. 1995 158 517
Locations in Hanover, Indiana (1)
10 Medical Plaza Drive.............. 1995 380 656
</TABLE>
(1) As a condition to obtaining regulatory aproval for the Acquisition from the
FRB, the Bank commited itself to divest its former branch located at 136
Thornton Road in Hanover. Pursuant to this commitment, the Bank sold this
branch to Peoples's Trust Company based in Brookville, Indiana on February
28, 1997.
The following table provides certain information with respect to real
estate owned by the Bank and rented to other entities as of December 31, 1997.
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 the Bank 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
The Bank owns 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 Bank was approximately
$443,000 at December 31, 1997.
The Bank operates six automated teller machines ("ATMs"), one at each
office location other than its locations at 233 E. Main Street and 307 W. Main
Street, and one at Hanover College. The Bank's ATMs participate in the MAC(R)
and MagicLine(R) networks.
Prior to the effective date of the Merger, the Bank had contracted for
the data processing and reporting services of BISYS, Inc. in Houston, Texas.
Following the Merger, the Bank performs these services in-house.
<PAGE>
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to the Holding
Company's or the Bank's 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, 1997.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Bank are identified below. The executive
officers of the Bank are elected annually by the Holding Company's Board of
Directors.
Position with Position with
Name Bank First Federal
---- ---- -------------
James E. Fritz President and Chief President and Chief
Executive Officer Executive Officer
Lonnie D. Collins Secretary Secretary
Larry C. Fouse Controller Controller
James E. Fritz (age 35) has served as The Bank's President and Chief
Executive Officer since August, 1995, as the Holding Company's President and
Chief Executive Officer since 1996. Prior to that Mr. Fritz served as the Chief
Financial Officer of the First Federal Savings Bank of Kokomo until January,
1995, and as a consultant to National City Corporation from January, 1995 to
August, 1995.
Lonnie D. Collins (age 49) has served as Secretary of the Bank 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 The Bank's outside
counsel since 1980.
Larry C. Fouse (age 52) has served as the Holding Company's Controller
since 1997. From 1993 to 1997, he served as the Chief Financial Officer and
Controller of Citizens, and from 1989 to 1993, served as Citizens' Vice
President and Operations Officer.
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's shares began to trade on December 20, 1996. The high and low bid
prices for the 1997 fiscal year were $19.00 and $13.00, 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 directly depends upon the ability of the Bank to pay dividends
to the Holding Company 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 the Bank (as calculated for federal income
tax purposes), will be taxable as ordinary income to the Holding Company and
will not be deductible by the Bank. Because the Holding Company and the Bank 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 the
Bank's accumulated bad debt reserves, which could result in increased federal
income tax liability for the Bank. Moreover, the Bank 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.
<PAGE>
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 the Bank. 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 Bank's financial
condition. 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 Bank paid dividends to its shareholders in 1997 in the amount of
$.13 per outstanding share of common stock.
Item 6. Selected Consolidated Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data" on pages 4
and 5 of the Holding Company's 1997 Shareholder Annual Report (the "Shareholder
Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to
pages 6 through 21 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Analysis of Financial Condition and
Results of Operation.
An important component of the Bank's asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on its net
portfolio value. An asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
the Bank's assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates. Conversely, if the Bank's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio value
and net interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates. The Bank's policy
has been to mitigate the interest rate risk inherent in the historical business
of savings associations, the origination of long-term loans funded by short-term
deposits, by pursuing certain strategies designed to decrease the vulnerability
of its earnings to material and prolonged changes in interest rates.
A key component of the Bank's strategy in managing interest rate risk
is to emphasize the origination of adjustable rate mortgage loans. As of
December 31, 1997, approximately 81% of the Bank's portfolio of one- to
four-family mortgage loans had adjustable rates.
Management believes it is critical to manage the relationship between
interest rates and the effect on the Bank's net portfolio value ("NPV"). This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. The Bank manages assets
and liabilities within the context of the marketplace, regulatory limitations
and within limits established by its Board of Directors on the amount of change
in NPV which is acceptable given certain interest rate changes.
The following table presents an analysis prepared by Baxter Capital
Management ("BCM"), the Bank's investment advisors, of the Bank's interest rate
risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve up and down 300 basis points, as of September 30,
1997. To estimate the NPV of mortgage loans and mortgage-backed securities, the
BCM model utilizes various price indications and prepayment rates. On September
<PAGE>
30, 1997, these price indications varied from 104.92 to 94.60 for fixed-rate
mortgage loans and mortgage-backed securities and varied from 103.51 to 94.84
for adjustable-rate mortgage loans and mortgage-backed securities. Prepayment
rates ranged from 36.34 to 8.84 for fixed-rate mortgage loans and mortgage
backed securities and ranged from 18.7% to 8.6% for adjustable-rate mortgage
loans and mortgage-backed securities.
To estimate the NPV of certificates of deposit ("CD's"), the BCM model
utilizes price indications given specific information about the CD's yield,
remaining maturity and compounding. On September 30, 1997, price indications
varied from 102.27 to 98.06 for CD's.
To estimate price indications of savings deposit accounts with no
specific maturity, the BCM model utilizes a regression model of consumer
responses to spreads between market rates and deposit rates and a regression
model of institutional deposit rate responses to market rates. On September 30,
1997, money market deposit account price indications varied from 97.78 to 90.88.
Passbook account price indications varied from 105.06 to 91.07 while
transactions account price indications varied from 103.87 to 84.16.
<TABLE>
<CAPTION>
CHANGE IN TREASURY CURVEPAR AMT
ASSET/LIABILITY TYPE -300 BP 0 BP +300 BP (000)
<S> <C> <C> <C> <C> <C>
FIXED RATE MORTGAGE LNS & PRICE INDICATION 104.92 101.10 94.60 43,589
MORTGAGE-BACKED SECS AVG PREPAYMENT CPR 36.3 15.3 8.8
ADJUSTABLE RATE MORTGAGE LNS & PRICE INDICATION 103.51 99.96 94.84 74,802
MORTGAGE-BACKED SECS AVG PREPAYMENT CPR 18.7 11.5 8.6
CERTIFICATES OF DEPOSIT PRICE INDICATION 102.27 100.10 98.06 63,584
MONEY MARKET DEPOSIT ACCOUNTS PRICE INDICATION 97.78 92.80 90.88 8,508
PASSBOOK ACCOUNTS PRICE INDICATION 105.06 95.40 91.07 21,211
TRANSACTIONS ACCOUNTS PRICE INDICATION 103.87 93.21 84.16 21,907
</TABLE>
<TABLE>
<CAPTION>
NPV OF CHANGE NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
ASSETS IN RATE $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
<S> <C> <C> <C> <C> <C> <C>
131,211 +300 BP 17,624 -2,664 -13.1 13.43 -124 BP
138,250 0 BP 20,288 0 0 14.67 0 BP
142,879 -300 BP 18,716 -1,572 -7.7 13.10 -157 BP
</TABLE>
This chart illustrates, for example, that a 300 basis point (or 3%)
increase in interest rates would result in a $2.6 million (or 13.1%) decrease in
the net portfolio value of the Bank's assets. This hypothetical increase in
interest rates would also result in a 124 basis point (or 1.24%) decrease in the
ratio of the net portfolio value to the present value of the Bank's assets.
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.
<PAGE>
Senior management regularly monitors the Bank's interest rate risk
position and employs various strategies to control its exposure to interest rate
risk. The Bank's primary method of controlling market risk exposure is to
actively adjust the composition and pricing of its interest-earning assets and
interest-bearing liabilities.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes
thereto contained on pages 23 through 59 in the Shareholder Annual Report are
incorporated herein by reference.
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 required by this item with respect to directors is
incorporated by reference to pages 2 through 5 of the Holding Company's Proxy
Statement for its Annual Shareholder Meeting to be held April 27, 1998 (the"1998
Proxy Statement"). Information concerning the Registrant's executive officers is
included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 and 6 of the 1998 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 1 through 3 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
pages 6 through 8 of the 1998 Proxy Statement.
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:
Annual Report
Financial Statements Page No.
Independent Auditor's Report............................. 23
Consolidated Statements of Financial Condition
at December 31, 1997, and 1996........................... 24-25
Consolidated Statements of Earnings for the
Years Ended December 31, 1997, 1996, and 1995............ 26
Consolidated Statements of Changes
in Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995........................ 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995.................. 28-29
Notes to Consolidated Financial Statements............... 30-59
<PAGE>
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1997.
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index on page E-1.
(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, 1998 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, 1998.
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/ Larry C. Fouse Treasurer )
Larry C. Fouse )
)
) March 31, 1998
)
(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 )
)
)
/s/ James E. Fritz )
James E. Fritz Director )
)
)
/s/ Michael J. Hensley Director )
Michael J. Hensley )
)
)
/s/ Earl W. Johann Director ) March 31, 1998
Earl W. Johann )
)
)
/s/ Fred W. Koehler Director )
Fred W. Koehler )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
2 Plan of Acquisition, Reorganizaztion, Arrangment,
Liquidation or Succession
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 Amended Code of By-Laws are included as
Exhibit 3(2) hereto.
10(5) Employment Agreement between River Valley Financial
Bank, as successor to 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 River Valley Financial
Bank, as successor to 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
(18) Special Termination Agreement between River Valley
Financial Bank, as successor to Madison First
Federal Savings and Loan Association and Robert W.
Anger is incorporated by reference to Exhibit 10(18)
to the Registration Statement
(20) Special Termination Agreement between River Valley
Financial Bank, as successor to Citizens National
Bank of Madison and Larry Fouse is incorporated by
reference to Exhibit 10(20) to the Registration
Statement
<PAGE>
(21) Special Termination Agreement between River Valley
Financial Bank, as successor to 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
(23) Special Termination Agreement between River Valley
Financial Bank, as successor to Citizens National
Bank of Madison and Robyne Hart
13 Shareholder Annual Report
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule (filed electronically)
27.2 Restated Financial Data Schedule (1996)
(filed electronically)
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION, dated as of September 26,
1997, is made by and among River Valley Bancorp ("RVB"), a unitary savings and
loan holding company and a bank holding company, Madison First Federal Savings
and Loan Association, a federal savings and loan association ("First Federal"),
and Citizens National Bank of Madison, a national banking association ("CNB").
WITNESSETH:
WHEREAS, RVB, First Federal and CNB have agreed to the merger of CNB
into First Federal in accordance with federal law on the terms and subject to
the conditions set forth herein (the "Merger");
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby; and
WHEREAS, the Boards of Directors of RVB, First Federal and CNB have
determined that the Merger, upon the terms and conditions of this Agreement,
will be in the best interests of the parties hereto and their respective
shareholders.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereby agree as follows:
ARTICLE I
Merger
Section 1.01. Surviving Bank. At the Effective Time (as defined in
Section 4.02 hereof), CNB shall be merged with and into First Federal, which
shall be the surviving bank of the Merger and which shall change its name to
"River Valley Financial Bank" at the time of the Merger (the "Surviving Bank").
At the Effective Time, the identity and separate existence of CNB shall cease
and all of the rights, privileges, powers, purchases, properties and assets of
CNB shall be vested in First Federal in accordance with the provisions of
federal law. The home office and branch offices of First Federal in existence
immediately prior to the Effective Time shall continue to be the home office and
branch offices, respectively, of First Federal from and after the Effective
Time, and the home office and branch offices of CNB shall become the branch
offices of First Federal from and after the Effective Time.
Section 1.02. Conversion of CNB Common. Subject to the fulfillment of
the conditions set forth in Article IV at the Effective Time and subject to the
exercise of dissenters' rights as provided in Section 1.09 hereof, (1) each
outstanding share of common stock, $8.00 par value per share, of
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CNB ("CNB Common") held by shareholders of CNB other than RVB or its
subsidiaries ("Minority CNB Common") shall be converted into the right to
receive $30.00 in cash, payable by RVB (the "Merger Consideration"), and (2)
each of the shares of CNB Common held by RVB and its subsidiaries ("Majority CNB
Common") shall be cancelled.
Section 1.03. Charter; By-Laws. The Charter of First Federal as in
effect immediately prior to the Effective Time, shall thereafter be the Charter
of the Surviving Bank until amended in accordance with federal law; provided
that Section 1 of such Charter shall be amended as of the Effective Time to read
as follows:
"Corporate Title. The full corporate title of the association is River
Valley Financial Bank."
The By-Laws of First Federal as in effect immediately prior to the Effective
Time shall be the ByLaws of the Surviving Bank, until amended or repealed.
Section 1.04. Directors and Officers. The officers of First Federal and
of CNB immediately prior to the Effective Time listed on Exhibit A hereto shall
thereafter be the officers of the Surviving Bank, each to serve or hold office
until his successor shall have been duly appointed or elected and qualified in
accordance with the Charter and By-Laws of the Surviving Bank. The directors of
First Federal, immediately prior to the Effective Time, listed on Exhibit B
hereto shall thereafter be the directors of the Surviving Bank, each to serve or
hold office until his successor shall have been duly appointed or elected and
qualified in accordance with the Charter and By-Laws of the Surviving Bank. Upon
the Effective Time, Burton P. Chambers, Van E. Shelton and Ralph E. Storm shall
be elected advisory directors of the Surviving Bank, with annual terms to expire
one year after the Effective Time, and shall each be paid monthly advisory fees
of $125.00.
Section 1.05. Liquidation Account. The Surviving Bank will continue to
maintain the liquidation account or accounts established pursuant to First
Federal's conversion to the stock form of ownership on the same basis as in
effect immediately prior to the Effective Time.
Section 1.06. Deposits. All deposits of First Federal and of CNB shall,
upon the Effective Time, be and remain deposits of the Surviving Bank without
change in their respective terms, interest rates, maturities, minimum required
balances or withdrawal values.
Section 1.07. Exchange of Minority CNB Common.
(a) No later than five (5) business days after the Effective Time of
the Merger, holders of record of certificates formerly representing shares of
Minority CNB Common other than shares as to which the dissenters' rights
contemplated by Section 1.09 hereof are exercised ("Dissenting Shares") (the
"Certificates") shall be instructed to tender such Certificates to First
Federal, as Exchange Agent (the "Exchange Agent"), pursuant to a letter of
transmittal that RVB shall deliver
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or cause to be delivered to such holders. Such letters of transmittal shall
specify that risk of loss and title to Certificates shall pass only upon
delivery of such Certificates to the Exchange Agent.
(b) After the Effective Time of the Merger, each holder of a
Certificate that surrenders such Certificate to the Exchange Agent will, upon
acceptance thereof by RVB or the Exchange Agent, be entitled to receive the
Merger Consideration, which shall be paid promptly (but in no event later than
five business days) after acceptance of such Certificate. RVB or the Exchange
Agent, as the case may be, shall notify such holder of its acceptance or
non-acceptance of such Certificate within five (5) business days of its receipt
of such Certificate. Any notice of non-acceptance shall include a statement of
the reasons therefor.
(c) The Exchange Agent shall accept Certificates upon compliance with
such reasonable terms and conditions as RVB or the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with customary exchange
practices. Certificates shall be appropriately endorsed or accompanied by such
instruments of transfer as RVB or the Exchange Agent may require.
(d) After the Effective Time of the Merger, holders of Certificates for
outstanding shares of Minority CNB Common shall cease to have rights with
respect to the Minority CNB Common previously represented by such Certificates,
and their sole rights shall be to exchange such Certificates for the Merger
Consideration. After the Effective Time of the Merger, there shall be no further
transfer on the records of CNB of Certificates, and if such Certificates are
presented to CNB for transfer, they shall be canceled against delivery of the
Merger Consideration. RVB and the Exchange Agent shall not be obligated to
deliver the Merger Consideration to any holder of Minority CNB Common until such
holder surrenders the Certificates as provided herein. Neither the Exchange
Agent, nor any party to this Agreement, nor any affiliate thereof shall be
liable to any holder of Minority CNB Common represented by any Certificate for
any consideration paid to a public official pursuant to applicable abandoned
property, escheat or similar laws. RVB and the Exchange Agent shall be entitled
to rely upon the stock transfer books of CNB to establish the identity of those
persons entitled to receive consideration specified in this Agreement, which
books shall be conclusive with respect thereto. In the event of a dispute with
respect to ownership of stock represented by any Certificate, RVB and the
Exchange Agent shall be entitled to deposit any consideration in respect thereof
in escrow with an independent third party and thereafter be relieved with
respect to any claims thereto.
Section 1.08. No Conversion of RVB Shares or Majority CNB Common. None
of the issued and outstanding shares of common stock, without par value, of RVB
immediately prior to the Effective Time shall be converted or otherwise affected
by the Merger, and as of the Effective Time, all of such RVB shares shall remain
issued and outstanding shares of common stock of RVB.
Section 1.09. Dissenters' Rights. The parties hereto will comply with
their respective duties under the National Bank Act governing the exercise of
dissenters' rights by holders of CNB Common.
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ARTICLE II
Representations and Warranties
Section 2.01. Representations and Warranties of RVB and First Federal.
RVB and First Federal represent and warrant to CNB the following:
(i) Organization, Authority and Good Standing of RVB and First
Federal. RVB is a corporation duly organized and validly
existing under the laws of the State of Indiana, has all
requisite power and authority (corporate and other) to (i)
enter into this Agreement and to perform the obligations
hereunder and thereunder on its part to be performed and to
(ii) own, operate and lease its properties and conduct its
business as currently conducted. First Federal is a federal
savings bank validly existing under federal law, has all
requisite power and authority (corporate and other) to (i)
enter into this Agreement and to perform the obligations
hereunder and thereunder on its part to be performed and to
(ii) own, operate and lease its properties and conduct its
business as currently conducted.
(ii) Authorization. The execution and delivery of this Agreement,
and the performance by RVB and by First Federal of their
respective obligations hereunder, have been duly and validly
authorized by all necessary corporate actions, except that
RVB, as the sole shareholder of First Federal and as the
majority shareholder of CNB, must vote in favor of the Merger.
This Agreement has been duly executed and delivered by RVB and
First Federal and (assuming due authorization, execution and
delivery by CNB) constitutes a valid, binding and enforceable
obligation of RVB and First Federal, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors
rights generally, and subject, as to enforceability, to
general principles of equity. This Agreement, and the
transactions contemplated hereby, do not require any consent,
approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority
except as contemplated by Section 3.01(a) hereof.
(iii) RVB's Financial Statements. Each of the balance sheets
included in RVB's consolidated audited financial statements as
of December 31, 1996, which have been provided to CNB
(including the related notes and schedules) (the "RVB 1996
Financial Statements") fairly presents the financial position
of the entity or entities to which it relates as of its date
and each of the statements of earnings and of stockholders'
equity, and statements of cash flows in the RVB 1996 Financial
Statements fairly presents the results of operation, and
changes in equity capital, as the case may be, of RVB for the
periods set forth therein. The RVB 1996 Financial Statements
were prepared in accordance with generally accepted accounting
principles consistently applied, except as may be noted
therein. Except as set forth
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<PAGE>
in the RVB 1996 Financial Statements, RVB does not have any
indebtedness, obligation or liability (contingent or
otherwise) that, either alone or when combined with all
similar obligations or liabilities, would be material to RVB
taken as a whole, and there does not exist a set of
circumstances that, to the knowledge of RVB, could reasonably
be expected to result in any such material indebtedness,
obligation or liability. Since December 31, 1996, there has
not been any material adverse change in the business,
operations, prospects or financial condition of RVB other than
the previously reported charges resulting from the sale by
First Federal of its Hanover, Indiana branch.
Section 2.02. Representations and Warranties of CNB. CNB represents and
warrants to RVB and First Federal the following:
(i) Organization, Authority and Good Standing of CNB. CNB is a
national banking association duly organized and validly
existing under federal law, has all requisite power and
authority (corporate and other) to (i) enter into this
Agreement and to perform the obligations hereunder on its part
to be performed and to (ii) own, operate and lease its
properties and conduct its business as currently conducted.
(ii) Capital Stock. The authorized and issued capital stock of CNB
on the date of this Agreement consists of 200,000 and 177,654
shares of CNB Common, respectively. RVB is the record owner of
173,478 outstanding shares of CNB Common Stock and the
remaining 4,176 shares are owned by 126 shareholders of
record. Each issued and outstanding share of the capital stock
of CNB is duly and validly authorized and issued and is fully
paid and nonassessable and is not subject to any restriction
on transfer under the Articles of Association or By-Laws of
CNB. CNB has not issued or granted nor is it a party to any
outstanding warrants, options, rights, calls or commitments of
any kind relating to, or any presently effective agreements or
understandings with respect to, the capital stock of CNB.
CNB's capital stock is not subject to any preemptive right of
any shareholder.
(iii) Authorization. The execution and delivery of this Agreement,
and the performance by CNB of its obligations hereunder, has
been duly and validly authorized by all necessary corporate
action on its part, except that the Merger must be approved
and adopted by CNB's shareholders, as provided in Section 3.02
hereof. This Agreement has been duly executed and delivered by
CNB and (assuming due authorization, execution and delivery by
First Federal and RVB) constitutes a valid, binding and
enforceable obligation of CNB, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors
rights generally, and subject, as to enforceability, to
general principles of equity. This Agreement, and the
transactions contemplated hereby, do not require any consent,
approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority
except as contemplated by Section 3.01(a) hereof.
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<PAGE>
(iv) CNB's Financial Statements. Each of the balance sheets
included in CNB's Call Report filed with Office of the
Comptroller of the Currency as of December 31, 1996, which
have been provided to RVB (the "CNB 1996 Financial
Statements") fairly presents the financial position of the
entity to which it relates as of its date, and the results of
operation and changes in equity capital, as the case may be,
of the entity to which it relates for the periods set forth
therein. Except as set forth in the CNB 1996 Financial
Statements, CNB does not have any indebtedness, obligation or
liability (contingent or otherwise) that, either alone or when
combined with all similar obligations or liabilities, would be
material to CNB taken as a whole, and there does not exist a
set of circumstances that, to the knowledge of CNB, could
reasonably be expected to result in any such material
indebtedness, obligation or liability. Since December 31,
1996, there has not been any material adverse change in the
business, operations, prospects or financial condition of CNB.
ARTICLE III
Covenants
Section 3.01. Joint Covenants. Each of RVB, First Federal and CNB
covenants and agrees with the other as follows:
(a) Regulatory Approvals. It shall each use its best efforts,
separately and jointly with the other parties, in good faith to take or cause to
be taken all such steps as shall be necessary or advisable to obtain all
consents and approvals of governmental authorities as are required by law or
otherwise to effect the Merger, including without limitation the prior approval
of the Office of Thrift Supervision (the "OTS") and prior notification to the
Office of the Comptroller of the Currency (the "OCC"), and shall do any and all
acts and things reasonably necessary or advisable in order to cause the Merger
to be consummated on the terms provided in this Agreement as promptly as
practicable; provided, however, that RVB and First Federal shall have no
obligation to accept conditions or restrictions with respect to the aforesaid
approvals of governmental authorities if such conditions or restrictions would
have a material adverse effect on the business, operations, prospects or
financial condition of RVB or First Federal or would be materially burdensome to
RVB or First Federal; provided, further, that RVB or First Federal and CNB agree
to prepare jointly the required application for approval by the OTS; and
provided, further that the Merger shall not be effective unless and until the
Merger receives any necessary approval from the OTS.
(b) Consents. It will use its best efforts to obtain as promptly as
practicable (and in any event prior to the Closing (as hereinafter defined)) all
consents or waivers that may be required under any loan or other agreement or
document to which it or any of its subsidiaries is a party, or by which it or
any of its subsidiaries is bound, and such other consents as are necessary or
advisable in connection with the Merger.
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Section 3.02. Covenants of CNB. CNB will take all steps necessary to
duly call, give notice of, convene and hold a meeting of its shareholders as
soon as practicable for the purpose of obtaining shareholder approval of this
Agreement and the Merger, including, without limitation, the preparation and
distribution of proxy soliciting materials to be mailed to the shareholders of
CNB in connection therewith in accordance with any applicable federal or state
laws relating to the solicitation of proxies for use at such shareholder
meeting. CNB will use its best efforts to cause such shareholder meeting to be
held no later than twenty (20) days from the date the last necessary approval
from the OTS is expected to be received. Such proxy materials will include a
recommendation by the Board of Directors of CNB that the shareholders of CNB
approve this Agreement and Merger.
Section 3.03. Covenants of RVB.
(a) Dissenting Shareholders, Appraisal Rights. To the extent required
by law, RVB will comply with all applicable notification and other provisions of
any applicable regulations or statutes regarding the right of CNB shareholders
to demand payment of the fair or appraised value of Dissenting Shares.
(b) RVB Shareholder Approval. RVB, as sole shareholder of First Federal
and as majority shareholder of CNB, shall vote in favor of the Merger.
(c) Indemnification. For six (6) years following the Effective Time,
RVB shall indemnify, defend and hold harmless the directors of CNB as of the
Effective Time against all losses, expenses (including attorneys' fees), claims,
damages or liabilities arising out of actions or omissions occurring on or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement), to the full extent permitted for directors of
RVB by RVB's Articles of Incorporation in effect on the date hereof, including
provisions relating to advances of expenses incurred in the defense of any
action or suit.
ARTICLE IV
Conditions Precedent; Closing
Section 4.01. Conditions to RVB's, First Federal's and CNB's
Obligations. The obligations of RVB, First Federal and CNB to consummate the
Merger in accordance with this Agreement are subject to the satisfaction on or
prior to the Closing of each of the following conditions precedent, unless
waived by each of RVB, First Federal and CNB in accordance with Section 6.04
hereof:
(a) Representations, Warranties and Covenants. The representations and
warranties of RVB, First Federal and CNB set forth in Article II hereof shall be
true in all material respects as of the Closing, and RVB, First Federal and CNB
each shall have complied with or performed all of the
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agreements, covenants and obligations hereunder required to be performed by them
as of the Closing.
(b) Shareholders and Director Approvals. The approvals of the Boards of
Directors of RVB, First Federal and CNB and the approvals of CNB's and First
Federal's shareholders specified in Sections 3.02 and 3.03(b) shall have been
obtained.
(c) Regulatory Approval. All regulatory approvals, including the
approval of the OTS, necessary for consummation of the Merger shall have been
obtained and be in force.
(d) Adverse Litigation. No action, suit or proceeding shall have been
instituted or threatened against RVB, First Federal and CNB by or before any
court or governmental agency to restrain or prohibit, or to obtain damages in
respect of, or which is related to or arising out of, this Agreement or the
consummation of the transactions contemplated hereby.
(e) Consents. RVB, First Federal and CNB shall have obtained all
consents referred to in Section 3.01(b) hereof and shall have delivered executed
copies thereof to the other party in form and content reasonably satisfactory to
such other party.
(f) Tax Opinion. RVB, First Federal and CNB shall have received an
opinion of RVB's counsel, Barnes & Thornburg, to the effect that if the Merger
is consummated in accordance with terms set forth in this Agreement, the Merger
will constitute a reorganization within the meaning of ss.368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
(g) RP Financial, LC. CNB will have obtained a current appraisal from
RP Financial, LC., its independent financial advisor, for the Minority CNB
Common indicating that its fair value is equal to $21.50 per share.
Section 4.02. Closing. Subject to the satisfaction of the conditions
precedent specified in Section 4.01 hereof and on the terms set forth herein,
the Closing of the Merger shall take place at the offices of Barnes & Thornburg
at 10:00 a.m. local time on the later of the date on which the approvals
specified in Section 4.01(c) have become effective and the date upon which the
shareholder approvals specified in Sections 3.02 and 3.03(b) have been obtained
(or at such other place and on such other date and time as the parties may
agree) (the "Closing"). At the Closing, the parties shall execute appropriate
articles of combination and such other documents as may be deemed necessary or
advisable in the opinion of RVB and CNB to effectuate the Merger. As promptly as
practicable at or after the Closing, the parties shall cause their
representatives to file such articles of combination with the Office of Thrift
Supervision and to take such other actions as may be deemed necessary or
advisable in the opinion of RVB to effectuate the Merger. The parties shall make
every effort to close the Merger on November 22, 1997. The "Effective Time" of
the Merger shall be the time stated in the Articles of Combination to be filed
with the Office of Thrift Supervision with respect to the Merger.
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ARTICLE V
Termination
Section 5.01. Termination. Notwithstanding the adoption and approval of
the Merger by the shareholders of First Federal and CNB, this Agreement may be
terminated:
(a) at any time prior to the Closing, by the mutual consent of the
boards of directors of RVB and CNB;
(b) at any time prior to the Closing, by RVB or CNB if there shall have
been a final judicial determination (as to which all periods for appeal shall
have expired and no appeal shall be pending) that any material provision of this
Agreement is illegal, invalid or unenforceable;
(c) at any time on or after November 30, 1997, by RVB or First Federal
if the Closing shall not then have occurred; or
(d) by RVB or First Federal when it becomes reasonably certain that any
condition precedent to such party's obligations set forth in Article IV hereof
cannot be satisfied on or prior to November 30, 1997;
In the event that either RVB or First Federal elects to effect any termination
pursuant to clauses (b) through (d) above, it shall give written notice to the
other party hereto specifying the basis for such termination.
Section 5.02. Expenses. Except as otherwise provided herein, whether or
not this Agreement terminates under Section 5.01, each party to this Agreement
shall bear its own costs and expenses (including, without limitation, legal and
accounting fees and expenses) of the preparation, negotiation, execution and
consummation of the Agreement and the transactions contemplated hereby.
ARTICLE VI
Other Agreements of the Parties
Section 6.01. Covenants, Etc, To Survive and Bind. All covenants,
agreements, warranties and representations made herein or in any certificates
delivered in connection with the Closing by or on behalf of RVB, First Federal
or CNB shall bind RVB, First Federal and CNB, respectively, and such covenants,
agreements, warranties and representations shall survive the execution and
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delivery of this Agreement or any investigation made by or on behalf of RVB,
First Federal or CNB but shall not survive the Closing.
Section 6.02. Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
effective only if delivered personally or sent by confirmed telex, telegram or
facsimile transmission, or by certified mail, postage prepaid and return receipt
requested, as follows:
If to RVB or First Federal:
River Valley Bancorp
303 Clifty Drive
P.O. Box 626
Madison, Indiana 47250
Copy to:
Claudia V. Swhier, Esq.
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
If to CNB:
Citizens National Bank of Madison
430 Clifty Drive
P.O. Box 1590
Madison, Indiana 47250
Copy to:
John C. Eckert, Esq.
Eckert, Alcorn, & Goering
One West Sixth
Madison, Indiana 47250
or to such other address as any party to this Agreement shall specify by notice
to the other party or parties, and shall be deemed to have been given upon
receipt.
Section 6.03. Assignment: Binding Effect; Benefits. Neither this
Agreement nor any right, remedy, obligation or liability arising hereunder or
thereunder or by reason hereof or thereof shall be assignable by any party to
this Agreement without the prior written consent of the other party hereto. This
Agreement shall be binding upon and inure to the benefit of the parties to this
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Agreement and their respective successors and permitted assigns. Nothing
expressed or referred to in this Agreement is intended or shall be construed to
give any person other than the parties to this Agreement or their respective
successors or permitted assigns any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein or
therein, it being the intention of the parties to this Agreement that this
Agreement is for the sole and exclusive benefit of such parties or such
successors and assigns and for the benefit of no other person.
Section 6.04. Waiver; Amendment.
(a) The parties may by an instrument in writing executed in the same
manner as this Agreement: (i) extend the time for the performance of any of the
agreements of the other party under this Agreement; (ii) waive the performance
by the other party of any of the agreements to be performed by it under this
Agreement; or (iii) waive the satisfaction or fulfillment of any condition the
nonsatisfaction or nonfulfillment of which is a condition to the right of the
party so waiving to terminate this Agreement. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any other or subsequent breach hereunder or thereunder.
(b) This Agreement may be amended, modified or supplemented by the
written agreement of RVB, First Federal and CNB, except that, after this
Agreement is approved by shareholders of CNB, no such amendment, modification,
or supplement shall be made which shall result in an increase or decrease in the
consideration for Minority CNB Common or which shall materially adversely affect
the rights of shareholders of First Federal or CNB, without the approval of the
affected shareholders of First Federal or CNB.
Section 6.05. Counterparts. This Agreement may be executed in one or
more counterparts each of which shall be deemed to constitute an original and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party.
Section 6.06. Governing Law. Except to the extent governed by federal
law, this Agreement shall be governed by and construed in accordance with the
laws of the State of Indiana without giving effect to conflict of law principles
thereof.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto on the day and year first above written.
RIVER VALLEY BANCORP
By:/s/ James E. Fritz
James E. Fritz, President and
Chief Executive Officer
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MADISON FIRST FEDERAL SAVINGS
AND LOAN ASSOCIATION
By: /s/ James E. Fritz
James E. Fritz, President and
Chief Executive Officer
CITIZENS NATIONAL BANK OF MADISON
By: /s/ Robert D. Hoban
Robert D. Hoban, President
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AMENDED CODE OF BY-LAWS
OF
RIVER VALLEY BANCORP
ARTICLE I
Offices
Section 1. Principal Office. The principal office (the "Principal Office")
of River Valley Bancorp (the "Corporation") shall be at 303 Clifty Drive, P.O.
Box 626, Madison, Indiana 47250, or such other place as shall be determined by
resolution of the Board of Directors of the Corporation (the "Board").
Section 2. Other Offices. The Corporation may have such other offices at
such other places within or without the State of Indiana as the Board may from
time to time designate, or as the business of the Corporation may require.
ARTICLE II
Seal
Section 1. Corporate Seal. The corporate seal of the Corporation (the
"Seal") shall be circular in form and shall have inscribed thereon the words
"River Valley Bancorp" and "INDIANA." In the center of the seal shall appear the
word "Seal." Use of the Seal or an impression thereof shall not be required, and
shall not affect the validity of any instrument whatsoever.
ARTICLE III
Shareholder Meetings
Section 1. Place of Meeting. Every meeting of the shareholders of the
Corporation (the "Shareholders") shall be held at the Principal Office, unless a
different place is specified in the notice or waiver of notice of such meeting
or by resolution of the Board or the Shareholders, in which event such meeting
may be held at the place so specified, either within or without the State of
Indiana.
Section 2. Annual Meeting. The annual meeting of the Shareholders (the
"Annual Meeting") shall be held each year at 3:00 o'clock P.M. on the third
Wednesday in April (or, if such day is a legal holiday, on the next succeeding
day not a legal holiday), for the purpose of electing directors of the
Corporation ("Directors") and for the transaction of such other business as may
legally come before the Annual Meeting. If for any reason the Annual Meeting
shall not be held at the date and time herein provided, the same may be held at
any time thereafter, or the business to be transacted at such Annual Meeting may
be transacted at any special meeting of the Shareholders (a "Special Meeting")
called for that purpose.
Section 3. Notice of Annual Meeting. Written or printed notice of the
Annual Meeting, stating the date, time and place thereof, shall be delivered or
mailed by the Secretary or an Assistant Secretary to each Shareholder of record
entitled to notice of such Meeting, at such address as appears on the records of
the Corporation, at least ten and not more than seventy days before the date of
such Meeting.
Section 4. Special Meetings. Special Meetings, for any purpose or purposes
(unless otherwise prescribed by law), may be called by only the Chairman of the
Board of Directors (the "Chairman"), if any, or by the Board, pursuant to a
resolution adopted by a majority of the total number of Directors of the
Corporation, to vote on the business proposed to be transacted thereat. All
requests for Special Meetings shall state the purpose or purposes thereof, and
the business transacted at such Meeting shall be confined to the purposes stated
in the call and matters germane thereto.
Section 5. Notice of Special Meetings. Written or printed notice of all
Special Meetings, stating the date, time, place and purpose or purposes thereof,
shall be delivered or mailed by the Secretary or the President or any Vice
President calling the Meeting to each Shareholder of record entitled to notice
of such Meeting, at such address as appears on the records of the Corporation,
at least ten and not more than sixty days before the date of such Meeting.
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Section 6. Waiver of Notice of Meetings. Notice of any Annual or Special
Meeting (a "Meeting") may be waived in writing by any Shareholder, before or
after the date and time of the Meeting specified in the notice thereof, by a
written waiver delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. A Shareholder's attendance at any Meeting in
person or by proxy shall constitute a waiver of (a) notice of such Meeting,
unless the Shareholder at the beginning of the Meeting objects to the holding of
or the transaction of business at the Meeting, and (b) consideration at such
Meeting of any business that is not within the purpose or purposes described in
the Meeting notice, unless the Shareholder objects to considering the matter
when it is presented.
Section 7. Quorum. At any Meeting, the holders of a majority of the voting
power of all shares of the Corporation (the "Shares") issued and outstanding and
entitled to vote at such Meeting (after giving effect to the provisions in
Article 11 of the Articles of Incorporation of the Corporation, as the same may,
from time to time, be amended (the "Articles")), represented in person or by
proxy, shall constitute a quorum for the election of Directors or for the
transaction of other business, unless otherwise provided by law, the Articles or
this Code of By-Laws, as the same may, from time to time, be amended (these
"By-Laws"). If, however, a quorum shall not be present or represented at any
Meeting, the Shareholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the Meeting from time to time,
without notice other than announcement at the Meeting of the date, time and
place of the adjourned Meeting, unless the date of the adjourned Meeting
requires that the Board fix a new record date (the "Record Date") therefor, in
which case notice of the adjourned Meeting shall be given. At such adjourned
Meeting, if a quorum shall be present or represented, any business may be
transacted that might have been transacted at the Meeting as originally
scheduled.
Section 8. Voting. At each Meeting, every Shareholder entitled to vote
shall have one vote for each Share standing in his name on the books of the
Corporation as of the Record Date fixed by the Board for such Meeting, except as
otherwise provided by law or the Articles, and except that no Share shall be
voted at any Meeting upon which any installment is due and unpaid and no share
which is not entitled to vote pursuant to Article 11 of the Articles shall be
voted at any Meeting. Voting for Directors and, upon the demand of any
Shareholder, voting upon any question properly before a Meeting, shall be by
ballot. A plurality vote shall be necessary to elect any Director, and on all
other matters, the action or a question shall be approved if the number of votes
cast thereon in favor of the action or question exceeds the number of votes cast
opposing the action or question, except as otherwise provided by law or the
Articles.
Section 9. Shareholder List. The Secretary shall prepare before each
Meeting a complete list of the Shareholders entitled to notice of such Meeting,
arranged in alphabetical order by class of Shares (and each series within a
class), and showing the address of, and the number of Shares entitled to vote
held by, each Shareholder (the "Shareholder List"). Beginning five business days
before the Meeting and continuing throughout the Meeting, the Shareholder List
shall be on file at the Principal Office or at a place identified in the Meeting
notice in the city where the Meeting will be held, and shall be available for
inspection by any Shareholder entitled to vote at the Meeting. On written
demand, made in good faith and for a proper purpose and describing with
reasonable particularity the Shareholder's purpose, and if the Shareholder List
is directly connected with the Shareholder's purpose, a Shareholder (or such
Shareholder's agent or attorney authorized in writing) shall be entitled to
inspect and to copy the Shareholder List, during regular business hours and at
the Shareholder's expense, during the period the Shareholder List is available
for inspection. The original stock register or transfer book (the "Stock Book"),
or a duplicate thereof kept in the State of Indiana, shall be the only evidence
as to who are the Shareholders entitled to examine the Shareholder List, or to
notice of or to vote at any Meeting.
Section 10. Proxies. A Shareholder may vote either in person or by proxy
executed in writing by the Shareholder or a duly authorized attorney-in-fact. No
proxy shall be valid after eleven months from the date of its execution, unless
a shorter or longer time is expressly provided therein.
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Section 11. Notice of Shareholder Business. At an Annual Meeting of the
Shareholders, only such business shall be conducted as shall have been properly
brought before the Meeting. To be properly brought before an Annual Meeting,
business must be (a) specified in the notice of Meeting (or any supplement
thereto) given by or at the direction of the Board, (b) otherwise properly
brought before the Meeting by or at the direction of the Board, or (c) otherwise
properly brought before the Meeting by a Shareholder. For business to be
properly brought before an Annual Meeting by a Shareholder, the Shareholder must
have the legal right and authority to make the Proposal for consideration at the
Meeting and the Shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a Shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 120 days prior to the Meeting; provided, however,
that in the event that less than 130 days' notice or prior public disclosure of
the date of the Meeting is given or made to Shareholders (which notice or public
disclosure shall include the date of the Annual Meeting specified in these
By-Laws, if such By-Laws have been filed with the Securities and Exchange
Commission and if the Annual Meeting is held on such date), notice by the
Shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the Annual Meeting was mailed or such public disclosure was made. A
Shareholder's notice to the Secretary shall set forth as to each matter the
Shareholder proposes to bring before the Annual Meeting (a) a brief description
of the business desired to be brought before the Annual Meeting and the reasons
for conducting such business at the Annual Meeting, (b) the name and record
address of the Shareholders proposing such business, (c) the class and number of
shares of the Corporation which are beneficially owned by the Shareholder, and
(d) any material interest of the Shareholder in such business. Notwithstanding
anything in these By-Laws to the contrary, no business shall be conducted at an
Annual Meeting except in accordance with the procedures set forth in this
Section 11. The Chairman of an Annual Meeting shall, if the facts warrant,
determine and declare to the Meeting that business was not properly brought
before the Meeting and in accordance with the provisions of this Section 11, and
if he should so determine, he shall so declare to the Meeting and any such
business not properly brought before the Meeting shall not be transacted. At any
Special Meeting of the Shareholders, only such business shall be conducted as
shall have been brought before the Meeting by or at the direction of the Board
of Directors.
Section 12. Notice of Shareholder Nominees. Only persons who are nominated
in accordance with the procedures set forth in this Section 12 shall be eligible
for election as Directors. Nominations of persons for election to the Board may
be made at a Meeting of Shareholders by or at the direction of the Board of
Directors, by any nominating committee or person appointed by the Board of
Directors or by any Shareholder of the Corporation entitled to vote for the
election of Directors at the Meeting who complies with the notice procedures set
forth in this Section 12. Such nominations, other than those made by or at the
direction of the Board, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a Shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 120 days prior to the Meeting; provided, however, that
in the event that less than 130 days' notice or prior public disclosure of the
date of the Meeting is given or made to Shareholders (which notice or public
disclosure shall include the date of the Annual Meeting specified in these
By-Laws, if such By-Laws have been filed with the Securities and Exchange
Commission and if the Annual Meeting is held on such date), notice by the
Shareholders to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the Meeting was mailed or such public disclosure was made. Such Shareholder's
notice shall set forth (a) as to each person whom the Shareholder proposes to
nominate for election or re-election as a Director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
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solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serving as a Director if
elected); and (b) as to the Shareholder giving the notice (i) the name and
record address of such Shareholder and (ii) the class and number of shares of
the Corporation which are beneficially owned by such Shareholder. No person
shall be eligible for election as a Director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 12. The Chairman of
the Meeting shall, if the facts warrant, determine and declare to the Meeting
that a nomination was not made in accordance with the procedures prescribed by
these By-Laws, and if he should so determine, he shall so declare to the Meeting
and the defective nomination shall be disregarded.
ARTICLE IV
Board of Directors
Section 1. Number. The business and affairs of the Corporation shall be
managed by a Board of not less than five (5) nor more than fifteen (15)
Directors, as may be specified from time to time by resolution adopted by a
majority of the total number of the Corporation's Directors, divided into three
classes as provided in the Articles. If and whenever the Board of Directors has
not specified the number of Directors, the number shall be six. Directors (a)
must have their primary domicile in either Jefferson County, Indiana or Trimble
County, Kentucky, and (b) must have a loan or deposit relationship with Madison
First Federal Savings & Loan Association which they have maintained for at least
a continuous period of twelve (12) months immediately prior to their nomination
to the Board. In addition, each Director who is not an employee of the
Corporation or any of its subsidiaries must have served as a member of a civic
or community organization based in Jefferson County, Indiana or Trimble County,
Kentucky for at least a continuous period of twelve (12) months during the five
(5) years prior to his or her nomination to the Board. The Board may elect or
appoint, from among its members, a Chairman of the Board (the "Chairman"), who
need not be an officer (an "Officer") or employee of the Corporation. The
Chairman, if elected or appointed, shall preside at all Shareholder Meetings and
Board Meetings and shall have such other powers and perform such other duties as
are incident to such position and as may be assigned by the Board.
Section 2. Vacancies and Removal. Any vacancy occurring in the Board shall
be filled as provided in the Articles. Shareholders shall be notified of any
increase in the number of Directors and the name, principal occupation and other
pertinent information about any Director elected by the Board to fill any
vacancy. Any Director, or the entire Board, may be removed from office only as
provided in the Articles.
Section 3. Powers and Duties. In addition to the powers and duties
expressly conferred upon it by law, the Articles or these By-Laws, the Board may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not inconsistent with the law, the Articles or these By-Laws.
Section 4. Annual Board Meeting. Unless otherwise determined by the Board,
the Board shall meet each year immediately after the Annual Meeting, at the
place where such Meeting has been held, for the purpose of organization,
election of Officers of the Corporation (the "Officers") and consideration of
any other business that may properly be brought before such annual meeting of
the Board (the "Annual Board Meeting"). No notice shall be necessary for the
holding of the Annual Board Meeting. If the Annual Board Meeting is not held as
above provided, the election of Officers may be held at any subsequent duly
constituted meeting of the Board (a "Board Meeting").
Section 5. Regular Board Meetings. Regular meetings of the Board ("Regular
Board Meetings") may be held at stated times or from time to time, and at such
place, either within or without the State of Indiana, as the Board may
determine, without call and without notice.
Section 6. Special Board Meetings. Special meetings of the Board ("Special
Board Meetings") may be called at any time or from time to time, and shall be
called on the written request of at least two Directors, by the Chairman or the
President, by causing the Secretary or any Assistant Secretary to give to each
Director, either personally or by mail, telephone, telegraph, teletype or other
form of wire or wireless communication at least two days' notice of the date,
time and place of such Meeting. Special Board Meetings shall be held at the
Principal Office or at such other place, within or without the State of Indiana,
as shall be specified in the respective notices or waivers of notice thereof.
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Section 7. Waiver of Notice and Assent. A Director may waive notice of any
Board Meeting before or after the date and time of the Board Meeting stated in
the notice by a written waiver signed by the Director and filed with the minutes
or corporate records. A Director's attendance at or participation in a Board
Meeting shall constitute a waiver of notice of such Meeting and assent to any
corporate action taken at such Meeting, unless (a) the Director at the beginning
of such Meeting (or promptly upon his arrival) objects to holding of or
transacting business at the Meeting and does not thereafter vote for or assent
to action taken at the Meeting; (b) the Director's dissent or abstention from
the action taken is entered in the minutes of such Meeting; or (c) the Director
delivers written notice of his dissent or abstention to the presiding Director
at such Meeting before its adjournment, or to the Secretary immediately after
its adjournment. The right of dissent or abstention is not available to a
Director who votes in favor of the action taken.
Section 8. Quorum. At all Board Meetings, a majority of the number of
Directors designated for the full Board (the "Full Board") shall be necessary to
constitute a quorum for the transaction of any business, except (a) that for the
purpose of filling of vacancies a majority of Directors then in office shall
constitute a quorum, and (b) that a lesser number may adjourn the Meeting from
time to time until a quorum is present. The act of a majority of the Board
present at a Meeting at which a quorum is present shall be the act of the Board,
unless the act of a greater number is required by law, the Articles or these
By-Laws.
Section 9. Audit and Other Committees of the Board. The Board shall, by
resolution adopted by a majority of the Full Board, designate an Audit Committee
comprised of two or more Directors, which shall have such authority and exercise
such duties as shall be provided by resolution of the Board. The Board may, by
resolution adopted by such majority, also designate other regular or special
committees of the Board ("Committees"), in each case comprised of two or more
Directors and to have such powers and exercise such duties as shall be provided
by resolution of the Board.
Section 10. Resignations. Any Director may resign at any time by giving
written notice to the Board, The Chairman, the President or the Secretary. Any
such resignation shall take effect when delivered unless the notice specifies a
later effective date. Unless otherwise specified in the notice, the acceptance
of such resignation shall not be necessary to make it effective.
Section 11. Age Limitations. No person seventy (70) years of age or older
shall be eligible for election, reelection, appointment, or reappointment to the
Board. No Director shall serve as such beyond the Annual Meeting of the
Corporation immediately following the Director becoming seventy (70) years of
age.
ARTICLE V
Officers
Section 1. Officers. The Officers shall be the President, one or more Vice
Presidents, the Secretary and the Treasurer, and may include one or more
Assistant Secretaries, one or more Assistant Treasurers, a Comptroller and one
or more Assistant Comptrollers. Any two or more offices may be held by the same
person. The Board may from time to time elect or appoint such other Officers as
it shall deem necessary, who shall exercise such powers and perform such duties
as may be prescribed from time to time by these By-Laws or, in the absence of a
provision in these By-Laws in respect thereto, as may be prescribed from time to
time by the Board.
Section 2. Election of Officers. The Officers shall be elected by the Board
at the Annual Board Meeting and shall hold office for one year or until their
respective successors shall have been duly elected and shall have qualified;
provided, however, that the Board may at any time elect one or more persons to
new or different offices and/or change the title, designation and duties and
responsibilities of any of the Officers consistent with the law, the Articles
and these By-Laws.
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Section 3. Vacancies; Removal. Any vacancy among the Officers may be filled
for the unexpired term by the Board. Any Officer may be removed at any time by
the affirmative vote of a majority of the Full Board.
Section 4. Delegation of Duties. In the case of the absence, disability,
death, resignation or removal from office of any Officer, or for any other
reason that the Board shall deem sufficient, the Board may delegate, for the
time being, any or all of the powers or duties of such Officer to any other
Officer or to any Director.
Section 5. President. The President shall be a Director and, subject to the
control of the Board, shall have general charge of and supervision and authority
over the business and affairs of the Corporation, and shall have such other
powers and perform such other duties as are incident to this office and as may
be assigned to him by the Board. In the case of the absence or disability of the
Chairman or if no Chairman shall be elected or appointed by the Board, the
President shall preside at all Shareholder Meetings and Board Meetings.
Section 6. Vice Presidents. Each of the Vice Presidents shall have such
powers and perform such duties as may be prescribed for him by the Board or
delegated to him by the President. In the case of the absence, disability,
death, resignation or removal from office of the President, the powers and
duties of the President shall, for the time being, devolve upon and be exercised
by the Executive Vice President, if there be one, and if not, then by such one
of the Vice Presidents as the Board or the President may designate, or, if there
be but one Vice President, then upon such Vice President; and he shall
thereupon, during such period, exercise and perform all of the powers and duties
of the President, except as may be otherwise provided by the Board.
Section 7. Secretary. The Secretary shall have the custody and care of the
Seal, records, minutes and the Stock Book of the Corporation; shall attend all
Shareholder Meetings and Board Meetings, and duly record and keep the minutes of
their proceedings in a book or books to be kept for that purpose; shall give or
cause to be given notice of all Shareholder Meetings and Board Meetings when
such notice shall be required; shall file and take charge of all papers and
documents belonging to the Corporation; and shall have such other powers and
perform such other duties as are incident to the office of secretary of a
business corporation, subject at all times to the direction and control of the
Board and the President.
Section 8. Assistant Secretaries. Each of the Assistant Secretaries shall
assist the Secretary in his duties and shall have such other powers and perform
such other duties as may be prescribed for him by the Board or delegated to him
by the President. In case of the absence, disability, death, resignation or
removal from office of the Secretary, his powers and duties shall, for the time
being, devolve upon such one of the Assistant Secretaries as the Board, the
President or the Secretary may designate, or, if there be but one Assistant
Secretary, then upon such Assistant Secretary; and he shall thereupon, during
such period, exercise and perform all of the powers and duties of the Secretary,
except as may be otherwise provided by the Board.
Section 9. Treasurer. The Treasurer shall have control over all records of
the Corporation pertaining to moneys and securities belonging to the
Corporation; shall have charge of, and be responsible for, the collection,
receipt, custody and disbursements of funds of the Corporation; shall have the
custody of all securities belonging to the Corporation; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation; and shall disburse the funds of the Corporation as may be ordered
by the Board, taking proper receipts or making proper vouchers for such
disbursements and preserving the same at all times during his term of office.
When necessary or proper, he shall endorse on behalf of the Corporation all
checks, notes or other obligations payable to the Corporation or coming into his
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possession for or on behalf of the Corporation, and shall deposit the funds
arising therefrom, together with all other funds and valuable effects of the
Corporation coming into his possession, in the name and the credit of the
Corporation in such depositories as the Board from time to time shall direct, or
in the absence of such action by the Board, as may be determined by the
President or any Vice President. If the Board has not elected a Comptroller or
an Assistant Comptroller, or in the absence or disability of the Comptroller and
each Assistant Comptroller or if, for any reason, a vacancy shall occur in such
offices, then during such period the Treasurer shall have, exercise and perform
all of the powers and duties of the Comptroller. The Treasurer shall also have
such other powers and perform such other duties as are incident to the office of
treasurer of a business corporation, subject at all times to the direction and
control of the Board and the President.
If required by the Board, the Treasurer shall give the Corporation a bond,
in such an amount and with such surety or sureties as may be ordered by the
Board, for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
Section 10. Assistant Treasurers. Each of the Assistant Treasurers shall
assist the Treasurer in his duties, and shall have such other powers and perform
such other duties as may be prescribed for him by the Board or delegated to him
by the President. In case of the absence, disability, death, resignation or
removal from office of the Treasurer, his powers and duties shall, for the time
being, devolve upon such one of the Assistant Treasurers as the Board, the
President or the Treasurer may designate, or, if there be but one Assistant
Treasurer, then upon such Assistant Treasurer; and he shall thereupon, during
such period, exercise and perform all the powers and duties of the Treasurer
except as may be otherwise provided by the Board. If required by the Board, each
Assistant Treasurer shall likewise give the Corporation a bond, in such amount
and with such surety or sureties as may be ordered by the Board, for the same
purposes as the bond that may be required to be given by the Treasurer.
Section 11. Comptroller. The Comptroller shall have direct control over all
accounting records of the Corporation pertaining to moneys, properties,
materials and supplies, including the bookkeeping and accounting departments;
shall have direct supervision over the accounting records in all other
departments pertaining to moneys, properties, materials and supplies; shall
render to the President and the Board, at Regular Board Meetings or whenever the
same shall be required, an account of all his transactions as Comptroller and of
the financial condition of the Corporation; and shall have such other powers and
perform such other duties as are incident to the office of comptroller of a
business corporation, subject at all times to the direction and control of the
Board and the President.
Section 12. Assistant Comptrollers. Each of the Assistant Comptrollers
shall assist the Comptroller in his duties, and shall have such other powers and
perform such other duties as may be prescribed for him by the Board or delegated
to him by the President. In case of the absence, disability, death, resignation
or removal from office of the Comptroller, his powers and duties shall, for the
time being, devolve upon such one of the Assistant Comptrollers as the Board,
the President or the Comptroller may designate, or, if there be but one
Assistant Comptroller, then upon such Assistant Comptroller; and he shall
thereupon, during such period, exercise and perform all the powers and duties of
the Comptroller, except as may be otherwise provided by the Board.
Section 13. Age Limitations. No person seventy (70) years of age or older
shall be eligible for election, reelection, appointment, or reappointment as an
Officer of the Corporation. No Officer shall serve beyond the Annual Meeting of
the Corporation immediately following the Officer becoming seventy (70) years of
age.
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ARTICLE VI
Certificates for Shares
Section 1. Certificates. Certificates for Shares ("Certificates") shall be
in such form, consistent with law and the Articles, as shall be approved by the
Board. Certificates for each class, or series within a class, of Shares, shall
be numbered consecutively as issued. Each Certificate shall state the name of
the Corporation and that it is organized under the laws of the State of Indiana;
the name of the registered holder; the number and class and the designation of
the series, if any, of the Shares represented thereby; and a summary of the
designations, relative rights, preferences and limitations applicable to such
class and, if applicable, the variations in rights, preferences and limitations
determined for each series and the authority of the Board to determine such
variations for future series; provided, however, that such summary may be
omitted if the Certificate states conspicuously on its front or back that the
Corporation will furnish the Shareholder such information upon written request
and without charge. Each Certificate shall be signed (either manually or in
facsimile) by (i) the President or a Vice President and (ii) the Secretary or an
Assistant Secretary, or by any two or more Officers that may be designated by
the Board, and may have affixed thereto the Seal, which may be a facsimile,
engraved or printed.
Section 2. Record of Certificates. Shares shall be entered in the Stock
Book as they are issued, and shall be transferable on the Stock Book by the
holder thereof in person, or by his attorney duly authorized thereto in writing,
upon the surrender of the outstanding Certificate therefor properly endorsed.
Section 3. Lost or Destroyed Certificates. Any person claiming a
Certificate to be lost or destroyed shall make affidavit or affirmation of that
fact and, if the Board or the President shall so require, shall give the
Corporation and/or the transfer agents and registrars, if they shall so require,
a bond of indemnity, in form and with one or more sureties satisfactory to the
Board or the President and/or the transfer agents and registrars, in such amount
as the Board or the President may direct and/or the transfer agents and
registrars may require, whereupon a new Certificate may be issued of the same
tenor and for the same number of Shares as the one alleged to be lost or
destroyed.
Section 4. Shareholder Addresses. Every Shareholder shall furnish the
Secretary with an address to which notices of Meetings and all other notices may
be served upon him or mailed to him, and in default thereof notices may be
addressed to him at his last known address or at the Principal Office.
ARTICLE VII
Corporate Books and Records
Section 1. Places of Keeping. Except as otherwise provided by law, the
Articles or these By-Laws, the books and records of the Corporation (including
the "Corporate Records," as defined in the Articles) may be kept at such place
or places, within or without the State of Indiana, as the Board may from time to
time by resolution determine or, in the absence of such determination by the
Board, as shall be determined by the President.
Section 2. Stock Book. The Corporation shall keep at the Principal Office
the original Stock Book or a duplicate thereof, or, in case the Corporation
employs a stock registrar or transfer agent within or without the State of
Indiana, another record of the Shareholders in a form that permits preparation
of a list of the names and addresses of all the Shareholders, in alphabetical
order by class of Shares, stating the number and class of Shares held by each
Shareholder (the "Record of Shareholders").
Section 3. Inspection of Corporate Records. Any Shareholder (or the
Shareholder's agent or attorney authorized in writing) shall be entitled to
inspect and copy at his expense, after giving the Corporation at least five
business days' written notice of his demand to do so, the following Corporate
Records: (1) the Articles; (2) these By-Laws; (3) minutes of all Shareholder
Meetings and records of all actions taken by the Shareholders without a meeting
(collectively, "Shareholders Minutes") for the prior three years; (4) all
written communications by the Corporation to the Shareholders including the
financial statements furnished by the Corporation to the Shareholders for the
<PAGE>
prior three years; (5) a list of the names and business addresses of the current
Directors and the current Officers; and (6) the most recent Annual Report of the
Corporation as filed with the Secretary of State of Indiana. Any Shareholder (or
the Shareholder's agent or attorney authorized in writing) shall also be
entitled to inspect and copy at his expense, after giving the Corporation at
least five business days' written notice of his demand to do so, the following
Corporate Records, if his demand is made in good faith and for a proper purpose
and describes with reasonable particularity his purpose and the records he
desires to inspect, and the records are directly connected with his purpose: (1)
to the extent not subject to inspection under the previous sentence,
Shareholders Minutes, excerpts from minutes of Board Meetings and of Committee
meetings, and records of any actions taken by the Board or any Committee without
a meeting; (2) appropriate accounting records of the Corporation; and (3) the
Record of Shareholders.
Section 4. Record Date. The Board may, in its discretion, fix in advance a
Record Date not more than seventy days before the date (a) of any Shareholder
Meeting, (b) for the payment of any dividend or the making of any other
distribution, (c) for the allotment of rights, or (d) when any change or
conversion or exchange of Shares shall go into effect. If the Board fixes a
Record Date, then only Shareholders who are Shareholders of record on such
Record Date shall be entitled (a) to notice of and/or to vote at any such
Meeting, (b) to receive any such dividend or other distribution, (c) to receive
any such allotment of rights, or (d) to exercise the rights in respect of any
such change, conversion or exchange of Shares, as the case may be,
notwithstanding any transfer of Shares on the Stock Book after such Record Date.
Section 5. Transfer Agents; Registrars. The Board may appoint one or more
transfer agents and registrars for its Shares and may require all Certificates
to bear the signature either of a transfer agent or of a registrar, or both.
ARTICLE VIII
Checks, Drafts, Deeds and Shares of Stock
Section 1. Checks, Drafts, Notes, Etc. All checks, drafts, notes or orders
for the payment of money of the Corporation shall, unless otherwise directed by
the Board or otherwise required by law, be signed by one or more Officers as
authorized in writing by the President. In addition, the President may authorize
any one or more employees of the Corporation ("Employees") to sign checks,
drafts and orders for the payment of money not to exceed specific maximum
amounts as designated in writing by the President for any one check, draft or
order. When so authorized by the President, the signature of any such Officer or
Employee may be a facsimile signature.
Section 2. Deeds, Notes, Bonds, Mortgages, Contracts, Etc. All deeds,
notes, bonds and mortgages made by the Corporation, and all other written
contracts and agreements, other than those executed in the ordinary course of
corporate business, to which the Corporation shall be a party, shall be executed
in its name by the President, a Vice President or any other Officer so
authorized by the Board and, when necessary or required, the Secretary or an
Assistant Secretary shall attest the execution thereof. All written contracts
and agreements into which the Corporation enters in the ordinary course of
corporate business shall be executed by any Officer or by any other Employee
designated by the President or a Vice President to execute such contracts and
agreements.
Section 3. Sale or Transfer of Stock. Subject always to the further orders
and directions of the Board, any share of stock issued by any corporation and
owned by the Corporation (including reacquired Shares of the Corporation) may,
for sale or transfer, be endorsed in the name of the Corporation by the
President or a Vice President, and said endorsement shall be duly attested by
the Secretary or an Assistant Secretary either with or without affixing thereto
the Seal.
<PAGE>
Section 4. Voting of Stock of Other Corporations. Subject always to the
further orders and directions of the Board, any share of stock issued by any
other corporation and owned or controlled by the Corporation (an "Investment
Share") may be voted at any shareholders' meeting of such other corporation by
the President or by a Vice President. Whenever, in the judgment of the
President, it is desirable for the Corporation to execute a proxy or give a
shareholder's consent in respect of any Investment Share, such proxy or consent
shall be executed in the name of the Corporation by the President or a Vice
President, and, when necessary or required, shall be attested by the Secretary
or an Assistant Secretary either with or without affixing thereto the Seal. Any
person or persons designated in the manner above stated as the proxy or proxies
of the Corporation shall have full right, power and authority to vote an
Investment Share the same as such Investment Share might be voted by the
Corporation.
ARTICLE IX
Fiscal Year
Section 1. Fiscal Year. The Corporation's fiscal year shall begin on
January 1 of each year and end on December 31 of the same year.
ARTICLE X
Amendments
Section 1. Amendments. These By-Laws may be altered, amended or repealed,
in whole or in part, and new By-Laws may be adopted, at any Board Meeting by the
affirmative vote of a majority of the Full Board.
SPECIAL TERMINATION AGREEMENT
THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered
into as of this 29th day of April, 1997, by and between Citizens National Bank
of Madison, a national banking association (which, together with any successor
thereto which executes and delivers the assumption agreement provided for in
Section 11(a) hereof or which otherwise becomes bound by the terms and
provisions of this Agreement by operation of law, is hereinafter referred to as
the "Bank"), and Robyne J. Hart, whose residence address is 507 East Main
Street, Madison, Indiana 47250 (the "Employee").
WHEREAS, the Employee is currently serving as Operations Officer of the
Bank; and
WHEREAS, River Valley Bancorp, an Indiana corporation (the "Holding
Company"), acquired over 95% of the outstanding shares of capital stock of the
Bank in December, 1996 (the "Acquisition"); and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the
case with publicly held corporations generally, the possibility of a change in
control of the Holding Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Bank, the Holding Company and its shareholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 1 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:
1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to
have commenced as of the date hereof (the "Effective Date") and shall continue
until February 1, 1998. Commencing on February 1, 1998, and continuing at each
anniversary date thereafter, the Board of Directors shall review this Agreement
and, in its discretion, may authorize extension thereof for an additional
one-year period.
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<PAGE>
2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a change in control of the Bank or the
Holding Company (as herein defined) during the term of the Employee's
employment, followed at any time during the term of this Agreement by the
involuntary termination of the Employee's employment, other than for cause, as
defined in Section 2(d) hereof, the provisions of Section 3 shall apply.
(b) A "change in control" of the Bank or the Holding Company shall be
deemed to have occurred if:
(i) as a result of, or in connection with, any initial public
offering, tender offer or exchange offer, merger or other business
combination, sale of assets or contested election, any combination of
the foregoing transactions, or any similar transaction, the persons who
were non-employee directors of the Bank or the Holding Company before
such transaction cease to constitute a majority of the Board of
Directors of the Bank or the Holding Company or any successor thereof;
(ii) the Bank or the Holding Company transfers substantially
all of its assets to another corporation which is not a wholly-owned
subsidiary of the Bank or the Holding Company;
(iii) the Bank or the Holding Company sells substantially all
of the assets of a subsidiary or affiliate which, at the time of such
sale, is the principal employer of the Employee; or
(iv) the Bank or the Holding Company is merged or consolidated
with another corporation and, as a result of the merger or
consolidation, less than fifty-one percent (51%) of the outstanding
voting securities of the surviving or resulting corporation is owned in
the aggregate by the former shareholders of the Bank or of the Holding
Company.
(c) The Employee's employment under this Agreement may be terminated at
any time by the Board of Directors of the Bank. The terms "involuntary
termination" or "involuntarily terminated" in this Agreement shall refer to the
termination of the employment of Employee without her express written consent.
In addition, a material diminution of or interference with the Employee's
duties, responsibilities and benefits shall be deemed and shall constitute an
involuntary termination of employment to the same extent as express notice of
such involuntary termination. By way of example and not by way of limitation,
any of the following actions, if unreasonable and materially adverse to the
Employee, shall constitute such diminution or interference unless consented to
in writing by the Employee: (1) the requirement that the Employee perform her
principal executive functions more than thirty (30) miles from her primary
office as of the date of the change in control; (2) a material reduction in the
Employee's salary, perquisites, contingent benefits or vacation time as in
effect on the date of the change in control as the same may be changed by mutual
agreement from time to time, unless part of an institution-wide reduction; (3)
the assignment to the
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<PAGE>
Employee of duties and responsibilities materially different from those normally
associated with her position as referenced in this Agreement; or (4) a material
diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with her employment with
the Bank.
(d) The Employee shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon termination for cause. For purposes
of this Agreement, termination for "cause" shall include termination because of,
in the good faith determination of the Board of Directors of the Bank, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than a law,
rule or regulation relating to traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), such meeting and the
opportunity to be heard to be held prior to, or as soon as reasonably
practicable following, termination, but in no event later than 60 days following
such termination, finding that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail. If, following such meeting, the
Employee is reinstated, she shall be entitled to receive back pay for the period
following termination and continuing through reinstatement.
(e) If the Employee's employment is involuntarily terminated by the
Bank, with or without cause, at any time after a date which is 18 months
following the Acquisition, and upon 90 days written notice to the Employee prior
to the public announcement of a change in control of the Bank or the Holding
Company, whether consummated or merely proposed at the time of such public
announcement, the Employee shall not have any right, by virtue of such
involuntary termination, to receive termination benefits under this Agreement.
3. TERMINATION BENEFITS.
(a) If (i) at any time during a period which begins on the Effective
Date and ends 14 months thereafter, there is an involuntary termination of the
Employee's employment, other than for cause, whether or not such termination
occurs during the term of this Agreement or (ii) during the term of this
Agreement there is a change in control, and within 12 months following such
change in control there is an involuntary termination of the Employee's
employment, other than for cause, whether or not such termination occurs during
the term of this Agreement, the Bank shall, in either case, pay to the Employee
in a lump sum in cash within 25 business days after the date of severance of
employment an amount equal to 100 percent of the Employee's "base amount" of
compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended ("Code"). At the discretion of the Employee, upon an election
pursuant to Section 3(c) hereof, such payment may
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<PAGE>
be made, on a pro rata basis, semi-monthly during the twelve (12) months
following the Employee's termination.
(b) If (i) at any time during a period which begins on the Effective
Date and ends 14 months thereafter, there is an involuntary termination of the
Employee's employment, other than for cause, whether or not such termination
occurs during the term of this Agreement or (ii) during the term of this
Agreement there is a change in control, and within 12 months following such
change in control there is an involuntary termination of the Employee's
employment, other than for cause, whether or not such termination occurs during
the term of this Agreement, the Bank shall, in either case, cause to be
continued life, health and disability coverage substantially identical to the
coverage maintained by the Bank for the Employee prior to her severance. Subject
to applicable federal and state laws, such coverage shall cease upon the earlier
of the Employee's obtaining similar coverage by another employer or twelve (12)
months from the date of the Employee's termination. In the event the Employee
obtains new employment and receives less coverage for life, health or
disability, the Bank shall provide coverage substantially identical to the
coverage maintained by the Bank for the Employee prior to termination for a
period of twelve (12) months.
(c) On an annual basis the Employee shall elect whether, in the event
amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a
lump sum or on a pro rata basis. Such election shall be irrevocable for the year
for which such election is made.
4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Bank to or
for the benefit of the Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be nondeductible (in whole or part) by the Bank for Federal
income tax purposes because of Section 280G of the Code, then the aggregate
present value of amounts payable or distributable to or for the benefit of the
Employee pursuant to this Agreement (such amounts payable or distributable
pursuant to this Agreement are hereinafter referred to as "Agreement Payments")
shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount,
not less than zero, expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Bank because of Section 280G of the Code. For purposes of
this Section 4, present value shall be determined in accordance with Section
280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 4 shall
be made by the Bank's independent auditors, or at the election of such auditors
by such other firm or individuals of recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten business days of the date of termination of the Employee's employment by the
Bank or the Holding Company resulting in benefit payments hereunder (the "Date
of Termination"), or at such earlier time as is requested by the Bank, provide
to both the Bank and the Employee an opinion (and
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<PAGE>
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority not to report on her federal
income tax return any excise tax imposed by Section 4999 of the Code with
respect to the Agreement Payments. Any such determination and opinion by the
Advisory Firm shall be binding upon the Bank and the Employee. The Employee
shall determine which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 4,
provided that, if the Employee does not make such determination within ten
business days of the receipt of the calculations made by the Advisory Firm, the
Bank shall elect which and how much, if any, of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Section 4 and
shall notify the Employee promptly of such election. Within five business days
of the earlier of (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 4.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
5. REQUIRED REGULATORY PROVISIONS.
(a) The Bank may terminate the Employee's employment at any time, but
any termination by the Bank, other than a termination for cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall not have the right to
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<PAGE>
receive compensation or other benefits for any period after a termination for
cause as defined in Section 2(d) hereinabove.
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss.
1818 (e)(3) and (g)(1), the Bank's obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while its obligations
under this Agreement were suspended, and (ii) reinstate (in whole or in part)
any of the obligations which were suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this
Agreement shall terminate, as of the effective date of the order, but vested
rights of the parties shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this Agreement shall
terminate as of the date of default, but this provision (d) shall not affect any
vested rights of the parties.
(e) All obligations under this Agreement may be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Office of the Comptroller of the
Currency (the "OCC"), or its designee, at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the OCC, or its designee, at
the time the OCC or its designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
OCC to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by any such action.
6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the
Employee is suspended and/or temporarily prohibited from participating in the
conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the
"Notice") during the term of this Agreement and a change in control occurs, the
Bank will assume its obligation to pay and the Employee will be entitled to
receive all of the termination benefits provided for under Section 3 of this
Agreement upon the Bank's receipt of a dismissal of charges in the Notice.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This
Agreement contains the entire understanding between the parties hereto and
supersedes any prior agreement between the Bank and the Employee.
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<PAGE>
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
the Employee, the Bank and their respective successors and assigns.
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
10. NO MITIGATION. Except as expressly provided herein, the amount of
any payment or benefit provided for in this Agreement shall not be reduced by
any compensation earned by the Employee as the result of employment by another
employer, by retirement benefits after the date of termination or otherwise.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 3 hereof. For purposes of implementing the provisions of
this Section 11(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
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<PAGE>
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Indiana.
17. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered an the arbitrator's award in any court having
jurisdiction.
18. REIMBURSEMENT. In the event the Bank purports to terminate the
Employee for cause, but it is determined by a court of competent jurisdiction or
by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: CITIZENS NATIONAL BANK OF
MADISON
By: /s/ Robert D. Hoban
Mark A. Goley, Vice President Robert D. Hoban, President
Robyne J. Hart
The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees
that if it shall be determined for any reason that any obligation on the part of
Bank to continue to make any payments due under this Agreement to Employee is
unenforceable for any reason, River Valley Bancorp agrees to honor the terms of
this Agreement and continue to make any such payments due hereunder to Employee
or to satisfy any such obligation pursuant to the terms of this Agreement, as
though it were the Bank hereunder.
RIVER VALLEY BANCORP
By: /s/ James E. Fritz
James E. Fritz, President and
Chief Executive Officer
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[FRONT COVER]
RIVER VALLEY BANCORP
and Subsidiary
---------------------------
River Valley Financial Bank
---------------------------
1997 Annual Report
[LOGO]
<PAGE>
River Valley Bancorp
P.O. Box 1590 * Madison, Indiana 47250-0590 * (812)273-4949 * Fax -(812)273-4944
To Our Shareholders:
It is my pleasure to present to you River Valley Bancorp's second Annual Report
to Shareholders covering the year ending December 31, 1997.
Net earnings for 1997 totaled a record $1.3 million, or $1.19 per share, easily
surpassing the $73,000 of net earnings recorded in 1996. The increase in 1997
results of operations were primarily the result of a $2.9 million, or 116%,
increase in net interest income and a $556,000, or 96%, increase in other
income. These increases generally reflect the addition of Citizens National Bank
of Madison on our profitability, as well as the beneficial earnings impact from
the capital raised in our conversion offering.
Most of 1997 was spent developing a strategy to use the strengths of both of our
subsidiary banks, Citizens National and Madison First Federal. The initial
phases of this process were completed on November 20, 1997, when we merged
Citizens National and Madison First Federal and changed the combined banks' name
to River Valley Financial Bank. The new name is more reflective of the
broadening financial service products we offer leading into the twenty-first
century and our commitment to the communities that we serve.
During the year we also initiated our capital management plans with the
declaration of our first dividends totaling $0.13 per share. Our shareholders
also benefited from the fact that the dividends paid in 1997 were considered a
100% return of capital and thus no federal taxes were due upon their receipt.
The investment community has clearly recognized our position, as the value of
our common shares has increased by approximately 90% since our conversion to
stock form. It is very unlikely that this stellar stock performance will
continue in 1998, however, your management and Board are optimistic as to River
Valley's continued success. Now that the conversion to one bank is behind us, we
plan, in 1998, to build upon the excellent foundations that Citizens National
and Madison First Federal have provided.
We extend a special thanks to all of our friends and shareholders who have
supported us with their business and referrals.
Sincerely,
/s/ James E. Fritz
James E. Fritz
President
<PAGE>
River Valley Bancorp
BUSINESS OF RIVER VALLEY
River Valley Bancorp ("River Valley" or the "Corporation"), an Indiana
corporation, was formed in 1996 for the primary purpose of purchasing all of the
issued and outstanding common stock of River Valley Financial Bank (formerly
Madison First Federal Savings and Loan Association; hereinafter "River Valley
Financial" or the "Bank") in its conversion from mutual to stock form. The
conversion offering was completed in December 1996, with the sale of 1,190,250
common shares at an initial offering price of $10.00 per share. In December
1996, the Corporation utilized approximately $3.0 million of the net conversion
proceeds to purchase 95.6% of the outstanding common shares of Citizens National
Bank of Madison ("Citizens") in a transaction that was accounted for using the
purchase method of accounting. River Valley Financial and Citizens merged on
November 20, 1997. Future references to River Valley, River Valley Financial and
Citizens are utilized herein as the context requires.
The activities of River Valley have been limited primarily to holding the stock
of the Bank. River Valley Financial was organized in 1875 under the laws of the
United States of America. River Valley Financial conducts operations from its
seven office locations in Jefferson County and offers a variety of deposit and
lending services to consumer and commercial customers in Jefferson and
surrounding counties. The Corporation is subject to regulation, supervision and
examination by the Office of Thrift Supervision of the U.S. Department of
Treasury (the "OTS"). River Valley Financial is subject to regulation,
supervision and examination by the OTS, the Federal Deposit Insurance
Corporation (the "FDIC") and the Indiana Department of Financial Institutions.
Deposits in River Valley Financial are insured up to applicable limits by the
FDIC.
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS
There were 1,190,250 common shares of River Valley Bancorp outstanding at March
9, 1998, held of record by 445 shareholders. The number of shareholders does not
reflect the number of persons or entities who may hold stock in nominee or
"street name." Since December of 1996, the Corporation's common shares have been
listed on The NASDAQ SmallCap Market ("NASDAQ"), under the symbol "RIVR".
Presented below are the high and low sale prices for the Corporation's common
shares, as well as cash distributions paid thereon since December 1996. Such
sales prices do not include retail financial markups, markdowns or commissions.
Information relating to sales prices have been obtained from NASDAQ.
<PAGE>
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS (CONTINUED)
Quarter Ended High Low Cash Distributions (1)
1997
December 31, 1997 $19.00 $16.25 $0.05
September 30, 1997 $17.25 $14.75 $0.04
June 30, 1997 $15.00 $13.63 $0.04
March 31, 1997 $15.50 $13.00 $ -
1996
December 31, 1996 $12.50 $10.00 $ -
- --------------
(1) River Valley Financial had filed a request with the Internal Revenue
Service ("IRS") in 1995 to deconsolidate the Bank's subsidiaries in future
federal income tax return filings. In December 1997, the Corporation
received a draft closing agreement and information request from the IRS
that, when executed, would enable the Corporation and each of its
subsidiaries to file separate returns. On February 27, 1998, the
Corporation complied with such information request and expects to finalize
the closing agreement with the IRS in May or June of 1998. By definition,
the current year's cash distributions will be deemed a tax-free return of
capital due to the Corporation's filing of a separate income tax return in
1997.
The high and low sales prices for River Valley's common shares between December
31, 1997 and March 9, 1998 were $19.75 and $18.50, respectively.
Under OTS regulations applicable to converted savings associations, River Valley
Financial is not permitted to pay a cash dividend on its common shares if the
regulatory capital of River Valley Financial would, as a result of the payment
of such dividend, be reduced below the amount required for the liquidation
account (which was established for the purpose of granting a limited priority
claim on the assets of River Valley Financial, in the event of a complete
liquidation, to those members of River Valley Financial before the Conversion
who maintain a savings account at River Valley Financial after the Conversion)
or applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without prior approval of the
OTS. River Valley Financial currently meets all of its regulatory capital
requirements and, unless the OTS determines that River Valley Financial is an
institution requiring more than normal supervision, River Valley Financial may
pay dividends in accordance with the foregoing provisions of the OTS
regulations.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding River Valley at the dates
and for the periods indicated. All financial information prior to 1996 relates
to River Valley Financial as a mutual savings association.
<TABLE>
<CAPTION>
Selected consolidated financial condition data: (1) At December 31,
1997 1996 1995 1994 1993
Total amount of: (In thousands)
<S> <C> <C> <C> <C> <C>
Assets $137,049 $145,541 $86,604 $87,072 $84,086
Loans receivable - net 112,003 108,994 57,945 56,287 51,970
Mortgage-backed and related securities 8,978 12,846 9,917 11,328 13,925
Cash and cash equivalents (2) 5,765 8,785 2,689 2,416 5,803
Investment securities (3) 4,272 8,948 13,018 14,097 9,491
FHLB advances 2,000 1,100 4,471 4,986 -
Deposits 114,955 125,656 75,233 75,458 78,081
Shareholders' equity- net (4) 17,989 16,805 6,574 6,304 5,668
</TABLE>
<TABLE>
<CAPTION>
Summary of consolidated earnings data: (1) Year Ended December 31,
1997 1996 1995 1994 1993
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Total interest income $10,362 $ 5,875 $ 5,794 $ 5,419 $ 5,684
Total interest expense 5,049 3,412 3,594 2,854 3,042
------- --------- ------- ------- -------
Net interest income 5,313 2,463 2,200 2,565 2,642
Provision for losses on loans 304 22 150 29 55
-------- ----------- -------- --------- ---------
Net interest income after provision for
losses on loans 5,009 2,441 2,050 2,536 2,587
Other income:
Insurance commissions - 200 175 181 182
Gain on sale of loans 127 - - - -
Service fees, charges and other operating income 807 246 187 189 182
Gain on sale of subsidiary - 141 - - -
Gain on sale of office premises and equipment 206 - - - -
Loss on sale of investment, mortgage-backed
and related securities (6) (9) - - -
---------- ------------ ------- ------- ------
Total other income 1,134 578 362 370 364
General, administrative and other expense:
Employee compensation and benefits 2,165 1,203 998 888 869
Data processing 224 282 237 243 234
Federal deposit insurance premiums 50 684 177 178 117
Occupancy and equipment 527 284 212 193 212
Other 1,037 417 342 356 370
--------- ---------- -------- -------- --------
Total general, administrative and other expense 4,003 2,870 1,966 1,858 1,802
--------- --------- ------- ------- -------
Earnings before income tax expense and cumulative
effect of change in accounting method 2,140 149 446 1,048 1,149
Income tax expense 830 76 188 412 456
Cumulative effect of change in method of
accounting - - - - 25
--------- --------- ------- ------- ---------
Net earnings $ 1,310 $ 73 $ 258 $ 636 $ 718
========= ========= ======= ======= ========
Basic earnings per share (5) $ 1.19 N/A N/A N/A N/A
========= ========= ======= ======= ========
Diluted earnings per share (5) $ 1.18 N/A N/A N/A N/A
========= ========= ======= ======= ========
</TABLE>
- --------------
(1) River Valley acquired Citizens as of December 20, 1996. The acquisition was
accounted for using the purchase method of accounting. The 1997
consolidated financial statements reflect the results of operations for a
full year while the 1996 financial statements reflect only eleven days of
activity with respect to Citizens.
(2) Includes certificates of deposit in other financial institutions.
(3) Includes investment securities designated as available for sale.
(4) Consists solely of retained earnings at December 31, 1993 through 1995,
inclusive.
(5) Earnings per share for the years ended December 31, 1996, 1995, 1994 and
1993 are not applicable as River Valley converted to stock form in 1996.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
Selected financial ratios and other data:
Year ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest rate spread during period 3.64% 2.79% 2.36% 3.00% 3.24%
Net yield on interest-earnings assets (1) 4.00 2.98 2.61 3.15 3.32
Return on assets (2) 0.99 0.08 0.30 0.74 0.86
Return on equity (3) 7.53 1.05 4.01 10.62 13.52
Equity to assets (4) 13.12 11.55 7.59 7.24 6.74
Average interest-earning assets to
average interest-bearing liabilities 109.56 104.64 105.62 104.43 101.96
Non-performing assets to total assets (4) 0.58 0.56 0.01 0.01 0.01
Allowance for loan losses to total
loans outstanding (4) 1.03 0.97 0.70 0.45 0.44
Allowance for loan losses to
non-performing loans (4) 161.56 131.14 5,087.50 1,938.46 3,242.86
Net charge-offs to average total
loans outstanding 0.20 0.01 0.01 0.01 0.17
General, administrative and other expense
to average assets (5) (6) 2.83 3.33 2.26 2.20 2.15
Number of full service offices (4) 6 6 3 3 3
</TABLE>
- --------------
(1) Net interest income divided by average interest-earning assets.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average total equity.
(4) At end of period.
(5) General, administrative and other expense divided by average total assets.
(6) Includes a $503,000 charge (or .94% of weighted-average assets) in 1996
related to the Savings Association Insurance Fund (the "SAIF")
recapitalization assessment.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
As discussed previously, River Valley was incorporated for the primary purpose
of owning all of the outstanding shares of River Valley Financial. As a result,
the discussion that follows focuses on River Valley Financial's financial
condition and results of operations for the periods presented. The following
discussion and analysis of the financial condition as of December 31, 1997 and
River Valley's results of operations for periods prior to that date should be
read in conjunction with the consolidated financial statements and the notes
thereto, included elsewhere in this Annual Report.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. River Valley's operations and River Valley'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, but are not limited to, changes in the
economy and interest rates in the nation and River Valley's general market area.
The forward-looking statements contained herein include those with respect to
the following matters:
1. Management's determination as to the amount and adequacy of the loan
loss allowance;
2. The effect of changes in interest rates on financial condition and
results of operations;
3. The effects of proposed legislation that would eliminate the federal
thrift charter and the separate federal regulation of thrifts.
4. Management's opinion as to the effect of recent accounting
pronouncements on River Valley's consolidated financial position and
results of operations.
5. Management's opinion as to the effect of the Year 2000 on River
Valley's information technology systems.
Discussion of Changes in Financial Condition from December 31, 1996 to December
31, 1997
At December 31, 1997, River Valley's consolidated assets totaled $137.0 million,
representing a decline of $8.5 million, or 5.8%, from the December 31, 1996
total of $145.5 million. The reduction in asset size was primarily attributable
to a $10.7 million, or 8.5%, decline in deposits, which was partially offset by
a $900,000 increase in FHLB advances and undistributed period earnings of $1.2
million.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and
certificates of deposit) decreased by $3.0 million from December 31, 1996 levels
to a total of $5.8 million at December 31, 1997. Investment securities totaled
$4.3 million at December 31, 1997, a decrease of $4.7 million, or 52.3%, from
December 31, 1996 levels. During the year ended December 31, 1997, maturities of
investment securities totaled $2.0 million, while sales of investment securities
designated as available for sale totaled $2.7 million. Mortgage-backed
securities decreased by $3.9 million, or 30.1%, to a total of $9.0 million at
December 31, 1997, primarily due to principal repayments of $3.1 million and
sales of mortgage-backed securities designated as available for sale of $2.1
million, partially offset by purchases of mortgage-backed securities totaling
$1.4 million.
The decrease in liquid assets, investments and mortgage-backed securities
primarily resulted from management's deployment of these assets to fund loan
originations and the sale of deposits in connection with the disposition of a
branch in Hanover, Indiana in February 1997.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from December 31, 1996 to December
31, 1997 (continued)
Loans receivable, including loans held for sale, totaled $112.0 million at
December 31, 1997, an increase of $3.0 million, or 2.8%, over the $109.0 million
total at December 31, 1996. The increase resulted primarily from loan
originations during 1997 of $53.6 million, which were partially offset by
principal repayments of $43.2 million and sales of $6.9 million.
River Valley's consolidated allowance for loan losses totaled $1.2 million and
$1.1 million at December 31, 1997 and 1996, respectively, which represented
1.03% and .97% of total loans at those dates. Nonperforming loans (defined as
loans delinquent greater than 90 days and loans on nonaccrual status) totaled
$718,000 and $819,000 at December 31, 1997 and 1996, respectively. The
consolidated allowance for loan losses represented 162% and 131% of
nonperforming loans at December 31, 1997 and 1996, respectively.
Although management believes that its allowance for loan losses at December 31,
1997 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.
Deposits decreased by $10.7 million, or 8.5%, to a total of $115.0 million at
December 31, 1997, compared to the $125.7 million total at December 31, 1996.
The decline can be attributed primarily to $6.8 million of deposits sold in
conjunction with the aforementioned sale of River Valley Financial's Hanover
branch, and, to a lesser extent, the shift of consumer preference from deposits
to alternative investment products.
Advances from the Federal Home Loan Bank totaled $2.0 million at December 31,
1997, an increase of $900,000, or 81.8%, over the $1.1 million total at December
31, 1996. The increase was due to current period borrowings of $7.0 million,
offset by repayments of $6.1 million. The borrowings were primarily utilized to
fund growth in loans receivable.
Shareholders' equity totaled $18.0 million at December 31, 1997, an increase of
$1.2 million, or 7.0%, over the $16.8 million total at December 31, 1996. The
increase resulted primarily from undistributed period earnings of $1.2 million.
River Valley Financial is required to maintain minimum regulatory capital
pursuant to federal regulations. At December 31, 1997, the Bank's regulatory
capital exceeded all applicable regulatory capital requirements.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Increases in the level of income and expenses during the year ended December 31,
1997, as compared to 1996, are primarily due to River Valley's acquisition of
Citizens, which was consummated in December 1996. As stated previously, the
business combination was accounted for using the purchase method of accounting,
which does not provide for restatement of the financial statements to give
effect to the combination. Accordingly, the statement of earnings and the
statement of cash flows for the year ended December 31, 1996, were not restated
for the acquisition.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996 (continued)
General
River Valley's net earnings for the year ended December 31, 1997, totaled $1.3
million, an increase of $1.2 million over the $73,000 net earnings reported in
the comparable 1996 period. The increase in net earnings in the 1997 period is
primarily attributable to an increase in net interest income of $2.9 million and
an increase of $556,000 in other income, which were partially offset by an
increase in the provision for losses on loans of $282,000, an increase in
general, administrative and other expense of $1.1 million and an increase in the
provision for federal income taxes of $754,000.
Net Interest Income
Total interest income for the year ended December 31, 1997, amounted to $10.4
million, an increase of $4.5 million, or 76.4%, over the 1996 year, reflecting
the effects of growth in average interest-earning assets outstanding, coupled
with an increase in yield year-to-year. Interest income on loans and
mortgage-backed securities totaled $9.8 million for 1997, an increase of $4.6
million, or 90.5%, over the 1996 year. The increase resulted primarily from the
$53.3 million, or 77.2%, increase in the average balance of loans and
mortgage-backed securities outstanding year-to-year, coupled with a 56 basis
point increase in yield, to 7.98% in 1997. Interest income on investments and
interest-earning deposits decreased by $151,000, or 20.1%, due to a decrease in
the average balance outstanding of $3.2 million, partially offset by an
approximate 24 basis point increase in yield from the comparable 1996 period.
Interest expense on deposits increased by $1.6 million, or 46.7%, to a total of
$4.9 million for the year ended December 31, 1997, due primarily to a $41.2
million increase in the average balance of deposits outstanding, which was
partially offset by an 18 basis point decline in the weighted-average cost of
deposits to 4.13% in 1997. Interest expense on borrowings totaled $135,000 for
the year ended December 31, 1997, an increase of $72,000, or 114.3%, over 1996.
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 increased during 1997 by $2.9 million, or 115.7%, compared
to 1996. The interest rate spread increased by approximately 85 basis points for
1997, to 3.64% from 2.79% in the 1996 period, while the net interest margin
amounted to approximately 4.00% in 1997 and 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
upon historical experience, the volume and type of lending conducted by River
Valley Financial, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
primary market area, and other factors related to the collectibility of the loan
portfolio. As a
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996 (continued)
Provision for Losses on Loans (continued)
result of such analysis, management recorded a $304,000 provision for losses on
loans in 1997. The current period provision generally reflects the higher
charge-off experience attendant to Citizens' installment loan portfolio, as
compared to the primarily residential loan portfolio of River Valley Financial
prior to the acquisition. While management believes that the allowance for
losses on loans is adequate at December 31, 1997, based upon 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 $556,000, or 96.2%, for the year ended December 31,
1997, as compared to 1996, due primarily to a $206,000 gain on sale of office
premises and equipment, coupled with a $561,000 increase in service fees,
charges and other operating income and a $127,000 gain on sale of loans, which
were partially offset by a decline of $200,000, or 100%, in insurance
commissions year-to-year. The gain on sale of office premises resulted from
River Valley Financial's sale of the Hanover branch facility, which was
consummated in accordance with the terms of regulatory approval of the Citizens
acquisition. The decline in insurance commissions year-to-year resulted from
River Valley's sale of its insurance agency subsidiary during the last quarter
of 1996. The increase in the service fees, charges and other operating income
primarily reflects the beneficial effects of Citizen's operations on the 1997
year.
General, Administrative and Other Expense
General, administrative and other expense increased by $1.1 million, or 39.5%,
during 1997, compared to 1996. This increase resulted primarily from a $962,000,
or 80.0%, increase in employee compensation and benefits, a $243,000, or 85.6%,
increase in occupancy and equipment expense and a $600,000, or 146.3%, increase
in other operating expense, which were partially offset by a $634,000, or 92.7%,
decrease in federal deposit insurance premiums. As previously discussed, the
1997 consolidated statements of operations include the accounts of Citizens,
while the 1996 statements have not been restated to include the acquisition of
Citizens. The increase in general, administrative and other expense during 1997
is primarily attributable to the Citizens' acquisition, offset somewhat by the
absence of the $503,000 SAIF recapitalization assessment recorded in 1996.
Income Taxes
The provision for income taxes increased by $754,000 for the year ended December
31, 1997, as compared to 1996. This increase resulted primarily from an increase
in net earnings before tax of $2.0 million. The effective tax rates were 38.8%
and 51.0% for the years ended December 31, 1997 and 1996, respectively.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995
General
The Corporation's net earnings for the year ended December 31, 1996, totaled
$73,000, a decrease of $185,000, or 71.7%, from the $258,000 in net earnings
recorded for the 1995 period. 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 reflected 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.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995 (continued)
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 Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the primary market areas
and other factors related to the collectibility of the 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.
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 sale of 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 sale of subsidiary resulted from River Valley Financial's sale of
its insurance agency subsidiary, McCauley Insurance Agency. The sale of McCauley
was required by the Federal Reserve Bank in connection with regulatory approval
of the acquisition of Citizens. 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 Bank. The assessment was computed based upon the Bank's deposits as of March
31, 1995. The assessment rate was finalized at $.657 per every $100 of deposits,
which resulted in a pre-tax charge to 1996 consolidated operations of
approximately $503,000. The legislation reduced federal deposit insurance
premiums from $.23 per $100 in deposits to $.065 per $100 in deposits, effective
January 1, 1997.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995 (continued)
General, Administrative and Other Expense (continued)
The increase in employee compensation and benefits resulted primarily from
normal merit increases and increased costs associated with stock 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 Corporation and nonrecurring
consulting fees which were partially offset by a reduction in advertising costs
year to year.
Income Taxes
The provision for 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 Corporation's effective tax rates were 51.0% and 42.2% for the years ended
December 31, 1996 and 1995, respectively.
<PAGE>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents certain information relating to River Valley's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing annual
income or expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio.
<TABLE>
<CAPTION>
1997 1996
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits and other $ 5,351 $ 322 6.02% $ 3,291 $ 188 5.71%
Investment securities (1) 5,043 277 5.49 10,295 562 5.46
Mortgage-backed and related securities (1) 10,874 733 6.74 9,176 574 6.26
Loans receivable, net (2) 111,423 9,030 8.10 59,828 4,551 7.61
------- ------- -------- ------ ----- --------
Total interest-earning assets $132,691 10,362 7.81 $82,590 5,875 7.11
======= ======
Interest-bearing liabilities:
Deposits $118,872 4,914 4.13 $77,710 3,349 4.31
FHLB advances 2,244 135 6.02 1,221 63 5.16
--------- -------- -------- ------- ------- --------
Total interest-bearing liabilities $121,116 5,049 4.17 $78,931 3,412 4.32
======= ------- -------- ====== ----- --------
Net interest income $ 5,313 $2,463
======= =====
Interest rate spread (3) 3.64% 2.79%
======== ========
Net yield on weighted average interest-earning
assets (4) 4.00% 2.98%
======== ========
Average interest-earning assets to average
interest-bearing liabilities 109.56% 104.64%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1995
Average Interest
outstanding earned/ Yield/
balance paid rate
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits and other $ 2,610 $ 107 4.10%
Investment securities (1) 13,925 777 5.58
Mortgage-backed and related securities (1) 10,989 670 6.10
Loans receivable, net (2) 56,916 4,240 7.45
------ ----- --------
Total interest-earning assets $84,440 5,794 6.86
======
Interest-bearing liabilities:
Deposits $76,983 3,419 4.44
FHLB advances 2,967 175 5.90
------- ------ --------
Total interest-bearing liabilities $79,950 3,594 4.50
====== ----- --------
Net interest income $2,200
=====
Interest rate spread (3) 2.36%
========
Net yield on weighted average interest-earning
assets (4) 2.61%
========
Average interest-earning assets to average
interest-bearing liabilities 105.62%
======
</TABLE>
- --------------
(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>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected River
Valley's interest income and expense during the years indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total changes in rate and volume.
The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended December 31,
1997 vs. 1996 1996 vs. 1995
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits and other $ 123 $ 11 $ 134 $ 30 $ 51 $ 81
Investment securities (288) 3 (285) (198) (17) (215)
Mortgage-backed and related securities 112 47 159 (83) (13) (96)
Loans receivable, net 4,168 311 4,479 206 105 311
----- --- ----- --- --- ---
Total 4,115 372 4,487 (45) 126 81
Interest-bearing liabilities:
Deposits 1,699 (134) 1,565 30 (100) (70)
FHLB advances 60 12 72 (92) (20) (112)
------- ---- ------- ---- ---- ---
Total 1,759 (122) 1,637 (62) (120) (182)
----- --- ----- ---- --- ---
Net change in interest income $2,356 $494 $2,850 $ 17 $246 $263
===== === ===== ==== === ===
</TABLE>
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management
Like other financial institutions, River Valley Financial is subject to interest
rate risk to the extent that interest-earning assets reprice differently than
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, River Valley Financial is using the Net Portfolio Value
("NPV") methodology adopted by the OTS as part of its capital regulations.
Although River Valley Financial is not subject to the NPV regulation because
such regulation does not apply to institutions with less than $300 million in
assets and risk-based capital in excess of 12%, the application of the NPV
methodology can illustrate River Valley Financial's degree of interest rate
risk.
Presented below is an analysis of River Valley Financial's interest rate risk,
using the latest information available, as measured by changes in NPV for an
instantaneous and sustained parallel shift of 300 basis points in market
interest rates.
As illustrated in the table, River Valley Financial's NPV is more sensitive to
rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining. As a result, in a rising
interest rate environment, the amount of interest River Valley Financial would
receive on loans would increase relatively slowly as loans are slowly prepaid
and new loans at higher rates are made. Moreover, the interest River Valley
Financial would pay on deposits would increase rapidly because the Bank's
deposits generally have shorter periods of repricing.
September 30, 1997
Change in interest rate $ Change % Change
(Basis Points) in NPV in NPV
(Dollars in thousands)
+300 $(2,665) (13.1)%
- - -
-300 (1,571) (7.7)%
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
If interest rates rise, River Valley's net interest income will be negatively
affected. Moreover, rising interest rates may negatively affect River Valley's
earnings due to diminished loan demand.
Liquidity and Capital Resources
The Corporation's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities, borrowings and
other funds provided by operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan and
mortgage-backed securities prepayments are more influenced by interest rates,
general economic conditions and competition. The Corporation maintains
investments in liquid assets based upon management's assessment of (1) the need
for funds, (2) expected deposit flows, (3) the yield available on short-term
liquid assets and (4) the objectives of the asset/liability management program.
OTS regulations presently require River Valley Financial to maintain an average
daily balance of cash, investments in United States Treasury and agency
securities and other investments in an amount equal to 4% of the sum of River
Valley Financial's average daily balance of net withdrawable deposit accounts.
The liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which River Valley Financial may rely if necessary
to fund deposit withdrawals or other short-term funding needs. At December 31,
1997, River Valley Financial's regulatory liquidity ratio was 19.9%. At such
date, River Valley Financial had commitments to originate loans totaling $4.0
million and, in addition, had undisbursed loans in process and unused lines of
credit of $4.1 million. At December 31, 1997, River Valley Financial had
$684,000 in commitments to sell loans and no outstanding commitments to purchase
loans. The Corporation considers River Valley Financial's liquidity and capital
resources sufficient to meet outstanding short- and long-term needs. At December
31, 1997, the Corporation had no material commitments for capital expenditures.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of the funds provided by or used in the Corporation's operating,
investing and financing activities. These activities are summarized below for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities $ 2,211 $ (194) $ 459
Cash flows from investing activities:
Investment maturities/sales 4,698 5,653 1,101
Mortgage-backed securities purchases (1,350) (729) -
Mortgage-backed securities repayments 3,072 2,110 1,417
Net loan originations (3,859) (458) (1,892)
Other 1,374 2,279 (22)
Cash flows from financing activities:
Net decrease in deposits (10,701) (6,222) (224)
Net increase (decrease) in borrowings 900 (6,371) (515)
Net proceeds from issuance of common stock - 10,221 -
Other (162) 7 (1)
------- -------- -------
Net increase (decrease) in cash and cash
equivalents $(3,817) $ 6,296 $ 323
======= ======== =======
</TABLE>
River Valley Financial is required by applicable law and regulation to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement, or leverage ratio, and a
risk-based capital requirement.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus
intangible assets. "Core capital" is comprised of common shareholders' equity
(including retained earnings), noncumulative preferred stock and related
surplus, minority interests in consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual association. OTS
regulations require savings associations to maintain core capital of at least 3%
of the association's adjusted total assets. The OTS has proposed to increase
such requirement to 4% or 5%, except for those associations with the highest
examination rating and acceptable levels of risk.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
OTS regulations require that savings associations maintain "risk-based capital"
in an amount not less than 8% of "risk-weighted assets." Risk-based capital is
defined as core capital plus certain additional items of capital, which in the
case of River Valley Financial includes a general loan loss allowance of $1.1
million at December 31, 1997.
River Valley Financial exceeded all of its regulatory capital requirements at
December 31, 1997. The following table summarizes River Valley Financial's
regulatory capital requirements and regulatory capital at December 31, 1997:
<TABLE>
<CAPTION>
OTS Requirement Actual Amount
Percent of Percent of Amount
Assets Amount Assets (1) Amount of Excess
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.5% $2,047 12.9% $17,566 $15,519
Core capital (2) 3.0 4,095 12.9 17,566 13,471
Risk-based capital 8.0 6,944 20.8 18,703 11,759
</TABLE>
- --------------
(1) Tangible and core capital levels are shown as a percentage of adjusted
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 adopted by the OCC for national
banks. The 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. River Valley
Financial expects to be in compliance with such new requirements.
(3) River Valley Financial's risk-based capital includes $1.1 million of
general valuation allowances.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements
In June 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 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 June 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.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
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. SFAS No. 130 is not expected to
have a material impact on the Corporation's consolidated financial statements.
In June 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 consolidated financial statements.
Other 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.
As of the date of this Annual Report, the Bank has not identified any specific
expenses that are reasonably likely to be incurred by the Bank in connection
with this issue and does not expect to incur significant expense to implement
the necessary corrective measures. 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.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other Matters (continued)
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. 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.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require River Valley to measure financial position and results of operations in
terms of historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well as changes in monetary and fiscal
policies.
<PAGE>
PAGE LEFT BLANK INTENTIONALLY
<PAGE>
[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 as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of River Valley
Bancorp as of December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 12, 1998
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 3,542 $ 4,209
Federal funds sold 300 -
Interest-earning deposits in other financial institutions 1,026 4,476
--------- ---------
Cash and cash equivalents 4,868 8,685
Certificates of deposit in other financial institutions 897 100
Investment securities designated as available for sale - at market 772 3,448
Investment securities - at amortized cost, approximate market value of
$3,444 and $5,434 as of December 31, 1997 and 1996 3,500 5,500
Mortgage-backed and related securities designated as available
for sale - at market 3,604 5,041
Mortgage-backed and related securities - at cost, approximate market
value of $5,432 and $7,794 as of December 31, 1997 and 1996 5,374 7,805
Loans receivable - net 111,319 107,918
Loans held for sale - at lower of cost or market 684 1,076
Real estate acquired through foreclosure 82 -
Office premises and equipment - at depreciated cost 2,065 2,057
Federal Home Loan Bank stock - at cost 943 943
Federal Reserve Bank stock - at cost - 80
Accrued interest receivable on loans 916 819
Accrued interest receivable on mortgage-backed and related securities 117 78
Accrued interest receivable on investments and interest-earning deposits 65 171
Goodwill - net of accumulated amortization 245 272
Cash surrender value of life insurance 776 747
Prepaid expenses and other assets 141 169
Prepaid federal income taxes - 4
Deferred tax asset 681 628
-------- --------
Total assets $137,049 $145,541
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Deposits $114,955 $125,656
Advances from the Federal Home Loan Bank 2,000 1,100
Advances by borrowers for taxes and insurance 53 70
Accrued interest payable 463 279
Other liabilities 1,524 1,422
Dividends payable 60 -
Minority interest in consolidated subsidiary - 209
Accrued federal income taxes 5 -
------------ --------
Total liabilities 119,060 128,736
Commitments - -
Shareholders' 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 - -
Additional paid in capital 11,229 11,173
Retained earnings - substantially restricted 7,797 6,635
Shares acquired by stock benefit plans (1,005) (952)
Unrealized losses on securities designated as available for sale,
net of related tax effects (32) (51)
----------- -----------
Total shareholders' equity 17,989 16,805
-------- --------
Total liabilities and shareholders' equity $137,049 $145,541
======= =======
</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, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
Interest income
<S> <C> <C> <C>
Loans $ 9,030 $4,551 $4,240
Mortgage-backed and related securities 733 574 670
Investment securities 277 562 777
Interest-earning deposits and other 322 188 107
-------- ------ ------
Total interest income 10,362 5,875 5,794
Interest expense
Deposits 4,914 3,349 3,419
Borrowings 135 63 175
-------- ------- ------
Total interest expense 5,049 3,412 3,594
------- ----- -----
Net interest income 5,313 2,463 2,200
Provision for losses on loans 304 22 150
-------- ------- ------
Net interest income after provision for losses on loans 5,009 2,441 2,050
Other income
Insurance commissions - 200 175
Gain on sale of loans 127 - -
Gain on sale of Hanover branch and related deposits 206 - -
Loss on sale of investment, mortgage-backed and related securities (6) (9) -
Gain on sale of subsidiary - 141 -
Service fees, charges and other operating 807 246 187
-------- ------ ------
Total other income 1,134 578 362
General, administrative and other expense
Employee compensation and benefits 2,165 1,203 998
Occupancy and equipment 527 284 212
Federal deposit insurance premiums 50 684 177
Amortization of goodwill 27 7 7
Data processing 224 282 237
Other operating 1,010 410 335
------- ------ ------
Total general, administrative and other expense 4,003 2,870 1,966
------- ----- -----
Earnings before income taxes 2,140 149 446
Income taxes
Current 893 124 245
Deferred (63) (48) (57)
--------- ------- -------
Total income taxes 830 76 188
-------- ------- ------
NET EARNINGS $ 1,310 $ 73 $ 258
======= ======= ======
EARNINGS PER SHARE
Basic $1.19 N/A N/A
======= ======= ======
Diluted $1.18 N/A N/A
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Shares gains (losses)
acquired on securities
Additional by stock designated
Common paid-in benefit as available Retained
stock capital plans for sale earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ - $ - $ - $ - $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
Purchase of shares for stock benefit plans - - (174) - - (174)
Amortization expense related to stock benefit plans - 56 121 - 7 184
Cash dividends of $0.13 per common share - - - - (155) (155)
Net earnings for the year ended December 31, 1997 - - - - 1,310 1,310
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - 19 - 19
--- ------- ------ ---- ----- ---------
Balance at December 31, 1997 $ - $11,229 $(1,005) $ (32) $7,797 $17,989
=== ====== ====== ==== ===== ======
</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>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,310 $ 73 $ 258
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization (accretion) of premiums and discounts on
investments, mortgage-backed and related securities - net 1 2 (9)
Loss on sale of investment, mortgage-backed and related securities
designated as available for sale 6 9 -
Gain on sale of Hanover branch and related deposits (206) - -
Loans originated for sale in the secondary market (6,538) (1,076) -
Proceeds from sale of loans in the secondary market 6,996 - -
Gain on sale of loans in the secondary market (66) - -
Amortization of deferred loan origination costs 73 83 85
Provision for losses on loans 304 22 150
Depreciation and amortization 223 91 68
Amortization of goodwill 27 7 7
Amortization expense of stock benefit plans 184 - -
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 (97) 29 (67)
Accrued interest receivable on mortgage-backed and related securities (39) (1) 7
Accrued interest receivable on investments and interest-earning deposits 106 100 (4)
Prepaid expenses and other assets 28 262 (6)
Accrued interest payable 184 (41) 6
Other liabilities (47) 413 26
Income taxes
Current 9 22 (5)
Deferred (63) (48) (57)
--------- --------- ---------
Net cash provided by (used in) operating activities 2,395 (194) 459
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 2,000 3,500 1,000
Proceeds from sale of investment securities designated as available for sale 2,698 2,153 101
Purchase of mortgage-backed and related securities designated as available
for sale (1,350) (729) -
Principal repayments on mortgage-backed and related securities 3,072 2,110 1,417
Proceeds from sale of mortgage-backed and related securities
designated as available for sale 2,146 - -
Loan principal repayments 43,220 17,114 13,708
Loan disbursements (47,079) (17,572) (15,600)
Additions to real estate acquired through foreclosure (1) - -
Proceeds from sale of office premises and equipment 405 - -
Purchase of office premises and equipment (430) (9) (46)
(Increase) decrease in certificates of deposit in
other financial institutions - net (797) 200 50
Purchase of Federal Reserve Bank stock (64) - -
Proceeds from sale of Federal Reserve Bank stock 144 - -
Purchase of single premium life insurance - (188) -
Increase in cash surrender value of life insurance (29) (24) (26)
Proceeds from sale of subsidiary - net - 282 -
Acquisition of Citizens National Bank common stock - net - 2,018 -
------- ------- ------
Net cash provided by investing activities 3,935 8,855 604
------- ------- --------
Net cash provided by operating and investing
activities (subtotal carried forward) 6,330 8,661 1,063
------- ------- -------
</TABLE>
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash provided by operating and investing
activities (subtotal brought forward) $ 6,330 $ 8,661 $ 1,063
Cash flows provided by (used in) financing activities:
Decrease in deposit accounts (3,913) (6,222) (224)
Decrease in deposit accounts due to the sale of a branch (6,788) -- --
Proceeds from Federal Home Loan Bank advances 7,000 -- 2,000
Repayment of Federal Home Loan Bank advances (6,100) (6,371) (2,515)
Advances by borrowers for taxes and insurance (17) 7 (1)
Proceeds from issuance of common stock -- 11,173 --
Acquisition of common stock for stock benefit plans (174) (952) --
Dividends on common stock (155) -- --
-------- -------- --------
Net cash used in financing activities (10,147) (2,365) (740)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,817) 6,296 323
Cash and cash equivalents at beginning of year 8,685 2,389 2,066
-------- -------- --------
Cash and cash equivalents at end of year $ 4,868 $ 8,685 $ 2,389
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 618 $ 84 $ 191
======== ======== ========
Interest on deposits and borrowings $ 4,865 $ 3,201 $ 3,588
======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 81 $ -- $ --
======== ======== ========
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 $ 19 $ (63) $ 12
======== ======== ========
Recognition of mortgage servicing rights in accordance with
SFAS No. 122 $ 61 $ -- $ --
======== ======== ========
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, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On March 5, 1996, the Board of Directors of River Valley Financial Bank
(formerly Madison First Federal Savings and Loan Association; hereinafter
"River Valley Financial" or the "Bank") adopted an overall plan of
conversion and reorganization (the "Plan") whereby the Bank would convert to
the stock form of ownership, followed by the issuance of all of the Bank'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 Bank 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. In December 1996, the
Corporation utilized approximately $3.0 million of the net conversion
proceeds to purchase Citizens National Bank of Madison ("Citizens') in a
transaction accounted for using the purchase method of accounting. On
November 20, 1997, Citizens and River Valley Financial merged. Condensed
financial statements of the Corporation are presented in Note L.
The Corporation is a financial institution holding company whose activities
are primarily limited to holding the stock of River Valley Financial. 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.
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, with
the exception of the policy described in Note A-3, have been consistently
applied in the preparation of the accompanying consolidated financial
statements.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Bank and its subsidiary, Madison First
Service Corporation ("First Service"). All significant intercompany balances
and transactions have been eliminated in the accompanying consolidated
financial statements.
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
shareholders' 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
Bank transferred approximately $5.0 million of investment securities
previously identified as held-to-maturity to an available for sale
classification. At December 31, 1997 and 1996, the Corporation's
shareholders' equity included unrealized losses on securities designated as
available for sale, net of related tax effects, of $32,000 and $51,000,
respectively. Realized gains and losses on the sale of investment and
mortgage-backed and related securities are recognized using the specific
identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for unamortized yield adjustments, including deferred loan
origination costs and capitalized mortgage servicing rights, and the
allowance for loan losses. The yield adjustments are amortized and accreted
to operations using the interest method over the average life of the
underlying loans.
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
Loans held for sale are carried at the lower of acquisition cost (less
principal payments received) or fair value (market value), calculated on an
aggregate basis. At December 31, 1997 and 1996, loans held for sale were
carried at cost, which approximated fair value.
At December 31, 1997 and 1996, the Bank was servicing approximately $28.6
million and $26.5 million, respectively, of mortgage loans that have been
sold to the Federal Home Loan Mortgage Corporation.
The Corporation retains the servicing on loans sold and agrees to remit to
the investor loan principal and interest at agreed-upon rates. 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.
The mortgage servicing rights recorded by the Bank, calculated in accordance
with the provisions of SFAS No. 122, were segregated into pools for
valuation purposes, using as pooling criteria the loan term and coupon rate.
Once pooled, each grouping of loans was evaluated on a discounted earnings
basis to determine the present value of future earnings that a purchaser
could expect to realize from each portfolio. Earnings were projected from a
variety of sources including loan servicing fees, interest earned on float,
net interest earned on escrows, miscellaneous income, and costs to service
the loans. The present value of future earnings is the "economic" value for
the pool, i.e., the net realizable present value to an acquirer of the
acquired servicing.
The Bank recorded amortization related to mortgage servicing rights totaling
approximately $18,000 for the year ended December 31, 1997. At December 31,
1997 and 1996, the fair value of the Corporation's mortgage servicing rights
totaled approximately $113,000 and $72,000, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees and Costs
The Corporation accounts for loan origination fees and costs in accordance
with 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, all origination fees received,
net of certain direct origination costs, are deferred on a loan-by-loan
basis and amortized to interest income using the interest 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.
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, 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. Such provision is based
upon management's estimate of the fair value of the underlying collateral,
taking into consideration the current and currently anticipated future
operating or sales conditions. As a result, such estimates are particularly
susceptible to changes that could result in a material adjustment to results
of operations in the near term.
The Corporation accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
Under SFAS No. 114, a loan is defined 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, 1997 and 1996, the Corporation had no loans that would be
defined as impaired under SFAS No. 114.
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
Depreciation of office premises and equipment is computed using the
straight-line method over the estimated 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.
8. Amortization of Goodwill
Amortization of goodwill arising from the Corporation's acquisition of
Citizens 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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Amortization of Goodwill (continued)
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". Pursuant to the provisions of 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
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.
The Corporation's principal temporary differences between pretax financial
income and taxable income result 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. A temporary difference is also recognized for
depreciation expense computed using accelerated methods for federal income
tax purposes.
10. Retirement and Incentive Plans
Qualified employees of Madison First Federal are covered by noncontributory
retirement plans. There were no unfunded past service liabilities at
December 31, 1997 and 1996. First Service has no qualified employees.
Employees of Madison First Federal 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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans (continued)
The Fund had previously advised the Bank 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. Because of the
continuing overfunded status of the Fund, no contributions were made to the
pension plan during the years ended December 31, 1997, 1996 and 1995. 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 Madison First Federal employees with
noncontributory retirement plans, the Bank has a supplemental retirement
plan, which provides retirement benefits to all directors. The Bank's
obligations under the plan have been funded via the purchase of key man life
insurance policies, of which the Bank 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
for each of the years ended December 31, 1997, 1996 and 1995.
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 year.
Expense recognized related to the ESOP totaled approximately $200,000 and
$65,000 for the years ended December 31, 1997 and 1996, respectively.
During 1997, the Corporation implemented a contributory 401(k) plan covering
all employees who have attained the age of 21 and have completed one year of
service. Contributions to the plan are voluntary and are subject to matching
by the employer. The Bank's contributions to the plan totaled approximately
$48,000 for the year ended December 31, 1997.
11. 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 95,220 unallocated ESOP shares, totaled
1,095,030 for the year ended December 31, 1997.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. 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
1,106,858 for the year ended December 31, 1997. There were 11,828
incremental shares related to the assumed exercise of stock options included
in the computation of diluted earnings per share for the year ended December
31, 1997.
The provisions of SFAS No. 128, "Earnings Per Share," were not applicable
for the years ended December 31, 1996 and 1995, 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-earning 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 1997
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. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from the disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
Cash and cash equivalents and certificates of deposit in other financial
institutions: The carrying amounts presented in the consolidated
statements 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: Fair values for
investment and mortgage-backed and related securities are based on
quoted market prices and dealer quotes.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, 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.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Federal Reserve Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair values of deposits with no stated maturity, such as
NOW and super NOW accounts, passbook accounts and money market demand
accounts are deemed to approximate the amount payable on demand as of
December 31, 1997 and 1996. The fair values for fixed-rate certificates
of deposit is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Advances from Federal Home Loan Bank: The fair value of these advances
is estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
Advances by borrowers for taxes and insurance: The carrying amount of
advances by borrowers for taxes and insurance is deemed to approximate
fair value.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
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, 1997 and 1996, 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>
1997 1996
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 4,868 $ 4,868 $ 8,685 $ 8,685
Certificates of deposit in other financial institutions 897 897 100 100
Investment securities designated as available for sale 772 772 3,448 3,448
Investment securities 3,500 3,444 5,500 5,434
Mortgage-backed and related securities designated
as available for sale 3,604 3,604 5,041 5,041
Mortgage-backed and related securities - at cost 5,374 5,432 7,805 7,794
Loans receivable - net 112,003 114,676 108,994 108,775
Federal Home Loan Bank stock 943 943 943 943
Federal Reserve Bank stock - - 80 80
--------- --------- ----------- -----------
$131,961 $134,636 $140,596 $140,300
======= ======= ======= =======
Financial liabilities
Deposits $114,955 $113,974 $125,656 $123,716
Advances from the Federal Home Loan Bank 2,000 2,000 1,100 1,099
Advances by borrowers for taxes and insurance 53 53 70 70
--------- --------- ----------- -----------
$117,008 $116,027 $126,826 $124,885
======= ======= ======= =======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
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>
1997 1996
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government agency obligations $3,500 $3,444 $5,500 $5,434
Available for sale:
U.S. Government agency obligations 498 494 2,997 2,980
Municipal obligations 276 278 474 468
------ ------ ------ ------
774 772 3,471 3,448
------ ------ ----- -----
Total investment securities $4,274 $4,216 $8,971 $8,882
===== ===== ===== =====
</TABLE>
At December 31, 1997 and 1996, the cost carrying value of the Corporation's
investment securities held to maturity exceeded fair value by $56,000 and
$66,000, 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>
1997 1996
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $2,500 $2,492 $2,000 $1,998
Due in one to three years 1,000 952 2,500 2,474
Due in three to five years - - 1,000 962
----- ----- ----- ------
$3,500 $3,444 $5,500 $5,434
===== ===== ===== =====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of U.S. Government agency
obligations and municipal obligations designated as available for sale at
December 31, 1997 and 1996, by term to maturity are shown below.
<TABLE>
<CAPTION>
1997 1996
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due in one to three years $ - $ - $2,000 $1,999
Due in three to five years 498 494 997 981
Due in five to ten years 276 278 474 468
--- --- ------ ------
$774 $772 $3,471 $3,448
=== === ===== =====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities designated
as held to maturity at December 31, 1997 and 1996 are shown below.
<TABLE>
<CAPTION>
1997
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 $2,448 $ 6 $ (17) $2,437
Government National Mortgage Association
participation certificates 1,935 46 - 1,981
Federal National Mortgage Association
participation certificates 973 23 - 996
Interest-only certificates 18 - - 18
------- -- -- -------
$5,374 $ 75 $ (17) $5,432
===== ==== ==== =====
</TABLE>
<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>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed and related securities held to
maturity at December 31, 1997, 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 $ 981
Due after one to three years 2,260
Due after three to five years 48
Due after ten to twenty years 86
Due after twenty years 1,999
-----
$5,374
======
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities designated
as available for sale at December 31, 1997 and 1996 are shown below.
<TABLE>
<CAPTION>
1997
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 $ 915 $ 11 $ (1) $ 925
Government National Mortgage Association
participation certificates 451 - (1) 450
Federal National Mortgage Association
participation certificates 1,657 4 (44) 1,617
Collateralized mortgage obligations 627 - (15) 612
------ ----- ---- ------
$3,650 $ 15 $(61) $3,604
====== ===== ==== ======
</TABLE>
<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 $ 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>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed and related securities designated as
available for sale at December 31, 1997, 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 three years $ 14
Due after three to five years 551
Due after five to ten years 61
Due after ten to twenty years 924
Due after twenty years 2,097
-----
$3,647
======
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1997 1996
(In thousands)
Residential real estate
One-to-four family residential $ 71,388 $ 67,417
Multi-family residential 2,781 3,416
Construction 3,652 4,895
Nonresidential real estate and land 14,703 14,960
Consumer and other 19,852 19,781
Deferred loan origination costs 202 226
---------- ----------
112,578 110,695
Less:
Undisbursed portion of loans in process 99 1,703
Allowance for loan losses 1,160 1,074
--------- ---------
$111,319 $107,918
======== ========
As depicted above, the Bank'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 $77.8 million, or 69%, of the total loan portfolio at December
31, 1997 and approximately $75.7 million, or 68%, of the total loan
portfolio at December 31, 1996. Generally, such loans have been underwritten
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Bank with adequate collateral coverage in the
event of default. Nevertheless, the Bank, 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 Bank's primary lending
areas are presently stable.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE (continued)
In the ordinary course of business, the Bank has granted loans to some of
its 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 $462,000 and $541,000 at December 31, 1997 and 1996,
respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,074 $ 407 $252
Provision for losses on loans 304 22 150
Allowance for loan losses of Citizens - 648 -
Charge-offs of loans (269) (3) -
Recoveries of loan losses 51 - 5
------- ----- -----
Balance at end of year $1,160 $1,074 $407
===== ===== ===
</TABLE>
As of December 31, 1997, the Corporation's allowance for loan losses was
comprised of a general loan loss allowance of approximately $1.1 million,
which is includible as a component of regulatory risk-based capital, and a
specific loan loss allowance of approximately $23,000.
The Corporation had nonperforming loans totaling $718,000, $819,000 and
$8,000 at December 31, 1997, 1996 and 1995, respectively.
The Corporation had no material loss of interest income related to such
nonperforming loans during the years ended December 31, 1997, 1996 and 1995.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 are comprised of the following:
1997 1996
(In thousands)
Land and improvements $ 662 $ 718
Office buildings and improvements 1,750 2,107
Leasehold improvements 115 115
Furniture, fixtures and equipment 1,943 1,742
Automobiles 32 16
------- -------
4,502 4,698
Less accumulated depreciation 2,437 2,641
----- -----
$2,065 $2,057
===== =====
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
Deposit type and 1997 1996
weighted-average interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 5,628 4.9 $ 5,951 4.7
NOW accounts
1997 - 2.57% 15,424 13.4
1996 - 2.56% 21,089 16.8
Money market demand accounts
1997 - 2.93% 8,257 7.2
1996 - 2.94% 9,623 7.7
Passbook accounts
1997 - 3.42% 21,411 18.7
1996 - 3.36% 21,718 17.3
-------- ----- -------- ------
Total demand, transaction and
passbook deposits 50,720 44.2 58,381 46.5
Certificates of deposit
4.00 - 4.99%
4.82% in 1997 13,016 11.3
4.80% in 1996 11,647 9.3
5.00 - 5.99%
5.40% in 1997 36,010 31.3
5.41% in 1996 41,560 33.1
6.00 - 6.99%
6.22% in 1997 12,312 10.7
6.28% in 1996 11,144 8.9
7.00 - 7.99%
7.50% in 1997 2,896 2.5
7.49% in 1996 2,923 2.3
8.00 - 8.99%
8.25% in 1997 1 -
8.25% in 1996 1 -
-------- ----- -------- ------
Total certificates of deposit 64,235 55.8 67,275 53.5
-------- ----- -------- ------
Total deposit accounts $114,955 100.0 $125,656 100.0
======== ===== ======== ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 totaled approximately $7.8 million and $9.7 million at December
31, 1997 and 1996, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1997 1996 1995
(In thousands)
Passbook $ 708 $ 539 $ 524
NOW accounts 435 206 176
Money market deposit accounts 480 234 243
Certificates of deposit 3,291 2,370 2,476
----- ----- -----
$4,914 $3,349 $3,419
===== ===== =====
Maturities of outstanding certificates of deposit are summarized as follows
at December 31:
1997 1996
(In thousands)
Less than one year $45,842 $47,948
One year to three years 16,970 16,563
More than three years 1,423 2,764
------- -------
$64,235 $67,275
====== ======
As a result of the Corporation's acquisition of Citizen's, regulatory
authorities required the sale of one of the Bank's retail branches. A
definitive agreement was reached in 1996, which provided for the purchaser
to acquire the branch facility for a price approximating book value, while
assuming the branch deposits, which totaled $6.8 million, for a premium on
core deposits. The transaction was consummated in 1997 and resulted in an
after-tax gain of $125,000.
NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances, collateralized at December 31, 1997, by
certain residential mortgage loans totaling $3.2 million and the Bank's
investment in Federal Home Loan Bank stock, are shown below:
Interest Maturing year
rate ending in 1997 1996
(In thousands)
7.35% 1997 $ - $1,100
6.12% 1998 2,000 -
----- ----
$2,000 $1,100
===== =====
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
expected statutory rate $728 $51 $152
State taxes, net of federal benefits 125 9 39
Increase (decrease) in taxes resulting from:
Amortization of goodwill 9 2 2
Other (primarily nontaxable income in 1997) (32) 14 (5)
---- -- -----
Income tax provision per consolidated
financial statements $830 $76 $188
=== == ===
Effective tax rate 38.8% 51.0% 42.2%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1997 1996
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination costs $ (69) $ (77)
Difference between book and tax depreciation (63) (71)
Percentage of earnings bad debt deduction (202) (121)
Mortgage servicing rights (38) -
------- -
Total deferred tax liabilities (372) (269)
Deferred tax assets:
Deferred compensation 59 42
Allowance for valuation decline on
mortgage-related securities 90 90
General loan loss allowance 447 282
Benefit plan expense 62 -
Unrealized loss on securities designated as
available for sale 16 25
Purchase accounting adjustments related to asset
valuation adjustments 378 458
Other 1 -
-------- -
Total deferred tax assets 1,053 897
----- ---
Net deferred tax asset $ 681 $628
====== ===
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE H - INCOME TAXES (continued)
Madison First Federal 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, 1997 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,
1997. See Note N for additional information regarding future percentage of
earnings bad debt deductions.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank 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 statements of financial condition.
The Bank'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
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1997, the Bank had outstanding commitments of approximately
$3.4 million to originate residential one-to-four family real estate loans,
of which $2.4 million were comprised of 6.75% to 8.50% fixed-rate loans and
$1.0 million were comprised of 7.00% to 8.50% variable rate loans.
Additionally, the Bank had commitments to originate loans secured by other
real estate and non-mortgage loans totaling $507,000 and $120,000,
respectively, as of December 31, 1997. The Bank also had unused lines of
credit under home equity loans and commercial loans of approximately $1.4
million and $2.6 million, respectively, at December 31, 1997, and commercial
letters of credit totaling $47,000 at that date. In the opinion of
management, all loan commitments equaled or exceeded prevalent market
interest rates as of December 31, 1997, 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 flows from operations and existing excess liquidity. Fees received in
connection with these commitments have not been recognized in earnings.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE I - COMMITMENTS AND CONTINGENCIES (continued)
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 Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank, 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 Citizens, the Corporation assumed
leases of branch banking facilities. For the lease of the banking facility
in the Wal-Mart Supercenter in Madison, the Corporation is to make payments
of approximately $23,000 and $17,000 in 1998 and 1999, respectively. 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 estimated annual
payments of $6,000 for 1998 under a year-to-year lease agreement.
NOTE K - STOCK OPTION PLAN
In June 1997, the Corporation adopted the 1997 Stock Option Plan that
provides for the issuance of 119,025 shares of common stock. Options to
purchase 117,648 shares were granted during 1997 at an exercise price equal
to the fair value at the date of grant.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE K - STOCK OPTION PLAN (continued)
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
1997
Net earnings (in thousands) As reported $1,310
======
Pro-forma $1,269
======
Earnings per share
Basic As reported $1.19
======
Pro-forma $1.16
======
Diluted As reported $1.18
======
Pro-forma $1.15
======
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: dividend yield
of 1.013%, expected volatility of 10.0%, a risk-free interest rate of 5.5%
and expected lives of seven years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1997, and changes during the period then ended is presented
below:
Weighted-
average
exercise
Shares price
Outstanding at beginning of year - $ -
Granted 117,648 14.81
Exercised - -
Forfeited 12,499 14.81
-------- -----
Outstanding at end of year 105,149 $14.81
======= =====
Options exercisable at year-end -
=======
Weighted-average fair value of
options granted during the year $4.74
=======
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE K - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at December 31,
1997:
Number outstanding 105,149
Range of exercise prices $14.78 - $17.875
Weighted-average exercise price $14.81
Weighted-average remaining contractual life 9.5 years
NOTE L - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP
The following condensed financial statements summarize the financial
position of River Valley Bancorp at December 31, 1997 and 1996, and the
results of its operations and its cash flows for the periods ended December
31, 1997 and 1996.
River Valley Bancorp
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and interest-earning deposits $ 374 $ 655
Investment in subsidiaries 17,744 16,453
Prepaid expenses and other assets 65 -
------ ------
Total assets $18,183 $17,108
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 194 $ 94
Minority interest in consolidated subsidiary - 209
------ ------
194 303
Shareholders' equity
Preferred stock - -
Common stock - -
Additional paid in capital 11,229 11,173
Retained earnings 7,797 6,635
Shares acquired by stock benefit plans (1,005) (952)
Unrealized losses on securities
designated as available
for sale, net of related tax effects (32) (51)
------ ------
Total shareholders' equity 17,989 16,805
------ ------
Total liabilities and shareholders' equity $18,183 $17,108
====== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued)
River Valley Bancorp
STATEMENTS OF EARNINGS
Periods ended December 31,
(In thousands)
1997 1996
Revenue
Interest income $ 81 $ -
Equity in earnings of subsidiaries 1,390 2
------ ------
1,471 2
General, administrative and other expense 243 -
------ ------
Earnings before income tax credits 1,228 2
Income tax credits 82 -
------ ------
NET EARNINGS $1,310 $ 2
====== ======
River Valley Bancorp
STATEMENTS OF CASH FLOWS
Periods ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net earnings for the year $1,310 $ 2
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (65) -
Other liabilities (109) 94
Undistributed net earnings of subsidiary (1,390) (2)
Amortization expense of stock benefit plans 128 -
------ --------
(126) 94
Cash flows from financing activities:
Proceeds from issuance of common stock - 11,173
Acquisition of stock by stock benefit plans - (952)
Acquisition of Citizens National Bank - (4,588)
Purchase of shares in River Valley Financial - (5,072)
Dividends on common stock (155) -
------ --------
(155) 561
------ --------
Net increase (decrease) in cash and cash equivalents (281) 655
Cash and cash equivalents at beginning of year 655 -
------ --------
Cash and cash equivalents at end of year $ 374 $ 655
====== ========
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE M - REGULATORY CAPITAL
The Bank is subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision (the "OTS"). 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 the Bank's 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 Bank's 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 shareholders'
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 Bank's excess
regulatory capital position as a result of this proposed 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 Bank 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, 1997 and 1996, management believes that the Bank met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
1997: To be "well-
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $17,566 12.9% *$2,047 *1.5% *$6,824 * 5.0%
Core capital $17,566 12.9% *$4,095 *3.0% *$8,189 * 6.0%
Risk-based capital $18,703 20.8% *$6,944 *8.0% *$8,680 *10.0%
</TABLE>
- --------------
* Equal to or greater than
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE M - REGULATORY CAPITAL (continued)
<TABLE>
<CAPTION>
1996: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $11,713 14.0% *$1,252 *1.5% *$4,173 * 5.0%
Core capital $11,713 14.0% *$2,503 *3.0% *$5,006 * 6.0%
Risk-based capital $12,136 27.6% *$3,515 *8.0% *$4,394 *10.0%
</TABLE>
- --------------
* Equal to or greater than
At December 31, 1997, the Bank 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 Bank's capital exceeded the minimum required amounts for classification
as a "well-capitalized" institution by $10.0 million and $10.7 million,
respectively.
The FDIC has adopted risk-based capital ratio guidelines to which Citizens
was 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, 1997, 1996 and 1995
NOTE M - REGULATORY CAPITAL (continued)
Management believes that Citizens met all capital adequacy requirements to
which it was subject as of December 31, 1996.
<TABLE>
<CAPTION>
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier I leverage $4,512 7.2% *$3,122 *4.0% *$3,903 * 5.0%
Tier I capital (to risk-
weighted assets) $4,512 9.9% *$1,818 *4.0% *$2,727 * 6.0%
Total capital (to risk-
weighted assets) $5,160 11.4% *$3,635 *8.0% *$4,544 *10.0%
- --------------
* Equal to or greater than
</TABLE>
The Bank is 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 an amount not to
exceed the greater 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, or (ii) 75% of its net earnings for the most
recent four quarters. Pursuant to such OTS dividend regulations, the Bank
had the ability to pay dividends of approximately $4.3 million to the
Corporation at December 31, 1997.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE N - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Bank 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 Bank
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, 2000. 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 Bank 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 Bank 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 Bank
has provided deferred taxes for this amount and will be permitted to
amortize the recapture of the bad debt reserve over six years.
NOTE O - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION
On March 5, 1996, the Bank's Board of Directors adopted an overall plan of
conversion and reorganization (the "Plan") whereby the Bank would convert to
the stock form of ownership, followed by the issuance of all of the Bank's
outstanding stock to a newly formed holding company, River Valley Bancorp.
Pursuant to the Plan, the Bank 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 capital proceeds of $10.2
million.
At the date of the conversion, the Bank 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 Bank after conversion.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE O - 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 Bank, the existence of
the liquidation account will not restrict the use or further application of
such retained earnings.
The Bank may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause the Bank's shareholders'
equity to be reduced below either the amount required for the liquidation
account or the regulatory capital requirements for insured institutions.
In 1995, the Bank had entered into a purchase agreement (the "Agreement")
with the majority shareholder of Citizens. The Agreement, as subsequently
amended, stated that the Corporation would purchase approximately 120,000
shares, representing 95.6% of Citizen's outstanding common stock, for total
cash consideration of approximately $3.0 million. The acquisition was
consummated in 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, 1997, 1996 and 1995
NOTE O - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)
The Bank 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 in 1996, resulting in a gain on sale totaling
$141,000.
<PAGE>
NOTES
================================================================================
<PAGE>
GENERAL INFORMATION FOR SHAREHOLDERS
<TABLE>
<CAPTION>
<S> <C>
Transfer Agent and Registrar: Shareholder and General Inquiries:
Corporate Trust Services River Valley Bancorp
Fifth Third Center Attn: James E. Fritz
38 Fountain Square Plaza 303 Clifty Drive, P.O. Box 1590
Cincinnati, Ohio 45263 Madison, Indiana 47250
Tel: (513)579-5417 Fax: (513)744-6785 Tel: (812)273-4949 Fax: (812)273-4944
Corporate Counsel: Special Counsel:
Lonnie D. Collins, Attorney Barnes & Thornburg
426 E. Main Street 11 S. Meridian Street
Madison, Indiana 47250 Indianapolis, Indiana 46204
Tel: (812)265-3616 Fax: (812)273-3143 Tel: (317)638-1313 Fax: (317)231-7433
</TABLE>
Annual and Other Reports:
Additional copies of this Annual Report to Shareholders and copies of the most
recent Form 10-K may be obtained without charge by contacting the Corporation.
Offices of River Valley Financial Bank:
Hilltop: 303 Clifty Drive
430 Clifty Drive
Downtown: 233 East Main Street
307 East Main Street
Drive thru: 401 East Main Street
Wal-Mart: 567 Ivy Tech Drive
Hanover: 10 Medical Plaza
Annual Meeting:
The Annual Meeting of Shareholders of River Valley Bancorp will be held on April
27, 1998, at 3:00 PM, at the office of River Valley Bancorp, 303 Clifty Drive,
Madison, IN 47250.
<PAGE>
BOARD OF DIRECTORS
Fred W. Koehler
Chairman
Cecil L. Dorten
Vice Chairman
Earl W. Johann
Director
Michael J. Hensley
Director
Jonnie L. Davis
Director
James E. Fritz
Director & President
Robert W. Anger
Director & Loan Officer
********************
Lonnie D. Collins
Secretary
<PAGE>
EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK
James E. Fritz
Director & President
Robert D. Hoban
Executive Vice President -
Business Development &
Marketing
Mark A. Goley
Vice President - Senior Loan Officer
Robyne J. Hart
Vice President - Operations Officer
Larry C. Fouse
Controller
Robert W. Anger
Director & Loan Officer
<PAGE>
OFFICERS OF RIVER VALLEY FINANCIAL BANK
Angela D. Adams
Branch Manager
James B. Allen
Branch Manager
Jerry D. Allen
Loan Officer
Isa K. Center
Training Coordinator
Kenneth L. Cull
Loan Officer
Barbara J. Eades
Customer Service Manager
V. Kay Kimmel
Loan Officer
Deanna J. Liter
Data Processing Officer
Linda L. Ralston
Customer Service Manager
Stephanie J. Rickerson
Customer Service Manager
Robert J. Schoenstein Jr.
Loan Officer
Patric W. Shimfessel
Loan Officer
Loy M. Skirvin
Human Resources Manager
Sandra S. Stretton
Loan Officer
<PAGE>
ADVISORY BOARD MEMBERS
Burton P. Chambers
Advisory Director
Van E. Shelton
Advisory Director
Ralph E. Storm
Advisory Director
<PAGE>
[BACK COVER]
[RIVER
VALLEY
FINANCIAL
BANK
LOGO]
SUBSIDIARIES OF RIVER VALLEY BANCORP
Subsidiaries of River Valley Bancorp:
Name Jurisdiction of Incorporation
River Valley Financial Bank Federal
Madison First Service Corporation Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001015593
<NAME> RIVER VALLEY BANCORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 4,868
<INT-BEARING-DEPOSITS> 897
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,376
<INVESTMENTS-CARRYING> 8,874
<INVESTMENTS-MARKET> 8,876
<LOANS> 113,163
<ALLOWANCE> 1,160
<TOTAL-ASSETS> 137,049
<DEPOSITS> 114,955
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 2,105
<LONG-TERM> 0
<COMMON> 0
0
0
<OTHER-SE> 17,989
<TOTAL-LIABILITIES-AND-EQUITY> 137,049
<INTEREST-LOAN> 9,030
<INTEREST-INVEST> 1,010
<INTEREST-OTHER> 322
<INTEREST-TOTAL> 10,362
<INTEREST-DEPOSIT> 4,914
<INTEREST-EXPENSE> 5,049
<INTEREST-INCOME-NET> 5,313
<LOAN-LOSSES> 304
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 4,003
<INCOME-PRETAX> 2,140
<INCOME-PRE-EXTRAORDINARY> 1,310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,310
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 4.00
<LOANS-NON> 60
<LOANS-PAST> 658
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,074
<CHARGE-OFFS> 269
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,160
<ALLOWANCE-DOMESTIC> 23
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,137
</TABLE>
<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> 73
<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>
