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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-21765
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 _____ 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 26, 1999 was $13,128,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 26, 1999, was 1,173,440 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 32 Pages
<PAGE>
RIVER VALLEY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................. 3
PART I
Item 1 Business................................................ 3
Item 2. Properties.............................................. 27
Item 3. Legal Proceedings....................................... 28
Item 4. Submission of Matters to a Vote of Security Holders..... 28
Item 4.5. Executive Officers of the Registrant.................... 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 28
Item 6. Selected Consolidated Financial Data.................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 29
Item 7A. Quantitative and Qualitative
Analysis of Financial Condition
and Results of Operation............................ 29
Item 8. Financial Statements and Supplementary Data............. 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 29
PART III
Item 10. Directors and Executive Officers of Registrant.......... 30
Item 11. Executive Compensation.................................. 30
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................... 30
Item 13. Certain Relationships and Related Transactions.......... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................. 30
SIGNATURES .................................................... 31
- 2 -
<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 operations
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.
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
- 3 -
<PAGE>
("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 57.4% of the Bank's total
loan portfolio, including loans held for sale, at December 31, 1998. 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,
1998, 1997 and 1996 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,
--------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
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..................... $65,907 57.4% $72,072 63.7% $ 68,493 61.4%
Multi-family........................... 1,775 1.6 2,781 2.5 3,416 3.1
Construction........................... 8,126 7.1 3,652 3.2 4,895 4.4
Nonresidential real estate................ 7,604 6.6 8,379 7.4 14,280 12.8
Land loans................................ 6,300 5.5 6,324 5.6 680 .6
Consumer loans:
Automobile loans....................... 6,828 5.9 8,028 7.1 5,245 4.7
Loans secured by deposits.............. 723 .6 1,041 .9 869 .8
Home improvement loans................. --- --- 205 .2 271 .2
Other.................................. 5,089 4.4 5,707 5.1 6,963 6.2
Commercial loans.......................... 12,461 10.9 4,871 4.3 6,433 5.8
-------- ---- -------- ---- -------- ----
Gross loans receivable.................... 114,813 100.0 113,060 100.0 111,545 100.0
Add/(Deduct):
Deferred loan origination costs........ 200 .2 202 .2 226 .2
Undisbursed portions
of loans in process.................. (1,151) (1.0) (99) (.1) (1,703) (1.5)
Allowance for loan losses.............. (1,477) (1.3) (1,276) (1.1) (1,190) (1.1)
-------- ---- -------- ---- -------- ----
Net loans receivable...................... $112,385 97.9% $111,887 99.0% $108,878 97.6%
======== ==== ======== ==== ======== ====
</TABLE>
- 4 -
<PAGE>
The following table sets forth certain information at December 31,
1998, 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 2002 2004 2009 2014
December 31, to to to and
1998 1999 2000 2001 2003 2008 2013 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
One-to four-family................. $ 65,907 $ 964 $110 $432 $2,123 $7,600 $20,737 $33,941
Multi-family....................... 1,775 --- --- --- 7 247 530 991
Construction....................... 8,126 6,487 10 7 146 266 385 825
Nonresidential
real estate loans.................. 7,604 459 87 91 448 1,483 2,885 2,151
Land loans ......................... 6,300 745 4 13 1,408 505 802 2,823
Consumer loans:
Loans secured by deposits.......... 723 245 30 137 63 70 --- 178
Other loans........................ 11,917 1,106 1,478 2,626 3,934 1,500 227 1,046
Commercial loans...................... 12,461 4,741 519 638 2,035 2,362 177 1,989
-------- ------- ------ ------ ------- ------- ------- -------
Total............................ $114,813 $14,747 $2,238 $3,944 $10,164 $14,033 $25,743 $43,944
======== ======= ====== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1998, 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, 1999
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Residential real estate loans:
One-to four-family................. $17,218 $47,725 $64,943
Multi-family....................... 161 1,614 1,775
Construction....................... 429 1,210 1,639
Non-residential
real estate loans.................. 476 6,669 7,145
Land loans ......................... 336 5,219 5,555
Consumer loans:
Loans secured by deposits.......... 344 134 478
Other loans........................ 10,811 0 10,811
Commercial loans...................... 1,485 6,235 7,720
------- ------- --------
Total............................ $31,260 $68,806 $100,066
======= ======= ========
</TABLE>
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $65.9 million, or 57.4% of the Bank's portfolio
of loans at December 31, 1998, consisted of one- to four-family residential
loans, of which approximately 72% had adjustable rates.
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, 1998 provide for maximum rate
adjustments per year and over the life of the loan of 1% and 4%, 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.
- 5 -
<PAGE>
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, 1998,
approximately 28% of the Bank's one-to four-family 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, 1998, the Bank had
approximately $34.3 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.
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, 1998, one- to four-family residential mortgage loans
amounting to $845,000 or .74%, or .99% 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, 1998, $8.1 million, or 7.1% of the Bank's total loan
portfolio, consisted of construction loans. The largest construction loan at
December 31, 1998, totalled $245,000. Construction loans in the amount of
$23,000 were included in non-performing assets on that date.
- 6 -
<PAGE>
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, 1998, $7.6 million,
or 6.6% of the Bank's portfolio consisted of nonresidential real estate loans.
Of this amount, approximately $438,000 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, 1998 was $333,000 and was secured by a convenience store in
Madison, Indiana. Nonresidential real estate loans in the amount of $325,000
were included in non-performing assets at December 31, 1998.
Loans secured by nonresidential real estate generally are larger than
one- to four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-family Loans. At December 31, 1998, approximately $1.8 million,
or 1.6% 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, 1998 was $666,000 and was secured by five apartment buildings in
Lawrenceburg, 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, 1998, approximately $6.3 million, or 5.5%
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, 1998, the Bank's largest land loan totalled $1,247,000.
Land loans totalling $203,000, or .18% of the Bank's total loan
portfolio, were included in non-performing assets as of December 31, 1998. 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, 1998, $12.5 million, or 10.9% 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
- 7 -
<PAGE>
basis with terms that vary depending on the type of security, if any. At
December 31, 1998, 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, 1998, the largest
commercial loan was $1,741,000. As of the same date, no commercial loans 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 $12.6 million at
December 31, 1998, or 10.9% 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, 1998, 90% 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.
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, 1998, consumer loans amounting to $465,000 were included in
non-performing assets.
Home Equity Loans. At December 31, 1998, the Bank had outstanding
approximately $2.7 million of home equity loans, with unused lines of credit
totalling approximately $2.1 million. Home equity loans of $86,000 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, 1998, the Bank serviced $34.3 million in loans sold to the FHLMC.
The Bank confines its loan origination activities primarily to
Jefferson County and surrounding counties. At December 31, 1998, the Bank held
loans totalling approximately $6.1 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 five 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
- 8 -
<PAGE>
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.
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, 1998, the Bank held in its loan portfolio
participations in these types of loans aggregating approximately $464,000 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,
------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans Originated:
Residential real estate loans (1).................... $37,537 $28,123 $12,452
Multi-family loans................................... 326 --- 1,032
Construction loans................................... 5,108 5,740 782
Non-residential real estate loans.................... 447 3,516 1,095
Land loans........................................... 2,909 3,473 391
Consumer loans....................................... 6,423 8,276 2,896
Commercial loans..................................... 16,771 4,489 ---
----------- -------- -------
Total loans originated........................... 69,521 53,617 18,648
Loans acquired through merger........................ --- --- 49,620
Reductions:
Sales................................................ 17,025 6,930 ---
Principal loan repayments............................ 51,624 43,220 17,114
Transfers from loans to real estate owned............ --- 81 ---
----------- -------- -------
Total reductions................................. 68,649 50,231 17,114
Decrease in other items (2).......................... (374) (377) (105)
----------- -------- -------
Net increase ........................................ $ 498 $ 3,009 $51,049
=========== ======== =======
</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.
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
- 9 -
<PAGE>
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, 1998, $1.9 million, or 1.4% of
the Bank's total assets, were non-performing loans compared to $718,000, or
.52%, of the Bank's total assets at December 31, 1997. At December 31, 1998,
residential loans and consumer loans accounted for $1.4 million and $465,000,
respectively, of non-performing assets. The Bank had REO in the amount of
$82,000 at December 31, 1998.
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,
----------------------------------------------
1998 1997 1996
------ ------ ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-performing loans......................... $1,947 $ 718 $819
Troubled debt restructurings................. 937 411 ---
------ ------ ----
Total non-performing loans and troubled
debt restructurings................... 2,884 1,129 819
Foreclosed real estate....................... 82 82 ---
------ ------ ----
Total non-performing assets................ $2,966 $1,211 $819
====== ====== ====
Total non-performing loans to total loans....... 2.51% 1.00% 0.73%
====== ====== ====
Total non-performing assets and troubled debt
restructurings to total assets............. 2.14% .88% 0.56%
====== ====== ====
</TABLE>
At December 31, 1998, the Bank held loans delinquent from 30 to 89 days
totalling $3.2 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.
Delinquent Loans. The following table sets forth certain information at
December 31, 1998, 1997 and 1996, 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, 1998 At December 31, 1997 At December 31, 1996
-------------------------------------- ----------------------------------- -----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
-------------------- ----------------- ------------------- --------------- ------------------ ----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loansof Loans of Loans of Loansof Loans of Loans of Loans of Loansof Loans of Loans
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans....... 69 $2,194 26 $931 16 $673 12 $431 13 $415 9 $430
Multi-family loans.... --- --- --- --- --- --- --- --- --- --- --- ---
Construction loans.... --- --- 1 23 --- --- --- --- --- --- --- ---
Land loans............ 1 11 3 203 --- --- 2 107 --- --- --- ---
Non-residential
real estate loans.. --- --- 4 325 --- --- --- --- --- --- --- ---
Consumer loans........ 86 560 56 465 24 160 22 152 25 116 18 72
Commercial loans...... 10 477 --- --- 2 113 1 28 8 86 6 317
--- ------ -- ------ -- ---- -- ---- -- ---- -- ----
Total.............. 166 $3,242 90 $1,947 42 $946 37 $718 46 $617 33 $819
=== ====== == ====== == ==== == ==== == ==== == ====
Delinquent loans to
total loans........ 2.69% 1.47% 1.29%
==== ==== ====
</TABLE>
- 10 -
<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.
At December 31, 1998, the aggregate amount of the Bank's classified
assets and general and specific loss allowances were as follows:
At December 31, 1998
--------------------
(In thousands)
Substandard assets..................................... $1,828
Doubtful assets........................................ ---
Loss assets............................................ 122
------
Total classified assets............................ $1,950
======
General loss allowances................................ $1,355
Specific loss allowances............................... 122
------
Total allowances................................... $1,477
======
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, 1998. 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.
- 11 -
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the five years ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $1,276 $1,190 $ 407 $252 $227
Charge-offs:
Single-family residential................... --- --- --- --- ---
Consumer.................................... (140) (254) (3) --- (4)
Commercial.................................. (83) (15) --- --- ---
------ ------ ------ ---- ----
Total charge-offs......................... (223) (269) (3) --- (4)
Recoveries....................................... 149 51 --- 5 ---
------ ------ ------ ---- ----
Net (charge-offs) recoveries.................. (74) (218) (3) 5 (4)
Provision for losses on loans.................... 275 304 22 150 29
Increase due to Acquisition...................... --- --- 764 --- ---
------ ------ ------ ---- ----
Balance at end of period...................... $1,477 $1,276 $1,190 $407 $252
====== ====== ====== ==== ====
Allowance for loan losses as a percent of
total loans outstanding before net items...... 1.29% 1.13% 1.07% 0.70% 0.45%
====== ====== ====== ==== ====
Ratio of net (charge-offs) recoveries to average
loans outstanding before net items............ (.06)% (0.20)% (0.01)% 0.01% (0.01)%
====== ====== ====== ==== ====
</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,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ---------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Residential real estate............ $11 66.1% $ 11 69.4% $ 414 68.9%
Nonresidential real estate......... --- 12.1 --- 13.0 264 13.4
Consumer loans..................... 111 10.9 12 13.3 132 11.9
Commercial loans................... --- 10.9 --- 4.3 200 5.8
Unallocated........................ 1,355 --- 1,253 --- 180 ---
------ ----- ------ ----- ------ -----
Total............................ $1,477 100.0% $1,276 100.0% $1,190 100.0%
====== ===== ====== ===== ====== =====
</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, 1998, approximately $2.2 million, or 1.6%,
of the Holding Company's total assets consisted of such investments.
- 12 -
<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,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and
agency obligations............... $1,000 $980 $3,500 $3,444 $5,500 $5,434
Available for Sale:
U.S. Government and
agency obligations............... --- --- 498 494 2,997 2,980
Muncipal securities................ 276 283 276 278 474 468
FHLB stock............................ 943 943 943 943 943 943
FRB stock............................. --- --- --- --- 80 80
------ ------ ------ ------ ------ ------
Total available for sale........... 1,219 1,226 1,717 1,715 4,494 4,471
------ ------ ------ ------ ------ ------
Total investments................ $2,219 $2,206 $5,217 $5,159 $9,994 $9,905
====== ====== ====== ====== ====== ======
</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,
1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998 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> <C> <C>
U.S. Government and agency obligations.......... $1,000 5.03% $--- ---% $--- ---% $--- ---%
Municipal securities............................ --- --- 100 4.35 176 4.80 --- ---
</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 interst-only certificates, 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.
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, 1998, the Bank had $6.0 million of mortgage-backed
securities outstanding, $3.2 million of which were classified as held to
maturity, and $2.8 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.
- 13 -
<PAGE>
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,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Held to Maturity:
Mortgage-backed
<S> <C> <C> <C> <C> <C> <C>
securities....................... $3,190 $3,220 $5,374 $5,432 $ 7,805 $ 7,794
Available for Sale:
Government
agency securities................ 2,196 2,177 3,023 2,992 4,466 4,439
Collateralized mortgage
obligations...................... 627 619 627 612 628 602
------ ------ ------ ------ ------- -------
Total mortgage-backed
securities................... $6,013 $6,016 $9,024 $9,036 $12,899 $12,835
====== ====== ====== ====== ======= =======
</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, 1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998 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)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
held to maturity............................. $447 5.59% $1,054 5.54% $1,689 7.06%
Mortgage-backed securities
available for sale........................... --- --- 383 6.41 2,440 6.42
---- ------ ------
Total...................................... $447 $1,437 $4,129
==== ====== ======
</TABLE>
The following table sets forth the changes in the Bank's
mortgage-backed securities portfolio for the years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance........................ $8,978 $12,846 $ 9,917
Purchases................................ --- 1,350 729
Sales .................................. --- (2,150) ---
Repayments............................... (2,970) (3,072) (2,110)
Premium and discount
amortization, net..................... (40) (1) 2
Mortgage-backed securities
received in Acquisition............... --- --- 4,312
Unrealized gains (losses) on securities
available for sale.................... 18 5 (4)
------ ------ -------
Ending balance........................... $5,986 $8,978 $12,846
====== ====== =======
</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
- 14 -
<PAGE>
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.
An analysis of the Bank's deposit accounts by type, maturity and rate at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1998 Deposits Rate
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C>
Non-interest bearing accounts........ $ 100 $8,365 7.0% ---%
Savings accounts..................... 50 22,378 19.0 3.70
MMDA................................. 100 6,984 5.9 2.92
NOW accounts......................... 100 14,417 12.2 2.60
-------- ----- ----
Total withdrawable................. 52,144 44.1 2.70
Certificates (original terms):
I.R.A................................ 250 7,250 6.1 4.97
3 months............................. 2,500 263 .2 4.12
6 months............................. 2,500 7,238 6.1 5.11
9 months............................. 2,500 3,052 2.6 5.11
12 months............................ 500 6,582 5.6 4.93
15 months............................ 500 18,774 15.9 5.63
18 months............................ 500 1,042 .9 5.09
24 months............................ 500 454 .4 5.29
30 months ........................... 500 2,548 2.2 5.28
36 months............................ 500 602 .5 5.37
48 months............................ 500 625 .5 5.88
60 months............................ 500 2,235 1.9 5.81
72 months ........................... 500 --- --- ---
96 months............................ 500 219 .2 7.64
120 months........................... 500 --- --- ---
Jumbo certificates...................... 100,000 15,123 12.8 5.46
-------- ----- ----
Total certificates................... 66,007 55.9 5.35
-------- ----- ----
Total deposits.......................... $118,151 100.0% 4.18%
======== ===== ====
</TABLE>
- 15 -
<PAGE>
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,
--------------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
3.00 to 4.99%...... $23,200 $13,016 $11,647
5.00 to 5.99%...... 31,364 36,010 41,560
6.00 to 6.99%...... 11,229 12,312 11,144
7.00 to 7.99%...... 214 2,896 2,923
8.00 to 8.99%...... --- 1 1
------- ------- -------
Total........... $66,007 $64,235 $67,275
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1998. Matured certificates, which have not been renewed as of
December 31, 1998, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1998
-------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
3.00 to 4.99%.... $19,148 $3,739 $ 217 $ 96
5.00 to 5.99%.... 24,787 3,605 1,919 1,053
6.00 to 6.99%.... 9,976 1,136 117 ---
7.00 to 7.99%.... 20 10 10 174
------- ------ ------ ------
Total......... $53,931 $8,490 $2,263 $1,323
======= ====== ====== ======
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, 1998.
At December 31, 1998
--------------------
Maturity Period (In thousands)
Three months or less............................... $9,147
Greater than three months through six months....... 3,337
Greater than six months through twelve months...... 1,416
Over twelve months................................. 1,223
-------
Total......................................... $15,123
=======
- 16 -
<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>
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1998 Deposits 1997 1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Non-interest bearing accounts...... $8,365 7.0% $2,737 $ 5,628 4.9% $ (323) $ 5,951 4.7%
Savings accounts................... 22,378 19.0 967 21,411 18.7 (307) 21,718 17.3
MMDA............................... 6,984 5.9 (1,273) 8,257 7.2 (1,366) 9,623 7.7
NOW accounts....................... 14,417 12.2 (1,007) 15,424 13.4 (5,665) 21,089 16.8
-------- ----- ------ -------- ----- -------- -------- -----
Total withdrawable............... 52,144 44.1 1,424 50,720 44.2 (7,661) 58,381 46.5
Certificates (original terms):
I.R.A.............................. 7,250 6.1 (497) 7,747 6.7 (336) 8,083 6.4
3 months........................... 263 .2 (115) 378 .3 477 207 .2
6 months........................... 7,238 6.1 2,549 4,689 4.1 36 6,288 5.0
9 months........................... 3,052 2.6 1,920 1,132 1.0 (36) 1,168 .9
12 months.......................... 6,582 5.6 (2,219) 8,801 7.7 (9,211) 18,003 14.4
15 months.......................... 18,774 15.9 2,072 16,702 14.5 11,912 6,247 5.0
18 months.......................... 1,042 .9 (483) 1,525 1.3 (1,687) 3,212 2.6
24 months.......................... 454 .4 (164) 618 .5 (187) 805 .6
30 months ......................... 2,548 2.2 (2,387) 4,935 4.3 (2,000) 6,935 5.5
36 months.......................... 602 .5 (2,234) 2,836 2.5 62 2,774 2.2
48 months.......................... 625 .5 (133) 758 .7 (53) 811 .6
60 months.......................... 2,235 1.9 (667) 2,902 2.5 (496) 3,398 2.7
72 months ......................... --- --- --- --- --- (10) 10 ---
96 months.......................... 219 .2 1 218 .2 (155) 155 .1
120 months......................... --- --- --- --- --- (4) 4 ---
Jumbo certificates.................... 15,123 12.8 4,129 10,994 9.5 (1,352) 9,175 7.3
-------- ----- ------ -------- ----- -------- -------- -----
Total certificates................. 66,007 55.9 1,772 64,235 55.8 (3,040) 67,275 53.5
-------- ----- ------ -------- ----- -------- -------- -----
Total deposits........................ $118,151 100.0% $3,196 $114,955 100.0% $(10,701) $125,656 100.0%
======== ===== ====== ======== ===== ======== ======== =====
</TABLE>
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, 1998, the Bank had $270,000 in other borrowed money consisting of a
variable-rate two-year line of credit advance. 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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances and Other Borrowed Money:
Outstanding at end of period............................... $ 270 $2,000 $1,100
Average balance outstanding for period..................... 2,549 2,244 1,221
Maximum amount outstanding at any
month-end during the period.............................. 5,000 5,000 2,000
Weighted average interest rate
during the period........................................ 6.28% 6.02% 5.16%
Weighted average interest rate
at end of period......................................... 6.63% 6.12% 7.35%
</TABLE>
- 17 -
<PAGE>
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, 1998, the Bank employed 58 persons on a full-time
basis and four persons on a part-time basis. None of the employees is
represented by a collective bargaining group. Management considers its employee
relations to be good.
COMPETITION
The 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 $16,000.
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.
- 18 -
<PAGE>
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.
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, 1998, 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.
- 19 -
<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, 1998, 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, 1998, dividends paid by the FHLB
of Indianapolis to the Bank totaled approximately $75,000, for an annual rate of
8.0%.
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.
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
- 20 -
<PAGE>
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.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
supervisory rating for safety and soundness, and no less than 4% for all other
savings associations. This amendment becomes effective April 1, 1999. 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, 1998, the Bank was in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be 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, 1998 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
- 21 -
<PAGE>
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,
1998, 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
The OTS recently adopted a regulation, which becomes effective on April
1, 1999, that revises the current restrictions that apply to "capital
distributions" by savings associations. The amended regulation defines a capital
distribution as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. This definition
includes a savings association's payment of cash dividends to shareholders, or
any payment by a savings association to repurchase, redeem, retire, or otherwise
acquire any of its shares or debt instruments that are included in total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. The amended regulation does not apply to dividends
consisting only of a savings association's shares or rights to purchase such
shares.
The amended regulation exempts certain savings associations from the
current requirement that all savings associations file either a notice or an
application with the OTS before making any capital distribution. As revised, the
regulation requires a savings association to file an application for approval of
a proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At December 31, 1998, the Bank's retained net income standard
was $2.7 million. A savings association must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Bank is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that the Bank file a notice with the OTS
30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, the Bank's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits the Bank from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
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
- 22 -
<PAGE>
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 a minimum 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
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, 1998, the Bank had liquid
assets of $12.3 million, and a regulatory liquidity ratio of 16.2%.
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
- 23 -
<PAGE>
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, 1998, 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
every twelve months. As of December 31, 1998, the Bank was in compliance with
its QTL requirement, with approximately 77% 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.
- 24 -
<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.
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.
- 25 -
<PAGE>
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 1998. 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.
- 26 -
<PAGE>
Item 2. Properties.
The following table provides certain information with respect to the
Bank's offices as of December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value
of Property
Year Furniture, Approximate
Opened or Fixtures and Square
Description and Address Acquired Equipment Footage
- ----------------------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Locations in Madison, Indiana
Downtown Offices:
233 E. Main Street................. 1952 $366 9,110
Drive-Through Branch:
401 E. Main Street................. 1984 71 375
Hilltop Locations:
303 Clifty Drive................... 1973 644 3,250
430 Clifty Drive................... 1983 345 6,084
Wal-mart Banking Center
567 Ivy Tech Drive................. 1995 153 517
Locations in Hanover, Indiana (1)
10 Medical Plaza Drive............. 1995 374 656
</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 as of December 31, 1998. These properties were acquired
by the Bank for future expansion of its banking operations.
Address
223 E. Main Street
Madison, Indiana 47250
225 E. Main Street
Madison, Indiana 47250
227 E. Main Street
Madison, Indiana 47250
407 E. Jefferson
Madison, Indiana 47250
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
$450,000 at December 31, 1998.
- 27 -
<PAGE>
The Bank operates six automated teller machines ("ATMs"), one at each
office location 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.
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, 1998.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company 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 Holding Company the Bank
---- ------------------- -------------
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 36) 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 50) 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 53) 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 1998 fiscal year were $15.75 and $14.00, 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.
- 28 -
<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 Holding Company paid dividends to its shareholders in 1998 in the
amount of $.22 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 1998 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.
The information required by this item is incorporated by reference to
pages 13 through 15 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes
thereto contained on pages 23 through 56 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.
- 29 -
<PAGE>
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 6 of the Holding Company's Proxy
Statement for its Annual Shareholder Meeting to be held April 21, 1999 (the
"1999 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 6 through 8 of the 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
pages 2 through 4 of the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
pages 7 and 8 of the 1999 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, 1998, and 1997........................... 24
Consolidated Statements of Earnings for the
Years Ended December 31, 1998, 1997, and 1996............ 26
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1998, 1997, 1996........ 27
Consolidated Statements of Shareholders'
Equity for the Years Ended December 31, 1998,
1997, and 1996........................................... 28
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996.................. 29
Notes to Consolidated Financial Statements............... 31
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1998.
(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.
- 30 -
<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 30, 1999 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 this30th day of March, 1999.
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 30, 1999
)
(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 )
)
)
- 31 -
<PAGE>
/s/ James E. Fritz )
---------------------------- )
James E. Fritz Director )
)
)
/s/ Michael J. Hensley Director )
---------------------------- )
Michael J. Hensley )
)
)
/s/ Earl W. Johann Director ) March 30, 1999
---------------------------- )
Earl W. Johann )
)
)
/s/ Fred W. Koehler Director )
---------------------------- )
Fred W. Koehler )
)
- 32 -
<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
(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)
E - 1
River Valley Bancorp
P.O. Box 1590 o Madison, Indiana 47250-0590 o (812)273-4949 o Fax (812)273-4944
To Our Shareholders:
It is my pleasure to present to you River Valley Bancorp's third Annual Report
to Shareholders covering the year ending December 31, 1998.
This past year has been one of great achievement for River Valley Bancorp. At
this time last year, I reported that we were spending much of our efforts on
developing a strategy to take advantage of the strengths of both banks. In 1998,
that strategy allowed us to come a long way toward meshing two distinct cultures
into one great bank and, although the process is not complete, we are encouraged
by the results reflected in the day to day operations.
Our strategic planning process established critical guidelines that we will
continue to address in the upcoming years in order for River Valley Financial
Bank to be an effective leader in this region. Providing a distinct difference
in the personal service offered to our customers, matched with technology to
provide increased access, will make us the bank of choice.
Net earnings for 1998 totaled $1,253,000, or basic earnings per share of $1.13,
compared to $1,310,000 reported in 1997. The results in 1997 reflected a
one-time pre-tax gain on the sale of a branch in Hanover of $206,000, while 1998
earnings reflected a one-time pre-tax gain on the sale of premises of $57,000.
Current year earnings were favorably impacted by increased secondary market
activity which resulted in $339,000 in gains on sale of loans, compared to
$127,000 in gains recorded in 1997. The current year reflected additional
general and administrative costs related mainly to increased staffing and
advertising.
During 1998 we continued to implement our capital management strategy with the
declaration of dividends totaling $0.22 per share, compared to $0.13 per share
in 1997. Our shareholders also benefited from the fact that the dividends paid
in 1998 and 1997 were considered a 100% return of capital and thus no federal
taxes were due upon their receipt.
Additionally, during 1998, we commenced a stock repurchase program targeted at
acquiring 5% of outstanding shares. At December 31, 1998, we had repurchased
18,000 shares. The repurchase of shares will serve to increase return on equity
and earnings per share in future periods.
It is now time for us to focus on setting the standard of personal service and
increased access that will make us the bank of choice for our area. As we
continue this journey, we again extend a special thanks to all our friends and
shareholders who have supported us with their business and referrals. Thank you
for your trust and support.
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 on December 20, 1996, with the sale of
1,190,250 common shares at an initial offering price of $10.00 per share. On
December 23, 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
five full-service 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 and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits in River Valley Financial are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
FDIC.
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS
There were 1,173,440 common shares of River Valley Bancorp outstanding at March
11, 1999, held of record by 422 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 has 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)
1998
December 31, 1998 $ 16.00 $13.25 $ 0.060
September 30, 1998 19.00 13.75 0.055
June 30, 1998 20.75 18.38 0.055
March 31, 1998 19.75 18.50 0.050
1997
December 31, 1997 $ 19.00 $16.25 $ 0.050
September 30, 1997 17.25 14.75 0.040
June 30, 1997 15.00 13.63 0.040
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 August 1998, the Corporation
finalized a closing agreement with the IRS that enabled the Corporation and
each of its subsidiaries to file separate returns. By definition, the 1998
and 1997 cash distributions have been deemed a tax-free return of capital.
The high and low sales prices for River Valley's common shares between December
31, 1998 and March 10, 1999 were $15.75 and $14.00, 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.
Regulations of the OTS impose limitations on the payment of dividends and other
capital distributions by savings associations. The OTS recently amended its
capital distribution regulation in a final rule which takes effect on April 1,
1999. Because the Bank is a subsidiary of a savings and loan holding company, it
is required to file a notice with the OTS 30 days before making any capital
distributions to the Holding Company. It may also have to file an application
for approval of a proposed capital distribution with the OTS if the Bank is not
eligible for expedited treatment under the OTS's application processing rules,
or the total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the Bank's net earnings for that year to date plus the Bank's retained net
earnings for the preceding two years. The Bank must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the Bank would not be at least adequately capitalized under the
OTS prompt corrective action regulations, or if the proposed distribution would
violate a prohibition contained in any applicable statute, regulation, or
agreement between the OTS or the FDIC.
<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,
1998 1997 1996 1995 1994
Total amount of: (In thousands)
<S> <C> <C> <C> <C> <C>
Assets $138,369 $136,933 $145,541 $86,604 $87,072
Loans receivable - net (2) 112,385 111,887 108,994 57,945 56,287
Cash and cash equivalents (3) 12,307 5,765 8,785 2,689 2,416
Mortgage-backed and related securities (4) 5,986 8,978 12,846 9,917 11,328
Investment securities (4) 1,283 4,272 8,948 13,018 14,097
Deposits 118,151 114,955 125,656 75,233 75,458
FHLB advances and other borrowings 270 2,000 1,100 4,471 4,986
Shareholders' equity- net (5) 18,613 17,989 16,805 6,574 6,304
Summary of consolidated earnings data: (1) Year Ended December 31,
1998 1997 1996 1995 1994
(In thousands, except share data)
Total interest income $10,108 $10,362 $ 5,875 $ 5,794 $ 5,419
Total interest expense 4,842 5,049 3,412 3,594 2,854
------- ------- --------- ------- -------
Net interest income 5,266 5,313 2,463 2,200 2,565
Provision for losses on loans 275 304 22 150 29
-------- -------- ----------- -------- ---------
Net interest income after provision for
losses on loans 4,991 5,009 2,441 2,050 2,536
Other income:
Insurance commissions - - 200 175 181
Gain on sale of loans 339 127 - - -
Service fees, charges and other operating 792 807 246 187 189
Gain on sale of subsidiary - - 141 - -
Gain on sale of office premises and equipment 57 206 - - -
Loss on sale of investment, mortgage-backed
and related securities - (6) (9) - -
------- ---------- ------------ ------- ------
Total other income 1,188 1,134 578 362 370
General, administrative and other expense:
Employee compensation and benefits 2,309 2,165 1,203 998 888
Occupancy and equipment 484 527 284 212 193
Data processing 127 224 282 237 243
Federal deposit insurance premiums 42 50 684 177 178
Other 1,131 1,037 417 342 356
------- --------- ---------- -------- --------
Total general, administrative and other expense 4,093 4,003 2,870 1,966 1,858
------- --------- --------- ------- -------
Earnings before income tax expense 2,086 2,140 149 446 1,048
Income tax expense 833 830 76 188 412
-------- -------- ----------- -------- --------
Net earnings $ 1,253 $ 1,310$ 73 $ 258 $ 636
======= ======= =========== ======== ========
Basic earnings per share (6) $1.13 $1.20 N/A N/A N/A
==== ==== === === ===
Diluted earnings per share (6) $1.12 $1.18 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 1998 and 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 loans held for sale.
(3) Includes certificates of deposit in other financial institutions.
(4) Includes securities designated as available for sale.
(5) Consists solely of retained earnings at December 31, 1994 and 1995.
(6) Earnings per share is not applicable for the years ended December 31, 1996,
1995 and 1994 as River Valley converted to stock form in 1996.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
OTHER DATA (CONTINUED)
Selected financial ratios and other data:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest rate spread during period 3.66% 3.64% 2.79% 2.36% 3.00%
Net yield on interest-earning assets (1) 4.08 4.00 2.98 2.61 3.15
Return on assets (2) 0.92 0.99 0.08 0.30 0.74
Return on equity (3) 6.85 7.53 1.05 4.01 10.62
Equity to assets (4) 13.45 13.12 11.55 7.59 7.24
Average interest-earning assets to
average interest-bearing liabilities 111.07 109.56 104.64 105.62 104.43
Non-performing assets to total assets (4) 1.47 0.58 0.56 0.01 0.01
Allowance for loan losses to total
loans outstanding (4) 1.28 1.13 1.06 0.70 0.45
Allowance for loan losses to
non-performing loans (4) 75.78 177.72 145.30 5,087.50 1,938.46
Net charge-offs to average total
loans outstanding 0.06 0.20 0.01 0.01 0.01
General, administrative and other expense
to average assets (5) (6) 3.01 2.83 3.33 2.26 2.20
Number of full service offices (4) 5 6 6 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 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, 1998 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, 1997 to December
31, 1998
At December 31, 1998, River Valley's consolidated assets totaled $138.4 million,
representing an increase of $1.4 million, or 1.0%, over the December 31, 1997
total. The increase in assets was funded primarily by a $3.2 million, or 2.8%,
increase in deposits and undistributed period earnings of $992,000, which were
partially offset by a $1.7 million decrease in borrowings.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and
certificates of deposit) increased by $7.5 million from December 31, 1997 levels
to a total of $12.3 million at December 31, 1998. Investment securities totaled
$1.3 million at December 31, 1998, a decrease of $3.0 million, or 70.0%, from
December 31, 1997 levels, due to maturities of investment securities totaling
$3.0 million during 1998. Mortgage-backed securities decreased by $3.0 million,
or 33.3%, to a total of $6.0 million at December 31, 1998, primarily due to
principal repayments.
<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, 1997 to December
31, 1998 (continued)
Loans receivable, including loans held for sale, totaled $112.4 million at
December 31, 1998, an increase of $498,000, or .4%, over the $111.9 million
total at December 31, 1997. The increase resulted primarily from loan
originations during 1998 of $69.5 million, which were partially offset by
principal repayments of $51.6 million and sales of $17.0 million. Loan
origination volume for 1998 exceeded that of 1997 by $15.9 million, or 29.7%.
The volume of loan sales into the secondary mortgage market increased during
1998 over 1997 volume by $10.1 million, or 145.7%.
River Valley's consolidated allowance for loan losses totaled $1.5 million and
$1.3 million at December 31, 1998 and 1997, respectively, which represented
1.28% and 1.13% of total loans at those dates. Nonperforming loans (defined as
loans delinquent greater than 90 days and loans on nonaccrual status) totaled
$1.9 million and $718,000 at December 31, 1998 and 1997, respectively. The
consolidated allowance for loan losses represented 76% and 178% of nonperforming
loans at December 31, 1998 and 1997, respectively.
Although management believes that its allowance for loan losses at December 31,
1998 was adequate based upon the available facts and circumstances, there can be
no assurance that additions to such allowance will not be necessary in future
periods, which could negatively affect the Corporation's results of operations.
Deposits increased by $3.2 million, or 2.8%, to a total of $118.2 million at
December 31, 1998, compared to the $115.0 million total at December 31, 1997.
Savings and demand deposits increased by $1.4 million, or 2.7%, during 1998,
while certificates of deposit increased by $1.8 million, or 2.8%. The increase
in deposits can be attributed to management's efforts to obtain a moderate rate
of growth primarily through marketing and pricing strategies.
Advances from the Federal Home Loan Bank and other borrowed money declined by
$1.7 million from the total at December 31, 1997, as current period borrowings
of $6.3 million were offset by repayments of $8.0 million.
Shareholders' equity totaled $18.6 million at December 31, 1998, an increase of
$624,000, or 3.5%, over the $18.0 million total at December 31, 1997. The
increase resulted primarily from net earnings of $1.3 million, which were
partially offset by cash dividends of $261,000, repurchases of shares totaling
$270,000 and a net increase in shares for stock benefit plans of $194,000.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
General
River Valley's net earnings for the year ended December 31, 1998, totaled $1.3
million, a decrease of $57,000, or 4.4%, from net earnings reported in 1997. The
decrease in net earnings in the 1998 period was primarily attributable to a
decrease in net interest income of $47,000, an increase in general,
administrative and other expense of $90,000 and an increase in the provision for
federal income taxes of $3,000, which were partially offset by a decrease in the
provision for losses on loans of $29,000 and an increase in other income of
$54,000.
<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, 1998 and
1997 (continued)
Net Interest Income
Total interest income for the year ended December 31, 1998, amounted to $10.1
million, a decrease of $254,000, or 2.5%, from the 1997 total, reflecting the
effects of a $3.5 million, or 2.6%, decline in the balance of average
interest-earning assets outstanding year-to-year. Interest income on loans and
mortgage-backed securities totaled $9.7 million for 1998, a decrease of $38,000,
or .4%, from 1997. The decrease resulted primarily from a $315,000, or .3%,
decrease in the average balance of loans and mortgage-backed securities
outstanding year-to-year, coupled with a one basis point decrease in yield, to
7.97% in 1998. Interest income on investments and interest-earning deposits
decreased by $216,000, or 36.1%, due to a decrease in the average balance
outstanding of $3.2 million, coupled with an approximate 45 basis point decrease
in yield from the comparable 1997 period.
Interest expense on deposits decreased by $232,000, or 4.7%, to a total of $4.7
million for the year ended December 31, 1998, due primarily to a $5.1 million
decrease in the average balance of deposits outstanding, coupled with a one
basis point decline in the weighted-average cost of deposits to 4.12% in 1998.
Interest expense on borrowings totaled $160,000 for the year ended December 31,
1998, an increase of $25,000, or 18.5%, over 1997. The increase resulted
primarily from an increase in average borrowings outstanding year-to-year,
coupled with an increase in average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased during 1998 by $47,000, or .9%, compared to 1997.
The interest rate spread increased by two basis points for 1998, to 3.66% from
3.64% in the 1997 period, while the net interest margin amounted to 4.08% in
1998 and 4.00% in 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
upon historical experience, the volume and type of lending conducted by 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 result of such analysis, management recorded a $275,000
provision for losses on loans in 1998, a decrease of $29,000, or 9.5%, compared
to the $304,000 provision recorded in 1997. The current period provision
generally reflects growth in the loan portfolio, coupled with an increase in the
level of nonperforming loans year-to-year. Net charge-offs amounted to $74,000
in 1998, compared to $218,000 in 1997. While management believes that the
allowance for losses on loans is adequate at December 31, 1998, 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.
<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, 1998 and
1997 (continued)
Other Income
Other income amounted to $1.2 million for the year ended December 31, 1998, an
increase of $54,000, or 4.8%, compared to 1997, due primarily to a $212,000, or
166.9%, increase in gain on sale of loans and a $57,000 gain on sale of office
premises and equipment, which were partially offset by a nonrecurring gain on
sale of branch office and related deposits in 1997 totaling $206,000. The 1997
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.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.1 million for the year
ended December 31, 1998, an increase of $90,000, or 2.2%, over the 1997 total.
This increase resulted primarily from a $144,000, or 6.7%, increase in employee
compensation and benefits, and a $94,000, or 9.3%, increase in other operating
expense, which were partially offset by a $43,000, or 8.2%, decrease in
occupancy and equipment expense and a $97,000, or 43.3%, decrease in data
processing. The increase in employee compensation and benefits resulted
primarily from normal merit increases coupled with an increase in staffing
levels year to year. The increase in other operating expense resulted from
increases in advertising, office supplies, and pro-rata increases in operating
expenses due to the Corporation's overall growth year-to-year. The decline in
occupancy and equipment resulted from reduced costs following the sale of the
Hanover branch location in 1997. The decrease in data processing was due to the
conversion to the in-house data processing system used by Citizens after the
merger in November 1997.
Income Taxes
The provision for income taxes increased by $3,000, or .4%, for the year ended
December 31, 1998, as compared to 1997. The effective tax rates were 39.9% and
38.8% for the years ended December 31, 1998 and 1997, respectively.
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, were primarily due to River Valley's acquisition of
Citizens, which was consummated on December 23, 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 was
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 result of such analysis, management recorded a $304,000
provision for losses on loans in 1997. The provision generally reflected 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.
<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)
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 Citizens' 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
was 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>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents certain information relating to River Valley's
average balance sheet 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>
Year ended December 31,
1998 1997
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 $ 4,337 $ 233 5.37% $ 5,351 $ 322 6.02%
Investment securities (1) 2,871 150 5.22 5,043 277 5.49
Mortgage-backed and related securities (1) 7,542 462 6.13 10,874 733 6.74
Loans receivable, net (2) 114,440 9,263 8.09 111,423 9,030 8.10
------- ------- -------- ------- ------- --------
Total interest-earning assets $129,190 10,108 7.82 $132,691 10,362 7.81
======= =======
Interest-bearing liabilities:
Deposits $113,770 4,682 4.12 $118,872 4,914 4.13
FHLB advances and other borrowings 2,549 160 6.28 2,244 135 6.02
--------- -------- -------- --------- -------- --------
Total interest-bearing liabilities $116,319 4,842 4.16 $121,116 5,049 4.17
======= ------- -------- ======= ------- --------
Net interest income $ 5,266 $ 5,313
======= =======
Interest rate spread (3) 3.66% 3.64%
======== ========
Net yield on weighted average interest-earning
assets (4) 4.08% 4.00%
======== ========
Average interest-earning assets to average
interest-bearing liabilities 111.07% 109.56%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1996
Average Interest
outstanding earned/ Yield/
balance paid rate
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits and other $ 3,291 $ 188 5.71%
Investment securities (1) 10,295 562 5.46
Mortgage-backed and related securities (1) 9,176 574 6.26
Loans receivable, net (2) 59,828 4,551 7.61
------ ----- --------
Total interest-earning assets $82,590 5,875 7.11
======
Interest-bearing liabilities:
Deposits $77,710 3,349 4.31
FHLB advances and other borrowings 1,221 63 5.16
------- ------- --------
Total interest-bearing liabilities $78,931 3,412 4.32
====== ----- --------
Net interest income $2,463
=====
Interest rate spread (3) 2.79%
========
Net yield on weighted average interest-earning
assets (4) 2.98%
========
Average interest-earning assets to average
interest-bearing liabilities 104.64%
======
</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,
1998 vs. 1997 1997 vs. 1996
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 $ (57) $ (32) $ (89) $ 123 $ 11 $ 134
Investment securities (114) (13) (127) (288) 3 (285)
Mortgage-backed and related securities (210) (61) (271) 112 47 159
Loans receivable, net 244 (11) 233 4,168 311 4,479
--- ----- ---- ----- --- -----
Total (137) (117) (254) 4,115 372 4,487
Interest-bearing liabilities:
Deposits (210) (22) (232) 1,699 (134) 1,565
FHLB advances and other borrowings 19 6 25 60 12 72
---- ------ ----- ------- ---- -------
Total (191) (16) (207) 1,759 (122) 1,637
--- ----- ---- ----- --- -----
Net change in interest income $ 54 $(101) $ (47) $2,356 $494 $2,850
==== ==== ===== ===== === =====
</TABLE>
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,
as of September 30, 1998 (the latest information available) and September 30,
1997, as measured by changes in NPV for an instantaneous and sustained parallel
shift of 100 through 400 basis points in market interest rates.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
As illustrated in the tables, 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.
<TABLE>
<CAPTION>
As of September 30, 1998
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
<S> <C> <C> <C>
+400 $14,046 $(2,875) (17)%
+300 15,746 (1,175) (7)
+200 16,651 (270) (2)
+100 16,947 26 -
- 16,921 - -
- -100 16,470 (451) (3)
- -200 16,009 (912) (5)
- -300 15,857 (1,064) (6)
- -400 15,788 (1,133) (7)
As of September 30, 1997
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
+400 $ 9,294 $(4,234) (31)%
+300 10,986 (2,542) (19)
+200 12,410 (1,118) (8)
+100 13,255 (273) (2)
- 13,528 - -
- -100 13,273 (255) (2)
- -200 12,921 (607) (4)
- -300 12,744 (784) (6)
- -400 12,544 (984) (7)
</TABLE>
<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,
1998, River Valley Financial's regulatory liquidity ratio was 16.2%. At such
date, River Valley Financial had commitments to originate loans totaling $2.8
million and, in addition, had undisbursed loans in process, unused lines of
credit and standby letters of credit totaling $7.2 million. At December 31,
1998, River Valley Financial had $3.7 million 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, 1998, 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, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities $(1,913) $ 2,395 $ (194)
Cash flows from investing activities:
Investment maturities/sales 3,000 4,698 5,653
Mortgage-backed securities purchases - (1,350) (729)
Mortgage-backed securities repayments 2,970 3,072 2,110
Net loan (originations) repayments 2,145 (3,859) (458)
Other 731 1,374 2,279
Cash flows from financing activities:
Net increase (decrease) in deposits 3,196 (10,701) (6,222)
Net increase (decrease) in borrowings (1,730) 900 (6,371)
Net proceeds from issuance of common stock - - 10,221
Other (960) (346) 7
------- ------- ----------
Net increase (decrease) in cash and cash
equivalents $ 7,439 $(3,817) $ 6,296
====== ====== =======
</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 associations. OTS
regulations require savings associations to maintain core capital of at least 3%
of the association's 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 $1.4
million at December 31, 1998.
River Valley Financial exceeded all of its regulatory capital requirements at
December 31, 1998. The following table summarizes River Valley Financial's
regulatory capital requirements and regulatory capital at December 31, 1998:
<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% $2,079 13.5% $18,729 $16,650
Core capital (2) 3.0 4,159 13.5 18,729 14,570
Risk-based capital 8.0 7,793 20.6 20,084 12,291
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that 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.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
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. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management adopted SFAS No. 130 effective January 1, 1998, as required, without
material 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. Management adopted SFAS No. 131 effective January 1, 1998, as
required, without material impact on the Corporation's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Corporation's consolidated
financial statements.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
As with all providers of financial services, the Bank's operations are heavily
dependent on information technology systems. The Bank is addressing the
potential problems associated with the possibility that the computers that
control or operate the Bank's information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. The Bank is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
The Bank's core data processing relative to customer loan and deposit accounts,
as well as the general ledger, is performed in-house through use of a purchased
software product. Management has been advised, and certain testing has been
performed to verify, that the system will continue to function upon arrival of
the year 2000. Additional testing is scheduled to be performed through June
1999.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that borrowers fail to prepare properly for Year
2000, and higher funding costs would result if consumers react to publicity
about the issue by withdrawing deposits. The Bank has assessed such risks among
its customers; specifically, management has sent letters to its commercial loan
borrowers with outstanding balances greater than $250,000, to request specific
information as to the borrowers awareness and status of their Year 2000
compliance efforts. 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. The Bank could also be materially adversely affected
if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities, and other service providers fail to prepare
properly. The Bank is therefore attempting to assess these risks and take action
to minimize their effect.
The Bank has established a budget of approximately $65,000 for Year 2000 related
costs. As of the date of this Annual Report, the Bank has identified certain
expenses, totaling $15,000, that will be incurred by the Bank in connection with
this issue. During the year ended December 31, 1998, the Bank has incurred
charges totaling approximately $8,000. From a review of the systems and vendors,
management believes the budgeted amount should be sufficient. No assurance can
be given, however, that significant expense will not be incurred in future
periods. In the event that the Bank is ultimately required to purchase
replacement computer systems, programs and equipment, or incur substantial
expense to make the Bank's current systems, programs and equipment Year 2000
compliant, the Bank's net earnings and financial condition could be adversely
affected.
Management has developed a contingency plan in connection with the Year 2000
issue, which includes the Bank's ability to process transactions manually should
the purchased software be unable to function, or given an interruption in
electrical power, upon arrival of the Year 2000. Management of the Bank does not
consider contingency planning to be a static process; therefore, the plan will
be amended should testing results indicate greater concern.
<PAGE>
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 changes in monetary and fiscal
policies.
<PAGE>
PAGE LEFT BLANK INTENTIONALLY
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Cincinnati, Ohio
March 4, 1999
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 4,014 $ 3,542
Federal funds sold 825 300
Interest-earning deposits in other financial institutions 7,468 1,026
--------- ---------
Cash and cash equivalents 12,307 4,868
Certificates of deposit in other financial institutions - 897
Investment securities designated as available for sale - at market 283 772
Investment securities held to maturity - at amortized cost, approximate
market value of $980 and $3,444 as of December 31, 1998 and 1997 1,000 3,500
Mortgage-backed and related securities designated as available
for sale - at market 2,796 3,604
Mortgage-backed and related securities held to maturity - at cost, approximate
market value of $3,220 and $5,432 as of December 31, 1998 and 1997 3,190 5,374
Loans receivable - net 108,684 111,203
Loans held for sale - at lower of cost or market 3,701 684
Real estate acquired through foreclosure 82 82
Office premises and equipment - at depreciated cost 2,023 2,065
Federal Home Loan Bank stock - at cost 943 943
Accrued interest receivable on loans 987 916
Accrued interest receivable on mortgage-backed and related securities 40 117
Accrued interest receivable on investments and interest-earning deposits 29 65
Goodwill - net of accumulated amortization 50 245
Cash surrender value of life insurance 818 776
Prepaid expenses and other assets 373 141
Prepaid federal income taxes 405 -
Deferred tax asset 658 681
---------- ----------
Total assets $138,369 $136,933
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Deposits $118,151 $114,955
Advances from the Federal Home Loan Bank - 2,000
Other borrowed money 270 -
Advances by borrowers for taxes and insurance 34 53
Accrued interest payable 468 463
Other liabilities 763 1,408
Dividends payable 70 60
Accrued federal income taxes - 5
--------- ------------
Total liabilities 119,756 118,944
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;
1,173,440 and 1,190,250 shares issued and outstanding - -
Additional paid in capital 11,036 11,229
Retained earnings - substantially restricted 8,789 7,797
Shares acquired by stock benefit plans (1,199) (1,005)
Unrealized losses on securities designated as available for sale,
net of related tax effects (13) (32)
----------- -----------
Total shareholders' equity 18,613 17,989
-------- --------
Total liabilities and shareholders' equity $138,369 $136,933
======= =======
</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>
1998 1997 1996
Interest income
<S> <C> <C> <C>
Loans $ 9,263 $ 9,030 $4,551
Mortgage-backed and related securities 462 733 574
Investment securities 150 277 562
Interest-earning deposits and other 233 322 188
-------- -------- ------
Total interest income 10,108 10,362 5,875
Interest expense
Deposits 4,682 4,914 3,349
Borrowings 160 135 63
-------- -------- -------
Total interest expense 4,842 5,049 3,412
------- ------- -----
Net interest income 5,266 5,313 2,463
Provision for losses on loans 275 304 22
-------- -------- -------
Net interest income after provision for losses on loans 4,991 5,009 2,441
Other income
Insurance commissions - - 200
Gain on sale of loans 339 127 -
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 office premises 57 - -
Gain on sale of subsidiary - - 141
Service fees, charges and other operating 792 807 246
-------- -------- ------
Total other income 1,188 1,134 578
General, administrative and other expense
Employee compensation and benefits 2,309 2,165 1,203
Occupancy and equipment 484 527 284
Federal deposit insurance premiums 42 50 684
Amortization of goodwill 27 27 7
Data processing 127 224 282
Other operating 1,104 1,010 410
------- ------- ------
Total general, administrative and other expense 4,093 4,003 2,870
------- ------- -----
Earnings before income taxes 2,086 2,140 149
Income taxes
Current 819 893 124
Deferred 14 (63) (48)
--------- --------- -------
Total income taxes 833 830 76
-------- -------- -------
NET EARNINGS $ 1,253 $ 1,310 $ 73
======= ======= =======
EARNINGS PER SHARE
Basic $1.13 $1.20 N/A
==== ==== ===
Diluted $1.12 $1.18 N/A
==== ==== ===
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings $1,253 $1,310 $ 73
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period 19 15 (69)
Reclassification adjustment for realized losses
included in earnings, net of tax of $2 and $3 for the
years ended December 31, 1997 and 1996 -- 4 6
------ ------ ------
Comprehensive income $1,272 $1,329 $ 10
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996 (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, 1996 $ - $ - $ - $ 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
Purchase of shares - (270) - - - (270)
Issuance of shares under stock option plan - 18 - - - 18
Purchase of shares for stock benefit plans - - (428) - - (428)
Amortization expense related to stock benefit plans - 59 234 - - 293
Cash dividends of $0.22 per common share - - - - (261) (261)
Net earnings for the year ended December 31, 1998 - - - - 1,253 1,253
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - 19 - 19
-- ------- ------ ---- ----- ---------
Balance at December 31, 1998 $- $11,036 $(1,199) $ (13) $8,789 $18,613
== ====== ====== ==== ===== ======
</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>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,253 $ 1,310 $ 73
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization of premiums and discounts on
investments, mortgage-backed and related securities - net 39 1 2
Loss on sale of investment, mortgage-backed and related securities
designated as available for sale - 6 9
Depreciation and amortization 223 223 91
Gain on sale of office premises (57) - -
Gain on sale of Hanover branch and related deposits - (206) -
Gain on sale of subsidiary - - (141)
Loans originated for sale in the secondary market (20,042) (6,538) (1,076)
Proceeds from sale of loans in the secondary market 17,194 6,996 -
Gain on sale of loans in the secondary market (169) (66) -
Amortization of deferred loan origination costs 99 73 83
Provision for losses on loans 275 304 22
Amortization of goodwill 27 27 7
Amortization expense of stock benefit plans 293 184 -
Increase (decrease) in cash, net of acquisition of Citizens National Bank in
1996, due to changes in:
Accrued interest receivable on loans (71) (97) 29
Accrued interest receivable on mortgage-backed and related securities 77 (39) (1)
Accrued interest receivable on investments and interest-earning deposits 36 106 100
Prepaid expenses and other assets (232) 28 262
Accrued interest payable 5 184 (41)
Other liabilities (467) (47) 413
Income taxes
Current (410) 9 22
Deferred 14 (63) (48)
---------- --------- ---------
Net cash provided by (used in) operating activities (1,913) 2,395 (194)
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 3,000 2,000 3,500
Proceeds from sales of investment securities designated as
available for sale - 2,698 2,153
Purchase of mortgage-backed and related securities designated as available
for sale - (1,350) (729)
Principal repayments on mortgage-backed and related securities 2,970 3,072 2,110
Proceeds from sale of mortgage-backed and related securities
designated as available for sale - 2,146 -
Loan principal repayments 51,624 43,220 17,114
Loan disbursements (49,479) (47,079) (17,572)
Additions to real estate acquired through foreclosure - (1) -
Proceeds from sale of office premises and equipment 67 405 -
Purchase of office premises and equipment (191) (430) (9)
(Increase) decrease in certificates of deposit in other financial institutions 897 (797) 200
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 (42) (29) (24)
Proceeds from sale of subsidiary - net - - 282
Acquisition of Citizens National Bank common stock - net - - 2,018
------- ------- -------
Net cash provided by investing activities 8,846 3,935 8,855
------- ------- -------
Net cash provided by operating and investing
activities (subtotal carried forward) 6,933 6,330 8,661
------- ------- -------
</TABLE>
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net cash provided by operating and investing
activities (subtotal brought forward) $ 6,933 $ 6,330 $ 8,661
Cash flows provided by (used in) financing activities:
Increase (decrease) in deposit accounts 3,196 (3,913) (6,222)
Decrease in deposit accounts due to the sale of a branch - (6,788) -
Proceeds from Federal Home Loan Bank advances 6,000 7,000 -
Repayment of Federal Home Loan Bank advances (8,000) (6,100) (6,371)
Proceeds from other borrowed money 270 - -
Advances by borrowers for taxes and insurance (19) (17) 7
Purchase of shares (270) - -
Stock options exercised 18 - -
Proceeds from issuance of common stock - - 11,173
Acquisition of common stock for stock benefit plans (428) (174) (952)
Dividends on common stock (261) (155) -
-------- -------- ------
Net cash provided by (used in) financing activities 506 (10,147) (2,365)
--------- ------ -------
Net increase (decrease) in cash and cash equivalents 7,439 (3,817) 6,296
Cash and cash equivalents at beginning of year 4,868 8,685 2,389
------- ------- -------
Cash and cash equivalents at end of year $12,307 $ 4,868 $ 8,685
====== ======= =======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 1,014 $ 618 $ 84
======= ======== =========
Interest on deposits and borrowings $ 4,837 $ 4,865 $ 3,201
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ - $ 81 $ -
======= ========= ======
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 19 $ 19 $ (63)
========= ========= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 170 $ 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, 1998, 1997 and 1996
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, through 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 M.
The Corporation is a savings and loan 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 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, 1998, 1997 and 1996
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 fair value with
resulting unrealized gains or losses recorded to operations or shareholders'
equity, respectively. At December 31, 1998 and 1997, the Corporation's
shareholders' equity included unrealized losses on securities designated as
available for sale, net of related tax effects, of $13,000 and $32,000,
respectively. Realized gains and losses on sales 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.
Loans held for sale are carried at the lower of cost (less principal
payments received) or fair value (market value), calculated on an aggregate
basis. At December 31, 1998 and 1997, loans held for sale were carried at
cost, which approximated fair value.
At December 31, 1998 and 1997, the Bank was servicing approximately $34.3
million and $28.6 million, respectively, of mortgage loans that have been
sold to the Federal Home Loan Mortgage Corporation.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Bank retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. The Bank accounts
for mortgage servicing rights pursuant to the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Bank 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. 125 requires that securitization of mortgage loans be accounted for
as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 125 requires that capitalized mortgage servicing
rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value.
The mortgage servicing rights recorded by the Bank, calculated in accordance
with the provisions of SFAS No. 125, 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 $34,000 and $18,000 for the years ended December 31, 1998 and
1997, respectively. The Bank had a valuation allowance for mortgage
servicing rights totaling $27,000 at December 31, 1998. The Bank had no
valuation allowance at December 31, 1997. At December 31, 1998 and 1997, the
fair value of the Corporation's mortgage servicing rights totaled
approximately $222,000 and $113,000, respectively.
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, 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.
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, 1998 and 1997, the Corporation had approximately $1.3
million and $420,000 of loans defined as impaired under SFAS No. 114.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the property's fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are considered. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
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 95.6%
of the common stock of Citizens is provided using the straight-line method
over an estimated life of ten years. During 1998, goodwill was reduced by
approximately $168,000 for the favorable resolution of certain
pre-acquisition contingencies, and for the purchase of the remaining 4.4%
minority interest shares of Citizens at a price below the value initially
assigned at acquisition.
Management periodically evaluates the carrying value of goodwill in relation
to the continuing earnings capacity of the acquired assets and assumed
liabilities.
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans
The Bank's employees are covered by a defined benefit non-contributory
pension plan administered by the Pentegra Group, previously the Financial
Institutions Retirement Fund (the "Fund"). Contributions are determined to
cover the normal cost of pension benefits, the one-year cost of the
pre-retirement death and disability benefits and the amortization of any
unfunded accrued liabilities.
The Fund had previously advised the 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, 1998, 1997, and 1996. 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.
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
$28,000 and $48,000 for the years ended December 31, 1998 and 1997,
respectively.
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 recognized under the
supplemental retirement plan totaled approximately $22,000 for the year
ended December 31, 1998, and $3,000 for each of the years ended December 31,
1997 and 1996.
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,
$200,000 and $65,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Corporation also has a Recognition and Retention Plan ("RRP") which
provides for the issuance and grant of 47,610 shares to members of the Board
of Directors and management. During 1998 and 1997, the RRP purchased 32,316
shares of the Corporation's common stock in the open market. At December 31,
1998, 32,316 shares had been granted. Expense recognized under the RRP plan
totaled approximately $113,000 and $61,000 for the years ended December 31,
1998 and 1997, respectively. Common stock granted under the RRP vests
ratably over a five-year period, commencing with the date of the award.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 83,124 and 95,220 unallocated ESOP
shares, totaled 1,105,930 and 1,095,030 for the years ended December 31,
1998 and 1997, respectively.
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
1,121,986 and 1,106,858 for the years ended December 31, 1998 and 1997,
respectively. There were 16,056 and 11,828 incremental shares related to the
assumed exercise of stock options included in the computation of diluted
earnings per share for the years ended December 31, 1998 and 1997,
respectively.
The provisions of SFAS No. 128, "Earnings Per Share," were not applicable
for the year ended December 31, 1996, 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, federal funds sold, 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 1998
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, 1998, 1997 and 1996
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.
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, 1998 and 1997. The
fair values for fixed-rate certificates of deposit are 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.
Other borrowed money: The carrying value for these variable
rate borrowings is deemed to approximate fair value.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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, 1998 and 1997, 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>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 12,307 $ 12,307 $ 4,868 $ 4,868
Certificates of deposit in other financial institutions - - 897 897
Investment securities designated as available for sale 283 283 772 772
Investment securities held to maturity 1,000 980 3,500 3,444
Mortgage-backed and related securities designated
as available for sale 2,796 2,796 3,604 3,604
Mortgage-backed and related securities held to
maturity 3,190 3,220 5,374 5,432
Loans receivable - net 112,385 120,163 111,887 114,560
Federal Home Loan Bank stock 943 943 943 943
---------- ---------- ---------- ----------
$132,904 $140,692 $131,845 $134,520
======= ======= ======= =======
Financial liabilities
Deposits $118,151 $118,496 $114,955 $113,974
Advances from the Federal Home Loan Bank - - 2,000 2,000
Other borrowed money 270 270 - -
Advances by borrowers for taxes and insurance 34 34 53 53
----------- ----------- ----------- -----------
$118,455 $118,800 $117,008 $116,027
======= ======= ======= =======
</TABLE>
15. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Financial statements for earlier periods have
been restated for comparative purposes. Accumulated comprehensive income
consists solely of the change in unrealized gains/losses on securities
designated as available for sale in accordance with SFAS No. 115.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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>
1998 1997
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 $1,000 $ 980 $3,500 $3,444
Available for sale:
U.S. Government agency obligations - - 498 494
Municipal obligations 276 283 276 278
------ ------ ------ ------
276 283 774 772
------ ------ ------ ------
Total investment securities $1,276 $1,263 $4,274 $4,216
===== ===== ===== =====
</TABLE>
At December 31, 1998 and 1997, the cost carrying value of the Corporation's
investment securities held to maturity exceeded fair value by $20,000 and
$56,000, 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>
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $1,000 $980 $2,500 $2,492
Due in one to three years - - 1,000 952
----- -- ----- ------
$1,000 $980 $3,500 $3,444
===== === ===== =====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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, 1998 and 1997, by term to maturity are shown below.
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due in three to five years $100 $102 $498 $494
Due in five to ten years 176 181 276 278
--- --- --- ---
$276 $283 $774 $772
=== === === ===
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, 1998 and 1997 are shown below.
<TABLE>
<CAPTION>
1998
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 $1,343 $- $ (2) $1,341
Government National Mortgage Association
participation certificates 1,190 22 - 1,212
Federal National Mortgage Association
participation certificates 639 10 - 649
Interest-only certificates 18 - - 18
------- -- -- -------
$3,190 $ 32 $ (2) $3,220
===== ==== ===== =====
</TABLE>
<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>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed and related securities held to
maturity at December 31, 1998, 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 $ 447
Due after one to three years 1,048
Due after three to five years 6
Due after ten to twenty years 987
Due after twenty years 702
------
$3,190
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, 1998 and 1997 are shown below.
<TABLE>
<CAPTION>
1998
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 $ 644 $ 7 $- $ 651
Government National Mortgage Association
participation certificates 277 1 (1) 277
Federal National Mortgage Association
participation certificates 1,275 3 (29) 1,249
Collateralized mortgage obligations 627 - (8) 619
------ -- ----- ------
$2,823 $ 11 $ (38) $2,796
===== ==== ==== =====
</TABLE>
<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>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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, 1998, 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 after one to three years $ 13
Due after three to five years 370
Due after five to ten years 213
Due after ten to twenty years 783
Due after twenty years 1,444
-----
$2,823
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1998 1997
(In thousands)
Residential real estate
One-to-four family residential $ 62,206 $ 71,388
Multi-family residential 1,775 2,781
Construction 8,126 3,652
Nonresidential real estate and land 13,904 14,703
Commercial 12,461 4,871
Consumer and other 12,640 14,981
Deferred loan origination costs 200 202
---------- ----------
111,312 112,578
Less:
Undisbursed portion of loans in process 1,151 99
Allowance for loan losses 1,477 1,276
--------- ---------
$108,684 $111,203
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 $71.0 million, or 65%, of the total loan portfolio at December
31, 1998 and approximately $77.7 million, or 70%, of the total loan
portfolio at December 31, 1997. 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, 1998, 1997 and 1996
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 $540,000 and $462,000 at December 31, 1998 and 1997,
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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,276 $1,190 $ 407
Provision for losses on loans 275 304 22
Allowance for loan losses of Citizens - - 764
Charge-offs of loans (223) (269) (3)
Recoveries of loan losses 149 51 -
------ ------- ----
Balance at end of year $1,477 $1,276 $1,190
===== ===== =====
</TABLE>
As of December 31, 1998, the Corporation's allowance for loan losses was
comprised of a general loan loss allowance of approximately $1.4 million,
which is includible as a component of regulatory risk-based capital, and a
specific loan loss allowance of approximately $122,000.
The Corporation had nonperforming loans totaling $1.9 million, $718,000 and
$819,000 at December 31, 1998, 1997 and 1996, respectively.
The Corporation had no material loss of interest income related to such
nonperforming loans during the years ended December 31, 1998, 1997, and
1996.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 are comprised of the following:
1998 1997
(In thousands)
Land and improvements $ 675 $ 662
Office buildings and improvements 1,758 1,750
Leasehold improvements 117 115
Furniture, fixtures and equipment 2,113 1,943
Automobiles 18 32
------- -------
4,681 4,502
Less accumulated depreciation 2,658 2,437
----- -----
$2,023 $2,065
===== =====
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
Deposit type and 1998 1997
weighted-average interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 8,365 7.0% $ 5,628 4.9%
NOW accounts
1998 - 2.60% 14,417 12.2
1997 - 2.57% 15,424 13.4
Money market demand accounts
1998 - 2.92% 6,984 5.9
1997 - 2.93% 8,257 7.2
Savings accounts
1998 - 3.70% 22,378 19.0
1997 - 3.42% 21,411 18.7
------------ --------- -------- ------
Total demand, transaction and
savings deposits 52,144 44.1 50,720 44.2
Certificates of deposit
3.00 - 4.99%
4.78% in 1998 23,200 19.6
4.82% in 1997 13,016 11.3
5.00 - 5.99%
5.34% in 1998 31,364 26.6
5.40% in 1997 36,010 31.3
6.00 - 6.99%
6.18% in 1998 11,229 9.5
6.22% in 1997 12,312 10.7
7.00 - 7.99%
7.86% in 1998 214 .2
7.50% in 1997 2,896 2.5
8.00 - 8.99%
8.25% in 1997 - - 1 -
--------- ------- -------- ------
Total certificates of deposit 66,007 55.9 64,235 55.8
-------- ------ -------- ------
Total deposit accounts $118,151 100.0% $114,955 100.0%
======= ======= ======= ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 totaled approximately $15.1 million and $11.0 million at
December 31, 1998 and 1997, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1998 1997 1996
(In thousands)
Savings $ 768 $ 708 $ 539
NOW accounts 344 435 206
Money market deposit accounts 211 480 234
Certificates of deposit 3,359 3,291 2,370
----- ----- -----
$4,682 $4,914 $3,349
===== ===== =====
Maturities of outstanding certificates of deposit are summarized as follows
at December 31:
1998 1997
(In thousands)
Less than one year $53,931 $45,842
One year to three years 10,880 16,970
More than three years 1,196 1,423
------- -------
$66,007 $64,235
====== ======
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
approximate 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
(In thousands)
6.12% 1998 $2,000
======
NOTE H - OTHER BORROWED MONEY
Other borrowed money consisted of a variable-rate two-year line of credit
advance, bearing interest at December 31, 1998 of 6.63%, scheduled to mature
in November 2000. The advance was collateralized by a pledge of the
Corporation's stock of River Valley Financial.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - 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>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes computed at
expected statutory rate $709 $728 $51
State taxes, net of federal benefits 122 125 9
Increase (decrease) in taxes resulting from:
Amortization of goodwill 9 9 2
Other (primarily nontaxable income in 1997) (7) (32) 14
----- ---- --
Income tax provision per consolidated
financial statements $833 $830 $76
=== === ==
Effective tax rate 39.9% 38.8% 51.0%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination costs $ (68) $ (69)
Difference between book and tax depreciation (93) (63)
Percentage of earnings bad debt deduction (210) (248)
Mortgage servicing rights (85) (38)
------- -------
Total deferred tax liabilities (456) (418)
Deferred tax assets:
Deferred compensation 97 59
Allowance for valuation decline on
mortgage-related securities 90 90
General loan loss allowance 628 542
Benefit plan expense 65 62
Unrealized loss on securities designated as
available for sale 7 16
Purchase accounting adjustments related to asset
valuation adjustments 227 329
Other - 1
------- --------
Total deferred tax assets 1,114 1,099
----- -----
Net deferred tax asset $ 658 $ 681
====== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - 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, 1998, 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,
1998. See Note O for additional information regarding future percentage of
earnings bad debt deductions.
NOTE J - LOAN COMMITMENTS
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, 1998, the Bank had outstanding commitments of approximately
$1.4 million to originate residential one-to-four family variable-rate real
estate loans at interest rates ranging from 7.0% to 7.5%. Additionally, the
Bank had commitments to originate loans secured by other real estate
totaling $1.4 million as of December 31, 1998. The Bank also had unused
lines of credit under home equity loans and commercial loans of
approximately $2.1 million and $3.8 million, respectively, at December 31,
1998, and standby letters of credit totaling $97,000 at that date. In the
opinion of management, all loan commitments equaled or exceeded prevalent
market interest rates as of December 31, 1998, 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, 1998, 1997 and 1996
NOTE J - LOAN COMMITMENTS (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 K - LEASES
In connection with the acquisition of Citizens, the Corporation assumed a
lease of branch banking facilities. The lease of the banking facility in the
Wal-Mart Supercenter in Madison requires the Corporation to make payments of
approximately $23,000 in 1999. The original lease expires in September 1999,
but does contain two renewable five year options at a maximum lease payment
of approximately $29,000 per year.
NOTE L - 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, 1998, 1997 and 1996
NOTE L - STOCK OPTION PLAN (continued)
The Corporation applies APB 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:
1998 1997
Net earnings (in thousands) As reported $1,253 $1,310
===== =====
Pro-forma $1,253 $1,269
===== =====
Earnings per share
Basic As reported $1.13 $1.20
==== ====
Pro-forma $1.13 $1.16
==== ====
Diluted As reported $1.12 $1.18
==== ====
Pro-forma $1.12 $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 ten years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1998 and 1997, and changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C>
Outstanding at beginning of year 105,149 $14.81 - $ -
Granted - - 117,648 14.81
Exercised 1,190 14.78 - -
Forfeited - - 12,499 14.81
--------- ------ --------- -----
Outstanding at end of year 103,959 $14.81 105,149 $14.81
======= ===== ======= =====
Options exercisable at year-end 19,834 -
======== ========
Weighted-average fair value of
options granted during the year N/A $4.85
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at December 31,
1998:
Number outstanding 103,959
Range of exercise prices $14.78 - $17.875
Weighted-average exercise price $14.81
Weighted-average remaining contractual life 8.5 years
NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP
The following condensed financial statements summarize the financial
position of River Valley Bancorp at December 31, 1998 and 1997, and the
results of its operations and its cash flows for the periods ended December
31, 1998, 1997 and 1996.
River Valley Bancorp
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and interest-earning deposits $ 198 $ 374
Investment in River Valley Financial Bank 18,788 17,744
Prepaid expenses and other assets 84 65
-------- --------
Total assets $ 19,070 $ 18,183
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ 270 $ --
Other liabilities 187 194
-------- --------
Total liabilities 457 194
Shareholders' equity
Preferred stock -- --
Common stock -- --
Additional paid in capital 11,036 11,229
Retained earnings 8,789 7,797
Shares acquired by stock benefit plans (1,199) (1,005)
Unrealized losses on securities designated as available
for sale, net of related tax effects (13) (32)
-------- --------
Total shareholders' equity 18,613 17,989
-------- --------
Total liabilities and shareholders' equity $ 19,070 $ 18,183
======== ========
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued)
River Valley Bancorp
STATEMENTS OF EARNINGS
Periods ended December 31,
(In thousands)
1998 1997 1996
Revenue
Interest income $ 71 $ 81 $ --
Equity in earnings of subsidiaries 1,274 1,390 2
------ ------ ------
1,345 1,471 2
General, administrative and other expense 105 243 --
------ ------ ------
Earnings before income tax credits 1,240 1,228 2
Income tax credits 13 82 --
------ ------ ------
NET EARNINGS $1,253 $1,310 $ 2
====== ====== ======
River Valley Bancorp
STATEMENTS OF CASH FLOWS
Periods ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,253 $ 1,310 $ 2
Undistributed net earnings of subsidiary (1,274) (1,390) (2)
Amortization expense of stock benefit plans 114 128 --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (19) (65) --
Other liabilities (7) (109) 94
-------- -------- --------
Net cash provided by (used in) operating activities 67 (126) 94
Cash flows from financing activities:
Purchase of shares (270) -- --
Stock options exercised 18 -- --
Proceeds from other borrowed money 270 -- --
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 paid on common stock (261) (155) --
-------- -------- --------
Net cash provided by (used in) financing activities (243) (155) 561
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (176) (281) 655
Cash and cash equivalents at beginning of year 374 655 --
-------- -------- --------
Cash and cash equivalents at end of year $ 198 $ 374 $ 655
======== ======== ========
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - 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, 1998 and 1997, management believes that the Bank met all
capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
1998: 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 $18,729 13.5% *$2,079 *1.5% *$6,931 * 5.0%
Core capital $18,729 13.5% *$4,159 *3.0% *$8,318 * 6.0%
Risk-based capital $20,084 20.6% *$7,793 *8.0% *$9,741 *10.0%
</TABLE>
* = Greater than or equal to
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - REGULATORY CAPITAL (continued)
<TABLE>
<CAPTION>
1997: 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 $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>
* = Greater than or equal to
At December 31, 1998, 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 $10.3 million and $10.4 million,
respectively.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. The OTS recently
amended its capital distribution regulation in a final rule which takes
effect on April 1, 1999. Because the Bank is a subsidiary of a savings and
loan holding company, it is required to file a notice with the OTS 30 days
before making any capital distributions to the Holding Company. It may also
have to file an application for approval of a proposed capital distribution
with the OTS if the association is not eligible for expedited treatment
under the OTS's application processing rules, or the total amount of all
capital distributions, including the proposed capital distribution, for the
applicable calendar year would exceed an amount equal to the savings
association's net income for that year to date plus the savings
association's retained net income for the preceding two years. A savings
association must also file an application for approval of a proposed capital
distribution if, following the proposed distribution, the association would
not be at least adequately capitalized under the OTS prompt corrective
action regulations, or if the proposed distribution would violate a
prohibition contained in any applicable statute, regulation, or agreement
between the OTS or the FDIC.
NOTE O - LEGISLATIVE MATTERS
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - LEGISLATIVE MATTERS (continued)
In 1996, Congress enacted legislation 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.
The 1996 law also provided for the merger of the SAIF and the BIF by 1999,
but not until such time as bank and thrift charters are combined. Although
Congress has not enacted legislation to combine bank and thrift charters,
any such legislation in the future could require the Bank to become a state
or national commercial bank and become subject to regulation by an agency
other than the OTS. In that event, the Bank's investment authority and the
ability of the Corporation to engage in diversified activities may be
limited or prohibited, and the profitability of the Corporation could be
adversely affected. Under separate legislation related to the
recapitalization plan, the Bank is required to recapture as taxable income
approximately $600,000 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 amortize the recapture
of the bad debt reserve over six years commencing in 1998.
NOTE P - 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, through 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.
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE P - CONVERSION TO STOCK FORM AND BUSINESS COMBINATION (continued)
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 is a pro-forma condensed consolidated statement of earnings
which has been prepared as if the acquisition had been consummated as of the
beginning of the year ended December 31, 1996.
(In thousands)
(Unaudited)
Total interest income $10,211
Total interest expense 5,640
Net interest income 4,571
Provision for losses on loans 252
Other income 1,164
General, administrative and other expense 5,049
-------
Earnings before income taxes 434
Federal income taxes 150
Net earnings $ 284
========
The Bank owns 100% of the outstanding capital stock of First Service which,
until the Banks conversion, 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
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)236-1313 Fax: (317)231-7433
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
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
21, 1999, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250.
<PAGE>
BOARD OF DIRECTORS
<PAGE>
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
********************
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
<PAGE>
OFFICERS OF RIVER VALLEY FINANCIAL BANK
Angela D. Adams
Branch Manager
James B. Allen
Branch Manager
Kenneth L. Cull
Loan Officer
Theresa A. Dryden
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
Robert J. Schoenstein Jr.
Loan Officer
Loy M. Skirvin
Human Resources Manager
Rhonda E. Wingham
Customer Service Manager
<PAGE>
ADVISORY BOARD MEMBERS
Burton P. Chambers
Advisory Director
Van E. Shelton
Advisory Director
Ralph E. Storm
Advisory Director
Exhibit 21
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, 1998 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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 4,014
<INT-BEARING-DEPOSITS> 7,468
<FED-FUNDS-SOLD> 825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,079
<INVESTMENTS-CARRYING> 4,190
<INVESTMENTS-MARKET> 4,200
<LOANS> 112,385
<ALLOWANCE> 1,477
<TOTAL-ASSETS> 138,369
<DEPOSITS> 118,151
<SHORT-TERM> 270
<LIABILITIES-OTHER> 1,335
<LONG-TERM> 0
<COMMON> 0
0
0
<OTHER-SE> 18,613
<TOTAL-LIABILITIES-AND-EQUITY> 138,369
<INTEREST-LOAN> 9,263
<INTEREST-INVEST> 612
<INTEREST-OTHER> 233
<INTEREST-TOTAL> 10,108
<INTEREST-DEPOSIT> 4,682
<INTEREST-EXPENSE> 4,842
<INTEREST-INCOME-NET> 5,266
<LOAN-LOSSES> 275
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,093
<INCOME-PRETAX> 2,086
<INCOME-PRE-EXTRAORDINARY> 1,253
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,253
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.08
<LOANS-NON> 0
<LOANS-PAST> 1,947
<LOANS-TROUBLED> 937
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,276
<CHARGE-OFFS> 223
<RECOVERIES> 149
<ALLOWANCE-CLOSE> 1,477
<ALLOWANCE-DOMESTIC> 122
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,355
</TABLE>
