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, 1999
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)
430 Clifty Drive
P.O. Box 1590
Madison, Indiana 47250-0590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 273-4949
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. N/A
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 17, 2000 was $8,600,671.86.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 17, 2000, was 921,972 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1999, are incorporated into Part II. Portions of the Proxy Statement for the
2000 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 31 Pages
<PAGE>
RIVER VALLEY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement..................................................... 3
PART I
Item 1. Business....................................................... 3
Item 2. Properties.....................................................26
Item 3. Legal Proceedings..............................................27
Item 4. Submission of Matters to a Vote of Security Holders............27
Item 4.5. Executive Officers of the Registrant...........................27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................28
Item 6. Selected Consolidated Financial Data...........................28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................28
Item 7A. Quantitative and Qualitative Analysis of Financial Condition
and Results of Operation...................................28
Item 8. Financial Statements and Supplementary Data....................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................28
PART III
Item 10. Directors and Executive Officers of Registrant.................29
Item 11. Executive Compensation.........................................29
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................29
Item 13. Certain Relationships and Related Transactions.................29
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................29
SIGNATURES ...........................................................30
<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, estimates 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 but are not limited to 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 does 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
("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 58.6% of the Bank's total
loan portfolio at December 31, 1999. The Bank had not identified any loans held
for sale at December 31, 1999. 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,
1999, 1998 and 1997 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,
--------------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN (Dollars in thousands)
Residential real estate:
One-to four-family..................... $69,588 58.6% $65,907 57.4% $72,072 63.7%
Multi-family........................... 2,918 2.5 1,775 1.6 2,781 2.5
Construction........................... 4,163 3.5 8,126 7.1 3,652 3.2
Nonresidential real estate................ 12,758 10.7 7,604 6.6 8,379 7.4
Land loans................................ 10,079 8.5 6,300 5.5 6,324 5.6
Consumer loans:
Automobile loans....................... 6,922 5.8 6,828 5.9 8,028 7.1
Loans secured by deposits.............. 548 .5 723 .6 1,041 .9
Home improvement loans................. 34 --- --- --- 205 .2
Other.................................. 2,040 1.7 5,089 4.4 5,707 5.1
Commercial loans.......................... 9,780 8.2 12,461 10.9 4,871 4.3
-------- ---- -------- ---- -------- ----
Gross loans receivable.................... 118,830 100.0 114,813 100.0 113,060 100.0
Add/(Deduct):
Deferred loan origination costs........ 245 .2 200 .2 202 .2
Undisbursed portions
of loans in process.................. (2,422) (2.0) (1,151) (1.0) (99) (.1)
Allowance for loan losses.............. (1,522) (1.3) (1,477) (1.3) (1,276) (1.1)
-------- ---- -------- ---- -------- ----
Net loans receivable...................... $115,131 96.9% $112,385 97.9% $111,887 99.0%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth certain information at December 31,
1999, 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 2003 2005 2010 2015
December 31, to to to and
1999 2000 2001 2002 2004 2009 2014 following
------------- ------ ------ ------- ------- ------ ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
One-to four-family................. $69,588 $1,084 $ 225 $ 617 $1,387 $7,781 $20,992 $37,502
Multi-family....................... 2,918 --- --- --- 157 76 502 2,183
Construction....................... 4,163 4,050 --- --- --- 94 19 ---
Nonresidential
Real estate loans.................. 12,758 1,133 433 87 404 2,987 2,982 4,732
Land loans ......................... 10,079 3,037 592 515 583 802 1,185 3,365
Consumer loans:
Loans secured by deposits.......... 548 245 15 43 147 43 55 ---
Other loans........................ 8,996 1,040 1,463 1,435 2,730 1,117 89 1,122
Commercial loans...................... 9,780 5,467 665 471 1,959 662 318 238
-------- ------- ------ ------ ------ ------- ------- -------
Total............................ $118,830 $16,056 $3,393 $3,168 $7,367 $13,562 $26,142 $49,142
======== ======= ====== ====== ====== ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth, as of December 31, 1999, the dollar
amount of all loans due after one year that have fixed interest rates and
floating or adjustable interest rates.
Due After December 31, 2000
-----------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Residential real estate loans:
One-to four-family.............. $14,871 $53,633 $68,504
Multi-family.................... 151 2,767 2,918
Construction.................... --- 113 113
Non-residential
Real estate loans............... 636 10,989 11,625
Land loans ...................... 1,309 5,733 7,042
Consumer loans:
Loans secured by deposits....... 276 27 303
Other loans..................... 6,323 1,633 7,956
Commercial loans................... 1,916 2,397 4,313
------- ------- --------
Total......................... $25,482 $77,292 $102,774
======= ======= ========
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $69.6 million, or 58.6% of the Bank's portfolio
of loans, at December 31, 1999, consisted of one- to four-family residential
loans, of which approximately 78.3% 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, 1999 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.
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, 1999,
approximately 21.7% of the Bank's one- to four-family residential mortgage loans
had fixed rates.
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, 1999, the Bank had
approximately $40.2 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.
At December 31, 1999, the Bank had outstanding approximately $3.2
million of home equity loans, with unused lines of credit totalling
approximately $2.7 million. No home equity loans were included in non-performing
assets on that date. The Bank's home equity lines of credit are adjustable-rate
lines of credit tied to the prime rate and are amortized based on a 10- to
20-year maturity. The Bank generally allows a maximum 90% Loan-to-Value Ratio
for its home equity loans (taking into account any other mortgages on the
property). Payments on such home equity loans equal 1.5% of the outstanding
principal balance per month.
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, 1999, one- to four-family residential mortgage loans
amounting to $726,000, or .61% 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, 1999, $4.2 million, or 3.5% of the Bank's total loan
portfolio, consisted of construction loans. The largest construction loan at
December 31, 1999, totalled $300,000. No construction loans were included in
non-performing assets on that date.
While providing the Bank with a comparable, and in some cases higher,
yield than a conventional mortgage loan, construction loans involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, the Bank may have to hire another contractor to complete the project
at a higher cost. Also, a project may be completed, but may not be saleable,
resulting in the borrower defaulting and the Bank taking title to the project.
Nonresidential Real Estate Loans. At December 31, 1999, $12.8 million,
or 10.7% of the Bank's portfolio, consisted of nonresidential real estate loans.
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, 1999 was $1.6 million and was secured by three commercial buildings
in (or close in proximity to) Madison, Indiana. No nonresidential real estate
loans were included in non-performing assets at December 31, 1999.
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, 1999, approximately $2.9 million,
or 2.5% of the Bank's total loan portfolio, consisted of mortgage loans secured
by multi-family dwellings (those consisting of more than four units). The Bank
writes multi-family loans on terms and conditions similar to its nonresidential
real estate loans. The largest multi-family loan in the Bank's portfolio as of
December 31, 1999 was $1.5 million and was secured by a 46 unit apartment
complex in Hanover, 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, 1999, approximately $10.1 million, or 8.5%
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, 1999, the Bank's largest land loan totalled $600,000.
Land loans totalling $36,000, or .03% of the Bank's total loan
portfolio, were included in non-performing assets as of December 31, 1999. 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, 1999, $9.8 million, or 8.2% of the
Bank's total loan portfolio, consisted of nonmortgage commercial loans. The
Bank's commercial loans are written on either a fixed-rate or an adjustable-rate
basis with terms that vary depending on the type of security, if any. At
December 31, 1999, approximately 93.6% 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, 1999, the largest
commercial loan was $1.2 million. As of the same date, commercial loans
totalling $23,000 were included in non-performing assets.
Commercial loans tend to bear somewhat greater risk than residential
mortgage loans, depending on the ability of the underlying enterprise to repay
the loan. Further, they are frequently larger in amount than the Bank's average
residential mortgage loans.
Consumer Loans. The Bank's consumer loans, consisting primarily of auto
loans, home improvement loans, unsecured installment loans, loans secured by
deposits and mobile home loans aggregated approximately $9.5 million at December
31, 1999, or 8.0% 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, 1999, 88.8% 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, 1999, consumer loans amounting to $72,000 were included in
non-performing assets.
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, 1999, the Bank serviced $40.2 million in loans sold to the FHLMC.
The Bank confines its loan origination activities primarily to
Jefferson County and surrounding counties. At December 31, 1999, the Bank held
loans totalling approximately $7.1 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 President may approve mortgage loans up to $220,000. All other
mortgage loans must be approved by at least four members of the Bank's Board of
Directors. The lending policy further provides that loans secured by readily
marketable collateral, such as stock, bonds and certificates of deposit may be
approved by a Loan Officer for up to $75,000, by a Senior Loan Officer for up to
$150,000 and by the 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 President up to $150,000. Finally,
the lending policy provides that unsecured loans may be approved by a Loan
Officer or senior loan officer up to $10,000 or by 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, 1999, the Bank held in its loan portfolio
participations in these types of loans aggregating approximately $25,000 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,
-------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loans Originated:
<S> <C> <C> <C>
Residential real estate loans (1).......... $28,816 $37,537 $28,123
Multi-family loans......................... 2,092 326 ---
Construction loans......................... 4,838 5,108 5,740
Non-residential real estate loans.......... 3,995 447 3,516
Land loans................................. 4,554 2,909 3,473
Consumer loans............................. 5,945 6,423 8,276
Commercial loans........................... 6,625 16,771 4,489
------- ------- --------
Total loans originated................. 56,865 69,521 53,617
Reductions:
Sales...................................... 14,253 17,025 6,930
Principal loan repayments.................. 39,640 51,624 43,220
Transfers from loans to real estate owned.. --- --- 81
------- ------- --------
Total reductions....................... 53,893 68,649 50,231
Decrease in other items (2)................ (226) (374) (377)
------- ------- --------
Net increase .............................. $ 2,746 $ 498 $ 3,009
======= ======= ========
- ----------
</TABLE>
(1) Includes loans originated for sale in the secondary market.
(2) Other items consist of amortization of deferred loan origination costs, the
provision for losses on loans and a charge to the allowance for loan
losses.
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
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, 1999, $857,000, or .62% of
consolidated total assets, were non-performing loans compared to $1.9 million,
or 1.5% of consolidated total assets, at December 31, 1998. At December 31,
1999, residential loans and consumer loans accounted for $726,000 and $72,000,
respectively, of non-performing assets. The Bank had no REO at December 31,
1999.
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,
1999 1998 1997
---------------------------------------
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-performing loans......................... $857 $1,947 $ 718
Troubled debt restructurings ................ 835 937 411
------ ------ ------
Total non-performing loans and troubled
debt restructurings...................... 1,692 2,884 1,129
Foreclosed real estate....................... --- 82 82
------ ------ ------
Total non-performing assets................ $1,692 $2,966 $1,211
====== ====== ======
Total non-performing loans and troubled debt
restructurings to total loans................ 1.42% 2.51% 1.00%
====== ====== ======
Total non-performing assets to total assets..... 1.22% 2.14% .88%
====== ====== ======
</TABLE>
At December 31, 1999, the Bank held loans delinquent from 30 to 89 days
totalling $334,000. 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, 1999, 1998 and 1997, 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, 1999 At December 31, 1998 At December 31, 1997
------------------------------------- ------------------------------------ ------------------------------------
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 Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- -------- -------- -------- -------- --------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans...... 5 $186 15 $726 69 $2,194 26 $931 16 $673 12 $431
Multi-family loans... --- --- --- --- --- --- --- --- --- --- --- ---
Construction loans... --- --- --- --- --- --- 1 23 --- --- --- ---
Land loans........... --- --- 1 36 1 11 3 203 --- --- 2 107
Non-residential
real estate loans. --- --- --- --- --- --- 4 325 --- --- --- ---
Consumer loans....... 32 133 13 72 86 560 56 465 24 160 22 152
Commercial loans..... 2 15 2 23 10 477 --- --- 2 113 1 28
-- ---- -- ---- --- ------ -- ------ -- ---- -- ----
Total............. 39 $334 31 $857 166 $3,242 90 $1,947 42 $946 37 $718
== ==== == ==== === ====== == ====== == ==== == ====
Delinquent loans to
total loans....... 1.00% 4.52% 1.47%
==== ==== ====
</TABLE>
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, 1999, the aggregate amount of the Bank's classified
assets and general and specific loss allowances were as follows:
At December 31, 1999
--------------------
(In thousands)
Substandard assets................................. $1,912
Doubtful assets.................................... ---
Loss assets........................................ 113
------
Total classified assets........................ $2,025
======
General loss allowances............................ $1,409
Specific loss allowances........................... 113
------
Total allowances............................... $1,522
======
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, 1999. 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.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the five years ended December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $1,477 $1,276 $1,190 $ 407 $252
Charge-offs:
Single-family residential................... (17) --- --- --- ---
Consumer.................................... (86) (140) (254) (3) ---
Commercial.................................. (20) (83) (15) --- ---
------ ------ ------ ------ ----
Total charge-offs......................... (123) (223) (269) (3) ---
Recoveries....................................... 28 149 51 --- 5
------ ------ ------ ------ ----
Net (charge-offs) recoveries.................. (95) (74) (218) (3) 5
Provision for losses on loans.................... 140 275 304 22 150
Increase due to Acquisition...................... --- --- --- 764 ---
------ ------ ------ ------ ----
Balance at end of period...................... $1,522 $1,477 $1,276 $1,190 $407
====== ====== ====== ====== ====
Allowance for loan losses as a percent of
total loans outstanding before net items...... 1.28% 1.29% 1.13% 1.07% 0.70%
====== ====== ====== ====== ====
Ratio of net (charge-offs) recoveries to average
loans outstanding before net items............ (0.08)% (0.06)% (0.20)% (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 loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
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............ $ 4 64.6% $ 11 66.1% $ 11 69.4%
Nonresidential real estate......... --- 19.2 --- 12.1 --- 13.0
Consumer loans..................... 109 8.0 111 10.9 12 13.3
Commercial loans................... --- 8.2 --- 10.9 --- 4.3
Unallocated........................ 1,409 --- 1,355 --- 1,253 ---
------ ----- ------ ----- ------ -----
Total............................ $1,522 100.0% $1,477 100.0% $1,276 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Investments and Mortgage-Backed Securities
Investments. The Bank's investment portfolio consists of U.S.
government and agency obligations, commercial paper, corporate bonds, municipal
securities and Federal Home Loan Bank ("FHLB") stock. At December 31, 1999,
approximately $6.2 million, or 4.5%, of the consolidated total assets consisted
of such investments.
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,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Held to Maturity:
U.S. Government and
<S> <C> <C> <C> <C> <C> <C>
agency obligations............... $1,000 $995 $1,000 $980 $3,500 $3,444
Available for Sale:
U.S. Government and
agency obligations............... --- --- --- --- 498 494
Commercial paper................... 2,972 2,957 --- --- --- ---
Corporate bonds.................... 1,000 1,000 --- --- --- ---
Muncipal securities................ 276 273 276 283 276 278
FHLB stock............................ 943 943 943 943 943 943
------ ------ ------ ------ ------ ------
Total available for sale........... 5,191 5,173 1,219 1,226 1,717 1,715
------ ------ ------ ------ ------ ------
Total investments................ $6,191 $6,168 $2,219 $2,206 $5,217 $5,159
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the amount of investment securities
(excluding FHLB stock) which mature during each of the periods indicated and the
weighted average yields for each range of maturities at December 31, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 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>
U.S. Government and agency obligations.......... $1,000 5.03% $ --- ---% $ --- ---% $ --- ---%
Commercial paper................................ 2,972 6.01 --- --- --- --- --- ---
Corporate bonds................................. 1,000 6.05 --- --- --- --- --- ---
Municipal securities............................ --- --- 276 4.63 --- --- --- ---
</TABLE>
Mortgage-Backed Securities. The Bank maintains a portfolio of
mortgage-backed pass-through securities in the form of FHLMC, FNMA and
Government National Mortgage Association ("GNMA") participation certificates.
Mortgage-backed pass-through securities generally entitle the Bank to receive a
portion of the cash flows from an identified pool of mortgages and gives the
Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are
each guaranteed by its respective agencies as to principal and interest. Except
for a $15,000 investment in interest-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, 1999, the Bank had $4.2 million of mortgage-backed
securities outstanding, $2.1 million of which were classified as held to
maturity, and $2.1 million of which were classified as available for sale. These
mortgage-backed securities may be used as collateral for borrowings and, through
repayments, as a source of liquidity.
The following table sets forth the amortized cost and market value of
the Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Mortgage-backed
securities.................. $2,138 $2,147 $3,190 $3,220 $5,374 $5,432
Available for Sale:
Government
agency securities........... 1,511 1,466 2,196 2,177 3,023 2,992
Collateralized mortgage
obligations................. 627 605 627 619 627 612
------ ------ ------ ------ ------ ------
Total mortgage-backed
securities.............. $4,276 $4,218 $6,013 $6,016 $9,024 $9,036
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 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............................. $857 4.93% $ 3 7.57% $1,278 6.29%
Mortgage-backed securities
available for sale........................... 8 7.09 235 6.54 1,895 6.25
---- ---- ------
Total...................................... $865 $238 $3,173
==== ==== ======
</TABLE>
The following table sets forth the changes in the Bank's
mortgage-backed securities portfolio for the years ended December 31, 1999, 1998
and 1997.
Year Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
(In thousands)
Beginning balance........................... $5,986 $8,978 $12,846
Purchases................................... --- --- 1,350
Sales ..................................... --- --- (2,150)
Repayments.................................. (1,709) (2,970) (3,072)
Premium and discount
amortization, net........................ (30) (40) (1)
Unrealized gains (losses) on securities
available for sale....................... (38) 18 5
------ ------ ------
Ending balance.............................. $4,209 $5,986 $8,978
====== ====== ======
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Bank derives funds from scheduled loan payments, investment maturities, loan
prepayments, retained earnings, income on earning assets and borrowings. While
scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis may be used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Deposits are attracted, principally from within Jefferson County,
through the offering of a broad selection of deposit instruments including
fixed-rate certificates of deposit, NOW, MMDAs and other transaction accounts,
individual retirement accounts and savings accounts. The Bank does not actively
solicit or advertise for deposits outside of Jefferson County. Substantially all
of the Bank's depositors are residents of that county. Deposit account terms
vary, with the principal differences being the minimum balance required, the
amount of time the funds remain on deposit and the interest rate. The Bank does
not pay a fee for any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals and applicable regulations. The Bank relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also closely prices its deposits in
relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its NOW and MMDAs are relatively stable
sources of deposits. However, the ability of the Bank to attract and maintain
certificates of deposit, and the rates paid on these deposits, have been and
will continue to be significantly affected by market conditions.
An analysis of the Bank's deposit accounts by type, maturity and rate at
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1999 Deposits Rate
- --------------- ----------- ------------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Withdrawable:
Non-interest bearing accounts......... $ 100 $ 7,903 6.9% ---%
Savings accounts...................... 50 26,640 23.3 3.52
MMDA.................................. 100 6,886 6.0 4.10
NOW accounts.......................... 100 14,329 12.6 2.62
-------- ----- ----
Total withdrawable.................. 55,758 48.8 2.86
Certificates (original terms):
I.R.A................................. 250 6,891 6.0 4.67
3 months.............................. 2,500 329 .3 4.31
6 months.............................. 2,500 6,940 6.1 4.55
9 months.............................. 2,500 1,025 .9 4.62
12 months............................. 500 13,880 12.1 4.85
15 months............................. 500 6,595 5.8 4.63
18 months............................. 500 820 .7 5.65
24 months............................. 500 339 .3 4.87
30 months ............................ 500 4,720 4.1 5.29
36 months............................. 500 517 .5 5.19
48 months............................. 500 489 .4 5.37
60 months............................. 500 2,063 1.8 5.89
Jumbo certificates....................... 100,000 13,885 12.2 5.07
-------- ----- ----
Total certificates.................... 58,493 51.2 4.90
-------- ----- ----
Total deposits........................... $114,251 100.0% 3.91%
======== ===== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank at the dates indicated:
At December 31,
-------------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
3.01 to 5.00%..... $36,591 $23,200 $13,016
5.01 to 6.00%..... 14,250 31,364 36,010
6.01 to 7.00%..... 7,445 11,229 12,312
7.01 to 8.00%..... 207 214 2,896
8.01 to 9.00%..... --- --- 1
------- ------- -------
Total.......... $58,493 $66,007 $64,235
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1999. Matured certificates, which have not been renewed as of
December 31, 1999, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1999
------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
-------- ------ -------- ------------
(In thousands)
3.01 to 5.00%............ $31,822 $3,168 $ 378 $1,223
5.01 to 6.00%............ 9,676 1,933 2,123 518
6.01 to 7.00%............ 4,265 2,196 974 10
7.01 to 8.00%............ 150 10 23 24
8.01 to 9.00%............ --- --- --- ---
------- ------ ------ ------
Total................. $45,913 $7,307 $3,498 $1,775
======= ====== ====== ======
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, 1999.
At December 31, 1999
--------------------
Maturity Period (In thousands)
Three months or less................................. $ 8,582
Greater than three months through six months......... 1,687
Greater than six months through twelve months........ 2,001
Over twelve months................................... 1,614
-------
Total........................................... $13,884
=======
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
1999 Deposits 1998 1998 Deposits 1997 1997 Deposits
-------- ----- ------- -------- ----- ------ -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Non-interest bearing accounts...... $ 7,903 6.9% $ (462) $8,365 7.0% $2,737 $ 5,628 4.9%
Savings accounts................... 26,640 23.3 4,262 22,378 19.0 967 21,411 18.7
MMDA............................... 6,886 6.0 (98) 6,984 5.9 (1,273) 8,257 7.2
NOW accounts....................... 14,329 12.6 (88) 14,417 12.2 (1,007) 15,424 13.4
-------- ----- ------- -------- ----- ------ -------- -----
Total withdrawable............... 55,758 48.8 3,614 52,144 44.1 1,424 50,720 44.2
Certificates (original terms):
I.R.A.............................. 6,891 6.0 (359) 7,250 6.1 (497) 7,747 6.7
3 months........................... 329 .3 66 263 .2 (115) 378 .3
6 months........................... 6,940 6.1 (298) 7,238 6.1 2,549 4,689 4.1
9 months........................... 1,025 .9 (2,027) 3,052 2.6 1,920 1,132 1.0
12 months.......................... 13,880 12.1 7,298 6,582 5.6 (2,219) 8,801 7.7
15 months.......................... 6,595 5.8 (12,179) 18,774 15.9 2,072 16,702 14.5
18 months.......................... 820 .7 (222) 1,042 .9 (483) 1,525 1.3
24 months.......................... 339 .3 (115) 454 .4 (164) 618 .5
30 months ......................... 4,720 4.1 2,172 2,548 2.2 (2,387) 4,935 4.3
36 months.......................... 517 .5 (85) 602 .5 (2,234) 2,836 2.5
48 months.......................... 489 .4 (136) 625 .5 (133) 758 .7
60 months.......................... 2,063 1.8 (172) 2,235 1.9 (667) 2,902 2.5
96 months.......................... --- --- (219) 219 .2 1 218 .2
Jumbo certificates.................... 13,885 12.2 (1,238) 15,123 12.8 4,129 10,994 9.5
-------- ----- ------- -------- ----- ------ -------- -----
Total certificates................. 58,493 51.2 (7,514) 66,007 55.9 1,772 64,235 55.8
-------- ----- ------- -------- ----- ------ -------- -----
Total deposits........................ $114,251 100.0% $(3,900) $118,151 100.0% $3,196 $114,955 100.0%
======== ===== ======= ======== ===== ====== ======== =====
</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, 1999, the Bank had $500,000 in other borrowed money consisting of a
variable-rate one-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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances and Other Borrowed Money:
Outstanding at end of period.............. $6,500 $ 270 $2,000
Average balance outstanding for period.... 2,228 2,549 2,244
Maximum amount outstanding at any
month-end during the period............. 6,500 5,000 5,000
Weighted average interest rate
during the period....................... 6.43% 6.28% 6.02%
Weighted average interest rate
at end of period........................ 6.07% 6.63% 6.12%
</TABLE>
Service Corporation Subsidiaries
Prior to the Acquisition and Conversion, the Bank had two subsidiaries:
Madison First Service Corporation ("First Service") and McCauley Insurance
Agency, Inc. ("McCauley"). First Service was incorporated under the laws of the
State of Indiana on July 3, 1973 and owned all of the outstanding capital stock
of McCauley. First Service had no other operations. McCauley was organized under
the laws of the State of Indiana under the name Builders Insurance Agency, Inc.
on August 2, 1957 and changed its name to McCauley Insurance Agency, Inc. on
August 29, 1957. McCauley engaged in the sale of general fire and accident, car,
home and life insurance to the general public. During the period ended December
31, 1996, McCauley received approximately $200,000 in commissions.
Upon consummation of the Acquisition, the Bank became a bank holding
company, subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA"). At that time, the insurance operations of McCauley were not permitted
under the BHCA, and the Bank was required to divest its ownership of McCauley.
On December 17, 1996, the Bank sold McCauley to the Madison Insurance Agency,
Inc. for a gain of $141,000. The Bank continues to hold First Service which
currently holds rental property but does not otherwise engage in significant
business activities.
The historic consolidated statements of earnings of the Bank and its
subsidiaries included elsewhere herein include the operations of First Service
and McCauley for the periods prior to the Holding Company's divestment of its
ownership of McCauley. All intercompany balances and transactions have been
eliminated in the consolidation.
Employees
As of December 31, 1999, the Bank employed 54 persons on a full-time
basis and five 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. A savings association must
pay a semi-annual assessment to the OTS based upon a marginal assessment rate
that decreases as the asset size of the savings association increases, and which
includes a fixed-cost component that is assessed on all savings associations.
The assessment rate that applies to a savings association depends upon the
institution's size, condition and the complexity of its operations. The Bank's
semi-annual assessment is approximately $19,000.
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, issuances 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.
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 thereby 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 obtaining the 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 currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company on file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
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 be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and the Bank were a
bank. See "-Qualified Thrift Lender." At December 31, 1999, 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.
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. The FHLB 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
("FHFB"), an independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
will become voluntary. Any savings association that chooses to become (or
remain) a member of the FHLB following the expiration of this six-month period
will have to qualify for membership under the criteria that existed prior to the
enactment of the GLB Act. The Bank currently intends to remain a member of the
FHLB of Indianapolis.
As a member of the FHLB, 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, 1999, 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, 1999, 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. During 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 1996, however, legislation was enacted to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF. 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.
In 1996, legislation was enacted that included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, the Bank was charged a one-time special
assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The
Bank recognized this one-time assessment as a non-recurring operating expense
during the three-month period ending September 30, 1996, and paid this
assessment during the fourth quarter of 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"). Although Congress has
considered merging the SAIF and the BIF, until then, 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 became 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, 1999, 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, 1999 would not have been required to deduct
any amounts from its total capital available to calculate its risk-based capital
requirement.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. At December 31,
1999, 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 became effective on April
1, 1999, that revised 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
requirement under the prior version of the regulation 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"). 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 requires, 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
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, 1999, the Bank had liquid
assets of $8.1 million, and a regulatory liquidity ratio of 28.2%.
Safety and Soundness Standards
In 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. During 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 be
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval and reporting requirements to monitor compliance with the association's
real estate lending policies. The association's written real estate lending
policies must be reviewed and approved by the association's Board of Directors
at least annually. Further, each association is expected to monitor conditions
in its real estate market to ensure that its lending policies continue to be
appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, the Bank may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 1999, 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 that requires the association
to maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. 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, 1999, the Bank was in compliance with
its QTL requirement, with approximately 85% 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 be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must dispose of any investment or activity
not permissible for a national bank and a savings association. 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, which became effective in 1996, 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.
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.
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 1999. 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 ("IFBT"), which is imposed at a flat rate of 8.5% on "adjusted gross
income." "Adjusted gross income," for purposes of IFBT, 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.
Item 2. Properties.
The following table provides certain information with respect to the
Bank's offices as of December 31, 1999.
Net Book Value
of Property,
Year Furniture, Approximate
Opened or Fixtures and Square
Description and Address Acquired Equipment Footage
- ----------------------- -------- --------- -------
(Dollars in thousands)
Locations in Madison, Indiana
Downtown Offices:
233 E. Main Street.............. 1952 $233 9,110
Drive-Through Branch:
401 E. Main Street.............. 1984 48 375
Hilltop Locations:
303 Clifty Drive................ 1973 525 3,250
430 Clifty Drive................ 1983 605 6,084
Wal-mart Banking Center
567 Ivy Tech Drive.............. 1995 5 517
Locations in Hanover, Indiana
10 Medical Plaza Drive.......... 1995 175 656
The following table provides certain information with respect to real
estate owned by the Bank as of December 31, 1999. These properties were acquired
by the Bank for future expansion of its banking operations.
Address
----------------------
225 E. Main Street
Madison, Indiana 47250
227 E. Main Street
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
$236,000 at December 31, 1999.
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, 1999.
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 the Position with
Name Holding Company the Bank
- --------------------------------------------------------------------------------
Matthew P. Forrester President and Chief President and Chief
Executive Officer Executive Officer
Lonnie D. Collins Secretary Secretary
Larry C. Fouse Vice President of Finance Vice President of Finance
Matthew P. Forrester (age 43) has served as the Bank and Holding
Company President and Chief Executive Officer since October, 1999. Prior to that
Mr. Forrester served as the Chief Financial Officer for Home Loan Bank in Fort
Wayne, Indiana and Senior Vice President and Treasurer for its holding company,
Home Bancorp. Prior to joining Home Loan Bank Mr. Forrester was an examiner for
the Indiana Department of Financial Institutions.
Lonnie D. Collins (age 51) 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 54) 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 1999 fiscal year were $15.75 and $11.50, 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.
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 1999 in the
amount of $.265 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 1999 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 18 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 19 through 50 in the Shareholder Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 through 4 and page 9 of the Holding
Company's Proxy Statement for its Annual Shareholder Meeting to be held April
19, 2000 (the "2000 Proxy Statement"). Information concerning the Registrant's
executive officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 through 8 of the 2000 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 3 of the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
pages 8 and 9 of the 2000 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.....................................19
Consolidated Statements of Financial Condition
at December 31, 1999, and 1998...................................20
Consolidated Statements of Earnings for the
Years Ended December 31, 1999, 1998, and 1997....................22
Consolidated Statements of Comprehensive Income for the Year
Ended December 31, 1999, 1998, 1997..............................23
Consolidated Statements of Shareholders'
Equity for the Years Ended December 31,
1999, 1998, and 1997.............................................24
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998, and 1997..........................25
Notes to Consolidated Financial Statements.......................27
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
RIVER VALLEY BANCORP
Date: March 23, 2000 By: /s/ Matthew P. Forrester
-----------------------------------
Matthew P. Forrester, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 23rd day of March, 2000.
Signatures Title Date
---------- -------------- --------------
(1) Principal Executive Officer:
/s/ Matthew P. Forrester )
--------------------------- )
Matthew P. Forrester President and )
Chief Executive Officer )
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
/s/ Larry C. Fouse Treasurer )
--------------------------- )
Larry C. Fouse )
)
) March 23, 2000
)
(3) The Board of Directors: )
)
)
/s/ Robert W. Anger Director )
--------------------------- )
Robert W. Anger )
)
)
/s/ Jonnie L. Davis Director )
--------------------------- )
Jonnie L. Davis )
)
)
/s/ Matthew P. Forrester Director )
--------------------------- )
Matthew P. Forrester )
)
)
<PAGE>
)
/s/ Michael J. Hensley Director )
--------------------------- )
Michael J. Hensley )
)
)
/s/ Earl W. Johann Director ) March 23, 2000
--------------------------- )
Earl W. Johann )
)
)
/s/ Fred W. Koehler Director )
--------------------------- )
Fred W. Koehler )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
2 Agreement and Plan of Reorganization is incorporated by
reference to Exhibit 2 to the Registrant's Form 10-K for
the fiscal year ending December 31, 1997.
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 incorporated by
reference to Exhibit 3(2) to the Registrant's Form 10-K
for the fiscal year ending December 31, 1997
10(1) Employment Agreement between River Valley Financial Bank
and Matthew P. Forrester is included as Exhibit 10(5)
hereto
(2) Director Deferred Compensation Master Agreement is
incorporated by reference to Exhibit 10(8) to the
Registration Statement
(3) Director Deferred Compensation Joinder Agreement --
Jerry D. Allen is incorporated by reference to Exhibit
10(9) to the Registration Statement
(4) Director Deferred Compensation Joinder Agreement --
Robert W. Anger is incorporated by reference to Exhibit
10(10) to the Registration Statement
(5) Director Deferred Compensation Joinder Agreement -- Earl
W. Johann is incorporated by reference to Exhibit 10(12)
to the Registration Statement
(6) Director Deferred Compensation Joinder Agreement --
Frederick W. Koehler is incorporated by reference to
Exhibit 10(13) to the Registration Statement
(7) Director Deferred Compensation Joinder Agreement --
Michael Hensley is incorporated by reference to Exhibit
10(15) to the Registration Statement
(8) 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
(9) 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
(10) 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
(11) 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
(12) 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)
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into and effective this 15th day of July, 1999,
by and between River Valley Financial Bank, a federal savings bank (the "Bank"),
and Matthew P. Forrester (the "Employee"). The parties agree, however, that the
"Effective Date" of this Agreement shall be October 12, 1999.
WHEREAS, the Employee is being employed by the Bank as its President
and as such will perform valuable services for the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment: The Employee is employed as the President of the Bank.
The Employee shall render such administrative and management services for the
Bank as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank. The Employee's other duties shall be such as the Board of Directors
(the "Board") of the Bank may from time to time reasonably direct, including
normal duties as an officer of the Bank.
2. Base Compensation: The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $95,000.00 per annum, payable in
cash not less frequently than monthly, and shall be effective and calculated
commencing the Effective Date. The salary shall be reviewed annually by the
Board of Directors of the Bank in February of each year commencing February of
2000 and any adjustment in the future on salary shall be effective on February
1st of each year.
3. Bonuses: The Employee shall participate in any year end bonus
granted to other employees by the Board. The Employee shall further participate
in an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Board may award from time to time to the Bank's
senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses.
4.(a) Participation in Retirement, Medical and Other Plans: During the
term of this Agreement, the Employee shall be eligible to participate in the
following benefit plans: group hospitalization, disability, health, dental, sick
leave, retirement, pension, and/or other present or future qualified plans
provided by the Bank, generally, which benefits, taken as a whole, must be at
least as favorable as those in effect on the Effective Date, unless the
continued operation of such plans would adversely affect the Bank's operating
results or financial condition in a material way, the Bank's Board of Directors
concludes that modifications to such plans are necessary to avoid such adverse
effects and such modifications apply consistently to all employees of the Bank.
(b) Employee Benefits: Expenses: The Employee shall be eligible to
participate in any fringe benefits which are or may become available to the
Bank's senior management employees, including, for example, any stock option or
incentive compensation plans, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement, upon substantiation of such expenses in accordance with the
policies of the Bank.
5. Term: The Bank hereby employs the Employee, and the Employee hereby
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending thirty six months thereafter (or such earlier date as
is determined in accordance with Section 9). Additionally, on each annual
anniversary date from the Effective Date, the Employee's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date, provided the Board determines in a duly adopted resolution that
the performance of the Employee has met the Board's requirements and standards,
and that this Agreement shall be extended. Only those members of the Board of
Directors who have no personal interest in this Employment Agreement shall
discuss and vote on the approval and subsequent review of this Agreement.
6. Loyalty; Noncompetition:
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, the Employee may serve on the Boards of Directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of Employee's duties pursuant
to this Agreement, or will not violate any applicable statute or regulation.
"Full business time" is hereby defined as that amount of time usually devoted to
like companies by similarly situated executive officers. During the term of his
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Bank, or be
gainfully employed in any other position or job other than as provided above.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
(c) While Employee is employed by the Bank and for a period of three
years after termination of Employee's employment by the Bank or by the Employee
for reasons other than those set forth in Section 9 (d) hereof, the Employee
shall not directly or indirectly, engage in any bank or bank-related business
which competes with the business of the Bank as conducted during Employee's
employment by the Bank for any financial institution, including but not limited
to banks, savings and loan associations, and credit unions within a forty mile
radius of Madison, Indiana.
7. Standards: The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
8. Vacation, Sick Leave and Disability:
The Employee shall be entitled to twenty days vacation annually and
shall be entitled to the same sick leave and disability leave as other employees
of the Bank.
The Employee shall not receive any additional compensation from the
Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in either case to the extent authorized by the Board.
In addition to the aforesaid paid vacations, the Employee shall be
entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Board may in its discretion
determine. Further, the Board may grant to the Employee a leave or leaves of
absence, with or without pay, at such time or times and upon such terms and
conditions as such Board in its discretion may determine.
9. Termination and Termination Pay: Subject to Section 11 hereof, the
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
(b) Disability.
(1) The Bank may terminate the Employee's
employment, should the Employee become disabled, in a manner consistent with the
Bank's and the Employee's rights and obligations under the Americans With
Disabilities Act or other applicable state and federal laws concerning
disability. For the purpose of this Agreement, "Disability" means a physical or
mental condition which substantially limits the employee's ability to perform
the essential functions of his position, as established by this Agreement, and
which results in the Employee becoming eligible for long-term disability
benefits under the Bank's long-term disability plan.
(2) During any period that the Employee shall
receive disability benefits and to the extent that the Employee shall be
physically and mentally able to do so, he shall furnish such information,
assistance and documents so as to assist in the continued ongoing business of
the Bank and, if able, shall make himself available to the Bank to undertake
reasonable assignments consistent with his prior position and his physical and
mental health. The Bank shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
(c) Just Cause: The Board may, by written notice to
the Employee, immediately terminate his employment at any time, for Just Cause.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause" shall
mean termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, in the
event of termination for Just Cause there shall be delivered to the Employee a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), such meeting and the opportunity to be heard to be held at
least 30 days prior to such termination, finding that in the good faith opinion
of the Board the Employee was guilty of conduct set forth above in the second
sentence of this Subsection (c) and specifying the particulars thereof in
detail.
(d) Without Just Cause; Constructive Discharge:
(1) The Board may, by written notice to the
Employee, immediately terminate his employment at any time for a reason other
than Just Cause, in which event the Employee shall be entitled to receive the
following compensation and benefits (unless such termination occurs within the
time period set forth in Section 11(b) hereof, in which event the benefits and
compensation provided for in Section 11 shall apply): (i) the salary provided
pursuant to Section 2 hereof, up to the date of termination of the term as
provided in Section 5 hereof (including any renewal term) of this Agreement (the
"Expiration Date"), plus said salary for an additional 12-month period, and (ii)
at the Employee's election, either (A) cash in an amount equal to the cost to
the Employee of obtaining all health, life, disability and other benefits
(excluding stock options) which the Employee would have been eligible to
participate in through the Expiration Date, based upon the benefit levels
substantially equal to those that the Bank provided for the Employee at the date
of termination of employment, or (B) continued participation under such Bank
benefit plans through the Expiration Date, but only to the extent the Employee
continues to qualify for participation therein. All amounts payable to the
Employee shall be paid, at the option of the Employee, either (I) in periodic
payments through the Expiration Date, or (II) in one lump sum within ten (10)
days of such termination.
(2) The Employee may voluntarily terminate his
employment under this Agreement, and the Employee shall thereupon be entitled to
receive the compensation and benefits payable under Section 9(d)(1) hereof,
within ninety (90) days following the occurrence of any of the following events,
which has not been consented to in advance by the Employee in writing (unless
such voluntary termination occurs within the time period set forth in Section
11(b) hereof, in which event the benefits and compensation provided for in
Section 11 shall apply): (i) the requirement that the Employee move his personal
residence, or perform his principal executive functions, more than thirty (30)
miles from his primary office; (ii) a material reduction in the Employee's base
compensation, unless part of an institution-wide reduction; (iii) the failure by
the Bank to continue to provide the Employee with compensation and benefits
provided for under this Agreement, as the same may be increased from time to
time, or with benefits substantially similar to those provided to him under any
of the employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Bank which would directly or
indirectly reduce any of such benefits or deprive the Employee of any material
fringe benefit enjoyed by him, unless part of an institution-wide reduction;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position as referenced in
Section 1; (v) a failure to elect or re-elect the Employee to the Board of
Directors of the Bank; or (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with his employment with the Bank.
(3) Notwithstanding the foregoing, but only to the
extent required under federal banking law, the amount payable under clause
(d)(1)(i) hereof shall be reduced to the extent that on the date of the
Employee's termination of employment, the present value of the benefits payable
under clauses (d)(1)(i) and (ii) hereof exceeds the limitation on severance
benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift
Supervision, as in effect on the Effective Date. In the event that Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code"), becomes
applicable to payments made under this Section 9(d), and the payments exceed the
"Maximum Amount" as defined in Section 11(a)(1) hereof, the payments shall be
reduced as provided by Section 11(a)(2) of this Agreement.
(e) Termination or Suspension Under Federal Law.
(1) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under
this Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(2) If the Bank is in default (as defined in Section
3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the
date of default; however, this Paragraph shall not affect the vested rights of
the parties.
(3) All obligations under this Agreement shall
terminate, except to the extent determined that continuation of this Agreement
is necessary for the continued operation of the Bank; (i) by the Director of the
Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the
time that the Federal Deposit Insurance Corporation ("FDIC") enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his
or her designee, at the time that the Director of the OTS, or his or her
designee approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director of the OTS to be in
an unsafe or unsound condition. Such action shall not affect any vested rights
of the parties.
(4) If a notice served under Section 8(e)(3) or
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the Bank's affairs,
the Bank's obligations under this Agreement shall be suspended as of the date of
such service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended,
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee: Subject to Section 11 hereof,
the Employee may voluntarily terminate employment with the Bank during the term
of this Agreement, upon at least ninety (90) days' prior written notice to the
Board of Directors, in which case the Employee shall receive only his
compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 9(d)(2) hereof,
in which event the benefits and compensation provided for in section 9(d) shall
apply).
10. No Mitigation: The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control:
(a) Change in Control; Involuntary Termination:
(1) Notwithstanding any provision herein to the
contrary, if the Employee's employment under this Agreement is terminated by the
Bank, without the Employee's prior written consent and for a reason other than
Just Cause, in connection with or within twelve (12) months after any Change in
Control of the Bank, the Employee shall, subject to paragraph (2) of this
Section 11(a), be paid an amount equal to the difference between (i) the product
of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and
regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of
any other parachute payments (as defined under Section 280G(b)(2) of the Code)
that the Employee receives on account of the Change in Control. Said sum shall
be paid in one lump sum within ten (10) days of such termination. This paragraph
would not apply to a termination of employment due to death, disability or
voluntary termination by the Employee.
(2) In the event that the Employee and the Bank
jointly determine and agree that the total parachute payments receivable under
clauses (i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount,
notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the
Employee shall determine which and how much, if any, of the parachute payments
to which he is entitled shall be eliminated or reduced so that the total
parachute payments to be received by the Employee do not exceed the Maximum
Amount. If the Employee does not make his determination within ten business days
after receiving a written request from the Bank, the Bank may make such
determination, and shall notify the Employee promptly thereof. Within five
business days of the earlier of the Bank's receipt of the Employee's
determination pursuant to this paragraph or the Bank's determination in lieu of
a determination by the Employee, the Bank shall pay to or distribute to or for
the benefit of the Employee such amounts as are then due the Employee under this
Agreement.
(3) As a result of uncertainty in application of
Section 280G of the Code at the time of payment hereunder, it is possible that
such payments will have been made by the Bank which should not have been made
("Overpayment") or that additional payments will not have been made by the Bank
which should have been made ("Underpayment"), in each case, consistent with the
calculations required to be made under Section 11(a)(1) hereof. In the event
that the Employee, based upon the assertion by the Internal Revenue Service
against the Employee of a deficiency which the Employee believes has a high
probability of success, determines that an Overpayment has been made, any such
Overpayment paid or distributed by the Bank to or for the benefit of Employee
shall be treated for all purposes as a loan ab initio which the Employee shall
repay to the Bank together with interest at the applicable federal rate provided
for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan
shall be deemed to have been made and no amount shall be payable by the Employee
to the Bank if and to the extent such deemed loan and payment would not either
reduce the amount on which the Employee is subject to tax under Section 1 and
Section 4999 of the Code or generate a refund of such taxes. In the event that
the Employee and the Bank determine, based upon controlling precedent or other
substantial authority, that an Underpayment has occurred, any such Underpayment
shall be promptly paid by the Bank to or for the benefit of the Employee
together with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code.
(4) A "Change in Control" shall be deemed to have
occurred if:
(i) as a result of, or in connection with, any public
offering, tender offer or exchange offer, merger or other business
combination, sale of assets or contested election, any combination of
the foregoing transactions, or any similar transaction, the persons who
were non-employee directors of the Bank or a holding company
controlling the Bank before such transaction cease to constitute a
majority of the Board of Directors of the Bank or such holding company
or any successor thereof;
(ii) the Bank or a holding company controlling the
Bank transfers substantially all of its assets to another corporation
which is not a wholly owned subsidiary of the Bank or such holding
company;
(iii) the Bank or a holding company controlling the
Bank sells substantially all of the assets of a subsidiary or affiliate
which, at the time of such sale, is the principal employer of the
Employee; or
(iv) the Bank or a holding company controlling the
Bank is merged or consolidated with another corporation and, as a
result of the merger or consolidation, less than fifty one percent
(51%) of the outstanding voting securities of the surviving or
resulting corporation is owned in the aggregate by the former
stockholders of the Bank or of such holding company controlling the
Bank.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under Subsection(a) of this Section 11
shall be reduced to the extent that on the date of the Employee's termination of
employment, the amount payable under Subsection(a) of this Section 11 exceeds
the limitation on severance benefits that is set forth in Regulatory Bulletin
27a of the Office of Thrift Supervision, as in effect on the Effective Date.
(b) Change in Control; Voluntary Termination: Notwithstanding any other
provision of this Agreement to the contrary, but subject to Section 11(a)(2)
hereof, the Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a Change in Control of the Bank,
as defined in paragraph (a)(4) of this Section 11, and the Employee shall
thereupon be entitled to receive the payment described in Section 11(a)(1) of
this Agreement, within ninety (90) days following the occurrence of any of the
following events, which has not been consented to in advance by the Employee in
writing; (i) the requirement that the Employee perform his principal executive
functions more than thirty (30) miles from his primary office as of the date of
the Change in Control; (ii) a material reduction in the Employee's base
compensation as in effect on the date of the Change in Control or as the same
may be changed by mutual agreement from time to time, unless part of an
institution-wide reduction; (iii) the failure by the Bank to continue to provide
the Employee with compensation and benefits provided for under this Agreement,
as the same may be increased from time to time, or with benefits substantially
similar to those provided to him under any employee benefit in which the
Employee is a participant at the time of the Change in Control, or the taking of
any action which would materially reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him at the time of the Change
in Control, unless part of an institution-wide reduction; (iv) the assignment to
the Employee of duties and responsibilities materially different from those
normally associated with his position as referenced at Section 1; (v) a failure
to elect or re-elect the Employee to the Board of Directors of the Bank, if the
Employee is serving on the Board on the date of the Change in Control; or (vi) a
material diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Bank.
(c) Compliance with 12 U.S.C. Section 1828(k): Any payments made to the
Employee pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
(d) Trust: (1) Within five business days before or after a Change in
Control as defined in Section 11(a) of this Agreement which was not approved in
advance by a resolution of a majority of the Continuing Directors of the Bank,
the Bank shall (i) deposit, or cause to be deposited, in a grantor trust (the
"Trust"), designed to conform with Revenue Procedure 93-64 (or any successor)
and having a trustee independent of the Bank, an amount equal to 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Code, and (ii)
provide the trustee of the Trust with a written direction to hold said amount
and any investment return thereon in a segregated account for the benefit of the
Employee, and to follow the procedures set forth in the next paragraph as to the
payment of such amounts from the Trust.
(2) During the twelve (12) consecutive month period
following the date on which the Bank makes the deposit referred to in the
preceding paragraph, the Employee may provide the trustee of the Trust with a
written notice requesting that the trustee pay to the Employee an amount
designated in the notice as being payable pursuant to Section 11(a) or (b).
Within three business days after receiving said notice, the trustee of the Trust
shall send a copy of the notice to the Bank via overnight and registered mail,
return receipt requested. On the tenth (10th) business day after mailing said
notice to the association, the trustee of the Trust shall pay the Employee the
amount designated therein in immediately available funds, unless prior thereto
the Bank provides the trustee with a written notice directing the trustee to
withhold such payment. In the latter event, the trustee shall submit the dispute
to non-appealable binding arbitration for a determination of the amount payable
to the Employee pursuant to Section 11(a) or (b) hereof, and the party
responsible for the payment of the costs of such arbitration (which may include
any reasonable legal fees and expenses incurred by the Employee) shall be
determined by the arbitrator. The trustee shall choose the arbitrator to settle
the dispute, and such arbitrator shall be bound by the rules of the American
Arbitration Association in making his or her determination. The parties and the
trustee shall be bound by the results of the arbitration and, within 3 days of
the determination by the arbitrator, the trustee shall pay from the Trust the
amounts required to be paid to the Employee and/or the Bank, and in no event
shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the
Trust to the Employee, or (ii) the date twelve (12) months after the date on
which the Bank makes the deposit referred to in the first paragraph of this
subsection (d)(1), the trustee of the Trust shall pay to the Bank the entire
balance remaining in the segregated account maintained for the benefit of the
Employee. The Employee shall thereafter have no further interest in the Trust
pursuant to this Agreement.
(e) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
11, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 11 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgment by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by the Employee.
Should the Employee fail to obtain a final judgment in favor of the
Employee and a final judgment is entered in favor of the Bank, then the Bank
shall be reimbursed for all costs and expenses, including reasonable Attorneys'
fees arising from such dispute, proceedings or actions. Such reimbursement shall
be paid within ten (10) days of the Bank furnishing to the Employee written
evidence, which may be in the form, among other things, of a canceled check or
receipt, of any costs or expenses incurred by the Bank.
12. Employer will permit Employee or his personal representative(s) or heirs,
during a period of three months following Employee's termination of employment
by Employer for the reasons set forth in Subsections 9(d) or 11(a), if such
termination follows a Change of Control, to require Employer, upon written
request, to purchase all outstanding stock options previously granted to
Employee under any stock option plan then in effect to the extent the options
are vested at a cash purchase price equal to the amount by which the aggregate
"fair market value" of the shares subject to such options exceeds the aggregate
option price for such shares. For purposes of this Agreement, the term "fair
market value" shall mean the higher of (1) the average of the highest asked
prices for shares in the over-the-counter market as reported on the NASDAQ
system or other exchange if the shares are traded on such system for the 30
business days preceding such termination, or (2) the average per share price
actually paid for the most highly priced 1% of the shares acquired in connection
with the Change of Control by any person or group acquiring such control.
13. Federal Income Tax Withholding: The Bank may withhold all federal and
state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
14. Successors and Assigns:
(a) Bank. This Agreement shall not be assignable by the Bank, provided
that this Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Employee. Since the Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank; provided, however, that nothing in this paragraph shall
preclude (i) the Employee from designating a beneficiary to receive any benefit
payable hereunder upon his death, or (ii) the executors, administrators, or
other legal representatives of the Employee or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion,
attachment, levy or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
15. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
16. Applicable Law. Except to the extent preempted by federal law, the laws
of the State of Indiana shall govern this Agreement in all respects, whether as
to its validity, construction, capacity, performance or otherwise.
17. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto and supersedes any other
agreement between the parties hereto relating to the employment of the Employee
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
ATTEST: RIVER VALLEY FINANCIAL BANK
/s/ Lonnie D. Collins By: /s/ Fred W. Koehler
- ---------------------------------- --------------------------------------
Lonnie D. Collins, Secretary Fred W. Koehler, Chairman of the Board
/s/ Matthew P. Forrester
--------------------------------------
Matthew P. Forrester
The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees
that if it shall be determined for any reason that any obligation on the part of
Bank to continue to make any payments due under this Agreement to Employee is
unenforceable for any reason, River Valley Bancorp agrees to honor the terms of
this Agreement and continue to make any such payments due hereunder to Employee
or to satisfy any such obligation pursuant to the terms of this Agreement, as
though it were the Bank hereunder.
RIVER VALLEY BANCORP
By: /s/ Fred W. Koehler
-------------------------------------
Fred W. Koehler, Chairman
River Valley Bancorp
P.O. Box 1590 Madison, Indiana 47250-0590 (812) 273-4949 Fax - (812) 273-2883
To Our Shareholders, Customers, and Friends:
It is my pleasure to present to you River Valley Bancorp's fourth Annual Report
to Shareholders covering the year ending December 31, 1999.
The world was enamored in 1999 as we waited, watched and anticipated change
associated with the passing of a century. In 1999, the impetus for change at
River Valley Bancorp came from new management and management philosophy. Many
will regard the passing of a century as a defining moment in time; history too
will decide if 1999 was a redefining moment in the life of this organization.
While our Corporation has its origins dating back nearly 125 years, we are very
mindful that our commitment to the future, not the past, will define our
successes in this new century. We are very proud of our heritage, but are
confident that we are using our past as an agent for change rather than a focus
for the future.
If 1999 is a defining moment for the future, it also marked the culmination of
an evolution in merging the cultures of two former banking organizations into
one. River Valley Bancorp reflects the strengths of what had been two distinct
entities. Today the organization is recognized in our communities as the only
locally owned and controlled bank. The Bank has developed a service
promise...Expect A Difference!..that reinforces our organization's commitment to
customer service and community involvement. Our employees are dedicated to the
premise that service is much more than a slogan, it's a commitment that stands
the test of time.
Operationally 1999 was a year of transitions as well, as net earnings for 1999
totaled $1,039,000, or basic earnings per share of $1.03, compared to
$1,253,000, or $1.13 basic earnings per share, reported in 1998. Current year
earnings were negatively impacted by decreased secondary market activity which
resulted in $74,000 in gains on sale of loans, compared to $339,000 in gains
recorded in 1998. The current year reflects a modest decrease in total operating
expenses while including a $150,000 pre-tax expense associated with a severance
agreement. During the fourth quarter of 1999, management implemented a
comprehensive plan to control operating expenses.
During 1999, and primarily in the last six months of the year, the Corporation
aggressively repurchased shares to be held as treasury shares. For the period
ended December 31, 1999, we repurchased a total of 202,943 shares for a total of
$2.7 million, or an average price of $13.42. The current book value of
outstanding shares as of December 31, 1999 was $17.33 compared to $15.86 as of
December 31, 1998. The Board of Directors declared dividends totaling $0.265 per
share during the year, an increase from the $0.22 recorded the year prior.
Additionally, during 1999, your Corporation diligently worked on nonperforming
assets. As of December 31, 1999, nonperforming assets totaled $857,000, or 0.62%
of total assets compared to $1.9 million, or 1.47% of total assets from the
prior year-end. The Corporation was able to reduce its nonperforming assets
without significantly raising its loan losses. Net losses for fiscal 1999
totaled $95,000 as compared to $74,000 in fiscal 1998. As a result of improving
trends and collection efforts, the Corporation was able to lower its provision
for losses on loans from $275,000 in fiscal 1998 to $140,000 in 1999.
While 1999 was a year marked by transitions and changes, we believe that these
changes have laid the foundation for significant improvements in the years to
come.
Respectfully,
/s/ Matthew P. Forrester
Matthew P. Forrester
President, CEO
<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 ("River
Valley Financial" or the "Bank") in its conversion from mutual to stock form.
The conversion offering culminated with the sale of 1,190,250 common shares at
an initial offering price of $10.00 per share. In 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 in 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 921,972 common shares of River Valley Bancorp outstanding at February
21, 2000, held of record by 402 shareholders. The number of shareholders does
not reflect the number of persons or entities who may hold stock in nominee or
"street name." The Corporation's common shares are 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 for each quarter of 1999,
1998 and 1997. 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)
1999
December 31, 1999 $12.63 $11.50 $0.075
September 30, 1999 14.38 13.00 0.065
June 30, 1999 14.75 12.25 0.065
March 31, 1999 15.75 13.13 0.060
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 -
(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, 1999 and February 21, 2000 were $12.63 and $12.00, 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 amended its capital
distribution regulation in a final rule which became effective 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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total amount of: (In thousands)
Assets $138,695 $138,369 $136,933 $145,541 $86,604
Loans receivable - net (2) 115,131 112,385 111,887 108,994 57,945
Cash and cash equivalents (3) 8,052 12,307 5,765 8,785 2,689
Mortgage-backed and related securities (4) 4,209 5,986 8,978 12,846 9,917
Investment securities (4) 5,230 1,283 4,272 8,948 13,018
Deposits 114,251 118,151 114,955 125,656 75,233
FHLB advances and other borrowings 6,500 270 2,000 1,100 4,471
Shareholders' equity- net (5) 16,866 18,613 17,989 16,805 6,574
Summary of consolidated earnings data: (1) Year ended December 31,
1999 1998 1997 1996 1995
(In thousands, except share data)
Total interest income $9,734 $10,108 $10,362 $ 5,875 $ 5,794
Total interest expense 4,617 4,842 5,049 3,412 3,594
----- ------- ------- --------- -------
Net interest income 5,117 5,266 5,313 2,463 2,200
Provision for losses on loans 140 275 304 22 150
------ -------- -------- ----------- --------
Net interest income after provision for
losses on loans 4,977 4,991 5,009 2,441 2,050
Other income 844 1,188 1,134 578 362
General, administrative and other expense 4,080 4,093 4,003 2,870 1,966
----- ------- --------- --------- -------
Earnings before income tax expense 1,741 2,086 2,140 149 446
Income tax expense 702 833 830 76 188
------ -------- -------- ----------- --------
Net earnings $1,039 $ 1,253 $ 1,310 $ 73 $ 258
===== ======= ======= =========== ========
Basic earnings per share (6) $1.03 $1.13 $1.20 N/A N/A
==== ==== ==== === ===
Diluted earnings per share (6) $1.03 $1.12 $1.18 N/A N/A
==== ==== ==== === ===
</TABLE>
(1) River Valley acquired Citizens National Bank as of December 20, 1996. The
acquisition was accounted for using the purchase method of accounting and,
therefore, the 1996 financial statements reflect only eleven days of
activity with respect to the acquisition.
(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, 1995.
(6) Earnings per share is not applicable for the years ended December 31, 1996
and 1995 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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest rate spread during period 3.63% 3.66% 3.64% 2.79% 2.36%
Net yield on interest-earning assets (1) 3.94 4.08 4.00 2.98 2.61
Return on assets (2) 0.76 0.92 0.99 0.08 0.30
Return on equity (3) 5.87 6.85 7.53 1.05 4.01
Equity to assets (4) 12.16 13.45 13.12 11.55 7.59
Average interest-earning assets to
average interest-bearing liabilities 108.81 111.07 109.56 104.64 105.62
Nonperforming assets to total assets (4) 0.62 1.47 0.58 0.56 0.01
Allowance for loan losses to total
loans outstanding (4) 1.28 1.33 1.13 1.06 0.70
Allowance for loan losses to
nonperforming loans (4) 164.41 75.78 177.72 145.30 5,087.50
Net charge-offs to average total
loans outstanding 0.08 0.06 0.20 0.01 0.01
General, administrative and other
expense to average assets (5) (6) 2.97 3.01 2.83 3.33 2.26
Dividends as percent of net earnings 26.66 20.33 11.83 N/A N/A
Numbers of full service offices 5 5 6 6 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, 1999 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. Management's opinion as to the effect of recent accounting pronouncements
on River Valley's consolidated financial position and results of
operations.
Discussion of Changes in Financial Condition from December 31, 1998 to December
31, 1999
At December 31, 1999, River Valley's consolidated assets totaled $138.7 million,
representing an increase of $326,000, or .2%, over the December 31, 1998 total.
The modest increase in assets was funded primarily by a $6.2 million increase in
borrowings. Deposits decreased by $3.9 million from $118.2 million as of
December 31, 1998, to $114.3 million as of December 31, 1999. Shareholders'
equity totaled $16.9 million at December 31, 1999, a net decrease of $1.7
million from the $18.6 million total as of December 31, 1998. The decrease in
equity was attributed primarily to the repurchase of approximately $2.7 million,
or 202,943 shares of common stock held as treasury shares.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and
certificates of deposit) decreased by $4.2 million from December 31, 1998
levels, to a total of $8.1 million at December 31, 1999. Investment securities
totaled $5.2 million at December 31, 1999, an increase of $3.9 million over
December 31, 1998 levels. The increase was due to purchases of investment
securities totaling $21.5 million during 1999, which were partially offset by
maturities of $17.7 million. Mortgage-backed securities decreased by $1.8
million, or 29.7%, to a total of $4.2 million at December 31, 1999, 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, 1998 to December
31, 1999 (continued)
Loans receivable, including loans held for sale, totaled $115.1 million at
December 31, 1999, an increase of $2.7 million, or 2.4%, over the $112.4 million
total at December 31, 1998. The increase resulted primarily from loan
originations during 1999 of $56.9 million, which were partially offset by
principal repayments of $39.6 million and sales of $14.2 million. Growth in the
loan portfolio was comprised primarily of a $7.4 million, or 11.9%, increase in
loans secured by one-to-four family residential real estate and an $8.9 million,
or 64.2%, increase in loans secured by nonresidential real estate, while
commercial and consumer loans declined by $2.7 million and $3.1 million,
respectively, year to year. Loan origination volume for 1998 exceeded that of
1999 by $12.7 million, or 18.2%. The volume of loan sales into the secondary
mortgage market decreased during 1999 by $3.0 million, or 17.3%, from 1998
volume.
River Valley's consolidated allowance for loan losses totaled approximately $1.5
million at both December 31, 1999 and 1998, which represented 1.28% and 1.33%,
respectively, of total loans at those dates. Nonperforming loans (defined as
loans delinquent greater than 90 days and loans on nonaccrual status) totaled
$857,000 and $1.9 million at December 31, 1999 and 1998, respectively. The
consolidated allowance for loan losses represented 178% and 76% of nonperforming
loans at December 31, 1999 and 1998, respectively.
Although management believes that its allowance for loan losses at December 31,
1999 was adequate based upon the available facts and circumstances, there can be
no assurance that additions to such allowance will not be necessary in future
periods, which could negatively affect the Corporation's results of operations.
Deposits decreased by $3.9 million, or 3.3%, to a total of $114.3 million at
December 31, 1999, compared to the $118.2 million total at December 31, 1998.
Savings and demand deposits increased by $3.6 million, or 6.9%, during 1999,
while certificates of deposit decreased by $7.5 million, or 11.4%. These
fluctuations in balances were attributed to management's efforts to lower its
funding costs for deposits.
Advances from the Federal Home Loan Bank and other borrowed money increased by
$6.2 million from the total at December 31, 1998, as current period borrowings
of $9.1 million were partially offset by repayments of $2.9 million. Proceeds
from advances were used to fund net deposit outflows and loan originations.
Shareholders' equity totaled $16.9 million at December 31, 1999, a decrease of
$1.7 million, or 9.1%, from the $18.6 million total at December 31, 1998. The
decrease resulted primarily from repurchases of shares totaling $2.7 million and
cash dividends of $277,000, which were partially offset by net earnings of $1.04
million and a net increase in shares for stock benefit plans of $232,000.
<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, 1999 and
1998
General
River Valley's net earnings for the year ended December 31, 1999 totaled $1.04
million, a decrease of $214,000, or 17.1%, from net earnings reported in 1998.
The decrease in net earnings in the 1999 period was primarily attributable to a
decrease in net interest income of $149,000 and a decrease of $344,000 in other
income, including a decrease of $265,000 in the gain on sale of loans year to
year. General, administrative and other expense for the year was marginally
lower, but included $150,000 in non-recurring expenses associated with severance
agreements. The provision for federal income taxes decreased by $131,000 in 1999
as compared to the same period in 1998. The provision for loan losses in 1999
was $140,000 as compared to $275,000 in 1998.
Net Interest Income
Total interest income for the year ended December 31, 1999, amounted to $9.7
million, a decrease of $374,000, or 3.7%, from the 1998 total, reflecting the
effects of a lower yield on average assets. While the average balance of average
interest-earning assets outstanding year-to-year increased by $823,000, the
yield on those assets decreased from an average yield of 7.82% in 1998 to 7.49%
in 1999. Interest income on loans and mortgage-backed securities totaled $9.0
million for 1999, a decrease of approximately $684,000, or 7.0%, from 1998.
Interest income on investments and interest-earning deposits increased by
$310,000, or 80.9%, due to an increase in the average balance outstanding of
$6.0 million associated with a modest decrease in the average yield of
approximately 4 basis points from the comparable 1998 period.
Interest expense on deposits decreased by $208,000, or 4.4%, to a total of $4.5
million for the year ended December 31, 1999, due primarily to a 30 basis point
decrease in the weighted average cost of deposits. The cost of deposits fell
from 4.12% in 1998 to 3.82% in 1999. Interest expense on borrowings totaled
$143,000 for the year ended December 31, 1999, a decrease of $17,000, or 10.6%,
from 1998. The decrease resulted primarily from lower average borrowings
year-to-year, partially offset by a 15 basis point increase in average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased during 1999 by $149,000, or 2.8%, compared to
1998. The interest rate spread decreased by three basis points for 1999 to 3.63%
from 3.66% in the 1998 period, while the net interest margin amounted to 3.94%
in 1999 and 4.08% in 1998.
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 $140,000
provision for losses on loans in 1999, a decrease of $135,000, or 49.1%,
compared to the $275,000 provision recorded in 1998. The current period
provision generally reflects growth in the loan portfolio, coupled with a
decrease in the level of nonperforming loans year-to-year. Nonperforming loans
for the period ended December 31, 1999, were $857,000, a reduction of
approximately $1.0 million from the $1.9 million at December 31, 1998. Net
charge-offs amounted to $95,000 in 1999, compared to $74,000 in 1998. While
management believes that the allowance for losses on loans is adequate at
December 31, 1999, 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, 1999 and
1998 (continued)
Other Income
Other income amounted to $844,000 for the year ended December 31, 1999, a
decrease of $344,000, or 29.0%, compared to 1998, due primarily to a $265,000,
or 78.2%, decrease in gain on sale of loans and a $33,000 decrease in service
fees, charges and other operating income.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.1 million for the year
ended December 31, 1999, a decrease of $13,000, or .3%, from the 1998 total.
Employee compensation and benefits decreased by $147,000, or 6.4%, in 1999 as
compared to 1998, primarily from the effects of a decrease in the Corporation's
stock price used to record expense for various stock compensation programs
coupled with a decrease in staffing levels. The current year's compensation
expense included $150,000 in non-recurring charges associated with a severance
agreement in a managerial restructuring completed in the third quarter of fiscal
1999. Occupancy and equipment expense increased by $80,000, or 16.5%, in 1999,
primarily from charges associated with equipment upgrades and expenses
associated with Year 2000 compliance. Other operating expenses increased by
$76,000, or 6.9%, due primarily to increases in advertising, office supplies and
educational expenses of staff.
Income Taxes
The provision for income taxes decreased by $131,000, or 15.7%, for the year
ended December 31, 1999, as compared to 1998. The decrease was due primarily to
a decrease in pretax earnings of $345,000, or 16.5%. The effective tax rates
were 40.3% and 39.9% for the years ended December 31, 1999 and 1998,
respectively.
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.
<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.
<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,
1999 1998 1997
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and other $ 7,821 $ 417 5.34% $ 4,337 $ 233 5.37% $ 5,351 $ 322 6.02%
Investment securities (1) 5,347 276 5.17 2,871 150 5.22 5,043 277 5.49
Mortgage-backed and
related securities (1) 5,051 301 5.97 7,542 462 6.13 10,874 733 6.74
Loans receivable, net (2) 111,794 8,740 7.82 114,440 9,263 8.09 111,423 9,030 8.10
------- ----- ---- ------- ------- ------- ------- ------- ------
Total interest-earning
assets $130,013 9,735 7.49 $129,190 10,108 7.82 $132,691 10,362 7.81
======= ======= =======
Interest-bearing liabilities:
Deposits $117,258 $4,474 3.82 $113,770 4,682 4.12 $118,872 4,914 4.13
FHLB advances and other borrowings 2,228 143 6.43 2,549 160 6.28 2,244 135 6.02
--------- ------ ---- --------- -------- ------- --------- -------- ------
Total interest-bearing
liabilities $119,486 4,617 3.86 $116,319 4,842 4.16 $121,116 5,049 4.17
======= ----- ---- ======= ------- ------- ======= ------- ------
Net interest income $5,118 $ 5,266 $ 5,313
====== ======= =======
Interest rate spread (3) 3.63% 3.66% 3.64%
==== ===== =====
Net yield on weighted average 3.94% 4.08% 4.00%
interest-earning assets (4) ==== ===== =====
Average interest-earning
assets to average 108.81% 111.07% 109.56%
====== ====== ======
</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,
1999 vs. 1998 1998 vs. 1997
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and other $ 186 $ (2) $ 184 $ (57) $ (32) $ (89)
Investment securities 128 (2) 126 (114) (13) (127)
Mortgage-backed and related securities (149) (11) (160) (210) (61) (271)
Loans receivable, net (211) (312) (523) 244 (11) 233
---- ----- ----- ---- ----- ----
Total (46) (327) (373) (137) (117) (254)
Interest-bearing liabilities:
Deposits 151 (359) (208) (210) (22) (232)
FHLB advances and other borrowings (21) 4 (17) 19 6 25
----- ------- ----- ---- ------ -----
Total 130 (355) (225) (191) (16) (207)
----- ---- ---- --- ----- ----
Net change in interest income $ (176) $ 28 $(148) $ 54 $(101) $ (47)
====== ===== ==== ===== ==== =====
</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.
The following is an analysis of River Valley Financial's interest rate risk, as
of September 30, 1999 (the latest information available) and December 31, 1998,
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 below, River Valley Financial's NPV is more sensitive to
declining rates than rising rates in 1999. Such difference in sensitivity occurs
principally due to the Bank's preponderance of adjustable rate mortgage ("ARM")
loans in its loan portfolio. Generally, as rates decline, the interest rates on
ARM loans will adjust downward. Moreover, the interest River Valley Financial
would pay on deposits would decrease because the Bank's deposits generally have
shorter periods of repricing.
As of September 30, 1999
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
+300 $18,220 $(1,741) (9)%
+200 19,579 (382) (2)
+100 19,943 18 -
- 19,961 - -
- -100 19,553 (408) (2)
- -200 18,801 (1,160) (6)
- -300 18,065 (1,896) (9)
As of December 31, 1998
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
+300 $18,081 $ (405) (2)%
+200 18,690 204 (1)
+100 18,717 231 (1)
- 18,486 - -
- -100 17,916 (570) (3)
- -200 17,343 (1,143) (6)
- -300 17,034 (1,452) (8)
<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.
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 government 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,
1999, River Valley Financial's regulatory liquidity ratio was 28.2%. At such
date, River Valley Financial had commitments to originate loans totaling $2.2
million and, in addition, had undisbursed loans in process, unused lines of
credit and standby letters of credit totaling $9.6 million. At December 31,
1999, River Valley Financial had no 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, 1999, 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities $ 5,382 $(1,913) $ 2,395
Cash flows from investing activities:
Investment maturities/sales (3,847) 3,000 4,698
Mortgage-backed securities purchases - - (1,350)
Mortgage-backed securities repayments 1,709 2,970 3,072
Net loan (originations) repayments (6,673) 2,145 (3,859)
Other (157) 731 1,374
Cash flows from financing activities:
Net increase (decrease) in deposits (3,900) 3,196 (10,701)
Net increase (decrease) in borrowings 6,000 (1,730) 900
Other (2,769) (960) (346)
------- ------- --------
Net increase (decrease) in cash and cash
equivalents $(4,255) $ 7,439 $ (3,817)
====== ====== ======
</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 generally
equal to 4% of the association's total assets except 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, 1999.
River Valley Financial exceeded all of its regulatory capital requirements at
December 31, 1999. The following table summarizes River Valley Financial's
regulatory capital requirements and regulatory capital at December 31, 1999:
<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% $2,086 12.1% $16,850 $14,764
Core capital (2) 4.0 5,563 12.1 16,850 11,287
Risk-based capital 8.0 7,615 19.0 18,040 10,425
</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 adopted a core capital requirement for savings associations
comparable to that required by the OCC for national banks. The regulation
requires core capital of at least 3% of total adjusted assets for savings
associations that receive the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. River Valley
Financial is in compliance with this requirement.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
<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. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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.
Year 2000 Compliance Matters
As with all providers of financial services, the Bank's operations are heavily
dependent on information technology systems. During the three year period
leading up to January 1, 2000, the Bank addressed the potential problems
associated with the possibility that the computers that control or operate the
Bank's information technology system and infrastructure may not have been
programmed to read four-digit date codes and, upon arrival of the year 2000, may
have recognized the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
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 had been advised, and certain testing had been
performed to verify, that the system would continue to function upon arrival of
the year 2000. The Bank experienced no technology-related difficulties upon
arrival of January 1, 2000, nor was there any interruption of services to its
customers.
Financial institutions may experience increases in problem loans and credit
losses in the event that borrowers failed to prepare properly for Year 2000.
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, and to date has not experienced, any significant or prolonged
difficulties that will affect net earnings or cash flow.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require River Valley to measure financial position and results of operations in
terms of historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well as changes in monetary and fiscal
policies.
<PAGE>
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Grant Thornton
Cincinnati, Ohio
February 16, 2000
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 3,648 $ 4,014
Federal funds sold 1,550 825
Interest-earning deposits in other financial institutions 2,854 7,468
-------- ---------
Cash and cash equivalents 8,052 12,307
Investment securities designated as available for sale - at market 4,230 283
Investment securities held to maturity - at amortized cost, approximate
market value of $995 and $980 as of December 31, 1999 and 1998 1,000 1,000
Mortgage-backed and related securities designated as available
for sale - at market 2,071 2,796
Mortgage-backed and related securities held to maturity - at cost, approximate
market value of $2,147 and $3,220 as of December 31, 1999 and 1998 2,138 3,190
Loans receivable - net 115,131 108,684
Loans held for sale - at lower of cost or market - 3,701
Real estate acquired through foreclosure - 82
Office premises and equipment - at depreciated cost 1,980 2,023
Federal Home Loan Bank stock - at cost 943 943
Accrued interest receivable on loans 970 987
Accrued interest receivable on mortgage-backed and related securities 26 40
Accrued interest receivable on investments and interest-earning deposits 47 29
Goodwill - net of accumulated amortization 44 50
Cash surrender value of life insurance 854 818
Prepaid expenses and other assets 210 373
Prepaid federal income taxes 359 405
Deferred tax asset 640 658
--------- ----------
Total assets $138,695 $138,369
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
<S> <C> <C>
Deposits $114,251 $118,151
Advances from the Federal Home Loan Bank 6,000 -
Other borrowed money 500 270
Advances by borrowers for taxes and insurance 36 34
Accrued interest payable 330 468
Other liabilities 641 763
Dividends payable 71 70
---------- ----------
Total liabilities 121,829 119,756
Commitments - -
Shareholders' equity
Preferred stock - 2,000,000 shares without par value
authorized; no shares issued - -
Common stock - 5,000,000 shares without par value authorized;
1,190,250 shares issued - -
Additional paid in capital 11,314 11,288
Retained earnings - substantially restricted 9,551 8,789
Shares acquired by stock benefit plans (967) (1,199)
Less 219,753 and 16,810 treasury shares - at cost (2,976) (252)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax benefits (56) (13)
---------- -----------
Total shareholders' equity 16,866 18,613
------- --------
Total liabilities and shareholders' equity $138,695 $138,369
======= =======
</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>
1999 1998 1997
Interest income
<S> <C> <C> <C>
Loans $8,740 $ 9,263 $ 9,030
Mortgage-backed and related securities 301 462 733
Investment securities 276 150 277
Interest-earning deposits and other 417 233 322
------ -------- --------
Total interest income 9,734 10,108 10,362
Interest expense
Deposits 4,474 4,682 4,914
Borrowings 143 160 135
------ -------- --------
Total interest expense 4,617 4,842 5,049
----- ------- -------
Net interest income 5,117 5,266 5,313
Provision for losses on loans 140 275 304
----- -------- --------
Net interest income after provision for losses on loans 4,977 4,991 5,009
Other income
Gain on sale of loans 74 339 127
Gain on sale of Hanover branch and related deposits - - 206
Loss on sale of investment, mortgage-backed and related securities - - (6)
Gain on sale of office premises 11 57 -
Service fees, charges and other operating 759 792 807
----- -------- --------
Total other income 844 1,188 1,134
General, administrative and other expense
Employee compensation and benefits 2,162 2,309 2,165
Occupancy and equipment 564 484 527
Federal deposit insurance premiums 42 42 50
Amortization of goodwill 6 27 27
Data processing 126 127 224
Other operating 1,180 1,104 1,010
----- ------- -------
Total general, administrative and other expense 4,080 4,093 4,003
----- ------- -------
Earnings before income taxes 1,741 2,086 2,140
Income taxes
Current 664 819 893
Deferred 38 14 (63)
------ --------- ---------
Total income taxes 702 833 830
----- -------- --------
NET EARNINGS $1,039 $ 1,253 $ 1,310
===== ======= =======
EARNINGS PER SHARE
Basic $1.03 $1.13 $1.20
==== ==== ====
Diluted $1.03 $1.12 $1.18
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $1,039 $1,253 $1,310
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax benefits of $22, $10 and $8
in 1999, 1998 and 1997, respectively (43) 19 15
Reclassification adjustment for realized losses
included in earnings, net of tax benefit of $2 for the
year ended December 31, 1997 - - 4
----- ----- --------
Comprehensive income $ 996 $1,272 $1,329
====== ===== =====
Accumulated comprehensive loss $ (56) $ (13) $ (32)
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(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 Treasury
stock capital plans for sale earnings stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ - $11,173 $ (952) $ (51) $6,635 $ - $16,805
Purchase of shares for stock benefit plans - - (174) - - - (174)
Amortization of 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
--- ------- ------ ---- ----- ------- -------
Balance at December 31, 1997 - 11,229 (1,005) (32) 7,797 - 17,989
Purchase of treasury shares - - - - - (270) (270)
Issuance of shares under stock option plan - - - - - 18 18
Purchase of shares for stock benefit plans - - (428) - - - (428)
Amortization of 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 - 11,288 (1,199) (13) 8,789 (252) 18,613
Purchase of treasury shares - - - - - (2,724) (2,724)
Amortization of expense related
to stock benefit plans - 26 232 - - - 258
Cash dividends of $0.265 per common share - - - - (277) - (277)
Net earnings for the year ended
December 31, 1999 - - - - 1,039 - 1,039
Unrealized losses on securities designated as
available for sale,
net of related tax effects - - - (43) - - (43)
--- ---- ------ --- ----- --------- -------
Balance at December 31, 1999 $ - $11,314 $ (967) $ (56) $9,551 $(2,976) $16,866
==== ====== ======== === ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year $ 1,039 $ 1,253 $ 1,310
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization (accretion) of premiums and discounts
on investments, mortgage-backed and related securities - net (95) 39 1
Loss on sale of investment, mortgage-backed and related securities
designated as available for sale - - 6
Depreciation and amortization 250 223 223
Gain on sale of office premises (11) (57) -
Gain on sale of Hanover branch and related deposits - - (206)
Loans originated for sale in the secondary market (10,552) (20,042) (6,538)
Proceeds from sale of loans in the secondary market 14,226 17,194 6,996
(Gain) loss on sale of loans in the secondary market 27 (169) (66)
Amortization of deferred loan origination costs 93 99 73
Provision for losses on loans 140 275 304
Amortization of goodwill 6 27 27
Amortization expense of stock benefit plans 258 293 184
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 17 (71) (97)
Accrued interest receivable on mortgage-backed and related securities 14 77 (39)
Accrued interest receivable on investments and interest-earning deposits (18) 36 106
Prepaid expenses and other assets 163 (232) 28
Accrued interest payable (138) 5 184
Other liabilities (121) (467) (47)
Income taxes
Current 46 (410) 9
Deferred 38 14 (63)
--------- ---------- ---------
Net cash provided by (used in) operating activities 5,382 (1,913) 2,395
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (21,537) - -
Proceeds from maturity of investment securities 17,690 3,000 2,000
Proceeds from sales of investment securities designated as available for sale - - 2,698
Purchase of mortgage-backed and related securities designated as available
for sale - - (1,350)
Principal repayments on mortgage-backed and related securities 1,709 2,970 3,072
Proceeds from sale of mortgage-backed and related securities designated as
available for sale - - 2,146
Loan principal repayments 39,640 51,624 43,220
Loan disbursements (46,313) (49,479) (47,079)
Proceeds from sale of real estate acquired through foreclosure 75 - -
Additions to real estate acquired through foreclosure - - (1)
Proceeds from sale of office premises and equipment 49 67 405
Purchase of office premises and equipment (245) (191) (430)
(Increase) decrease in certificates of deposit in other financial institutions - 897 (797)
Purchase of Federal Reserve Bank stock - - (64)
Proceeds from sale of Federal Reserve Bank stock - - 144
Increase in cash surrender value of life insurance (36) (42) (29)
---- ---- ----
Net cash provided by (used in) investing activities (8,968) 8,846 3,935
--------- ------- -------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (3,586) 6,933 6,330
--------- ------- -------
</TABLE>
<PAGE>
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ (3,586) $ 6,933 $ 6,330
Cash flows provided by (used in) financing activities:
Increase (decrease) in deposit accounts (3,900) 3,196 (3,913)
Decrease in deposit accounts due to the sale of a branch - - (6,788)
Proceeds from Federal Home Loan Bank advances 6,000 6,000 7,000
Repayment of Federal Home Loan Bank advances - (8,000) (6,100)
Proceeds from other borrowed money 3,131 270 -
Repayment of other borrowed money (2,901) - -
Advances by borrowers for taxes and insurance 2 (19) (17)
Purchase of shares (2,724) (270) -
Stock options exercised - 18 -
Acquisition of common stock for stock benefit plans - (428) (174)
Dividends on common stock (277) (261) (155)
-------- -------- --------
Net cash provided by (used in) financing activities (669) 506 (10,147)
-------- --------- ------
Net increase (decrease) in cash and cash equivalents (4,255) 7,439 (3,817)
Cash and cash equivalents at beginning of year 12,307 4,868 8,685
------ ------- -------
Cash and cash equivalents at end of year $ 8,052 $12,307 $ 4,868
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 469 $ 1,014 $ 618
====== ======= ========
Interest on deposits and borrowings $ 4,755 $ 4,837 $ 4,865
===== ======= =======
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 $ (43) $ 19 $ 19
======= ========= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 101 $ 170 $ 61
======= ======== =========
Exchange of office premises and equipment for similar assets $ 103 $ - $ -
======= ========== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
River Valley Bancorp (the "Corporation") is a savings and loan holding
company whose activities are primarily limited to holding the stock of River
Valley Financial Bank ("River Valley Financial" or the "Bank"). The Bank
conducts a general banking business in southeastern Indiana which consists
of attracting deposits from the general public and applying those funds to
the origination of loans for residential, consumer and commercial purposes.
River Valley Financial's profitability is significantly dependent on its 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.
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, 1999 and 1998, the Corporation's
shareholders' equity included unrealized losses on securities designated as
available for sale, net of related tax effects, of $56,000 and $13,000,
respectively. Realized gains and losses on sales of investment and
mortgage-backed and related securities are recognized using the specific
identification method.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 1999, the Corporation had not identified any loans as
held for sale. At December 31, 1998, loans held for sale were carried at
cost, which approximated fair value.
At December 31, 1999 and 1998, the Bank was servicing approximately $40.2
million and $34.3 million, respectively, of mortgage loans that have been
sold to the Federal Home Loan Mortgage Corporation.
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 must
allocate some of the cost of the loans to the mortgage servicing rights.
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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Bank recorded amortization related to mortgage servicing rights totaling
approximately $99,000, $34,000 and $18,000 for the years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, the carrying value
of the Corporation's mortgage servicing rights totaled approximately
$225,000 and the fair value totaled approximately $286,000. At December 31,
1998, the carrying value and fair value of the Corporation's mortgage
servicing rights totaled approximately $222,000.
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 loan origination fees
received, net of certain direct origination costs, are deferred on a
loan-by-loan basis and amortized to interest income using the interest
method, giving effect to actual loan prepayments. Additionally, SFAS No. 91
generally limits the definition of loan origination costs to the direct
costs attributable to originating a loan, i.e., principally actual personnel
costs.
Fees received for loan commitments that are expected to be drawn upon, based
on the Corporation's experience with similar commitments, are deferred and
amortized over the life of the related loan using the interest method. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
5. Allowance for Losses on Loans
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of
delinquent and specific problem loans, loan concentrations to single
borrowers, changes in the composition of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral and current and anticipated economic
conditions in its primary lending area. 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 loan's observable market price or fair value of the
collateral.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
Under SFAS No. 114, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Corporation's investment in nonresidential, commercial, and multifamily
residential real estate loans, and its evaluation of impairment thereof,
such loans are generally collateral dependent and, as a result, are carried
as a practical expedient at the lower of cost or fair value.
It is generally the Corporation's policy to charge off unsecured credits
that are more than ninety days delinquent. Similarly, collateral dependent
loans which are more than ninety days delinquent are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
At December 31, 1999 and 1998, the Corporation had approximately $600,000
and $1.3 million, respectively, of loans defined as impaired under SFAS No.
114.
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the property's fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are considered. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Depreciation of office premises and equipment is computed using the
straight-line method over the estimated useful lives of the assets,
estimated to be thirty to forty-five years for buildings, three to ten years
for furniture and equipment, and three years for automobiles.
8. Amortization of Goodwill
Amortization of goodwill, resulting from the acquisition of Citizens
National Bank of Madison ("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 minority interest
shares at a price below the assigned value at acquisition.
Management periodically evaluates the carrying value of goodwill in relation
to the continuing earnings capacity of the acquired assets and assumed
liabilities.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, mortgage servicing rights, purchase
accounting adjustments, the general loan loss allowance, the percentage of
earnings bad debt deduction and certain components of retirement and benefit
plan expense. A temporary difference is also recognized for depreciation
expense computed using accelerated methods for federal income tax purposes.
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, 1999, 1998, and 1997. 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
$24,000, $28,000 and $48,000 for the years ended December 31, 1999, 1998,
and 1997, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans (continued)
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. Expense recognized under the supplemental
retirement plan totaled approximately $32,000, $22,000 and $3,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Corporation has an Employee Stock Ownership Plan ("ESOP"), which
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 related to the ESOP totaled approximately $147,000, $200,000
and $200,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Corporation also has a Recognition and Retention Plan ("RRP") which
provides for the award and issuance of up to 47,610 shares of the
Corporation's stock 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, 1999, 31,271 shares had
been awarded. Common stock awarded under the RRP vests ratably over a
five-year period, commencing with the date of the award. Expense recognized
under the RRP plan totaled approximately $113,000, $113,000 and $61,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.
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 71,730, 83,124 and 95,220 unallocated
ESOP shares, totaled 1,007,087, 1,105,930 and 1,095,030 for the years ended
December 31, 1999, 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
1,007,087, 1,121,986 and 1,106,858 for the years ended December 31, 1999,
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. Options to purchase 93,959 shares of common
stock with a weighted-average exercise price of $14.70 were outstanding at
December 31, 1999, but were excluded from the computation of common share
equivalents because their exercise prices were greater than the average
market price of the common shares.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. 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.
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents 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.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
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, 1999 and 1998. 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 the 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.
Other borrowed money: The carrying value for these variable
rate borrowings is deemed to approximate fair value.
Advances by borrowers for taxes and insurance: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
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, 1999 and 1998, 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>
1999 1998
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,052 $ 8,052 $ 12,307 $ 12,307
Investment securities designated as available for sale 4,230 4,230 283 283
Investment securities held to maturity 1,000 995 1,000 980
Mortgage-backed and related securities designated
as available for sale 2,071 2,071 2,796 2,796
Mortgage-backed and related securities held to
maturity 2,138 2,147 3,190 3,220
Loans receivable - net 115,131 112,633 112,385 120,163
Federal Home Loan Bank stock 943 943 943 943
-------- -------- -------- --------
$133,565 $131,071 $132,904 $140,692
======= ======= ======= =======
Financial liabilities
Deposits $114,251 $114,527 $118,151 $118,496
Advances from the Federal Home Loan Bank 6,000 6,000 - -
Other borrowed money 500 500 270 270
Advances by borrowers for taxes and insurance 36 36 34 34
-------- -------- -------- --------
$120,787 $121,063 $118,455 $118,800
======= ======= ======= =======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
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>
1999 1998
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 $ 995 $1,000 $ 980
Available for sale:
Commercial paper 2,972 2,957 - -
Corporate bonds 1,000 1,000 - -
Municipal obligations 276 273 276 283
------ ------ ------ ------
Total securities available for sale 4,248 4,230 276 283
----- ----- ------ ------
Total investment securities $5,248 $5,225 $1,276 $1,263
===== ===== ===== =====
</TABLE>
At December 31, 1999 and 1998, the cost carrying value of the Corporation's
investment securities held to maturity exceeded fair value by $5,000 and
$20,000, respectively, comprised solely of gross unrealized losses.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
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>
1999 1998
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 $995 $ - $ -
Due in one to three years - - 1,000 980
----- ----- ----- ----
$1,000 $995 $1,000 $980
===== === ===== ===
</TABLE>
The amortized cost and estimated fair value of commercial paper, corporate
bonds and municipal obligations designated as available for sale at December
31, 1999 and 1998, by term to maturity are shown below.
<TABLE>
<CAPTION>
1999 1998
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due in three to five years $4,072 $4,056 $100 $102
Due in five to ten years 176 174 176 181
----- ----- --- ---
$4,248 $4,230 $276 $283
===== ===== === ===
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities designated
as held to maturity at December 31, 1999 and 1998 are shown below.
<TABLE>
<CAPTION>
1999
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 $ 856 $- $5 $ 851
Government National Mortgage Association
participation certificates 900 14 - 914
Federal National Mortgage Association
participation certificates 367 - 1 366
Interest-only certificates 15 1 - 16
------- --- -- -------
$2,138 $15 $6 $2,147
===== == = =====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<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>
The amortized cost of mortgage-backed and related securities held to
maturity at December 31, 1999, 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 $ 857
Due after one to three years 2
Due after three to five years 1
Due after ten to twenty years 746
Due after twenty years 532
-------
$2,138
======
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, 1999 and 1998 are shown below.
<TABLE>
<CAPTION>
1999
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 $ 330 $ - $ 5 $ 325
Government National Mortgage Association
participation certificates 186 - 4 182
Federal National Mortgage Association
participation certificates 995 - 36 959
Collateralized mortgage obligations 627 - 22 605
------ --- --- ------
$2,138 $ - $67 $2,071
===== ===== == =====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<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>
The amortized cost of mortgage-backed and related securities designated as
available for sale at December 31, 1999, 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 in one year or less $ 8
Due after one to three years 235
Due after five to ten years 286
Due after ten to twenty years 343
Due after twenty years 1,266
-----
$2,138
======
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1999 1998
(In thousands)
Residential real estate
One-to-four family residential $ 69,588 $ 62,206
Multi-family residential 2,918 1,775
Construction 4,163 8,126
Nonresidential real estate and land 22,837 13,904
Commercial 9,780 12,461
Consumer and other 9,544 12,640
Deferred loan origination costs 245 200
--------- ----------
119,075 111,312
Less:
Undisbursed portion of loans in process 2,422 1,151
Allowance for loan losses 1,522 1,477
-------- ---------
$115,131 $108,684
======== ========
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE (continued)
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 $74.3 million, or 64%, of the total loan portfolio at December
31, 1999 and approximately $71.0 million, or 65%, of the total loan
portfolio at December 31, 1998. 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.
In the ordinary course of business, the Bank has granted loans to some of
its officers, directors and their related business interests. In the opinion
of management, such loans are consistent with sound lending practices and
are in accordance with applicable regulatory lending limitations. The
aggregate dollar amount of loans outstanding to related parties was
approximately $893,000 and $781,000 at December 31, 1999 and 1998,
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:
1999 1998 1997
(In thousands)
Balance at beginning of year $1,477 $1,276 $1,190
Provision for losses on loans 140 275 304
Charge-offs of loans (123) (223) (269)
Recoveries of loan losses 28 149 51
------- ------ -------
Balance at end of year $1,522 $1,477 $1,276
===== ===== =====
As of December 31, 1999, 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 $113,000.
The Corporation had nonperforming loans totaling $857,000, $1.9 million and
$718,000 at December 31, 1999, 1998 and 1997, respectively.
The Corporation would have recognized approximately $6,000 and $9,000 of
additional interest income related to such nonperforming loans had these
loans performed pursuant to contractual terms during the years ended
December 31, 1999 and 1998, respectively. The Corporation had no material
loss of interest income related to nonperforming loans during the year ended
December 31, 1997.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 are comprised of the following:
1999 1998
(In thousands)
Land and improvements $ 792 $ 675
Office buildings and improvements 1,724 1,758
Leasehold improvements 117 117
Furniture, fixtures and equipment 2,183 2,113
Automobiles 18 18
------- -------
4,834 4,681
Less accumulated depreciation 2,854 2,658
----- -----
$1,980 $2,023
===== =====
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
Deposit type and 1999 1998
weighted-average interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 7,903 6.9% $ 8,365 7.0%
NOW accounts
1999 - 2.62% 14,329 12.6
1998 - 2.60% 14,417 12.2
Money market demand accounts
1999 - 4.10% 6,886 6.0
1998 - 2.92% 6,984 5.9
Savings accounts
1999 - 3.52% 26,640 23.3
1998 - 3.70% 22,378 19.0
------------- -------- -------- ------
Total demand, transaction and
savings deposits 55,758 48.8 52,144 44.1
Certificates of deposit
3.01% to 5.00%
4.39% in 1999 36,591 32.0
4.78% in 1998 23,200 19.6
5.01% to 6.00%
5.45% in 1999 14,250 12.5
5.34% in 1998 31,364 26.6
6.01% to 7.00%
6.14% in 1999 7,445 6.5
6.18% in 1998 11,229 9.5
7.01% to 8.00%
7.85% in 1999 207 .2
7.86% in 1998 214 .2
------------ -------- --------- ------
Total certificates of deposit 58,493 51.2 66,007 55.9
-------- ----- -------- ------
Total deposit accounts $114,251 100.0% $118,151 100.0%
======= ===== ======= ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 totaled approximately $11.2 million and $15.1 million at
December 31, 1999 and 1998, respectively.
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1999 1998 1997
(In thousands)
Savings $1,028 $ 768 $ 708
NOW accounts 351 344 435
Money market deposit accounts 195 211 480
Certificates of deposit 2,900 3,359 3,291
----- ----- -----
$4,474 $4,682 $4,914
===== ===== =====
Maturities of outstanding certificates of deposit are summarized as follows
at December 31:
1999 1998
(In thousands)
Less than one year $45,784 $53,931
One year to three years 10,934 10,880
More than three years 1,775 1,196
------- -------
$58,493 $66,007
====== ======
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 THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances, collateralized at December 31, 1999, by
certain residential mortgage loans totaling $9.6 million and the Bank's
investment in Federal Home Loan Bank stock, consist of a $6.0 million
advance, bearing interest at a rate of 5.91%, which matures during the year
ended December 31, 2000.
NOTE H - OTHER BORROWED MONEY
Other borrowed money consists of a variable-rate two-year line of credit
advance, bearing interest at December 31, 1999 of 8.00%, 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, 1999, 1998 and 1997
NOTE I - INCOME TAXES
The provision for income taxes on earnings differs from that computed at the
expected statutory corporate tax rate for the years ended December 31 as
follows:
1999 1998 1997
(Dollars in thousands)
Federal income taxes computed at
expected statutory rate $592 $709 $728
State taxes, net of federal benefits 105 122 125
Increase (decrease) in taxes resulting from:
Amortization of goodwill 2 9 9
Other 3 (7) (32)
---- ----- ----
Income tax provision per consolidated
financial statements $702 $833 $830
=== === ===
Effective tax rate 40.3% 39.9% 38.8%
==== ==== ====
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
Taxes (payable) refundable on temporary 1999 1998
differences at statutory rate: (In thousands)
Deferred tax liabilities:
Deferred loan origination costs $ (83) $ (68)
Difference between book and tax depreciation (93) (93)
Percentage of earnings bad debt deduction (178) (210)
Mortgage servicing rights (86) (85)
------- -------
Total deferred tax liabilities (440) (456)
Deferred tax assets:
Deferred compensation 106 97
Allowance for valuation decline on
mortgage-related securities 90 90
General loan loss allowance 647 628
Benefit plan expense 66 65
Unrealized loss on securities designated as
available for sale 29 7
Purchase accounting adjustments related to asset
valuation adjustments 142 227
------- ------
Total deferred tax assets 1,080 1,114
------ -----
Net deferred tax asset $ 640 $ 658
====== ======
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES (continued)
The Bank 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, 1999, 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, 1999. 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
is 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 commencing in 1998, began amortizing the recapture of the bad debt
reserve into taxable income over a six year period.
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, 1999, the Bank had outstanding commitments of approximately
$366,000 to originate residential one-to-four family variable-rate real
estate loans at interest rates ranging from 6.5% to 8.0%. The Bank had
outstanding commitments of approximately $244,000 to originate residential
one-to-four family fixed-rate real estate loans at interest rates ranging
from 7.75% to 8.25% at December 31, 1999. Additionally, the Bank had
commitments to originate loans secured by other real estate totaling $1.6
million as of December 31, 1999. The Bank also had unused lines of credit
under home equity loans and commercial loans of approximately $2.7 million
and $4.4 million, respectively, at December 31, 1999, 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, 1999, 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, 1999, 1998 and 1997
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
The Corporation leases a banking facility in the Wal-Mart Supercenter in
Madison, which required the Corporation to make payments totaling
approximately $23,000 in 1999. The original lease expired in September 1999
and the Corporation exercised the first of two five year renewal options.
The lease agreement for this option period requires the Corporation to make
payments of approximately $27,000 per year.
NOTE L - STOCK OPTION PLAN
In June 1997, the Corporation adopted the 1997 Stock Option Plan that
provided 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.
The Corporation accounts for its stock option plan in accordance with 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, 1999, 1998 and 1997
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings (in thousands) As reported $1,039 $1,253 $1,310
===== ===== =====
Pro-forma $1,038 $1,253 $1,269
===== ===== =====
Earnings per share
Basic As reported $1.03 $1.13 $1.20
==== ==== ====
Pro-forma $1.02 $1.13 $1.16
==== ==== ====
Diluted As reported $1.03 $1.12 $1.18
==== ==== ====
Pro-forma $1.02 $1.12 $1.15
===== ==== ====
</TABLE>
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 1999: dividend yield of
2.18%, expected volatility of 10.0%, a risk-free interest rate of 5.5% and
expected lives of ten years. Similar assumptions were used for the grants in
1997, with the exception of a 1.013% dividend yield.
A summary of the status of the Corporation's stock option plan as of
December 31, 1999, 1998 and 1997, and changes during the periods then ended
is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 103,959 $14.81 105,149 $14.81 - $ -
Granted 10,000 13.75 - - 117,648 14.81
Exercised - - (1,190) 14.78 - -
Forfeited (20,000) 14.78 - - (12,499) 14.81
------- ----- --------- ------- -------- -----
Outstanding at end of year 93,959 $14.70 103,959 $14.81 105,149 $14.81
======= ===== ======= ===== ======= =====
Options exercisable at year-end 39,787 19,834 -
====== ======== =======
Weighted-average fair value of
options granted during the year $ 2.79 N/A $ 4.85
====== === =====
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at December 31,
1999:
Number outstanding 93,959
Range of exercise prices $13.75-$17.875
Weighted-average exercise price $14.70
Weighted-average remaining contractual life 7.7 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, 1999 and 1998, and the
results of its operations and its cash flows for the years ended December
31, 1999, 1998 and 1997.
River Valley Bancorp
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and interest-earning deposits $ 371 $ 198
Investment in River Valley Financial Bank 16,861 18,788
Prepaid expenses and other assets 134 84
-------- ---------
Total assets $17,366 $19,070
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ 500 $ 270
Other liabilities - 187
--------- --------
Total liabilities 500 457
Shareholders' equity
Preferred stock - -
Common stock - -
Additional paid in capital 11,314 11,288
Retained earnings 9,551 8,789
Shares acquired by stock benefit plans (967) (1,199)
Treasury shares (2,976) (252)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax effects (56) (13)
-------- ---------
Total shareholders' equity 16,866 18,613
------ ------
Total liabilities and shareholders' equity $17,366 $19,070
====== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued)
River Valley Bancorp
STATEMENTS OF EARNINGS
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
Revenue
<S> <C> <C> <C>
Interest income $ 62 $ 71 $ 81
Equity in earnings of subsidiaries 1,125 1,274 1,390
----- ----- -----
1,187 1,345 1,471
Expense
Interest expense 101 3 -
General, administrative and other expense 105 102 243
---- ------ -----
206 105 243
---- ---- -----
Earnings before income tax credits 981 1,240 1,228
Income tax credits 58 13 82
------ ------- ------
NET EARNINGS $1,039 $1,253 $1,310
===== ===== =====
</TABLE>
River Valley Bancorp
STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year $ 1,039 $1,253 $1,310
Excess distributions from (undistributed earnings of)
subsidiary 2,033 (1,274) (1,390)
Amortization expense of stock benefit plans 109 114 128
Decrease in cash due to changes in:
Prepaid expenses and other assets (50) (19) (65)
Other liabilities (187) (7) (109)
------- -------- -----
Net cash provided by (used in) operating activities 2,944 67 (126)
Cash flows from financing activities:
Purchase of shares (2,724) (270) -
Stock options exercised - 18 -
Proceeds from other borrowed money 3,131 270 -
Repayments of other borrowed money (2,901) - -
Dividends paid on common stock (277) (261) (155)
------- ------ ------
Net cash used in financing activities (2,771) (243) (155)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 173 (176) (281)
Cash and cash equivalents at beginning of year 198 374 655
------ ------ ------
Cash and cash equivalents at end of year $ 371 $ 198 $ 374
======= ====== ======
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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) generally equal to 4.0% of adjusted total assets except
for those associations with the highest examination rating and acceptable
levels of risk. 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%.
During the calendar year, the Bank was notified from its regulator that it
was categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized" the Bank
must maintain minimum capital ratios as set forth in the following table.
At December 31, 1999 and 1998, management believes that the Bank met all
capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
1999: 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 $16,850 12.1% =>$2,086 =>1.5% =>$6,954 => 5.0%
Core capital $16,850 12.1% =>$5,563 =>4.0% =>$8,345 => 6.0%
Risk-based capital $18,040 19.0% =>$7,615 =>8.0% =>$9,518 => 10.0%
</TABLE>
<PAGE>
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE N - REGULATORY CAPITAL (continued)
<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% =>$5,545 =>4.0% =>$8,318 => 6.0%
Risk-based capital $19,947 20.5% =>$7,793 =>8.0% =>$9,741 => 10.0%
</TABLE>
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Bank,
such as increased interest rates or a downturn in the economy in the primary
market areas, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the amount
of capital distributions payable to the Corporation. Generally, the Bank's
payment of dividends is limited, without prior OTS approval, to net earnings
for the current calendar year plus the two preceding calendar years, less
capital distributions paid over the comparable time period. Insured
institutions are required to file an application with the OTS for capital
distributions in excess of this limitation.
<PAGE>
GENERAL INFORMATION FOR SHAREHOLDERS
Transfer Agent and Registrar:
Corporate Trust Services
Fifth Third Center
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Tel: (513) 579-5417 Fax: (513) 744-6785
Corporate Counsel:
Lonnie D. Collins, Attorney
426 E. Main Street
Madison, Indiana 47250
Tel: (812) 265-3616 Fax: (812) 273-3143
Shareholder and General Inquiries:
River Valley Bancorp
Attn: Matthew P. Forrester, President
430 Clifty Drive, P.O. Box 1590
Madison, Indiana 47250
Tel: (812) 273-4949 Fax: (812) 273-2883
Special Counsel:
Barnes & Thornburg
11 S. Meridian Street
Indianapolis, Indiana 46204
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
E-MAIL Address: rivervalleyfinancial.com
Annual Meeting:
The Annual Meeting of Shareholders of River Valley Bancorp will be held on
Wednesday, April 19, 2000, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250.
Memoriam
Director Cecil L. Dorten passed away on February 17, 2000. Cecil Dorten was a
valuable member of this organization, a major general (retired) in the Indiana
National Guard, and an outstanding civic citizen. His counsel and business savvy
will be greatly missed.
<PAGE>
BOARD OF DIRECTORS
Fred W. Koehler
Chairman
Cecil L. Dorten
Vice Chairman
Earl W. Johann
Director
Michael J. Hensley
Director
Jonnie L. Davis
Director
Matthew P. Forrester
Director & President
Robert W. Anger
Director
********************
Lonnie D. Collins
Secretary
<PAGE>
EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK
Matthew P. Forrester
Director & President
Mark A. Goley
Vice President of Lending
Robyne J. Hart
Vice President of Operations
Larry C. Fouse
Vice President of Finance
Deanna J. Liter
Vice President of Data Services
Loy M. Skirvin
Director of Human Resources
<PAGE>
OFFICERS OF RIVER VALLEY FINANCIAL BANK
Barbara J. Eades
Assistant Vice President
Branch Manager
Robert J. Schoenstein, Jr.
Assistant Vice President
Loan Officer
Angela D. Adams
Branch Manager
James B. Allen
Branch Manager
Kenneth L. Cull
Loan Officer
Theresa A. Dryden
Loan Officer
V. Kay Kimmel
Loan Officer
Linda L. Ralston
Branch Manager
Rhonda E. Wingham
Branch 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, 1999 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-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 3,648
<INT-BEARING-DEPOSITS> 2,854
<FED-FUNDS-SOLD> 1,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,301
<INVESTMENTS-CARRYING> 3,138
<INVESTMENTS-MARKET> 3,142
<LOANS> 115,131
<ALLOWANCE> 1,522
<TOTAL-ASSETS> 138,695
<DEPOSITS> 114,251
<SHORT-TERM> 6,500
<LIABILITIES-OTHER> 1,078
<LONG-TERM> 0
<COMMON> 0
0
0
<OTHER-SE> 16,866
<TOTAL-LIABILITIES-AND-EQUITY> 138,695
<INTEREST-LOAN> 8,740
<INTEREST-INVEST> 577
<INTEREST-OTHER> 417
<INTEREST-TOTAL> 9,734
<INTEREST-DEPOSIT> 4,474
<INTEREST-EXPENSE> 4,617
<INTEREST-INCOME-NET> 5,117
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,080
<INCOME-PRETAX> 1,741
<INCOME-PRE-EXTRAORDINARY> 1,039
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,039
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.94
<LOANS-NON> 72
<LOANS-PAST> 785
<LOANS-TROUBLED> 835
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,477
<CHARGE-OFFS> 123
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,522
<ALLOWANCE-DOMESTIC> 113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,409
</TABLE>
