<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File Number: 0-026248
INDUSTRIAL BANCORP, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1800830
------------------------------- ---------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
211 North Sandusky Street, Bellevue, Ohio 44811
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (419) 483-3375
Securities registered pursuant to Section 12(b) of the Act:
None None
------------------- ------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
----------------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of issuer'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. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the Nasdaq National Market as of March 18, 1997, was
$12,179,905. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant.)
As of March 18, 1997, there were 5,416,500 of the Registrant's Common
Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1996 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the 1997 Annual
Meeting of Shareholders
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Industrial Bancorp, Inc. (the "Holding Company" or the "Corporation")
was incorporated in the State of Ohio in February 1995 for the purpose of
owning all of the outstanding capital stock of The Industrial Savings and Loan
Association ("Industrial" or the "Association") issued upon the conversion of
the Association from a mutual savings association to a permanent capital stock
savings association (the "Conversion"). On August 1, 1995, the effective date
of the Conversion, the Holding Company acquired 100 shares of the capital stock
of the Association.
The Association was organized as a mutual savings association under
Ohio law in 1890. As an Ohio savings association, the Association is subject to
supervision and regulation by the Office of Thrift Supervision (the "OTS"), the
Ohio Department of Commerce, Division of Financial Institutions (the
"Division") and the Federal Deposit Insurance Corporation (the "FDIC"). The
Association is a member of the Federal Home Loan Bank (the "FHLB") of
Cincinnati and the deposits of the Association are insured up to applicable
limits by the FDIC in the Savings Association Insurance Fund (the "SAIF").
The Association conducts business from its main office at 211 N.
Sandusky Street in Bellevue, Ohio, and its nine branch offices in the Northern
Ohio communities of Ashland, Bellevue, Clyde, Findlay, Fremont, Norwalk,
Sandusky, Tiffin and Willard. The Association is principally engaged in the
business of originating construction and permanent mortgage loans secured by
first mortgages on one- to four-family residential real estate located in the
Association's primary market area, which consists of the six Ohio counties in
which its offices are located: Ashland, Erie, Hancock, Huron, Sandusky and
Seneca. The Association also originates construction and permanent mortgage
loans secured by multifamily real estate (over four units) and nonresidential
real estate in its primary market area. In addition to real estate lending, the
Association originates a limited number of commercial loans and secured and
unsecured consumer loans. For liquidity and interest rate risk management
purposes, the Association invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations, mortgage-backed
securities and other investments permitted by applicable law. Funds for lending
and other investment activities are obtained primarily from savings deposits
and loan principal repayments. Advances from the FHLB of Cincinnati are
utilized from time to time as an additional source of funds.
Interest on loans and investments is the Association's primary source
of income. The Association's principal expense is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the "net
interest income" of the Association, which is the difference between interest
income earned on loans, mortgage-backed securities and other interest-earning
assets and interest paid on deposits and borrowings. Like most thrift
institutions, the Association's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
MARKET AREA
The Association conducts business from its main office in Bellevue,
Ohio, and its nine branch offices in Bellevue and the northern Ohio cities of
Ashland, Clyde, Findlay, Fremont, Norwalk, Sandusky, Tiffin and Willard. The
Association's primary market area for lending and deposit activity consists of
the six counties in which the Association has its offices.
The economy of the Association's primary market area is stable.
Population growth and household growth have occurred at slightly slower rates
than the State of Ohio as a whole. The principal segments of the local economy
are manufacturing, wholesale/retail trade, tourism and other service
industries. Erie and Sandusky Counties include popular tourist attractions
along Lake Erie, such as Cedar Point, which provide a significant number of
jobs during the summer season and draw large numbers of visitors to the area.
Other major employers in the Association's primary market area include
Whirlpool Corporation, Cooper Tire & Rubber Company, Consolidated Biscuit Co.,
General Motors, Ford Motor Company, Marathon Oil and R.R. Donnelly Co. There
are also several colleges and universities in the Association's primary market
area.
LENDING ACTIVITIES
GENERAL. The Association's principal lending activity is the
origination of conventional real estate loans, including construction loans,
secured by one- to four-family homes located in the Association's primary
market area. Loans secured by multifamily properties containing more than four
units and nonresidential properties, including construction loans, are also
offered by the Association. The Association does not originate first mortgage
loans insured by the Federal Housing Authority or
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<PAGE> 3
guaranteed by the Veterans Administration. In addition to real estate lending,
the Association originates a limited number of commercial loans and consumer
loans, including education loans, loans secured by deposit accounts, automobile
loans and a limited number of unsecured loans.
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<PAGE> 4
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the Association's loan
portfolio at the dates indicated:
[CAPTION]
<TABLE>
At December 31,
----------------------------------------------------------------------
1996 1995 1994
------------------ -------------------- -------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $248,694 85.35% $226,868 85.90% $207,943 86.61%
Home equity 11,651 4.00 8,546 3.24 5,509 2.29
Multifamily 9,028 3.10 8,213 3.11 8,019 3.35
Nonresidential 8,842 3.03 9,100 3.45 6,511 2.71
Construction (1) 8,765 3.01 6,746 2.55 7,187 2.99
-------- ------ -------- ------- -------- ------
Total real estate loans 286,980 98.49 259,473 98.25 235,169 97.95
Commercial loans 398 0.14 585 0.22 666 0.28
Consumer loans:
Education loans 1,268 0.44 1,456 0.55 1,650 0.68
Loans on deposits 1,087 0.37 987 0.38 1,032 0.43
Automobile loans 773 0.27 826 0.31 807 0.34
Other consumer loans 831 0.29 771 0.29 763 0.32
-------- ------ -------- ------- -------- ------
Total consumer loans 3,959 1.37 4,040 1.53 4,252 1.77
-------- ------ -------- ------- -------- ------
Total loans 291,337 100.00% 264,098 100.00% 240,087 100.00%
====== ====== ======
Less:
Deferred loan origination fees (3,977) (3,598) (3,341)
Allowance for loan losses (1,557) (1,376) (1,209)
-------- -------- --------
Net loans $285,803 $259,124 $235,537
======== ======== ========
</TABLE>
[CAPTION]
<TABLE>
At December 31,
---------------------------------------------
1993 1992
------------------ --------------------
Percent Percent
of total of total
Amount loans Amount loans
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $180,580 86.38% $162,648 85.20%
Home equity 4,179 2.00 4,422 2.32
Multifamily 8,584 4.10 9,243 4.85
Nonresidential 7,171 3.43 6,544 3.43
Construction (1) 3,799 1.82 2,270 1.19
-------- ------ -------- ------
Total real estate loans 204,313 97.73 185,127 96.99
Commercial loans 567 0.27 714 0.37
Consumer loans:
Education loans 1,729 0.83 1,837 0.96
Loans on deposits 1,071 0.51 1,372 0.72
Automobile loans 608 0.29 829 0.43
Other consumer loans 777 0.37 1,004 0.53
-------- ------ -------- ------
Total consumer loans 4,185 2.00 5,042 2.64
-------- ------ -------- ------
Total loans 209,065 100.00% 190,883 100.00%
====== ======
Less:
Deferred loan origination fees (3,063) (2,632)
Allowance for loan losses (1,001) (773)
-------- --------
Net loans $205,001 $187,478
======== ========
</TABLE>
(1) Net of the undisbursed portion of construction loans.
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<PAGE> 5
LOAN MATURITY. The following table sets forth certain information as
of December 31, 1996, regarding the dollar amount of loans maturing in the
Association's portfolio based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of
repayments or no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due in Due in
December 31, Due in years years Due in
-------------------------- years 2002 2007 year 2017
2000 and through through and
1997 1998 1999 2001 2006 2016 after Total
--------------------------- -------- ------- ------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 651 $283 $ 522 $2,081 $17,005 $132,228 $95,924 $248,694
Home equity - - - - - - 11,651 11,651
Multifamily and nonresidential 377 72 255 690 2,118 11,353 3,005 17,870
Construction 473 - - - 55 4,236 4,001 8,765
Commercial loans 190 1 48 - 21 138 - 398
Consumer loans 1,384 307 463 585 724 496 - 3,959
------ ---- ------ ------ ------- -------- -------- --------
Total $3,075 $663 $1,288 $3,356 $19,923 $148,451 $114,581 $291,337
====== ==== ====== ====== ======= ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans which
will become due more than one year from December 31, 1996, and which have
predetermined interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
December 31, 1996
----------------------------
(In thousands)
<S> <C>
Fixed interest rates $179,875
Adjustable interest rates 108,387
--------
$288,262
========
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal
lending activity of the Association is the origination of permanent
conventional loans secured by one- to four-family residences, primarily
single-family residences, located within the Association's primary market area.
Each of such loans is secured by a first mortgage on the underlying real estate
and improvements thereon, if any. At December 31, 1996, the Association's one-
to four-family residential real estate loan portfolio was approximately $248.7
million, or 85.35% of total loans.
OTS regulations and Ohio law limit the amount which the Association
may lend in relationship to the appraised value of the real estate and
improvements at the time of loan origination. In accordance with such
regulations and laws, the Association typically makes loans on one- to
four-family residences for up to 80% of the value of the real estate and
improvements (the "LTV") and occasionally makes loans with up to a 95% LTV. The
principal amount of any loan which exceeds an 80% LTV at the time of
origination is usually covered by private mortgage insurance at the expense of
the borrower.
Fixed-rate one- to four-family loans are offered by the Association,
currently for terms of up to 30 years. Adjustable-rate one- to four-family real
estate loans ("ARMs") are also offered by the Association for terms of up to 30
years. The interest rate adjustment periods on such ARMs are one year and the
rates are tied to the one-year U.S. Treasury bill rate. The new interest rate
at each change date is determined by adding a specified margin, typically
between 2.75% and 3.75%, to the prevailing index. The maximum allowable
adjustment at each adjustment date is 1% or 2% with a maximum adjustment of 6%
over the term of the loan. The initial rate on an ARM with a 1% cap is
typically higher than the initial rate on an ARM with a 2% cap to compensate
for the reduced interest rate sensitivity. The initial rate on ARMs originated
by the Association is sometimes less than the sum of the index at the time of
origination plus the specified margin. Such loans may be subject to greater
risk of default as the interest rate adjusts to the fully-indexed level. The
Association attempts to reduce the risks by underwriting such loans on the
basis of the payment amount the borrower will be required to pay during the
second year of the loan, assuming the maximum possible rate increase.
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<PAGE> 6
Adjustable-rate loans decrease the Association's interest rate risk
but involve other risks, primarily credit risk, because as interest rates rise
the payment by the borrower rises to the extent permitted by the terms of the
loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Association believes that these risks have not had a
material adverse effect on the Association to date.
HOME EQUITY LOANS. In recent years, lines of credit secured by the
equity in a borrower's principal residence have become increasingly popular.
The Association offers home equity lines of credit in an amount which, when
added to any prior indebtedness secured by the real estate, does not exceed 85%
of the appraised value of the real estate. The Association's home equity loans
have terms of up to 30 years. The borrower can draw on the line of credit
during the first 15 years and must repay the loan during the second 15 years.
Home equity loans are typically secured by a second mortgage on the real
estate. The Association frequently holds the first mortgage, although the
Association will make home equity loans in cases where another lender holds the
first mortgage. The interest rates charged by the Association on home equity
loans adjust quarterly and are tied to the composite prime rate of 75% of the
thirty largest U.S. banks, as published in The Wall Street Journal.
At December 31, 1996, the Association had $11.7 million, or 4.00% of
total loans, in home equity loans.
LOANS SECURED BY MULTIFAMILY REAL ESTATE. In addition to loans on one-
to four-family properties, the Association originates loans secured by
multifamily properties containing over four units. Multifamily loans are
offered with adjustable rates for terms of up to 30 years and have a maximum
LTV of 80%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control
of the borrower. The Association attempts to reduce the risk associated with
multifamily lending by evaluating the creditworthiness of the borrower and the
projected income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships. The Association requests that borrowers
submit rent rolls and that all borrowers submit financial statements annually
to enable the Association to monitor such loans.
At December 31, 1996, loans secured by multifamily properties totaled
approximately $9.0 million, or 3.10% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At December 31, 1996,
approximately $8.8 million, or 3.03%, of the Association's total loans were
secured by permanent mortgages on nonresidential real estate. Such loans have
adjustable rates, terms of up to 25 years and LTVs of up to 75%. Among the
properties securing nonresidential real estate loans are office buildings and
motel and retail properties located in the Association's primary market area.
For the last five years, the amount of the Association's nonresidential real
estate loans as a percent of total loans has ranged from a low of 2.71% at
December 31, 1994, to a high of 3.45% at December 31, 1995.
Although the loans secured by nonresidential real estate typically
have higher interest rates than one- to four-family residential real estate
loans, nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger
loan amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Association has endeavored to
reduce such risk by evaluating the credit history and past performance of the
borrower, the location of the real estate, the financial condition of the
borrower, the quality and characteristics of the income stream generated by the
property and appraisals supporting the property's valuation. The Association
also makes loans for the construction of nonresidential real estate.
CONSTRUCTION LOANS. The Association makes loans for the construction
of single-family houses, multifamily properties and nonresidential real estate
projects. At December 31, 1996, the Association's loan portfolio included $8.8
million in construction loans, or 3.01% of total loans, net of undisbursed
proceeds.
The Association's construction loan portfolio at December 31, 1996,
consisted of loans to individuals and builders for the construction and
permanent financing of single-family residences. Such loans are offered with
fixed or adjustable rates for terms of up to 30 years. During the first year,
while the residence is being constructed, the borrower is required to pay
interest only.
At December 31, 1996, the Association had no loans for the
construction of nonresidential real estate in its portfolio.
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<PAGE> 7
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTV and the total loan funds required to
complete a project. In the event a default on a construction loan occurs and
foreclosure follows, the Association would have to take control of the project
and attempt either to arrange for completion of construction or dispose of the
unfinished project. All of the Association's construction loans are secured by
property in the Association's primary market area.
COMMERCIAL LOANS. The Association occasionally makes commercial loans
to businesses in its primary market area. Such loans are typically secured by a
security interest in inventory, accounts receivable or other assets of the
borrower. At December 31, 1996, the Association's commercial loan portfolio was
$398,000, or 0.14% of total loans.
CONSUMER LOANS. The Association makes various types of consumer loans,
including education loans, loans made to depositors on the security of their
deposit accounts, automobile loans and other secured loans and unsecured
personal loans. Consumer loans are made at fixed rates of interest and for
varying terms based on the type of loan. At December 31, 1996, the Association
had approximately $4.0 million, or 1.37% of total loans, invested in consumer
loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail greater
risk than do residential real estate loans. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Association's
lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel in the office where the loan is originated. The Association typically
obtains a credit report, verification of employment and other documentation
concerning the creditworthiness of the borrower. An appraisal of the fair
market value of the real estate which will be given as security for the loan is
prepared by a staff appraiser or a fee appraiser approved by the Board of
Directors. Upon the completion of the appraisal and the receipt of information
on the credit history of the borrower, the application for a loan is submitted
for review in accordance with the Association's underwriting guidelines to the
Association's Executive Committee. All loans are ratified by the full Board of
Directors.
Under the Association's current loan guidelines, if a real estate loan
application is approved, title insurance is usually obtained on the real estate
which will secure the mortgage loan. In the past, the Association used an
attorney's opinion for single-family loans, whereas title insurance was
typically used for nonresidential real estate loans. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name the Association as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction project
and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's
credit history and an analysis of the borrower's income and expenses, ability
to repay the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. Currently, the Association is
originating both fixed-rate and ARM loans for its portfolio and not with the
intention of selling such loans in the secondary market, although a majority of
the loans in the Association's portfolio conform to the secondary market
standards of the Federal Home Loan Mortgage Corporation (the "FHLMC") or the
Federal National Mortgage Association (the "FNMA"). The Association charges a
higher interest rate on loans that do not conform to FHLMC or FNMA standards to
mitigate the increased interest rate risk associated with loans that cannot be
readily sold.
Loan sales have not been a significant business activity for the
Association, although it has sold loans in the past when funds were needed for
new loan originations and market conditions favored a sale. At December 31,
1996, the Association had $5.7 million of loans serviced for others.
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<PAGE> 8
The following table presents the Association's loan origination,
purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family residential $58,626 $46,007 $50,809 $57,916 $49,906
Multifamily residential 702 375 149 296 1,129
Nonresidential 957 848 446 272 1,116
Construction 18,751 17,478 15,986 12,791 7,623
Commercial 624 601 836 969 542
Consumer 2,572 2,568 2,627 1,867 2,523
------- ------- ------- ------- -------
Total loans originated 82,232 67,877 70,853 74,111 62,839
Loan participations purchased - - - 25 -
Reductions:
Principal repayments 54,521 40,609 40,571 53,375 47,740
Loans sold - 1,250 - - -
Transfers from loans to real estate owned - 33 276 48 -
------- ------- ------- ------- -------
Total reductions 54,521 41,892 40,847 53,423 47,740
Increase (decrease) in other items, net (1) 1,032 2,398 (530) 3,190 698
------- ------- ------- ------- -------
Net increase $26,679 $23,587 $30,536 $17,523 $14,401
======= ======= ======= ======= =======
- -----------------------------
</TABLE>
(1) Other items consist of the undisbursed portion of construction loans,
net loan origination fees, unearned interest and the allowance for
loan losses.
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan loss reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." An exception to this limit permits loans of any type to one
borrower of up to $500,000. In addition, the OTS, under certain circumstances,
may permit exceptions to the lending limit on a case-by-case basis. In applying
these limits, the regulations require that loans to certain related or
affiliated borrowers be aggregated.
Based on such limits, the Association was able to lend approximately
$8.6 million to one borrower at December 31, 1996. The largest amount the
Association had outstanding to one borrower and related persons or entities at
December 31, 1996, was $3.9 million, consisting primarily of two loans secured
by motels in the Association's primary market area.
LOAN ORIGINATION AND OTHER FEES. The Association realizes loan
origination fee and other fee income from its lending activities and also
realizes income from late payment charges, application fees and fees for other
miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards No. 91 as an adjustment to yield over the life
of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS.
Delinquent loans are loans for which payment has not been received within 30
days of the payment due date. Loan payments are due on the first day of the
month with the interest portion of the payment applicable to interest accrued
during the prior month. When loan payments have not been made by the thirtieth
of the month, late notices are sent to the borrower. If payment is not received
by the sixtieth day, second notices are sent
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<PAGE> 9
and telephone calls are made. Each loan bears a late payment penalty
which is assessed as soon as such loan is more than 15 days delinquent.
The late penalty is 5% of the payment due.
When a loan secured by real estate becomes delinquent more than 90
days, the Board of Directors reviews the loan and foreclosure proceedings are
instituted if the Board determines that the delinquency is not likely to be
resolved in a reasonable period of time. An appraisal of the security is
performed when foreclosure proceedings are initiated. If the appraisal
indicates that the value of the collateral is less than the book value of the
loan, a valuation allowance is established for such loan.
When a consumer loan becomes more than 120 days past due, the loan is
classified loss and a specific reserve is established for the book balance of
the loan.
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<PAGE> 10
The following table reflects the amount of loans in a delinquent
status as of the dates indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------------- ---------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------- --------- ------- ------- --------- ------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 65 $1,267 0.43% 70 $1,238 0.47% 56 $1,394 0.58%
60 - 89 days 34 575 0.20 47 749 0.28 36 1,342 0.56
90 days and over 75 999 0.34 73 1,502 0.57 47 1,142 0.48
--- ------ ---- --- ------ ---- --- ------ ----
Total delinquent 174 $2,841 0.97% 190 $3,489 1.32% 139 $3,878 1.62%
loans === ====== ==== === ====== ==== === ====== ====
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
1993 1992
--------------------------- ----------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------- --------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 57 $1,380 0.66% 89 $1,868 0.97%
60 - 89 days 39 1,264 0.60 54 935 0.49
90 days and over 52 1,752 0.84 87 1,882 0.99
--- ------ ---- --- ------ ----
Total delinquent 148 $4,396 2.10% 230 $4,685 2.45%
loans === ====== ==== === ====== ====
</TABLE>
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<PAGE> 11
Nonperforming assets include nonaccruing loans, accruing loans which
are delinquent 90 days or more, real estate acquired by foreclosure or by
deed-in-lieu thereof, in-substance foreclosures and repossessed assets. The
Association ceases to accrue interest on real estate loans if the collateral
value is not adequate, in the opinion of management, to cover the outstanding
principal and interest.
The following table sets forth information with respect to the accrual
and nonaccrual status of the Association's loans and other nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90
days or more $ 721 $ 939 $ 874 $ 325 $ 387
Loans accounted for on a
nonaccrual basis:
Real estate:
One- to four-family 504 621 548 899 1,232
Multifamily - - - 652 469
Nonresidential - 7 63 43 -
Consumer 13 5 13 9 65
------- ------ ------ ------ ------
Total nonaccrual loans 517 633 624 1,603 1,766
------- ------ ------ ------ ------
Total nonperforming loans 1,238 1,572 1,498 1,928 2,153
Real estate owned 15 15 48 63 -
------ ------ ------ ------ ------
Total nonperforming assets $1,253 $1,587 $1,546 $1,991 $2,153
====== ====== ====== ====== ======
Allowance for loan losses $1,557 $1,376 $1,209 $1,001 773
====== ====== ====== ====== ======
Nonperforming assets as a
percent of total assets 0.38% 0.49% 0.58% 0.81% 0.95%
Nonperforming loans as a percent
of total loans 0.42% 0.60% 0.62% 0.92% 1.13%
Allowance for loan losses as a
percent of nonperforming
loans 125.77% 87.53% 80.71% 51.92% 35.90%
</TABLE>
For the year ended December 31, 1996, gross interest income which
would have been recorded had nonaccruing loans been current in accordance with
their original terms was $32,000. Interest collected on such loans and included
in net income was $27,000.
Real estate acquired by the Association as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. When
property is so acquired it is recorded by the Association at the estimated fair
value of the real estate at the date of acquisition, less estimated selling
expenses, and any write-down resulting therefrom is charged to the allowance
for loan losses. Interest accrual, if any, ceases no later than the date of
acquisition of the real estate, and all costs incurred from such date in
maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized to the extent of fair value.
The Association classifies its own assets on a monthly basis in
accordance with federal regulations. Problem assets are classified as
"substandard," "doubtful" or "loss." "Substandard" assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
Association will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the same weaknesses as "substandard" assets, with the
additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (ii) there is a
-11-
<PAGE> 12
high possibility of loss. An asset classified "loss" is considered
uncollectible and of such little value that its continuance as an asset
of the Association is not warranted.
The aggregate amounts of the Association's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Classified assets:
Substandard $874 $1,408 $1,441 $1,654 $1,491
Doubtful - - - - -
Loss 54 46 74 101 134
---- ------ ------ ------ ------
Total classified assets $928 $1,454 $1,515 $1,755 $1,625
==== ====== ====== ====== ======
</TABLE>
The Association establishes general allowances for loan losses for any
loan classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Association establishes specific allowances for losses
in the amount of 100% of the portion of the asset classified loss. Generally,
the Association charges off the portion of any real estate loan deemed to be
uncollectible.
The Association analyzes each classified asset on a monthly basis to
determine whether a change in its classification is appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly.
ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the
Board, reviews on a monthly basis the allowance for loan losses as it relates
to a number of relevant factors, including but not limited to, trends in the
level of delinquent and nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single
borrowers and changes in the composition of the loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking" statement within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Factors that could affect the adequacy of the
loan loss allowance include, but are not limited to, the following: (1) changes
in the national and local economy which may negatively impact the ability of
borrowers to repay their loans and which may cause the value of real estate and
other properties that secure outstanding loans to decline; (2) unforeseen
adverse changes in circumstances with respect to certain large loans; (3)
decreases in the value of collateral securing consumer loans to amounts less
than the outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that the Association must recognize additions to
its loan loss allowance based on such regulators' judgment of information
available to them at the time of their examinations.
-12-
<PAGE> 13
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,376 $1,209 $1,001 $ 773 $ 526
Charge-offs - (17) (4) (18) (5)
Recoveries 1 4 12 6 22
------ ------ ------ ------- -----
Net (charge-offs) recoveries 1 (13) 8 (12) 17
Provision for loan losses 180 180 200 240 230
------ ------ ------ ------ -----
Balance at end of year $1,557 $1,376 $1,209 $1,001 $ 773
====== ====== ====== ====== =====
Net (charge-offs) recoveries to
average loans 0.00% (0.01)% 0.00% (0.01)% 0.01%
Allowance for loan losses to
total loans 0.53% 0.52% 0.50% 0.48% 0.40%
</TABLE>
The following table sets forth the allocation of the Association's
allowance for loan losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ -------------------- ------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans loans loans loans loans
in each in each in each in each in each
category to category to category to category to category to
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ---------- ------ ----------- ------ ----------- ------ ---------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at year
end applicable to:
Real estate loans $1,166 99% $1,036 98% $ 913 98% $ 765 98% $562 97%
Commercial loans 30 - 27 - 23 - 18 - 13 -
Consumer loans 134 1 112 2 103 2 83 2 103 3
Unallocated 227 - 201 - 170 - 135 - 95 -
------ --- ------ --- ----- --- ------ --- ---- ---
Total $1,557 100% $1,376 100% $1,209 100% $1,001 100% $773 100%
====== === ====== === ====== === ====== === ==== ===
</TABLE>
Because the loan loss allowance is based on estimates, it is monitored
monthly and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
Federal regulation and Ohio law permit the Association to invest in
various types of investments, including interest-bearing deposits in other
financial institutions, U.S. Treasury and agency obligations, mortgage-backed
securities and certain other specified investments. The Board of Directors of
the Association has adopted an investment policy which authorizes management to
make investments in U.S. Government and agency securities, deposits in the
FHLB, certificates of deposit in federally-insured financial institutions,
banker's acceptances issued by major U.S. banks, corporate debt securities
rated at least "AA," or equivalent, by a major statistical rating firm and
municipal or other tax free obligations. The Association's investment policy is
designed primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality investments to minimize risk
and to maximize return without sacrificing liquidity and safety.
-13-
<PAGE> 14
The following table sets forth the composition of the Association's
interest-bearing deposits, investment securities and mortgage-backed
securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1996 1995
----------------------------------------- ---------------------------------------
Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total
-------- ----- ----- ----- -------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $2,101 7.03% $2,101 7.02% $ 4,894 9.10% $ 4,894 9.08%
Overnight deposits 4,000 13.38 4,000 13.36 21,000 39.05 21,000 38.97
Time deposits - - - - - - - -
------ ------ ------- ------ ------- ------ ------- -----
Total interest-bearing deposits 6,101 20.41 6,101 20.38 25,894 48.15 25,894 48.05
Investment securities:
U.S. Treasury securities:
Available for sale 21,938 73.38 21,938 73.27 16,144 30.02 16,144 29.95
Held to maturity - - - - 9,987 18.57 10,045 18.64
Equity securities (1) 1,298 4.34 1,298 4.33 984 1.83 1.83
------- ------ ------- ------ ------- ------ ------- ------
Total investment securities 23,236 77.72 23,236 77.60 27,115 50.42 27,173 50.42
------- ------ ------- ------ ------- ------ ------- ------
Mortgage-backed securities 561 1.87 608 2.02 767 1.43 1.53
------- ------ ------- ------ ------- ------ ------- ------
Total investments $29,898 100.00% $29,945 100.00% $53,776 100.00% $53,893 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1994
-----------------------------------------
Carrying % of Fair % of
value total value total
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $ 3,337 14.29% $ 3,337 14.42%
Overnight deposits 1,500 6.42 1,500 6.48
Time deposits 2,500 10.71 2,500 10.81
------- ------ ------- ------
Total interest-bearing deposits 7,337 31.42 7,337 31.71
Investment securities:
U.S. Treasury securities:
Available for sale - - - -
Held to maturity 14,442 61.85 14,181 61.28
Equity securities (1) 585 2.50 585 2.53
------- ------ ------- ------
Total investment securities 15,027 64.35 14,766 63.81
------- ------ ------- ------
Mortgage-backed securities 987 4.23 1,037 4.48
------- ------ ------- ------
Total investments $23,351 100.00% $23,140 100.00%
======= ====== ======= ======
</TABLE>
- -----------------------------
(1) Comprised of FHLMC preferred stock.
-14-
<PAGE> 15
The maturities of the Association's interest-bearing deposits
and investment securities at December 31, 1996, are indicated in the
following table:
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------------------------------------------------------------------
After one After five After
through through ten
One year or less five years ten years years Total
----------------- ------------------- ----------------- ------------------ -------------------------------
Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market average
value yield value yield value yield value yield value value yield
-------- ------- -------- ------- -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits $ 6,101 6.21% $ - -% $ - -% $ - -% $ 6,101 $ 6,101 6.21%
U.S. Treasury
securities 12,030 6.02 9,908 5.28 - - - - 21,938 21,938 5.69
Mortgage-backed
securities - - 26 8.50 165 10.00 370 10.95 561 608 10.56
------- ---- ------ ---- ---- ----- ---- ----- ------ ------- -----
Total $18,131 6.08% $9,934 5.29% $165 10.00% $370 10.95% $28,600 $28,647 5.89%
======= ==== ====== ==== ==== ===== ==== ===== ======= ======= =====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments and
principal repayments on loans and income on interest-earning assets. Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate more in response to general interest rates and money market
conditions. The Association also utilizes FHLB advances as an alternative
source of funds.
DEPOSITS. Deposits are attracted principally from within the
Association's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, demand deposit accounts, money
market accounts, regular passbook savings accounts, term certificate accounts,
IRAs and Keogh accounts. Interest rates paid, maturity terms, service fees and
withdrawal penalties for the various types of accounts are established
periodically by management of the Association based on the Association's
liquidity requirements, growth goals and interest rates paid by competitors.
The Association does not use brokers to attract deposits. The amount of
deposits from outside the Association's primary market area is not significant.
At December 31, 1996, the Association's certificates of deposit
totaled $183.6 million, or 70.88% of total deposits. Of such amount,
approximately $122.3 million in certificates of deposit mature within one year.
Based on past experience and the Association's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will be
renewed with the Association at maturity. If deviation from historical
experience occurs, the Association can utilize borrowings from the FHLB of
Cincinnati as an alternative source of funds, up to the Association's limit on
such borrowings, which was $52.9 million at December 31, 1996.
-15-
<PAGE> 16
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Association at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- --------------------
Weighted
average
rate at Percent of Percent of Percent of
December 31, total total total
1996 Amount deposits Amount deposits Amount deposits
------------ ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Non-interest bearing
demand deposits -% $ 3,173 1.22% $ 2,910 1.22% $ 2,436 1.05%
Passbook savings accounts 3.10 53,410 20.62 51,008 21.41 62,804 27.08
NOW accounts 2.50 14,321 5.53 12,692 5.33 11,049 4.76
Money market accounts 3.00 4,531 1.75 4,892 2.05 5,556 2.40
--------- ------ -------- ------ -------- ------
Total transaction accounts 75,435 29.12 71,502 30.01 81,845 35.29
Certificates of deposit:
2.01% - 4.00% - - - - - 19,078 8.22
4.01% - 6.00% 5.49 130,367 50.32 115,406 48.43 99,199 42.77
6.01% - 8.00% 6.44 28,962 11.18 28,759 12.07 7,759 3.34
8.01% - 10.00% 8.05 6 0.00 311 0.13 786 0.34
Adjustable-rate (1) 5.79 24,304 9.38 22,304 9.36 23,299 10.04
-------- ------ -------- ------ -------- ------
Total certificates
of deposit 5.68 183,639 70.88 166,780 69.99 150,121 64.71
-------- ------ -------- ------ -------- ------
Total deposits 4.86% $259,074 100.00% $238,282 100.00% $231,966 100.00%
======== ====== ======== ====== ======== ======
- -----------------------------
</TABLE>
(1) Consists of IRA and Keogh accounts, the rates on which adjust
monthly at the discretion of the Association.
The Association bids on deposits of public funds from entities in its
primary market area. The amount of such deposits was approximately $15.8
million at December 31, 1996.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1996:
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- --------- ---------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
4.01% to 6.00% $ 94,984 $21,155 $10,526 $3,702 $130,367
6.01% to 8.00% 10,816 9,810 3,389 4,947 28,962
8.01% to 10.00% 6 - - - 6
Adjustable rate 16,506 7,798 - - 24,304
-------- ------- ------- ------ --------
Total certificates of deposit $122,312 $38,763 $13,915 $8,649 $183,639
-------- ------- ------- ------ --------
</TABLE>
The following table presents the amount of the Association's
certificates of deposit of $100,000 or more, by the time remaining until
maturity, at December 31, 1996:
<TABLE>
<CAPTION>
Maturity Amount
- -------- ------
(In thousands)
<S> <C>
Three months or less $ 9,182
Over 3 months to 6 months 9,167
Over 6 months to 12 months 11,228
Over 12 months 5,793
-------
Total $35,370
=======
</TABLE>
-16-
<PAGE> 17
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $238,282 $231,966 $219,704
Deposits 399,604 402,953 305,274
Withdrawals (388,210) (405,184) (300,341)
-------- -------- ---------
Net deposits before interest credited 249,676 229,735 224,637
Interest credited 9,398 8,547 7,329
======== ======== ========
Ending balance $259,074 $238,282 $231,966
======== ======== ========
Net increase $ 20,792 $ 6,316 $ 12,262
======== ======== ========
Percent increase 8.7% 2.7% 5.6%
=== === ===
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank,
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, the
Association is authorized to apply for advances from the FHLB of Cincinnati,
provided certain standards of creditworthiness have been met. Under current
regulations, an association must meet certain qualifications to be eligible for
FHLB advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
test"). If an association meets the QTL test, it will be eligible for 100% of
the advances it would otherwise be eligible to receive. If an association does
not meet the QTL test, it will be eligible for such advances only to the extent
it holds specified QTL test assets. At December 31, 1996, the Association was
in compliance with the QTL test.
The following table sets forth the maximum month-end balance and
average balance of the Association's FHLB advances during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $2,000 $15,000 $6,000
Average balance 462 6,615 1,308
Weighted average interest rate 6.15% 6.64% 6.34%
</TABLE>
At December 31, 1996, the Association had outstanding FHLB advances
totalling $2.0 million, with a weighted average interest rate of 6.15%.
COMPETITION
The Association competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, the Association competes with
other savings banks, savings associations, commercial banks, mortgage brokers,
consumer finance companies, credit unions, leasing companies and other lenders.
The Association competes for loan originations primarily through the interest
rates and loan fees it charges and through the efficiency and quality of
services it provides to borrowers. Competition is intense and is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable. The Association does not offer all of the products
and services offered by some of its competitors, particularly commercial banks.
The Association monitors the product offerings of its competitors and adds new
products when it can do so competitively and cost effectively.
-17-
<PAGE> 18
The size of financial institutions competing with the Association is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon the
Association.
EMPLOYEES
As of December 31, 1996, the Association had 76 full-time employees
and 12 part-time employees. The Association believes that relations with its
employees are excellent. The Association offers health and disability benefits,
life insurance and an employee stock ownership plan. None of the employees of
the Association are represented by a collective bargaining unit.
REGULATION
GENERAL
The Corporation is a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the
Corporation is subject to regulation, examination and oversight by the OTS and
must submit periodic reports to the OTS concerning its activities and financial
condition. In addition, as a corporation organized under Ohio law, the
Corporation is subject to provisions of the Ohio Revised Code applicable to
corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Industrial is subject to regulation, examination and oversight by the
Superintendent of the Division of Financial Institutions of the Department of
Commerce of the State of Ohio (the "Ohio Superintendent"). Because Industrial's
deposits are insured by the FDIC, Industrial also is subject to regulation and
examination by the OTS and regulatory oversight by the FDIC. Industrial must
file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by federal and state
regulators to determine whether Industrial is in compliance with various
regulatory requirements and is operating in a safe and sound manner. Industrial
is a member of the FHLB and is subject to certain regulations promulgated by
the Board of Governors of the Federal Reserve System (the "FRB").
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all federally-chartered
financial institutions. Pursuant to such legislation, Congress may eliminate
the OTS and Industrial may be regulated under federal law as a bank or be
required to change its charter. Such change in regulation or charter would
likely change the range of activities in which Industrial may engage and would
probably subject Industrial to more regulation by the FDIC. In addition, the
Corporation might become subject to a different set of holding company
regulations limiting the activities in which the Corporation may engage and
subjecting the Corporation to additional regulatory requirements, including
separate capital requirements. At this time, the Corporation cannot predict
when or whether Congress may actually pass legislation regarding the
Corporation's and Industrial's regulatory requirements or charter. Although
such legislation may change the activities in which the Corporation or
Industrial are authorized to engage, it is not anticipated that the current
activities of either the Corporation or Industrial will be materially affected
by those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which
have significant ties to Ohio. This statute prohibits, with some exceptions,
any merger, combination or consolidation and any of certain other sales,
leases, distributions, dividends, exchanges, mortgages or transfers between an
Ohio corporation and any person who has the right to exercise, alone or with
others, 10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted
only if, prior to the time such person first becomes an Interested Shareholder,
the Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose,
-18-
<PAGE> 19
or (3) the business combination meets certain statutory criteria designed to
ensure that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business combination
that would have been prohibited but for the adoption of such an opt-out
amendment. The statute also provides that it will continue to apply to any
business combination between a person who became an Interested Shareholder
prior to the adoption of such an amendment as if the amendment had not been
adopted. Neither the Holding Company nor Industrial has opted out of the
protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the
acquiring shareholder. The Control Share Acquisition Statute was intended, in
part, to protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Section 1701.041 of the Ohio Revised Code (the
"Takeover Bid Statute") provides that no offeror may make a takeover bid for an
Ohio corporation, including a savings and loan association, unless (i) at least
20 days prior thereto the offeror announces publicly the terms of the proposed
takeover bid and files with the Ohio Division of Securities (the "Securities
Division") and provides the target company with certain information regarding
the offeror, his ownership of the company's shares and his plans for the
company, and (ii) within ten days following such filing either (a) no hearing
is required by the Securities Division, (b) a hearing is requested by the
target company within such time but the Securities Division finds no cause for
hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair
and effective disclosure to offers of all information material to a decision to
accept or reject the offer.
The Takeover Bid Statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before
making any such purchase, failed to announce his intention to gain control of
the target company, or otherwise failed to make full and fair disclosure of
such intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Takeover Bid Statute is preempted by federal regulation.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws
of the State of Ohio and imposes assessments on Ohio associations based on
their asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. See " - Federal
Deposit Insurance Corporation -- State Association Activities." The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Industrial is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
OFFICE OF THRIFT SUPERVISIONOFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured
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by the FDIC in the SAIF. The OTS issues regulations governing the operation of
savings associations, regularly examines such associations and imposes
assessments on savings associations based on their asset size to cover the costs
of general supervision and examination. The OTS also may initiate enforcement
actions against savings associations and certain persons affiliated with them
for violations of laws or regulations or for engaging in unsafe or unsound
practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.
REGULATORY CAPITAL REQUIREMENTS. Industrial is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4%
to 5%, depending on the association's examination rating and overall risk.
Industrial does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets.
Risk-based capital is defined as core capital plus certain additional items of
capital, which in the case of Industrial includes a general loan loss allowance
of $1.5 million at December 31, 1996.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the
methodology of the OTS. If the measured interest rate risk is above the level
deemed normal under the regulation, the association will be required to deduct
one-half of such excess exposure from its total capital when determining its
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based capital ratio in excess of 12% will not be subject to
the interest rate risk component. Pending implementation of the interest rate
risk component, the OTS has the authority to impose a higher individualized
capital requirement on any savings association it deems to have excess interest
rate risk. The OTS also may adjust the risk-based capital requirement on an
individualized basis to take into account risks due to concentrations of credit
and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations are those
that have total risk-based capital of at least 10%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of at
least 6% and core capital of at least 5%; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and core capital of 4% (except for
associations receiving the highest examination rating, in which case the level
is 3%) but are not well-capitalized; (3) undercapitalized associations are
those that do not meet regulatory limits, but that are not significantly
undercapitalized; (4) significantly undercapitalized associations have total
risk-based capital of less than 6%, core risk-based capital of less than 3% or
core capital of less than 3%; and (5) critically undercapitalized associations
are those with tangible capital of 2% or less of total assets. In addition, the
OTS generally can downgrade an association's capital category, notwithstanding
its capital level, if, after notice and opportunity for hearing, the
association is deemed to be engaging in an unsafe or unsound practice because
it has not corrected deficiencies that resulted in it receiving a less than
satisfactory examination rating on matters other than capital or it is deemed
to be in an unsafe or unsound condition. All undercapitalized associations must
submit a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required
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to obtain prior approval for acquisitions, branching and engaging in new lines
of business. Furthermore, critically undercapitalized institutions must be
placed in conservatorship or receivership within 90 days of reaching that
capitalization level, except under limited circumstances. Industrial's capital
at December 31, 1996, met the standards for a well-capitalized institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control
of the association if, after such distribution or payment, the association
would be undercapitalized. In addition, each company controlling an
undercapitalized association must guarantee that the association will comply
with its capital plan until the association has been adequately capitalized on
an average during each of four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
association's total assets at the time the institution became undercapitalized
and (b) the amount that is necessary to bring the association into compliance
with all capital standards applicable to such association at the time the
association fails to comply with its capital restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets of not less than 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Industrial at December 31,
1996, was approximately $15.9 million, or 6.10%, and exceeded the then
applicable 5.0% liquidity requirement by approximately $2.9 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to
meet the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally
related to domestic residential real estate and manufactured housing and
include credit card, student and small business loans and stock issued by any
FHLB, the FHLMC or the FNMA. Under such test, 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business and 20% of liquid assets) must consist of QTI on a
monthly average basis in nine out of every 12 months. Effective September 30,
1996, a savings association may also qualify as a QTL by meeting the definition
of "domestic building and loan association" under the Internal Revenue Code of
1986, as amended (the "Code"). In order for an institution to meet the
definition of a "domestic building and loan association" under the Code, at
least 60% of such institution's assets must consist of specified types of
property, including cash loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL test under certain circumstances. If a savings
association fails to meet the QTL test, the association and its holding company
become subject to certain operating and regulatory restrictions. A savings
association that fails to meet the QTL test will not be eligible for new FHLB
advances. At December 31, 1996, Industrial met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15%
of the association's Lending Limit Capital. A savings association may lend to
one borrower an additional amount not to exceed 10% of the association's
Lending Limit Capital, if the additional amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to the
lending limit. A general exception to the 15% limit provides that an
association may lend to one borrower up to $500,000, for any purpose. In
applying the limit on loans to one borrower, the regulations require that loans
to certain related borrowers be aggregated. At December 31, 1996, Industrial
was in compliance with this lending limit. See "Lending Activities - Federal
Lending Limit."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive
officers, directors and principal shareholders and their related interests must
conform to the lending limit on loans to one borrower, and the total of such
loans to executive officers, directors, principal shareholders and their
related interests cannot exceed the association's Lending Limit Capital (or
200% of Lending Limit Capital for qualifying institutions with less than $100
million in assets). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers
are subject to additional limitations. Industrial was in compliance with such
restrictions at December 31, 1996.
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All transactions between savings associations and their affiliates
must comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA").
An affiliate of a savings association is any company or entity that controls,
is controlled by or is under common control with the savings association. The
Holding Company is an affiliate of Industrial. Generally, Sections 23A and 23B
of the FRA (i) limit the extent to which a savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, (ii) limit
the aggregate of all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to
the association, as those provided in transactions with a non-affiliate. The
term "covered transaction" includes the making of loans, purchasing of assets,
issuance of a guarantee and other similar types of transactions. In addition to
the limits in Sections 23A and 23B, a savings association may not make any loan
or other extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for a bank holding company and may not purchase
or invest in securities of any affiliate except shares of a subsidiary.
Industrial was in compliance with these requirements and restrictions at
December 31, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more
than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Industrial meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of
up to 75% of net income over the most recent four quarters. Tier 3 associations
do not meet current minimum capital requirements and must obtain OTS approval
of any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior
to such distribution.
As a subsidiary of the Holding Company, Industrial is required to give
the OTS 30 days' notice prior to declaring any dividend on its stock. The OTS
may object to the distribution during such 30-day period based on safety and
soundness concerns. Industrial paid no dividends to the Holding Company during
fiscal 1996.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, associations which are not owned by a
holding company and which have a CAMEL examination rating of 1 or 2 could make
a capital distribution without notice to the OTS, if they remain adequately
capitalized, as described above, after the distribution is made. Any other
association seeking to make a capital distribution that would not cause the
association to fall below the capital levels to qualify as adequately
capitalized or better would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distribution would be
permitted if it caused the association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. The Holding Company is a savings and loan
holding company within the meaning of the HOLA. As such, the Holding Company
has registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to
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be controlled by the holding company. Except with the prior approval of the OTS,
no director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such holding company's stock
may also acquire control of any savings institution, other than a subsidiary
institution, or any other savings and loan holding company.
As a unitary savings and loan holding company, the Holding Company
generally has no restrictions on its activities. Such companies are the only
financial institution holding companies which may engage in any commercial,
securities and insurance activities without restriction. Congress is
considering legislation which may limit the Holding Company's ability to engage
in these activities. It cannot be predicted whether and in what form these
proposals might become law. However, such limits would not impact the Holding
Company's current activities, which consist solely of holding stock of
Industrial. The broad latitude to engage in activities under current law can be
restricted. If the OTS determines that there is reasonable cause to believe
that the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings association, the OTS may impose such restrictions as
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings association, (ii) transactions between the savings
association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1996, Industrial met both those
tests.
If the Holding Company acquired control of another savings
institution, other than through a merger or other business combination with
Industrial, the Holding Company would become a multiple savings and loan
holding company. Unless the acquisition was an emergency thrift acquisition and
each subsidiary savings association met the QTL test, the activities of the
Holding Company and any of its subsidiaries (other than Industrial or other
subsidiary savings associations) would thereafter be subject to activity
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof that is not a savings
institution 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 institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal 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 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 OTS prior to
being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that 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 institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
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 institutions). As under prior law, 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. Bank holding companies have had more expansive authority to make
interstate acquisitions than savings and loan holding companies since August
1995.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF THE HOLDING COMPANY
AND INDUSTRIAL. In addition to the Ohio law limitations on the merger and
acquisition of Industrial and the Holding Company, federal limitations
generally require regulatory approval of acquisitions at specified levels.
Under pertinent federal law and regulations, no person, directly or indirectly,
or acting in concert with others, may acquire control of Industrial or the
Holding Company without 60 days' prior notice to the OTS. "Control" is
generally defined as having more than 25% ownership or voting power; however,
ownership or voting power of more than 10% may be deemed "control" if certain
factors are in place. If the acquisition of control is by a company, the
acquiror must obtain approval, rather than give notice, of the acquisition as a
savings and loan holding company.
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In addition, any merger of Industrial must be approved by the OTS as
well as the Superintendent. Further, any merger of the Holding Company in which
the Holding Company is not the resulting company must also be approved by both
the OTS and the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Industrial is a member of the SAIF and its deposit accounts are insured by the
FDIC up to the prescribed limits. The FDIC has examination authority over all
insured depository institutions, including Industrial, and has authority to
initiate enforcement actions against federally-insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such
target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments vary based
on the risk the institution poses to its deposit insurance fund. The risk level
is determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit
insurance assessments paid by healthy commercial banks were reduced
significantly below the level paid by healthy savings associations effective in
mid-1995. Assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in late
1995. Such excess equaled approximately $.23 per $100 in deposits beginning in
1996. This premium disparity had a negative competitive impact on Industrial
and other institutions with SAIF-insured deposits.
Federal legislation, which was effective September 30, 1996, provided
for the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF-insured
deposits were required to pay the same special assessment on 80% of deposits at
March 31, 1995. In addition, part of the cost of prior thrift failures, which
had previously been paid only by SAIF members, will be paid by BIF members. As
a result, BIF assessments for healthy banks in 1997 will be $.013 per $100 in
deposits, and SAIF assessments for healthy institutions in 1997 will be $.064
per $100 in deposits.
Industrial had approximately $230.5 million in deposits at March 31,
1995. Industrial paid a special assessment of $1.5 million in November 1996,
which was accounted for and recorded as of September 30, 1996. This assessment
is tax-deductible, but has reduced earnings for the year ended December 31,
1996.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or
investment not permissible for a federal association is subject to approval by
the FDIC. Such approval will not be granted unless certain capital
requirements are met and there is not a significant risk to the FDIC insurance
fund. All of Industrial' activities and investments at December 31, 1996, were
permissible for a federal association.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $52.0
million of such accounts (subject to an exemption of up to $4.3 million), and
of 10% of net transaction accounts in excess of $52.0 million. At December 31,
1996, Industrial was in compliance with this reserve requirement.
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FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks provide credit to their members in the
form of advances. Industrial is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1.0% of the aggregate outstanding principal
amount of Industrial's residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 5% of its advances from
the FHLB of Cincinnati. Industrial was in compliance with this requirement with
an investment in stock of the FHLB of Cincinnati of $2.6 million at December
31, 1996.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured or guaranteed by the United
States Government or an agency thereof; deposits in any FHLB; or other real
estate related collateral (up to 30% of the member association's capital)
acceptable to the FHLB, if such collateral has a readily ascertainable value
and the FHLB can perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance. The FHLB has established an "Affordable Housing
Program" to subsidize the interest rate on advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. The FHLB reviews and accepts
proposals for subsidies under that program twice a year. Industrial has
participated in this program.
TAXATION
FEDERAL TAXATION
The Holding Company and Industrial are both subject to the federal tax
laws and regulations which apply to corporations generally. In addition to the
regular income tax, the Holding Company and Industrial are subject to the
alternative minimum tax which is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and before 1996, the
Holding Company and Industrial are also subject to an environmental tax equal
to 0.12% of the excess of alternative minimum taxable income for the taxable
year (determined without regard to net operating losses and the deduction for
the environmental tax) over $2.0 million.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Industrial, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of
the base year. A thrift institution could elect annually to compute its
allowable addition to bad debt reserves for qualifying loans either under the
experience method or the percentage of taxable income method. For tax years
1995, 1994,
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1993 and 1992, Industrial used the percentage of taxable income method because
such method provided a higher bad debt deduction than the experience method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only
the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is
treated as a large bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans (generally loans secured by improved real
estate) and its reserve for losses on nonqualifying loans (all other types of
loans) as of the close of its last taxable year beginning before January 1,
1996, over (ii) the balances of such reserves as of the close of its last
taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves").
In the case of a thrift institution that is treated as a small bank, like
Industrial, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1,
1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b)
what the thrift's reserves would have been at the close of its last year
beginning before January 1, 1996, had the thrift always used the experience
method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less than its base amount. The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996. A
residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally
a loan secured by residential or church property and certain mobile homes), but
only to the extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institution's post-1951 accumulated earnings and profits; second,
out of the pre-1988 reserves; and third, out of such other accounts as may be
proper. To the extent a distribution by Industrial to the Holding Company is
deemed paid out of its pre-1988 reserves under these rules, the pre-1988
reserves would be reduced and the gross income of Industrial for tax purposes
would be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 1996, the
pre-1988 reserves of Industrial for tax purposes totaled approximately $3.1
million. Industrial believes it had approximately $27.0 million of accumulated
earnings and profits for tax purposes as of December 31, 1996, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made
as to whether Industrial will have current or accumulated earnings and profits
in subsequent years.
The tax returns of Industrial have been audited or closed without
audit through fiscal year 1992. In the opinion of management, any examination
of open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Industrial.
-26-
<PAGE> 27
OHIO TAXATION
The Holding Company is subject to the Ohio corporation franchise tax,
which, as applied to the Holding Company, is a tax measured by both net
earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable
income in excess of $50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Holding Company
may exclude 100% of its investment in the capital stock of Industrial after the
Conversion, as reflected on the balance sheet of the Holding Company, in
computing its taxable net worth as long as it owns at least 25% of the issued
and outstanding capital stock of Industrial. The calculation of the exclusion
from net worth is based on the ratio of the excludable investment (net of any
appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, the Holding
Company may be entitled to various other deductions in computing taxable net
worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
the Holding Company, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
Industrial is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
book net worth of Industrial determined in accordance with generally accepted
accounting principles. As a "financial institution," Industrial is not subject
to any tax based upon net income or net profits imposed by the State of Ohio.
-27-
<PAGE> 28
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31,
1996, regarding the office facilities of the Association:
<TABLE>
<CAPTION>
Owned or Date Net book
Location leased acquired Deposits value
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
30 East Main Street
Ashland, Ohio 44805 Owned 11/04/94 $24,213 $1,267
211 North Sandusky Street
Bellevue, Ohio 44811 Owned 05/06/72 54,737 388
225 North Main Street
Clyde, Ohio 43410 Owned 06/05/75 11,438 112
1500 Bright Road
Findlay, Ohio 45840 Owned 01/29/93 14,704 1,148
321 West State Street
Fremont, Ohio 43420 Owned 06/30/87 17,429 280
50 West Main Street
Norwalk, Ohio 44857 Owned 08/06/76 36,869 141
51 West Main Street (1)
Norwalk, Ohio 44587 Owned 09/11/92 - 371
4112 Milan Road
Sandusky, Ohio 44870 Owned 02/29/88 12,130 481
48 East Market Street (2)
Tiffin, Ohio 44883 Owned 06/15/83 52,951 403
796 West Market Street (2)
Tiffin, Ohio 44883 Owned 12/18/90 - 236
301 Myrtle Avenue
Willard, Ohio 44890 Owned 05/07/77 34,603 132
203 North Sandusky Street (3)
Bellevue, Ohio 44811 Owned 02/25/93 - 70
- -----------------------------
</TABLE>
(1) Drive-up facility only.
(2) Deposit totals are combined for the two Tiffin offices.
(3) Office facility for the Association's appraisal staff.
ITEM 3. LEGAL PROCEEDINGS
The Association is not presently involved in any material legal
proceedings. From time to time, the Association is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by the Association.
-28-
<PAGE> 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information contained in the 1996 Annual Report to Shareholders of
the Corporation (the "Annual Report"), a copy of which is attached hereto as
Exhibit 13, under the caption "Market Price of Common Shares and Related
Shareholder Matters," is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the Annual Report under the caption
"Selected Consolidated Financial Data" is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements appearing in the Annual Report
and the report of Crowe, Chizek and Company LLP dated January 15, 1997, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement for the 1997 Annual
Meeting of Shareholders of the Company (the "Proxy Statement"), filed with the
Securities and Exchange Commission (the "Commission") on March 18, 1997, under
the captions "Election of Directors" and "Executive Officers," is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors - Certain Transactions"
is incorporated herein by reference.
-29-
<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management"
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors - Certain Transactions"
is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) EXHIBITS
3(a) Articles of Incorporation
3(b) Certificate of Amendment to Articles of
Incoporation
3(c) Code of Regulations
11 Statement Regarding Computation
of Per Share Earnings
13 Annual Report to Shareholders
21 Subsidiaries of Registrant
27 Financial Data Schedule
99 Proxy Statement for 1997 Annual Meeting
of Shareholders
(b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto.
(c) REPORTS ON FORM 8-K. On October 22, 1996, the Holding Company filed a
Form 8-K with the Commission to report the retirement of Lawrence R. Rhoades
from the offices of Chief Executive Officer the Holding Company and Industrial
and the succession of David M. Windau to such offices.
-30-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL BANCORP, INC.
By: /s/ David M. Windau
--------------------------------------------
David M. Windau, Chief Executive
Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<S> <C>
/s/ David M. Windau /s/ Lawrence R. Rhoades
- ---------------------------------------- -----------------------------------------------
David M. Windau, President, Lawrence R. Rhoades, Chairman of the Board,
Chief Executive Officer and Director Chief Financial Officer and Director
Date: March 18, 1997 Date: March 18, 1997
/s/ Graydon H. Hayward /s/ Leon W. Maginnis
- ---------------------------------------- ----------------------------------------------
Graydon H. Hayward, Director Leon W. Maginnis, Director
Date: March 18, 1997 Date: March 18, 1997
- ---------------------------------------- ----------------------------------------------
Bob Moore, Director Fredric C. Spurck, Director
Date: March 18, 1997 Date: March 18, 1997
/s/ Roger O. Wilkinson
- ----------------------------------------
Roger O. Wilkinson, Director
Date: March 18, 1997
</TABLE>
-31-
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
3(a) Articles of Incorporation Incorporated by reference to the Registration Statement on
Form S-1 filed by the Holding Company on March 23, 1995 (the
"S-1") with the Securities and Exchange Commission,
Exhibit 3.1
3(b) Certificate of Amendment to Articles of Incorporation Incorporated by reference to the S-1, Exhibit 3.2
3(c) Code of Regulations Incorporated by reference to the S-1, Exhibit 3.3
11 Statement Regarding Computation of Per Share Earnings Incorporated by reference to Note 1 to the Financial
Statements included in the Annual Report
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for 1997 Annual Meeting of Incorporated by reference to the Proxy Statement, filed with
Shareholders the Securities and Exchange Commission on March 17, 1997
</TABLE>
<PAGE> 1
EXHIBIT 13
Dear Shareholders,
I am pleased to present our second Annual Report to Shareholders as a
publicly traded stock company. 1996 was a very successful year, highlighted by
being one of the first savings and loan holding companies in the nation to
return capital to its shareholders. This $3.50 per share special return of
capital distribution was done to enhance shareholder value and to improve
return on equity in the future. In addition to the special return of capital
distribution, Industrial Bancorp, Inc. paid a total of $.325 per share of
dividends to its shareholders during 1996. Also during 1996, the Company
applied for and received approval from the Office of Thrift supervision to
repurchase up to 5% of its total outstanding common shares. The repurchase
program, which began late in 1996 and will be completed in 1997, was also done
to enhance shareholder value.
Transition of management continued during 1996. On August 4, 1996, Mr.
Lawrence R. Rhoades announced his retirement as Chief Executive Officer of the
Company and its subsidiary. Mr. Rhoades began his career with Industrial
Savings and Loan Association in 1964 when the association had two offices and
$8.5 million in assets. Under his leadership and guidance, the association
prospered to a total of 11 offices serving nine communities and over $326
million in assets. Under his direction, Industrial Savings and Loan Association
has continually been recognized as one of the strongest and top performing
thrifts in the State of Ohio, as well as the nation. His leadership skills and
visionary talents distinguished him as one of the most highly regarded leaders
within the thrift industry. He will continue his career with Industrial Savings
as the Chief Financial Officer and Chairman of the Board. I am honored to have
succeeded him as Chief Executive Officer.
Our subsidiary, Industrial Savings and Loan Association, also
completed a very successful year in 1996. Having completed its 106th year of
operation, it continued to grow and prosper. One of the highlights of 1996 was
the opening of our new branch facility in Ashland. We are very proud of this
new facility and the new services it brings to our Ashland customers.
Industrial Savings also expanded its servicing network in 1996 by adding two
new ATMs. In 1996, we also announced the opening of a new loan production
office in Mansfield. Industrial Savings is excited to have the opportunity to
offer our loan products and services to the people of Mansfield and Richland
County.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. We reached a record high of $326.6
million in consolidated assets as of December 31, 1996. Savings deposits
increased to $259.1 million as of year-end, which is also a new record.
Mortgage lending remained strong in 1996, as we originated $81.1 million in new
loans, which represents a 21% increase over the previous year.
On behalf of the directors, management and employees, I would like to
express our appreciation to you, our shareholders, for your confidence and
investment in Industrial Bancorp, Inc. and to our valued customers for their
continued support of Industrial Savings and Loan Association.
David M. Windau
President and Chief Executive Officer
<PAGE> 2
BUSINESS OF INDUSTRIAL BANCORP, INC.
================================================================================
Industrial Bancorp, Inc. ("Industrial Bancorp"), a unitary savings and loan
holding company incorporated under the laws of the State of Ohio, owns all of
the issued and outstanding common shares of The Industrial Savings and Loan
Association ("Industrial Savings"), a savings and loan association chartered
under the laws of the State of Ohio. In August 1995, Industrial Bancorp acquired
all of the common shares issued by Industrial Savings upon its conversion from a
mutual savings and loan association to a stock savings and loan association (the
"Conversion"). Since its formation, Industrial Bancorp's activities have been
limited primarily to holding the common shares of Industrial Savings.
As a savings and loan holding company, Industrial Bancorp is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury (the "OTS").
BUSINESS OF THE INDUSTRIAL SAVINGS AND LOAN ASSOCIATION
================================================================================
Industrial Savings, which was organized under Ohio law in 1890, conducts
business from its main office at 211 N. Sandusky Street in Bellevue, Ohio, and
its nine branch offices in the northern Ohio communities of Ashland, Clyde,
Findlay, Fremont, Norwalk, Sandusky, Tiffin and Willard. The principal business
of Industrial Savings is the origination of loans secured by one- to four-family
residential real estate located in the primary market area of Industrial
Savings, which consists of the six Ohio counties of Ashland, Erie, Hancock,
Huron, Sandusky and Seneca. Industrial Savings also originates construction and
permanent mortgage loans secured by multifamily residences (over four units) and
nonresidential real estate in its primary market area. In addition to real
estate lending, Industrial Savings originates a limited number of commercial
loans and secured and unsecured consumer loans. For liquidity and interest rate
risk management purposes, Industrial Savings invests in interest-bearing
deposits in other financial institutions, U.S. Government and agency
obligations, mortgage-backed securities and other investments permitted by
applicable law. Funds for lending and other investment activities are obtained
primarily from savings deposits, which are insured up to applicable limits by
the Federal Deposit Insurance Corporation (the "FDIC"), borrowings from the
Federal Home Loan Bank (the "FHLB") and principal repayments on loans.
As a savings and loan association incorporated under the laws of Ohio,
Industrial Savings is subject to regulation, supervision and examination by the
OTS and the Division of Financial Institutions of the Ohio Department of
Commerce. Industrial Savings is also a member of the FHLB of Cincinnati.
1
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding Industrial Bancorp at
the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED FINANCIAL CONDITION DATA: (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets $326,613 $322,994 $268,041 $245,516 $227,736
Investment securities 23,797 27,882 16,014 5,010 8,450
Loans receivable - net 285,803 259,124 235,537 205,001 187,478
Deposits 259,074 238,282 231,966 219,704 205,579
FHLB advances 2,000 - 6,000 - -
Shareholders' equity (1) 62,104 81,055 27,616 23,430 20,195
SUMMARY OF EARNINGS:
Interest income $25,468 $22,858 $19,024 $18,113 $18,420
Interest expense 11,863 11,236 9,181 8,620 9,808
------- ------- ------- ------- -------
Net interest income 13,605 11,622 9,843 9,493 8,612
Provision for loan losses 180 180 200 240 230
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 13,425 11,442 9,643 9,253 8,382
Noninterest income 447 398 461 377 414
Noninterest expense 9,453 5,518 4,734 4,220 3,845
------- ------- ------- ------- -------
Income before income tax and
effect of accounting change 4,419 6,322 5,370 5,410 4,951
Income tax expense 2,020 2,149 1,752 1,853 1,765
Effect of accounting change - - - (166) -
------- ------- ------- ------- -------
- -
Net income $ 2,399 $ 4,173 $ 3,618 $ 3,391 $ 3,186
======= ======= ======= ======= =======
Earnings per share (2) $ 0.47 $ 0.42 - - -
Cash dividends declared per share (2) (3) $ 3.75 $ 0.15 - - -
SELECTED FINANCIAL RATIOS:
Return on average assets 0.75% 1.42% 1.42% 1.45% 1.51%
Return on average equity 3.62 8.21 14.33 15.51 17.06
Average equity to average assets 20.59 17.29 9.88 9.36 8.85
Interest rate spread 3.26 3.26 3.55 3.76 3.68
Net interest margin 4.32 4.04 3.94 4.14 4.15
Efficiency ratio (4) 68.14 46.60 46.85 43.82 43.71
Noninterest expense to average assets 2.94 1.88 1.85 1.81 1.82
Nonperforming assets to total assets 0.38 0.49 0.58 0.81 0.95
Nonperforming loans to total loans 0.42 0.60 0.62 0.92 1.13
Allowance for loan losses to total loans 0.53 0.52 0.50 0.48 0.40
Allowance for loan losses to
nonperforming loans 125.77 87.53 80.71 51.92 35.90
- ---------------------------
</TABLE>
(1) Shareholders' equity prior to the Conversion refers to members' equity.
(2) Per share data for 1995 is for the period from the date of completion of
the Conversion, August 1, 1995, to December 31, 1995.
(3) The amount for the year ended December 31, 1996, includes a $3.50 per
share special return of capital distribution in May 1996.
(4) Noninterest expense as a percentage of the sum of net interest income
after provision for loan losses and noninterest income.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of Industrial Bancorp and Industrial Savings should be read in
conjunction with and with reference to the consolidated financial statements,
and the notes thereto, presented in this Annual Report.
Industrial Bancorp was incorporated for the purpose of owning all of the
outstanding common shares of Industrial Savings following the Conversion, and
the ownership of such shares constitutes its principal business. As a result,
the consolidated financial condition and results of operations discussed below
focus principally on the financial condition and results of operations of
Industrial Savings.
CHANGES IN FINANCIAL CONDITION
- --------------------------------------------------------------------------------
The total consolidated assets of Industrial Bancorp amounted to $326.6 million
at December 31, 1996, an increase of $3.6 million from $323.0 million at
December 31, 1995. Growth in assets was limited by the $3.50 per share special
return of capital distribution in May 1996, which totalled $19.4 million.
Loans receivable increased $26.7 million, or 10%, from $259.1 million at
December 31, 1995, to $285.8 million at December 31, 1996. Substantially all of
this increase was in one- to four-family residential real estate loans, which
represent 85% of the total loan portfolio of Industrial Savings at December 31,
1996.
Investment securities totaled $23.8 million at December 31, 1996, compared
to $27.9 million at December 31, 1995. The decrease occurred as proceeds from
maturities of U.S. Treasury securities were used to partially fund loan growth.
Cash and cash equivalents declined by $19.3 million during 1996. Of the
approximately $25.9 million of Conversion offering proceeds that remained in
interest-bearing deposits at December 31, 1995, $19.4 million was used to make
the special return of capital distribution in May 1996.
Office properties and equipment, net of accumulated depreciation, increased to
$5.0 million at December 31, 1996, from $4.7 million at December 31, 1995. The
$290,000 increase was primarily the result of completing the construction and
relocation of Industrial Savings' branch office in the City of Ashland during
1996.
Total deposits increased $20.8 million, or 9%, to $259.1 million at December
31, 1996, from $238.3 million at December 31, 1995. Passbook savings deposits
and certificates of deposit increased $2.4 million and $16.9 million,
respectively.
FHLB advances were $2.0 million at December 31, 1996. These advances were
acquired late in the year to fund loan growth.
Shareholders' equity was $62.1 million at December 31, 1996, $18.9 million less
than the $81.0 million reported at December 31, 1995. The decline was primarily
a result of the $19.4 million special return of capital distribution in May
1996 and the $2.6 million cost associated with the purchase of shares by The
Industrial Savings and Loan Association Management Recognition Plan (the
"MRP"). These expenditures were partially offset by net income of $2.4 million
in 1996.
3
<PAGE> 5
The following table presents certain average-balance information, as well as
average yield on interest-earning assets and average cost of interest-bearing
liabilities for the years indicated. Such yields and costs are derived by
dividing 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 monthly ending balances, which do not vary
significantly from daily average balances.
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
--------------------------------------------------------------------------------------
Weighted 1996 1995 1994
Average ------------------------- ------------------------------------- ----------------------
yield/rate Average
December 31, Average yield/ Average Average Average Average
1996 balance Interest rate balance Interest yield/rate balance Interest yield/rate
----------- ------- -------- -------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 6.21% $ 13,629 $ 649 4.76%$ 15,915 $ 861 5.41% 17,747$ 679 3.83%
Investment securities (1) 5.69 28,289 1,712 6.05 22,544 1,288 5.71 11,143 566 5.08
Mortgage-back securities 10.56 660 67 10.15 897 91 10.14 1,161 114 9.82
Loans receivable (2) 8.11 271,998 23,040 8.47 248,012 20,618 8.31 220,058 17,665 8.03
-------- ------- ------- ------ -------- -------
Total interest-earning
assets 7.92 314,576 25,468 8.10 287,368 22,858 7.95 250,109 19,024 7.61
Non-interest-earning assets:
Cash and due from banks 933 847 760
Premises and equipment 5,019 4,419 4,056
Other nonearning assets 2,596 2,552 1,769
Allowance for loan losses (1,557) (1,292) (1,104
-------- -------- --------
Total assets $321,567 $293,894 $255,590
======== ======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts 2.50 12,778 298 2.33 $ 11,358 264 2.32 $ 10,796 258 2.39
Money market accounts 3.00 4,653 140 3.01 5,360 162 3.02 5,626 169 3.00
Passbook savings accounts 3.10 52,872 1,631 3.08 55,559 1,719 3.09 71,367 2,208 3.09
Certificates of deposit 5.68 174,590 9,772 5.60 156,811 8,503 5.42 136,836 6,493 4.75
-------- ------- -------- ------- -------- -------
Total deposits 4.86 244,893 11,841 4.84 229,088 10,648 4.65 224,625 9,128 4.06
Conversion stock
purchase funds - - - - 3,838 117 3.05 - - -
FHLB advances 6.15 462 22 4.76 6,615 471 7.12 1,308 53 4.05
-------- --------- -------- -------- ------ ---------
Total interest-bearing
liabilities 4.87 245,355 11,863 4.84 239,541 11,236 4.69 225,933 9,181 4.06
Non-interest-bearing liabilities 10,005 3,526 4,404
-------- --------
Total liabilities 255,360 243,067 230,337
Shareholders' equity (3) 66,207 50,827 25,253
-------- -------- -------
Total liabilities and
shareholders' equity $321,567 $293,894 $255,590
======== ======== ========
Net interest income $13,605 $11,622 $9,843
======= ======= ======
Interest rate spread 3.05% 3.26% 3.26% 3.55%
Net interest margin (4) 4.32% 4.04% 3.94%
Average interest-earning
assets to average
interest-bearing liabilities 128.21% 119.97% 110.70%
</TABLE>
- -------------------------
(1) Average yields have been computed based on the amortized cost of
the investment security.
(2) Net of deferred loan fees, loan discounts and loans in process.
Loan fees included in interest income amounted to $625,000, $493,000
and $530,000 in 1996, 1995 and 1994, respectively.
(3) Shareholders' equity prior to the Conversion refers to members' equity.
(4) Net interest income to average interest-earning assets.
4
<PAGE> 6
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earnings assets and interest-bearing liabilities
have affected the interest income and interest expense of Industrial Savings
during the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided for changes attributable
to (i) increases and decreases in volume (change in volume multiplied by prior
year rate), (ii) increases and decreases in rate (change in rate multiplied by
prior year volume) and (iii) total increases and decreases 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,
----------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------------------- ----------------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
---------------------- increase ---------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
------ ---- ---------- ------ ---- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ (116) $ (96) $ (212) $ (76) $ 258 $ 182
Investment securities 344 80 424 644 78 722
Mortgage-backed securities (24) - (24) (27) 4 (23)
Loans receivable 2,026 396 2,422 2,306 647 2,953
------- ----- ------- ------- ------- -------
Total interest income 2,230 380 2,610 2,847 987 3,834
Interest expense attributable to:
Deposits:
NOW accounts 33 1 34 13 (7) 6
Money market accounts (21) (1) (22) (8) 1 (7)
Passbook savings accounts (83) (5) (88) (489) - (489)
Certificates of deposit 988 281 1,269 1,016 994 2,010
----- ----- ------- ------ ------- -------
Total deposits 917 276 1,193 532 988 1,520
Conversion stock purchase
funds (117) - (117) 117 - 117
FHLB advances (331) (118) (449) 352 66 418
------ ----- ------ ------ ------- -------
Total interest expense 469 158 627 1,001 1,054 2,055
------ ----- ------ ------ ------- -------
Increase (decrease) in net
interest income $1,761 $222 $1,983 $1,846 $ (67) $1,779
====== ==== ====== ====== ======= ======
</TABLE>
5
<PAGE> 7
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
EARNINGS SUMMARY. Industrial Bancorp had consolidated net income of $2.4
million for the year ended December 31, 1996, compared to $4.2 million recorded
for 1995. The decrease was due principally to two separate, but individually
significant, events which occurred during 1996. The first was the special
assessment levied by the Federal Deposit Insurance Corporation upon
institutions with deposits insured by the Savings Association Insurance Fund
(the "SAIF"). The second was the impact of the $3.50 per share special return
of capital distribution on shares held in trust for Industrial Bancorp's
Employee Stock Ownership Plan (the "ESOP") but not allocated to ESOP
participants. Industrial Bancorp recorded approximately $2.7 million in expense
related to these two events. See Notes 9 and 13 of the Notes to Consolidated
Financial Statements. The effect of these expenses offset an increase in net
interest income of $2.0 million.
NET INTEREST INCOME. The consolidated net interest income of Industrial Bancorp
is primarily dependent upon the net interest income of Industrial Savings,
which is a function of the difference, or spread, between the average yield
earned on loans and other interest-earning assets and the average rate paid on
deposits and borrowings as well as the relative amounts of such assets and
liabilities. The interest rate spread is affected by the economic and
competitive factors that influence interest rates, loan demand and deposit
flows.
Net interest income increased $2.0 million, or 17%, to $13.6 million in 1996,
compared to $11.6 million in 1995. The increase was primarily attributable to
an increase in the excess of average interest-earning assets over average
interest-bearing liabilities to $69.2 million in 1996 from $47.8 million in
1995, due to the growth in loans receivable and the reduced use of FHLB
borrowings.
Total interest income increased $2.6 million, or 11%, to $25.5 million in 1996,
compared to $22.9 million in 1995. The increase was largely due to average
loans being $24.0 million higher in 1996 than in 1995. Interest and fees on
loans totaled $23.0 million in 1996, compared to $20.6 million in 1995. The
average yield earned on loans increased to 8.47% for 1996, compared to 8.31%
for 1995, as a result of the moderately higher interest rate environment.
Interest earned on investment securities increased to $1.7 million in 1996,
compared to $1.3 million in 1995. The average yield earned on investment
securities increased to 6.05% for 1996, compared to 5.71% for 1995, as a result
of the higher interest rate environment.
Total interest expense increased $627,000, or 6%, to $11.9 million in 1996,
compared to $11.2 million in 1995. The increase was primarily attributable to
growth in average deposits, from $229.1 million in 1995 to $244.9 million in
1996, coupled with the related increase in weighted average rate paid from
4.65% in 1995 to 4.84% in 1996. The increase in interest expense due to deposit
growth was somewhat offset by the limited use of FHLB borrowings, which
averaged $6.2 million less in 1996 than in 1995.
YIELDS EARNED AND RATES PAID. The spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
was 3.26% for 1996, the same as for 1995. The increase in the average yield
earned on interest-earning assets matched the increase in the average rate paid
on interest-bearing liabilities. Average interest-earning assets continued to
exceed average interest-bearing liabilities, increasing to a ratio of 128.21%
at December 31, 1996, from 119.97% at December 31, 1995.
PROVISION FOR LOAN LOSSES. Industrial Savings maintains an allowance for loan
losses in an amount which, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in its loan portfolio. The amount of the
provision which is charged against earnings each year and added to the
allowance is based upon management's ongoing review of such factors as
historical loss performance, general prevailing economic conditions, changes in
the size and
6
<PAGE> 8
composition of the loan portfolio and considerations relating to specific loans,
including the ability of the borrower to repay the loan and the estimated value
of the underlying collateral.
The foregoing statement regarding the adequacy of the allowance for loan losses
is a "forward-looking" statement within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Factors that could affect the adequacy of the
allowance for loan losses include, but are not limited to, the following: (1)
changes in the national and local economy which may negatively impact the
ability of borrowers to repay their loans and which may cause the value of real
estate and other properties that secure outstanding loans to decline; (2)
unforeseen adverse changes in circumstances with respect to certain large
loans; (3) decreases in the value of collateral securing consumer loans to
amounts equal to less than the outstanding balances of the consumer loans; and
(4) determinations by various regulatory agencies that Industrial Savings must
recognize additions to its loan loss allowance based on such regulators'
judgment of information available to them at the time of their examinations.
The provision for loan losses was $180,000 in 1996, the same as in 1995.
Industrial Savings had no charge-offs in 1996 and approximately $1,000 in
recoveries, compared to 1995, in which net charge-offs amounted to $13,000.
Nonperforming loans were $334,000 less at December 31, 1996 than at December
31, 1995. At December 31, 1996, the allowance for loan losses was 125.77% of
nonperforming loans and .53% of total loans. Management determined that a
provision for loan losses was warranted in 1996 based on the $26.7 million
growth in loans receivable.
NONINTEREST INCOME. Noninterest income for 1996 increased $49,000 from that
recorded in 1995. Service fees related to the growing deposit base and
expanding ATM usage contributed largely to this increase.
NONINTEREST EXPENSE. Noninterest expense increased significantly, to $9.5
million in 1996, compared to $5.5 million in 1995. The increase was primarily
attributable to the industry-wide special SAIF assessment and the employee
benefits expense associated with accounting for the special return of capital
distribution on unallocated ESOP shares.
Salaries and employee benefits were $4.3 million in 1996, compared to $2.1
million in 1995, due principally to the recording of $1.2 million associated
with the $3.50 per share special return of capital distribution related to
unallocated ESOP shares. The accounting rules for this transaction dictated
that an expense be reported on the income statement and that there be a
compensating increase to an equity account. Salaries and employee benefits were
also affected by the implementation of the MRP and its related expense, an
increase in the number of full-time equivalent employees and normal pay
increases.
Federal deposit insurance premiums, including the special assessment, were $2.1
million in 1996, compared to $531,000 in 1995. The special assessment upon
SAIF-insured deposits amounted to $1.5 million. As a result of the special
assessment in 1996, FDIC insurance premiums paid by Industrial Savings have
been reduced effective October 1, 1996.
The foregoing statement regarding federal deposit insurance premiums is a
"forward-looking" statement within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Events that could cause FDIC insurance premiums to increase
above current rates include, but are not limited to, failures of thrift
institutions and legislative action increasing the required reserves of the
SAIF.
State franchise tax increased from $748,000 in 1995 to $843,000 in 1996, due to
increased capital at Industrial Savings. Data processing and related fees,
which are based on the outstanding number of loan and deposit accounts,
increased from $339,000 in 1995 to $355,000 in 1996. Total occupancy and
equipment and depreciation expense remained relatively stable at $601,000
7
<PAGE> 9
for 1996, compared to $591,000 for 1995. Other expenses increased $139,000 in
1996, compared to 1995, due principally to increased lending activity.
INCOME TAX EXPENSE. Fluctuations in income tax expense are primarily
attributable to the change in net income before taxes. Income before taxes
amounted to $4.4 million in 1996, compared to $6.3 million in 1995. Despite
this 30% decrease in income before taxes, the provision for income taxes
declined only slightly to $2.0 million in 1996, compared to $2.1 million in
1995, as the expense related to the special return of capital distribution as
applied to unallocated ESOP shares was not deductible for tax purposes.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
EARNINGS SUMMARY. Industrial Bancorp had consolidated net income of $4.2
million for the year ended December 31, 1995, an increase of 15% over the $3.6
million recorded for 1994. The increase in net income was primarily
attributable to an increase in net interest income of $1.8 million. This
increase was offset by a decrease in noninterest income of $63,000 and
increases in noninterest expense of $784,000 and federal income tax expense of
$397,000.
NET INTEREST INCOME. Net interest income increased $1.8 million, or 18%, to
$11.6 million for 1995, compared to $9.8 million for 1994. The increase was
primarily attributable to an increase in the excess of average interest-earning
assets over average interest-bearing liabilities to $47.8 million in 1995 from
$24.2 million in 1994. The increase in net interest income due to volume,
principally the growth in loans, was marginally offset by reductions in net
interest income due to rate.
Total interest income increased $3.8 million, or 20%, to $22.9 million for
1995, compared to $19.0 million for 1994. The increase was largely due to
average loan and average investment securities balances being $28.0 and $11.4
million higher, respectively, for 1995, compared to 1994. Interest and fees on
loans totaled $20.6 million in 1995, compared to $17.7 million for 1994. The
average yield earned on loans increased to 8.31% for 1995, compared to 8.03%
for 1994, as a result of the higher interest rate environment. Interest earned
on investment securities and interest-bearing deposits increased to $2.1
million in 1995 from $1.2 million in 1994. The average yield earned on
investment securities increased to 5.71% for 1995, from 5.08% for 1994, as a
result of the investment portfolio increase and the higher interest rate
environment.
Total interest expense increased $2.1 million, or 22%, to $11.2 million for
1995, compared to $9.2 million for 1994. The increase was primarily
attributable to the weighted average rate paid on deposits increasing from
4.06% in 1994 to 4.65% in 1995, a result of the higher interest rate
environment. A $4.4 million increase in average interest-bearing deposits and
increased use of FHLB advances, which averaged $5.3 million more in 1995 than
in 1994, also contributed to the increase in interest expense in 1995, compared
to 1994. Interest expense on the funds deposited with Industrial Savings for
the purchase of stock in the Conversion amounted to $117,000.
YIELDS EARNED AND RATES PAID. The spread between the average yield on
interest-earning assets and the average interest cost of interest-bearing
liabilities declined from 3.55% in 1994 to 3.26% in 1995. During 1995, the
average rate paid on interest-bearing liabilities rose to a greater degree than
did the average yields earned on interest-earning assets.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased by $20,000,
or 10%, for the year ended December 31, 1995, compared to 1994. Industrial
Savings had net charge-offs of $13,000 in 1995, compared to net recoveries of
$8,000 in 1994, and nonperforming loans were $74,000 greater at December 31,
1995, than at December 31, 1994. With the provision in 1995, however, the
allowance for loan losses as a percentage of nonperforming loans increased to
87.5%
8
<PAGE> 10
at December 31, 1995, from 80.7% at December 31, 1994. As a percentage of
total loans, the allowance for loan losses was .52% at December 31, 1995.
NONINTEREST INCOME. Noninterest income for 1995 decreased $63,000 from
that recorded in 1994. The total for 1994 included a $70,000 gain on sale
of real estate associated with the relocation of the Ashland branch office.
NONINTEREST EXPENSE. Noninterest expense increased $784,000, or 17%, to $5.5
million for 1995, compared to $4.7 million in 1994. Salaries and employee
benefits increased $246,000, or 13%, for 1995 compared to 1994, as a result of
an increase in the number of full-time equivalent employees and normal pay
increases. State franchise tax, which is based on a percentage of consolidated
capital, more than doubled, from $353,000 in 1994 to $748,000 in 1995, due
primarily to the increase in capital raised through the Conversion.
Federal deposit insurance premiums increased to $531,000 in 1995 from $505,000
in 1994, as total deposit balances subject to such premiums increased. For the
same reason, data processing and related fees, which are based on the
outstanding number of loan and deposit accounts, increased from $302,000 in
1994 to $339,000 in 1995. Total occupancy and equipment and depreciation
expense remained relatively stable at $591,000 for 1995, compared to $575,000
for 1994. Other expenses increased $64,000 in 1995, compared to 1994, as the
capital raised through the Conversion resulted in increased lending activity
and expenses related thereto.
INCOME TAX EXPENSE. Fluctuations in income tax expense are primarily
attributable to the change in net income before taxes. Income before taxes in
1995 amounted to $6.3 million, compared to $5.4 million in 1994. The provision
for income taxes increased, therefore, to $2.1 million in 1995, compared to
$1.8 million in 1994.
ASSET QUALITY
- ------------------------------------------------------------------------------
Industrial Savings has consistently maintained a high quality loan portfolio,
as evidenced by its levels of nonperforming assets and nonperforming loans.
Nonperforming assets (which includes nonperforming loans and real estate
acquired through foreclosure or by deed-in-lieu thereof) declined from $1.6
million at December 31, 1995, to $1.3 million at December 31, 1996.
The following table summarizes Industrial Savings' nonperforming assets for the
periods indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
90 days or more $ 721 $ 939 $ 874 $ 325 $ 387
Nonaccrual loans 517 633 624 1,603 1,766
------ ------ ------ ------ -------
Total nonperforming loans 1,238 1,572 1,498 1,928 2,153
Real estate owned 15 15 48 63 -
------- ------ ------ ------ -------
Total nonperforming assets $1,253 $1,587 $1,546 $1,991 $2,153
====== ====== ====== ====== ======
Nonperforming assets to
total assets 0.38% 0.49% 0.58% 0.81% 0.95%
Nonperforming loans as a
percent of total loans 0.42% 0.60% 0.62% 0.92% 1.13%
</TABLE>
Industrial Savings' allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past five years and stood at $1.6
million at December 31, 1996. Over the last five
9
<PAGE> 11
years, Industrial Savings has experienced total charge-offs of $44,000 and total
recoveries of $45,000.
The following table provides a history of Industrial Savings' loan loss
experience and allowance for loan losses:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,376 $1,209 $1,001 $ 773 $526
Charge-offs - (17) (4) (18) (5)
Recoveries 1 4 12 6 22
------ ------ ------ ------ ----
Net (charge-offs) recoveries 1 (13) 8 (12) 17
Provision for loan losses 180 180 200 240 230
------ ------ ------ ------ ----
Balance at end of year $1,557 $1,376 $1,209 $1,001 $773
====== ====== ====== ====== ====
Net (charge-offs) recoveries to
average loans 0.00% (0.01)% 0.00% (0.01)% 0.01%
Allowance for loan losses to
total loans 0.53% 0.52% 0.50% 0.48% 0.40%
Allowance for loan losses to
nonperforming loans 125.77% 87.53% 80.71% 51.92% 35.90%
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Industrial Savings, like other financial institutions, is subject to interest
rate risk to the extent that its interest-earning assets reprice differently
than its interest-bearing liabilities. As part of its efforts to monitor and
manage interest rate risk, Industrial Savings utilizes the "net portfolio
value" ("NPV") reports provided by the OTS on a quarterly basis.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the NPV methodology attempts to quantify interest rate risk as
the change in the NPV which would result from a theoretical 200 basis point (1
basis point equals .01%) change in market interest rates. Both a 200 basis
point increase and a 200 basis point decrease in market interest rates are
considered.
The OTS has proposed regulations which, if adopted, would require an
institution whose NPV would decrease more than 2% of the present value of the
institution's assets as a result of an increase or a decrease in market
interest rates to deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital. At December 31,
1996, 2% of the present value of the assets of Industrial Savings was $6.8
million. Because the interest rate risk of a 200 basis point increase in market
interest rates (which was greater than the interest rate risk of a 200 basis
point decrease) was $12.7 million at December 31, 1996, the proposed OTS
regulations, if effective, would require that Industrial Savings deduct $2.9
million from its capital in determining whether Industrial Savings met its
risk-based capital requirement. Even if such deduction was required, the
risk-based capital of Industrial Savings at December 31, 1996, would still
exceed the regulatory risk-based capital requirement by approximately $40.4
million.
10
<PAGE> 12
The following table presents, at December 31, 1996, an analysis of the interest
rate risk of Industrial Savings, as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis point increments in
market interest rates. The table also contains the policy limits set by the
Board of Directors of Industrial Savings as the maximum change in NPV that the
Board of Directors deems advisable in the event of various changes in interest
rates. Such limits have been established with consideration of the dollar
impact of various rate changes and the strong capital position of Industrial
Savings.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------
Change in
interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
-------------- ------------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+400 80% $(26,390) (38)%
+300 60 (19,582) (28)
+200 40 (12,650) (18)
+100 20 (5,953) (9)
0 - - -
-100 20 4,016 6
-200 40 5,360 8
-300 60 5,638 8
-400 80 6,914 10
</TABLE>
Based on the information presented in the foregoing table, in the event that
interest rates rise from the recent low levels, the net interest income of
Industrial Savings could be negatively affected. Moreover, rising interest
rates could negatively affect the earnings of Industrial Savings due to
diminished loan demand. Industrial Savings attempts to mitigate interest rate
risk by originating adjustable-rate loans and by maintaining its status as an
approved Federal Home Loan Mortgage Corporation seller/servicer. The ability to
sell certain loans will provide Industrial Savings the opportunity to continue
to offer fixed-rate mortgage loans to its customers without retaining all of
the interest rate risk associated with fixed-rate loans.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Industrial Bancorp's liquidity, primarily represented by cash and cash
equivalents, is a result of the operating, investing and financing activities
of Industrial Savings. These activities, on a consolidated basis, are
summarized in the following table for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income $ 2,399 $ 4,173 $ 3,618
Adjustments to reconcile net income to
net cash from operating activities 2,062 315 (699)
-------- ------- -------
Net cash from operating activities 4,461 4,488 2,919
Net cash from investment activities (22,555) (32,850) (20,381)
Net cash from financing activities (1,204) 49,607 18,262
-------- ------- -------
Net change in cash and cash equivalents (19,298) 21,245 800
Cash and cash equivalents at beginning of year 26,711 5,466 4,666
-------- ------- -------
Cash and cash equivalents at end of year $ 7,413 $26,711 $ 5,466
======== ======= =======
</TABLE>
11
<PAGE> 13
The principal sources of funds for Industrial Savings are deposits, FHLB
borrowings, loan repayments, maturity of investment securities and funds
generated through operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayments are
more influenced by interest rates, general economic conditions and competition.
Industrial Savings maintains a level of investment in liquid assets which is
based upon management's assessment of (i) the need for funds, (ii) expected
deposit flows, (iii) the yields available on short-term liquid assets and (iv)
the objectives of the asset and liability management program of Industrial
Savings.
OTS regulations presently require Industrial Savings to maintain an average
daily balance of liquid assets, which may include, but are not limited to,
investments in U. S. Treasury and federal agency obligations and other
investments having maturities of five years or less, in an amount equal to 5%
of the sum of Industrial Savings' average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. 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 Industrial Savings may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At December 31, 1996,
the regulatory liquidity ratio of Industrial Savings was 6.10%. At such date,
Industrial Savings had commitments to originate loans and loans in process
totaling $20.8 million and no commitments to purchase or sell loans. Industrial
Savings considers its liquidity and capital reserves sufficient to meet its
foreseeable short-term and long-term needs.
Industrial Savings is required by OTS regulations to maintain specified minimum
amounts of capital. At December 31, 1996, Industrial Savings exceeded all
applicable minimum capital requirements. The following table summarizes the
regulatory capital requirements and actual capital of Industrial Savings at
December 31, 1996:
<TABLE>
<CAPTION>
Amount Percent of Assets
------ -----------------
<S> <C> <C>
Capital under generally accepted
accounting principles before adjustments $56,627 17.34%
======= =====
Tangible capital: (1)
Capital level $55,777 17.14%
Requirement 4,881 1.50
------- -----
Excess $50,896 15.64%
======= =====
Leverage capital: (1)
Capital level $55,777 17.14%
Requirement 9,763 3.00
------- -----
Excess $46,014 14.14%
======= =====
Risk-based capital: (2)
Capital level $57,291 32.78%
Requirement 13,984 8.00
------- -----
Excess $43,307 24.78%
======= =====
</TABLE>
- -------------------------------
(1) Tangible and leverage capital percentages are based on adjusted total
assets of $325.4 million.
(2) Risk-based capital percentages are based on risk-weighted assets of
$174.8 million.
12
<PAGE> 14
MARKET PRICE OF COMMON SHARES
AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 5,504,500 common shares of Industrial Bancorp outstanding on
December 31, 1996, held of record by approximately 1,584 shareholders. The
common shares of Industrial Bancorp are listed on the Nasdaq National Market
("Nasdaq") under the symbol "INBI".
The following table sets forth the high and low sales prices of the common
shares of Industrial Bancorp during the periods indicated, as reported by
Nasdaq. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low Period-end
---- --- ----------
<S> <C> <C> <C>
Quarter ended:
September 30, 1995 (1) $13.125 $12.000 $12.875
December 31, 1995 14.125 12.375 13.750
March 31, 1996 15.375 13.250 15.250
June 30, 1996 (2) 16.000 11.250 11.250
September 30, 1996 12.375 9.875 12.250
December 31, 1996 13.500 12.125 12.750
- -----------------------------
</TABLE>
(1) For the period from August 1, 1995, the date of completion of the
Conversion, to September 30, 1995.
(2) In May 1996, Industrial Bancorp paid a $3.50 per share special return
of capital distribution.
Industrial Bancorp has declared and paid quarterly cash dividends in each full
fiscal quarter since the Conversion. Prior to the fourth quarter of 1996, all
of such dividends were in the amount of $.075 per share. For the fourth quarter
of 1996 and the first quarter of 1997, Industrial Bancorp increased the amount
of the quarterly cash dividend to $.10 per share.
The income of Industrial Bancorp on an unconsolidated basis consists of
dividends which may periodically be declared and paid by the Board of Directors
of Industrial Savings on the common shares of Industrial Savings held by
Industrial Bancorp and earnings on other investments. At December 31, 1996,
investments of Industrial Bancorp, other than its investment in Industrial
Savings, consisted of a $4.0 million loan to the ESOP, a loan of $700,000 to
Industrial Savings to be used for operations and investment purposes and
$662,000 on deposit with Industrial Savings.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings associations. Under OTS regulations applicable to converted savings
associations, Industrial Savings is not permitted to pay a cash dividend on its
common shares if the regulatory capital of Industrial Savings 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 Industrial Savings, in the event of a
complete liquidation, to those members of Industrial Savings before the
Conversion who maintain a savings account at Industrial Savings after the
Conversion) or applicable regulatory capital requirements prescribed by the
OTS. OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been
13
<PAGE> 15
notified by the OTS that they are in need of more than normal supervision will
be subject to restrictions on dividends. A savings association that fails to
meet current minimum capital requirements is prohibited from making any capital
distributions without the prior approval of the OTS.
Industrial Savings currently meets all of its regulatory capital requirements
and, unless the OTS determines that Industrial Savings is an institution
requiring more than normal supervision, Industrial Savings may pay dividends in
accordance with the foregoing provisions of the OTS regulations.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
Several new accounting pronouncements have been issued by the Financial
Accounting Standards Board that were effective for Industrial Bancorp's
consolidated financial statements for the year ended December 31, 1996.
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of,"
requires a review of long-term assets for impairment of recorded value and
resulting write-downs if the value is impaired. SFAS No. 122, "Accounting for
Mortgage Servicing Rights," requires recognition of an asset when servicing
rights are retained on in-house originated loans that are sold. SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting is not adopted, entities must
disclose the pro forma effect on net income and on earnings per share as if the
accounting had been adopted. These statements did not have a material effect on
Industrial Bancorp's consolidated financial position or its results of
operations.
In addition, SFAS No. 125, "Accounting for Transfer and Servicing of Financial
Assets and Extinguishment of Liabilities," provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities and requires a consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred and derecognizes liabilities when
extinguished. SFAS No. 125, which supersedes SFAS No. 122, requires that
servicing assets and liabilities be subsequently measured by amortization in
proportion to and over the period of estimated net servicing income or loss and
requires assessment for asset impairment or increased obligation based on their
fair values. SFAS No. 125 applies to transfers and extinguishments occurring
after December 31, 1996, and early or retroactive application is not permitted.
This statement is not expected to have a material impact on Industrial
Bancorp's consolidated financial position or its results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
- --------------------------------------------------------------------------------
The financial statements and notes thereto included herein have been prepared
in accordance with generally accepted accounting principles, which require
Industrial Savings to measure financial position and operating results in terms
of historical dollars, with the exception of investment 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.
14
<PAGE> 16
INDUSTRIAL BANCORP, INC.
1996 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS ....................................................................16
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets..................................................................17
Consolidated Statements of Income............................................................18
Consolidated Statements of Shareholders' Equity..............................................19
Consolidated Statements of Cash Flows........................................................21
Notes to Consolidated Financial Statements ..................................................23
</TABLE>
15
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Industrial Bancorp, Inc.
Bellevue, Ohio
We have audited the accompanying consolidated balance sheets of Industrial
Bancorp, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Industrial Bancorp,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for impaired loans in 1995.
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 1997
- --------------------------------------------------------------------------------
16
<PAGE> 18
INDUSTRIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In Thousands of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits (Note 14) $ 1,312 $ 817
Interest-bearing demand deposits 2,101 4,894
Overnight deposits 4,000 21,000
------------- ------------
Cash and cash equivalents 7,413 26,711
Investment securities available for sale, at fair value (Note 3) 23,236 17,128
Investment securities held to maturity (fair value: 1996 - $608;
1995 - $10,871) (Note 3) 561 10,754
Loans receivable - net (Notes 4 and 7) 285,803 259,124
Office properties and equipment - net (Note 5) 5,029 4,739
Accrued interest receivable 1,784 1,765
Other assets 2,787 2,773
------------- ------------
$ 326,613 $ 322,994
============= ============
LIABILITIES
Deposits (Note 6) $ 259,074 $ 238,282
Federal Home Loan Bank advances (Note 7) 2,000
Accrued interest payable and other liabilities 3,435 3,657
------------- ------------
264,509 241,939
------------- ------------
Commitments (Note 14)
SHAREHOLDERS' EQUITY (Notes 2 and 15)
Common stock, no par value, 10,000,000 shares authorized,
5,554,500 shares issued 34,669 54,110
Additional paid-in capital 1,669
Retained earnings 31,803 30,682
Treasury stock, 50,000 shares at cost (634)
Unearned employee stock ownership plan shares (Note 9) (3,974) (4,436)
Unearned compensation (Note 11) (2,279)
Minimum additional pension liability (Note 8) (49)
Unrealized gain on securities available for sale 850 748
------------- ------------
62,104 81,055
------------- ------------
$ 326,613 $ 322,994
============= ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
INDUSTRIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
(In Thousands of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 23,040 $ 20,618 $ 17,665
Interest and dividends on investment securities 1,779 1,379 680
Interest on deposits 649 861 679
----------- ----------- -----------
25,468 22,858 19,024
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits (Note 6) 11,841 10,648 9,128
Interest on FHLB advances 22 471 53
Interest on conversion stock purchase funds 117
----------- -----------
11,863 11,236 9,181
----------- ----------- -----------
NET INTEREST INCOME 13,605 11,622 9,843
Provision for loan losses (Note 4) 180 180 200
----------- ----------- -----------
Net interest income after provision for loan losses 13,425 11,442 9,643
----------- ----------- -----------
NONINTEREST INCOME
Service fees and other charges 401 348 330
Other 46 50 131
----------- ----------- -----------
447 398 461
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits (Notes 8, 9, 10 and 11) 4,291 2,145 1,899
State franchise tax 843 748 353
Federal deposit insurance premiums (Note 13) 2,060 531 505
Occupancy and equipment 330 353 361
Data processing 355 339 302
Depreciation 271 238 214
Other 1,303 1,164 1,100
----------- ----------- -----------
9,453 5,518 4,734
----------- ----------- -----------
Income before income tax 4,419 6,322 5,370
Provision for income tax (Note 12) 2,020 2,149 1,752
----------- ----------- -----------
NET INCOME $ 2,399 $ 4,173 $ 3,618
=========== =========== ===========
Earnings per share (Note 1) $ .47 $ .42
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
<PAGE> 20
INDUSTRIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(In Thousands of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unrealized
Employee Minimum Gain on
Additional Stock Additional Securities
Common Paid in Retained Treasury Ownership Unearned Pension Available
Stock Capital Earnings Stock Plan Shares Compensation Liability for Sale Total
------ ---------- -------- -------- ----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 23,658 $ (227) $ 23,431
Net income 3,618 3,618
Effect of change
in accounting for investment
securities (Note 1) $ 357 357
Change in unrealized gain on
securities available for sale (2) (2)
Change in minimum additional
pension liability 212 212
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 27,276 (15) 355 27,616
Net income 4,173 4,173
Sale of 5,554,500 shares of no
par common stock, net of
conversion costs (Note 2) 54,110 54,110
Shares purchased under
Employee Stock Ownership
Plan (Note 9) $ (4,436) (4,436)
Cash dividends declared
($.15 per share) (767) (767)
Change in unrealized gain on
securities available for sale 393 393
Change in minimum additional
pension liability (34) (34)
------- --------- --------- --------- -------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 54,110 30,682 (4,436) (49) 748 81,055
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
19
<PAGE> 21
INDUSTRIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(In Thousands of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unrealized
Employee Minimum Gain on
Additional Stock Additional Securities
Common Paid in Retained Treasury Ownership Unearned Pension Available
Stock Capital Earnings Stock Plan Shares Compensation Liability for Sale Total
----- ---------- -------- -------- ----------- ------------ --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 54,110 $ 30,682 $ (4,436) $ (49) $ 748 $ 81,055
Net income 2,399 2,399
Capital distribution declared
($3.50 per share) (Note 15) (19,441) (19,441)
Employee stock ownership plan:
Capital distribution on
unallocated shares $ 1,553 1,553
Shares released 116 462 578
Management Recognition plan:
Shares purchased $ (2,630) (2,630)
Compensation earned 351 351
Cash dividends declared
($.25 per share) (1,278) (1,278)
Purchase of treasury stock
(50,000 shares) $ (634) (634)
Change in unrealized gain on
securities available for sale 102 102
Change in minimum additional
pension liability 49 49
-------- -------- --------- --------- -------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 $ 34,669 $ 1,669 $ 31,803 $ (634) $ (3,974) $ (2,279) $ 0 $ 850 $ 62,104
======== ======== ========= ========= ======== ========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
INDUSTRIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,399 $ 4,173 $ 3,618
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 271 238 214
Provision for loan losses 180 180 200
Accretion of deferred loan fees (639) (497) (537)
FHLB stock dividends (176) (153) (111)
Net accretion on investment securities (55) (50) (20)
Gain on sale of fixed assets (70)
ESOP expense 1,794
MRP compensation expense 351
Change in
Deferred taxes 29 312 (145)
Accrued interest receivable and other assets 96 (462) (541)
Accrued interest payable and other liabilities 211 747 311
-------- -------- --------
Net cash from operating activities 4,461 4,488 2,919
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits 2,500 21,000
Proceeds from maturities of investment securities held
to maturity 10,000 6,500 2,000
Purchases of investment securities available for sale (5,910)
Purchases of investment securities held to maturity (17,944) (12,916)
Mortgage-backed securities principal repayments 205 220 471
Net increase in loans (26,220) (23,303) (30,475)
Proceeds from sale of real estate owned 60 284
FHLB stock purchases (69) (241) (5)
Properties and equipment expenditures, net (561) (642) (740)
-------- -------- --------
Net cash from investing activities (22,555) (32,850) (20,381)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 20,792 6,316 12,262
Proceeds from FHLB advances 2,000 11,000 9,000
Repayment of FHLB advances (17,000) (3,000)
Capital distribution to shareholders (19,071)
Purchase of management recognition plan shares (2,630)
Proceeds from issuance of common stock, net of costs 54,110
Cash provided to ESOP (4,436)
Cash dividends paid (1,661) (383)
Purchase of treasury stock (634)
-------- --------- ---------
Net cash from financing activities (1,204) 49,607 18,262
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21
<PAGE> 23
INDUSTRIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1995 and 1994
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net change in cash and cash equivalents $ (19,298) $ 21,245 $ 800
Cash and cash equivalents at beginning of year 26,711 5,466 4,666
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,413 $ 26,711 $ 5,466
=========== ========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 11,655 $ 11,060 $ 9,096
Income taxes 1,780 1,646 2,439
Noncash transactions:
Transfer of loans to real estate owned 33 276
Transfer of securities to available for sale at fair value 16,144 585
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Industrial Bancorp, Inc. (Company) and its
wholly-owned subsidiary, Industrial Savings and Loan Association (Industrial).
All significant intercompany transactions have been eliminated.
Industry Segment Information: The Company grants residential, consumer and
commercial loans to customers located primarily in north-central Ohio. These
loans account for substantially all of the Company's revenues. Mortgage loans
make up approximately 98% of the Company's loan portfolio and the remaining 2%
is made up of consumer and commercial loans.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Areas involving the use of management's estimates and
assumptions include the allowance for loan losses, the realization of deferred
tax assets, the determination and carrying value of impaired loans,
depreciation of premises and equipment, the net accrued pension liability and
the carrying value of other real estate recognized in the Company's financial
statements. Actual results could differ from those estimates.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-
and off-balance sheet financial instruments do not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, demand deposits with financial institutions
and overnight deposits. Overnight deposits are sold for one-day periods. The
Company reports net cash flows for customer loan transactions, deposit
transactions and time deposits made with other financial institutions.
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE> 25
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities: Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
accounting guidance requires the Company to classify debt and marketable
securities as held to maturity, trading or available for sale. The cumulative
effect on shareholders' equity at January 1, 1994 of adopting SFAS No. 115 is
included as a separate component of shareholders' equity in the statement of
shareholders' equity and represents the after tax effect of adjusting
securities available for sale to fair value. Prior to the adoption of SFAS No.
115, the Company recorded investment securities at amortized cost.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts. Securities classified as available for sale are those that have no
stated maturity or those that management intends to sell or that could be sold
for liquidity, investment management, or similar reasons, even if there is not
a present intention for such a sale. Securities available for sale are carried
at fair value with unrealized gains and losses included as a separate component
of shareholders' equity, net of tax.
Gains or losses on dispositions are based on net proceeds and the adjusted
carrying amount of securities sold, using the specific identification method.
Office Properties and Equipment: Office properties and equipment are stated at
cost less accumulated depreciation. Depreciation is computed principally on the
straight-line and declining-balance methods over the estimated useful lives of
the respective properties and equipment. Maintenance and repairs are charged to
expense as incurred and improvements are capitalized.
Real Estate Owned: Real estate acquired through foreclosure or
deed-in-lieu-of-foreclosure is initially recorded at the estimated fair value
less estimated selling expenses. The costs of preparing properties for their
intended use are capitalized, whereas costs relating to the holding of
properties are expensed. Any subsequent reductions in the estimated fair value
are reflected through a charge to operations.
- -------------------------------------------------------------------------------
(Continued)
24
<PAGE> 26
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loans, the whole allowance is available for any loan charge-offs that
occur. A loan is charged off by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
SFAS No. 114, as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan," became effective January 1, 1995 and requires
recognition of loan impairment. Loans are considered impaired if full principal
or interest payments are not anticipated. Impaired loans are carried at the
present value of expected cash flows discounted at the loan's effective
interest rate or at the fair value of the collateral if the loan is collateral
dependent. A portion of the allowance for loan losses is allocated to impaired
loans.
Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one- to four-family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Mortgage loans secured by other properties are evaluated
individually for impairment. When analysis of borrower operating results and
financial condition indicates that underlying cash flows of the borrower's
business are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Loans are generally moved to nonaccrual status when
90 days or more past due. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and nonperforming and past-due asset
disclosures.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if the interest accrual should be discontinued.
The carrying value of impaired loans reflects cash payments, revised estimates
of future cash flows, and increases in the present value of expected cash flows
due to the passage of time. Cash payments representing interest income are
reported as such and other cash payments are reported as reductions in carrying
value. Increases or decreases in carrying value due to changes in estimates of
future payments or the passage of time are reported as reductions or increases
in bad debt expense.
- -------------------------------------------------------------------------------
(Continued)
25
<PAGE> 27
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Fees and Costs: The Company defers loan origination fees, net of direct
loan origination costs, and recognizes them over the life of the loan as a
yield adjustment. The net amount deferred is reported as a reduction of loans.
Employee Stock Ownership Plan: The Company has established an employee stock
ownership plan (ESOP) for the benefit of substantially all employees of the
Company and Industrial. The ESOP borrowed funds from the Company with which to
acquire common shares of the Company. The loan is secured by the shares
purchased with the loan proceeds and will be repaid by the ESOP with funds from
Industrial's discretionary contributions to the ESOP and earnings on ESOP
assets. All dividends on unallocated shares received by the ESOP are used to
pay debt service, or, at the Company's discretion, may be allocated to the ESOP
participants and recorded as compensation expense. The shares purchased with
the loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. As payments are made, the shares are
released from the suspense account and allocated to the participants. As shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
earnings per share computations.
Stock Compensation: Expense for employee compensation under stock option plans
is based on APB Opinion No. 25, with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of SFAS No. 123
were used for stock-based compensation.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, using currently enacted tax rates,
adjusted for allowances made for uncertainty regarding the realization of net
tax assets.
Commitments and Financial Instruments With Off-Balance-Sheet Risk: The Company,
in the normal course of business, makes commitments to extend credit which are
not reflected in the financial statements. A summary of these commitments is
disclosed in Note 13.
Earnings per Common Share: Earnings per common share have been computed based
on the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. ESOP shares that have not been
allocated to participants are not considered outstanding for earnings per share
purposes. Total shares used to compute earnings per common share were 5,135,213
and 5,110,890 in 1996 and 1995, respectively. Earnings per share for 1995 are
based on the earnings for the period in which the stock was actually
outstanding, August 1, 1995 to December 31, 1995.
Reclassifications: Certain items in the 1995 and 1994 financial statements
have been reclassified to correspond with the 1996 presentation.
- -------------------------------------------------------------------------------
(Continued)
26
<PAGE> 28
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 2 -CONVERSION TO STOCK FORM OF OWNERSHIP
On January 17, 1995, the Board of Directors of Industrial unanimously adopted a
Plan of Conversion to convert from a state-chartered mutual savings and loan
association to a state chartered stock savings and loan association with the
concurrent formation of a holding company, Industrial Bancorp, Inc. The
conversion was consummated on August 1, 1995 by amending Industrial's articles
of incorporation and issuing the Company's common stock in an amount equal to
the market value of Industrial after giving effect to the conversion. A total
of 5,554,500 shares of the Company's common stock were sold at $10 per share
and net proceeds from the sale were $54.1 million after deducting the costs of
the conversion.
The Company retained 50% of the net proceeds from the sale of common stock.
The remainder of the net proceeds was invested in the capital stock issued by
Industrial to the Company in connection with the conversion.
At the time of the conversion, Industrial established a liquidation account in
the amount of $29.7 million, which was equal to its regulatory capital as of
the latest practicable date prior to the conversion. The liquidation account
will be maintained for the benefit of eligible depositors who continue to
maintain their accounts at Industrial after the conversion. The liquidation
account will be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. Subsequent increases in deposit accounts
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible depositor will
be entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. Industrial may not pay dividends that would reduce shareholders' equity
below the required liquidation account balance.
- -------------------------------------------------------------------------------
(Continued)
27
<PAGE> 29
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1996, the amortized cost and estimated fair value of debt and
equity securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 21,902 $ 43 $ (7) $ 21,938
Federal Home Loan Mortgage
Corporation preferred stock 46 1,252 1,298
----------- ----------- ----------- -----------
Total investment securities
available for sale $ 21,948 $ 1,295 $ (7) $ 23,236
=========== =========== =========== ===========
INVESTMENT SECURITIES HELD TO MATURITY
Mortgage-backed securities $ 561 $ 47 $ 608
=========== =========== ===========
</TABLE>
At December 31, 1995, the amortized cost and estimated fair value of debt and
equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 15,949 $ 195 $ 16,144
Federal Home Loan Mortgage
Corporation preferred stock 46 938 984
=========== =========== ===========
Total investment securities
available for sale $ 15,995 $ 1,133 $ 17,128
=========== =========== ===========
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 9,987 $ 59 $ (1) $ 10,045
Mortgage-backed securities 767 59 826
----------- ----------- ----------- -----------
Total investment securities held to
maturity $ 10,754 $ 118 $ (1) $ 10,871
=========== =========== =========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
28
<PAGE> 30
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 12,992 $ 12,030
Due after one year through five years 8,910 9,908
---------- -----------
21,902 21,938
Federal Home Loan Mortgage Corporation
preferred stock 46 1,298
---------- -----------
$ 21,948 $ 23,236
========== ===========
INVESTMENT SECURITIES HELD TO MATURITY
Mortgage-backed securities $ 561 $ 608
========== ===========
</TABLE>
In December 1995, to provide additional flexibility to meet customer and
asset/liability needs, Industrial reclassified certain investment securities
with an amortized cost of approximately $15.9 million from held to maturity to
available for sale. The securities were transferred as allowed by the Financial
Accounting Standards Board guide to implementation of SFAS No. 115. The equity
impact of the transfer was an increase of approximately $129,000 in unrealized
gain.
No investment securities were sold during 1996, 1995 or 1994. The par values of
securities pledged to collateralize public funds and for other purposes were
approximately $15.0 million and $11.0 million at December 31, 1996 and 1995,
respectively.
- -------------------------------------------------------------------------------
(Continued)
29
<PAGE> 31
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
At December 31, 1996 and 1995, loans receivable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate loans
Secured by one- to four-family residences $ 248,694 $ 226,868
Home equity 11,651 8,546
Multi-family 9,028 8,213
Nonresidential 8,842 9,100
----------- ------------
278,215 252,727
----------- ------------
Real estate construction loans 15,885 13,394
Undisbursed portion of construction loans (7,120) (6,648)
----------- ------------
Total construction loans 8,765 6,746
----------- ------------
Total real estate loans 286,980 259,473
----------- ------------
Commercial loans 398 585
----------- ------------
Consumer loans
Education 1,268 1,456
Loans on deposit accounts 1,087 987
Automobile 773 826
Other consumer 831 771
----------- ------------
Total consumer loans 3,959 4,040
----------- ------------
Total loans 291,337 264,098
Net deferred loan origination fees (3,977) (3,598)
Allowance for loan losses (1,557) (1,376)
----------- ------------
$ 285,803 $ 259,124
=========== ============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
30
<PAGE> 32
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Loans serviced by the Company for other institutions totaled approximately $5.7
million, $7.1 million and $7.0 million at December 31, 1996, 1995 and 1994,
respectively.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,376 $ 1,209 $ 1,001
Provision for losses 180 180 200
Charge-offs (17) (4)
Recoveries 1 4 12
----------- ---------- -----------
Balance at end of year $ 1,557 $ 1,376 $ 1,209
=========== ========== ===========
</TABLE>
No loans were classified as impaired at December 31, 1996 and 1995 or during
the years then ended.
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 1,718 $1,646
Buildings and improvements 5,037 4,153
Furniture and equipment 1,026 921
Construction in progress 531
------- ------
Total cost 7,781 7,251
Accumulated depreciation 2,752 2,512
------- ------
$ 5,029 $4,739
======= ======
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
31
<PAGE> 33
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
A summary of deposits at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Noninterest-bearing demand
deposits $ 3,173 $ 2,910
Passbook savings accounts 53,410 51,008
NOW accounts 14,321 12,692
Money market accounts 4,531 4,892
Certificates of deposit 183,639 166,780
------------- -------------
$ 259,074 $ 238,282
============= =============
</TABLE>
Deposit accounts with balances of $100,000 or more at December 31, 1996 and
1995 totaled approximately $40.1 million and $40.5 million, respectively.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1997 $ 122,312
1998 38,763
1999 13,915
2000 3,229
2001 4,099
Thereafter 1,321
-------------
$ 183,639
=============
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Industrial has an advance line of credit with the Federal Home Loan Bank of
Cincinnati. These advances are collateralized by residential mortgage loans
under a blanket collateral agreement and by Federal Home Loan Bank stock. At
December 31, 1996 Industrial had one $2.0 million advance outstanding which
carried a 6.15% fixed interest rate and matures in October, 1998. At December
31, 1995, Industrial had no advances outstanding.
- ------------------------------------------------------------------------------
(Continued)
32
<PAGE> 34
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 8 - PENSION PLAN
Prior to January 1, 1996, the Company sponsored a defined benefit pension plan
for all eligible employees. Retirement benefits were based on years of service
and the employee's compensation. On February 20, 1996, the Board of Directors
approved a resolution to terminate the pension plan effective December 31,
1995. This eliminated the accrual of benefits for future services, except for
additional benefits that accrued for employees during the Plan year beginning
in 1995. The nonvested accumulated benefit obligation as of December 31, 1995
became vested. The vested benefit obligation was settled by a lump-sum payment
to each covered employee in December, 1996. The following table sets forth the
funded status and amounts recognized in the December 31, 1995 balance sheet for
the plan:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefits of $595,000 $ 638
===========
Actuarial present value of projected benefit obligation for services
rendered to date $ 914
Plan assets at fair value, primarily deposits in financial institutions (579)
----------
Unfunded projected benefit obligation 335
Unrecognized prior service costs 34
Unrecognized net loss (325)
Unrecognized transition liability, net of amortization over 19 years (108)
Minimum additional pension liability 122
-----------
Accrued pension liability $ 58
===========
</TABLE>
For financial reporting purposes at December 31, 1995, an additional liability
was recognized for the amount by which the accumulated benefit obligation
exceeded plan assets. An intangible asset was recorded up to the sum of the
unrecognized prior service costs and transition obligation, and shareholders'
equity was reduced for the excess.
- -------------------------------------------------------------------------------
(Continued)
33
<PAGE> 35
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 8 - PENSION PLAN (Continued)
Net pension expense for 1995 and 1994 included the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Service cost - benefits earned $ 92 $ 114
Interest cost on projected
benefit obligation 66 81
Actual return on plan assets (76) (27)
Net amortization and deferral 45 (2)
---------- -----------
Net pension expense $ 127 $ 166
========== ===========
</TABLE>
Significant assumptions used in determining the net period pension expense
were:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Discount rate 6.50% 6.50%
Rate of increase in compensation levels 3.00 3.00
Long-term rate of return on assets 5.75 5.75
</TABLE>
Total contributions made during 1995 and 1994 for the defined benefit pension
plan were $151,000 and $141,000, respectively.
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for the benefit of substantially all
employees of the Company and Industrial. The ESOP borrowed funds from the
Company with which to acquire common shares of the Company. The loan is secured
by the shares purchased with the loan proceeds and will be repaid by the ESOP
with funds from Industrial's discretionary contributions to the ESOP and
earnings on ESOP assets. The shares purchased with the loan proceeds are held
in a suspense account for allocation among participants as the loan is repaid.
- -------------------------------------------------------------------------------
(Continued)
34
<PAGE> 36
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6
of the American Institute of Certified Public Accountants. Accordingly, the
shares pledged as collateral are reported as unearned ESOP shares in the
balance sheet. As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are reported as a reduction of retained earnings.
Dividends on unallocated ESOP shares are recorded as a reduction of debt, or,
at the Company's discretion, may be allocated to the ESOP participants and
recorded as compensation expense. Compensation expense for the year ended
December 31, 1996 for the ESOP was approximately $1.8 million. Approximately
$1.2 million of the 1996 ESOP expense was related to the $3.50 per share return
of capital. Of the return of capital corresponding to ESOP shares,
approximately 25% was recorded as a reduction of debt while the remainder was
allocated to the participants and, therefore, recorded as compensation expense.
ESOP shares as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shares released for allocation 46,218
Unreleased shares 397,392 443,610
-------------- -------------
Total ESOP shares 443,610 443,610
============== =============
Fair value of unreleased shares (in thousands) $ 5,067 $ 6,100
============== =============
</TABLE>
NOTE 10 - STOCK OPTION AND INCENTIVE PLAN
At December 31, 1996, shares reserved, options granted and shares available for
grants are as follows:
<TABLE>
<S> <C>
Shares reserved 555,450
Options granted, $11.00 per share 388,815
-----------
Shares available for grant 166,635
===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
35
<PAGE> 37
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The Company sponsors a stock option plan which authorizes the Stock Option and
Incentive Plan Committee of the Board of Directors to grant options to certain
officers and directors of Industrial and the Company. A total of 555,450 common
shares were reserved for issuance under the Plan. Options may be granted at a
price not less than fair market value at the date of grant. Options to purchase
388,815 shares were granted during 1996 at an exercise price of $11.00 per
share. One-fifth of the options awarded become exercisable on each of the first
five anniversaries of the date of grant. The option period expires 10 years
from the date of grant. No options were exercisable during the year ended
December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
stock option plans as the market value of the Company's common stock was less
than the exercise price of the options at the date of grant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, entities to use a
"fair value based method" to account for stock-based compensation plans. If the
fair value accounting encouraged by SFAS No. 123 is not adopted, entities must
disclose the pro forma effect on net income and on earnings per share had the
fair value accounting been adopted. The fair value of a stock option is
estimated using an option pricing model which considers the current price of
the stock, expected price volatility, expected dividends on the stock and the
risk-free interest rate. Once estimated, the fair value of an option is not
later changed. Had compensation cost been determined based on the fair value
guidelines of SFAS No. 123, the Company's net income and earnings per share for
1996 would have been:
<TABLE>
<S> <C> <C>
Net income As reported $ 2,399
Pro forma $ 2,323
Primary earnings per share As reported $ .47
Pro forma $ .44
Fully diluted earnings per share As reported $ .47
Pro forma $ .44
</TABLE>
Using the Black-Scholes option pricing model for purposes of the pro forma
disclosures above, the following assumptions for December 31, 1996 were
risk-free interest rates of 6.34%; dividend yields of 3.86%; volatility factors
of the expected market price of the Company's common stock of 40.8% and an
expected life of the option of 7.5 years. Based on these assumptions the
estimated fair value of the options granted during 1996 was $3.57 per share.
- -------------------------------------------------------------------------------
(Continued)
36
<PAGE> 38
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In future years, the pro forma effect of not applying SFAS No. 123 is expected
to increase as additional options are granted and as outstanding options
continue to vest.
NOTE 11 - MANAGEMENT RECOGNITION PLAN
A management recognition plan (MRP) was adopted by the Board of Directors on
February 20, 1996 and approved by the shareholders of the Company on April 16,
1996. The MRP will be used as a means of providing directors and certain key
employees of Industrial with an ownership interest in the Company in a manner
designed to compensate such directors and key employees for services to
Industrial. Industrial contributed sufficient funds to enable the MRP to
purchase a number of common shares in the open market which is equal to 4% of
the common shares sold in connection with the conversion.
On May 1, 1996, the Management Recognition Plan Committee of the Board of
Directors awarded 222,180 shares to certain directors and officers of
Industrial and the Company. No shares had been previously awarded. One-fifth of
such shares will be earned and nonforfeitable on each of the first five
anniversaries of the date of the awards. In the event of the death or
disability of a participant, however, the participant's shares will be deemed
to be earned and nonforfeitable upon such date. There were 500 shares at
December 31, 1996 which had not been awarded. Compensation expense, which is
based upon the cost of the shares, was $351,000 for the year ended December 31,
1996.
- -------------------------------------------------------------------------------
(Continued)
37
<PAGE> 39
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current expense $ 1,991 $ 1,837 $ 1,897
Deferred expense/(benefit) 29 312 (145)
----------- ---------- -----------
$ 2,020 $ 2,149 $ 1,752
=========== ========== ===========
</TABLE>
The differences between the financial statement provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate $ 1,502 $ 2,149 $ 1,826
Add tax effect of ESOP deduction 579
Other (61) (74)
----------- ---------- -----------
$ 2,020 $ 2,149 $ 1,752
=========== ========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
38
<PAGE> 40
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES (Continued)
Deferred income taxes are provided for temporary differences. The components
of the Company's net deferred tax asset at December 31 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 1,337 $ 1,521
Accrued MRP award 119
Construction period interest 18 12
Accrued vacation 37 9
ESOP shares allocated 31
---------- -----------
1,542 1,542
---------- -----------
Deferred tax liabilities
Bad debt deduction (410) (435)
FHLB stock dividends (447) (387)
Unrealized gain on investment
securities available for sale (438) (385)
Depreciation expense (120) (125)
Pension expense (14)
Accumulated accretion (33) (20)
---------- -----------
(1,448) (1,366)
---------- -----------
Net deferred tax asset $ 94 $ 176
========== ===========
</TABLE>
The Company has paid more federal income tax in the last three years than the
recorded deferred tax asset at December 31, 1996. Therefore, management has
determined that the recorded deferred tax asset is totaly recoverable.
In years prior to 1996, Industrial was permitted to determine taxable income
after deducting a provision for bad debts in excess of such provision recorded
in the financial statements. Accordingly, retained earnings at December 31,
1996 includes approximately $3.4 million for which no provision for federal
income taxes has been made. If this portion of retained earnings is used in the
future for any purpose other than to absorb bad debts, it will be added to
future taxable income. The related amount of unrecognized deferred tax
liability was approximately $1.1 million at December 31, 1996.
- -------------------------------------------------------------------------------
(Continued)
39
<PAGE> 41
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 13 - FDIC INSURANCE
The deposits of savings associations such as Industrial are presently insured
by the Savings Association Insurance Fund (the SAIF), which, along with the
Bank Insurance Fund (the BIF), is one of the two insurance funds administered
by the FDIC. Financial institutions which are members of the BIF had
historically experienced substantially lower deposit insurance premiums because
the BIF had achieved its required level of reserves, while the SAIF had not. On
September 30, 1996, President Clinton signed into law the Omnibus Bill which
included provisions designed to recapitalize the SAIF and to mitigate the
BIF/SAIF premium disparity. As a result, the FDIC levied a special assessment
of 65.7 cents per $100 of SAIF insured deposits at March 31, 1995. The
assessment was paid on November 27, 1996, from working capital of Industrial.
When the SAIF reaches its required reserve ratio following the assessment, the
FDIC is expected to reduce the annual assessment rates for SAIF-insured
institutions to bring them in line with BIF assessment rates. The Company's
special assessment totaled $1.0 million after taxes.
Industrial, however, will continue to be subject to an assessment to fund the
repayment of the FICO obligations. It is anticipated that the FICO assessment
for SAIF-insured institutions will be approximately 6.5 cents per $100 of
deposits while BIF-insured institutions will pay approximately 1.5 cents per
$100 of deposits until the year 2000 when the assessment will be imposed at the
same rate on all FDIC-insured institutions.
NOTE 14 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK
Industrial is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans. Industrial's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans is represented by the
contractual amount of those instruments. Industrial follows the same credit
policy to make such commitments as is followed for those loans recorded in the
financial statements.
- -------------------------------------------------------------------------------
(Continued)
40
<PAGE> 42
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK (Continued)
As of December 31, 1996 and 1995, Industrial had commitments to make loans at
market rates and loans in process to be funded in six months or less
approximating $20.8 million and $16.2 million, respectively. Approximately $9.5
million and $8.3 million of these commitments had fixed rates at December 31,
1996 and 1995, respectively. The interest rates on mortgage loans ranged from
6.250% to 10.250% for variable rate loans and from 6.750% to 8.875% for fixed
rate loans at December 31, 1996. Loan commitments are generally for 30 days
from the time management approves the loan. Since loan commitments may expire
without being used, the amount does not necessarily represent future cash
commitments.
At December 31, 1996 and 1995, Industrial was required by the Federal
Reserve Bank of Cleveland to maintain cash reserves of $417,000 and $306,000,
respectively. These reserves do not earn interest.
NOTE 15 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS
Industrial is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
Industrial must meet specific capital guidelines that involve quantitative
measures of Industrial's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Industrial's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about Industrial's components, risk weightings and other factors. At
December 31, 1996, management believes the Company and Industrial are in
compliance with all regulatory capital requirements. Based on Industrial's
computed regulatory capital ratios, Industrial is considered well capitalized
under Section 38 of the Federal Deposit Insurance Act at December 31, 1996.
Federal regulations limit all capital distributions, including cash dividends,
by savings associations. The regulation establishes a three-tiered system of
restrictions, with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings.
The Company paid a capital distribution of $3.50 per share on May 15, 1996.
The capital distribution resulted in a $19.4 million reduction in shareholders'
equity.
- -------------------------------------------------------------------------------
(Continued)
41
<PAGE> 43
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 15 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS (Continued)
At December 31, 1996 and 1995, Industrial's actual capital levels (in
thousands) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
- ----
Total capital (to risk weighted assets) $ 57,291 32.78% $ 13,984 8.0% $ 17,480 10.0%
Tier 1 (core) capital (to risk weighted assets) $ 55,777 31.91% $ 6,992 4.0% $ 10,488 6.0%
Tier 1 (core) capital (to adjusted total assets) $ 55,777 17.14% $ 9,763 3.0% $ 16,271 5.0%
Tangible capital (to adjusted total assets) $ 55,777 17.14% $ 4,881 1.5% N/A
1995
- ----
Total capital (to risk weighted assets) $ 55,079 33.81% $ 13,034 8.0% $ 16,293 10.0%
Tier 1 (core) capital (to risk weighted assets) $ 53,738 32.98% $ 6,517 4.0% $ 9,776 6.0%
Tier 1 (core) capital (to adjusted total assets) $ 53,738 16.62% $ 9,701 3.0% $ 16,168 5.0%
Tangible capital (to adjusted total assets) $ 53,738 16.62% $ 4,851 1.5% N/A
</TABLE>
NOTE 16 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair
values of financial instruments at December 31, 1996 and 1995. Items which
are not financial instruments are not included.
<TABLE>
<CAPTION>
-------------1996------------ -------------1995------------
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 7,413 $ 7,413 $ 26,711 $ 26,711
Investment securities 23,797 23,844 27,882 27,999
Loans receivable, net 285,803 287,168 259,124 260,076
Accrued interest receivable 1,784 1,784 1,765 1,765
FINANCIAL LIABILITIES
Deposits $ (259,074) $ (259,603) $ (238,282) $ (238,893)
FHLB advances (2,000) (2,016)
Accrued interest payable (582) (582) (372) (372)
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
42
<PAGE> 44
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 16 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents
is considered to approximate cost. The estimated fair value for securities is
based on quoted market values for the individual securities or for equivalent
securities. The estimated fair value for commercial loans is based on estimates
of the difference in the interest rate Industrial would charge borrowers for
similar loans with similar maturities made at December 31, applied for an
estimated time period until the loan is assumed to reprice or be repaid. The
estimated fair value for other loans is based on estimates of the rate
Industrial would charge for similar loans at December 31, applied over
estimated payment periods. The estimated fair value for demand and savings
deposits is based on their carrying value. The estimated fair value for
certificates of deposit is based on estimates of the rate Industrial would pay
on such deposits at December 31, applied for the time period until maturity.
The estimated fair value of commitments is not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that were Industrial to have
disposed of such items at December 31, 1995, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1995 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of Industrial that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements may nevertheless have value, but are not included in
the above disclosures. These include, among other items, the estimated earning
power of core deposit accounts, the earning potential of loan servicing rights,
the value of a trained work force, customer goodwill and similar items.
- -------------------------------------------------------------------------------
(Continued)
43
<PAGE> 45
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The following are condensed parent company only financial statements for the
Company at December 31:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 662 $ 288
Investment in subsidiary 56,627 54,486
Loan receivable from ESOP 4,066 4,436
Loan receivable from subsidiary 700 22,250
Other assets 49 11
----------- -----------
$ 62,104 $ 81,471
=========== ===========
LIABILITIES
Dividend payable $ 416
-----------
SHAREHOLDERS' EQUITY
Common stock $ 34,669 54,110
Additional paid-in capital 1,669
Retained earnings 31,803 30,682
Treasury stock (634)
Unearned employee stock ownership plan shares (3,974) (4,436)
Unearned compensation (2,279)
Minimum additional pension liability (49)
Unrealized gain on securities available for sale 850 748
----------- -----------
62,104 81,055
----------- -----------
$ 62,104 $ 81,471
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
44
<PAGE> 46
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED INCOME STATEMENT
For the year ended December 31, 1996
and the five months ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INCOME
Interest $ 791 $ 565
EXPENSES
Management fees 60 25
Other operating expense 167 14
----------- -----------
227 39
----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY 564 526
Provision for income taxes 192 179
----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 372 347
Equity in undistributed earnings of subsidiary 2,027 1,786
----------- -----------
NET INCOME $ 2,399 $ 2,133
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
45
<PAGE> 47
INDUSTRIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
and for the five months ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,399 $ 2,133
Adjustments to reconcile net income to net cash from
operating activities
Equity in undistributed net income of subsidiary (2,027) (1,786)
Dividends on unallocated ESOP shares (144) 32
Changes in other assets (38) (11)
----------- -----------
Net cash from operating activities 190 368
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary (27,121)
Loans to subsidiary (22,600)
Principal repayment on loan to subsidiary 21,550 350
Loan to ESOP (4,436)
Principal repayment on loan to ESOP 370
----------- -----------
Net cash used by investing activities 21,920 (53,807)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock, net of offering costs 54,110
Capital distribution to shareholders (19,441)
Cash dividends paid (1,661) (383)
Purchase of treasury stock (634)
----------- -----------
Net cash from financing activities (21,736) 53,727
----------- -----------
Net change in cash and cash equivalents 374 288
Cash and cash equivalents at beginning of period 288
----------- -----------
Cash and cash equivalents at end of period $ 662 $ 288
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
46
<PAGE> 48
INDUSTRIAL BANCORP, INC.
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a consolidated summary of quarterly financial information:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Interest income $ 6,344 $ 6,377 $ 6,332 $ 6,415
Interest expense 2,832 2,887 3,011 3,133
---------- ---------- ---------- ----------
Net interest income 3,512 3,490 3,321 3,282
Provision for loan losses 45 45 45 45
Other income 96 99 104 148
Other expense 1,664 1,658 4,786 1,345
---------- ---------- ---------- ----------
Income before taxes 1,899 1,886 (1,406) 2,040
Provision for incomes taxes 645 637 55 683
---------- ---------- ---------- ----------
Net income $ 1,254 $ 1,249 $ (1,461) $ 1,357
========== ========== ========== ==========
1995
Interest income $ 5,250 $ 5,459 $ 6,033 $ 6,116
Interest expense 2,681 2,931 2,854 2,770
---------- ---------- ---------- ----------
Net interest income 2,569 2,528 3,179 3,346
Provision for loan losses 45 45 45 45
Other income 80 87 95 136
Other expense 1,263 1,318 1,433 1,504
---------- ---------- ---------- ----------
Income before taxes 1,341 1,252 1,796 1,933
Provision for incomes taxes 457 438 603 651
---------- ---------- ---------- ----------
Net income $ 884 $ 814 $ 1,193 $ 1,282
========== ========== ========== ==========
</TABLE>
47
<PAGE> 49
INDUSTRIAL BANCORP, INC.
DIRECTORS AND EXECUTIVE OFFICERS
================================================================================
<TABLE>
<S> <C>
Lawrence R. Rhoades Director and Chairman of the Board
Chairman of the Board and Chief Financial Officer
The Industrial Savings and Loan Association
David M. Windau Director and President
President, Chief Executive Officer and Treasurer
The Industrial Savings and Loan Association
Fredric C. Spurck Director
President and Chief Executive Officer
Webster Industries, Inc.
Roger O. Wilkinson Director
Deputy Director
Huron County Alcohol, Drug Addiction
and Mental Health Services Board
Graydon H. Hayward Director
President
Hayward Rigging & Construction, Inc.
Leon W. Maginnis Director
Vice President
Hirt Publishing Company, Inc.
Bob Moore Director
President
Willard Foods
David W. Ball Secretary
Senior Vice President and Secretary
The Industrial Savings and Loan Association
Stephan S. Beal Treasurer
Senior Vice President
The Industrial Savings and Loan Association
</TABLE>
THE INDUSTRIAL SAVINGS AND LOAN ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
================================================================================
<TABLE>
<S> <C>
Lawrence R. Rhoades Director, Chairman of the Board and
Chief Financial Officer
David M. Windau Director, President, Chief Executive
Officer and Treasurer
Fredric C. Spurck Director
Roger O. Wilkinson Director
Graydon H. Hayward Director
Leon W. Maginnis Director
Bob Moore Director
David W. Ball Senior Vice President and Secretary
Stephan S. Beal Senior Vice President
</TABLE>
48
<PAGE> 50
ANNUAL MEETING
================================================================================
The 1997 Annual Meeting of Shareholders of Industrial Bancorp, Inc. will be
held on April 15, 1997, at 2:30 p.m., local time, at The Bellevue Elks Lodge
#1013, located at 214 W. Main Street, Bellevue, Ohio 44811. Shareholders are
cordially invited to attend.
FORM 10-K
================================================================================
A copy of Industrial Bancorp's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be available at no charge to
shareholders upon request to:
Industrial Bancorp, Inc.
211 N. Sandusky Street
Bellevue, Ohio 44811
Attention: Patrick S. Smith, Investor Relations
SHAREHOLDER SERVICES
================================================================================
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for Industrial Bancorp's shares. Communications regarding
change of address, transfer of shares, lost certificates and dividends should
be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016-3572
(908) 272-8511
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Industrial Savings and Loan Association
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,312
<INT-BEARING-DEPOSITS> 6,101
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,236
<INVESTMENTS-CARRYING> 561
<INVESTMENTS-MARKET> 608
<LOANS> 287,360
<ALLOWANCE> 1,557
<TOTAL-ASSETS> 326,613
<DEPOSITS> 259,074
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,435
<LONG-TERM> 2,000
0
0
<COMMON> 34,669
<OTHER-SE> 27,435
<TOTAL-LIABILITIES-AND-EQUITY> 326,613
<INTEREST-LOAN> 23,040
<INTEREST-INVEST> 1,779
<INTEREST-OTHER> 649
<INTEREST-TOTAL> 25,468
<INTEREST-DEPOSIT> 11,841
<INTEREST-EXPENSE> 11,863
<INTEREST-INCOME-NET> 13,605
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,453
<INCOME-PRETAX> 4,419
<INCOME-PRE-EXTRAORDINARY> 2,399
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,399
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 4.32
<LOANS-NON> 517
<LOANS-PAST> 721
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,376
<CHARGE-OFFS> 0
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,557
<ALLOWANCE-DOMESTIC> 1,557
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
