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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to _____________
Commission File Number: 0-026248
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 17, 1998, was
$80,275,743. (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 17, 1998, there were 5,077,800 of the Registrant's Common
Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1997 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement
for the 1998 Annual Meeting of Shareholders
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, its nine branch offices and its one loan
production office in the Northern Ohio communities of Ashland, Bellevue,
Clyde, Findlay, Fremont, Mansfield, 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 seven Ohio counties in which its offices
are located: Ashland, Erie, Hancock, Huron, Richland, 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 also utilized 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 branch
offices. The Association's lending activity also reaches into Richland
County through a loan production office in Mansfield, Ohio.
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 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.
Loan Portfolio Composition. The following table presents certain
information in respect of the composition of the Association's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of total of total of total of total of 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>
Real estate loans:
One- to four-family $278,438 85.00% $248,694 85.35% $226,868 85.90% $207,943 86.61% $180,580 86.38%
Home equity 15,407 4.70 11,651 4.00 8,546 3.24 5,509 2.29 4,179 2.00
Multifamily 8,170 2.49 9,028 3.10 8,213 3.11 8,019 3.35 8,584 4.10
Nonresidential 10,521 3.21 8,842 3.03 9,100 3.45 6,511 2.71 7,171 3.43
Construction (1) 10,341 3.16 8,765 3.01 6,746 2.55 7,187 2.99 3,799 1.82
-------------------------------------------------------------------------------------------------
Total real estate loans 322,877 98.56 286,980 98.49 259,473 98.25 235,169 97.95 204,313 97.73
Commercial loans 297 0.09 398 0.14 585 0.22 666 0.28 567 0.27
Consumer loans:
Education loans 1,155 0.35 1,268 0.44 1,456 0.55 1,650 0.68 1,729 0.83
Loans on deposits 1,258 0.39 1,087 0.37 987 0.38 1,032 0.43 1,071 0.51
Automobile loans 1,189 0.36 773 0.27 826 0.31 807 0.34 608 0.29
Other consumer loans 806 0.25 831 0.29 771 0.29 763 0.32 777 0.37
-------------------------------------------------------------------------------------------------
Total consumer loans 4,408 1.35 3,959 1.37 4,040 1.53 4,252 1.77 4,185 2.00
-------------------------------------------------------------------------------------------------
Total loans 327,582 100.00% 291,337 100.00% 264,098 100.00% 240,087 100.00% 209,065 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan origination
fees (4,171) (3,977) (3,598) (3,341) (3,063)
Allowance for loan losses (1,742) (1,557) (1,376) (1,209) (1,001)
-------- -------- -------- -------- --------
Net loans $321,669 $285,803 $259,124 $235,537 $205,001
======== ======== ======== ======== ========
<FN>
- --------------------
<F1> Net of the undisbursed portion of construction loans.
</FN>
</TABLE>
Loan Maturity. The following table sets forth certain information as
of December 31, 1997, 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 in years
---------------------------------------------------------------------
2001 2003 2008 2018
and through through and
1998 1999 2000 2002 2004 2017 after Total
---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 1,138 $ 313 $385 $3,731 $23,430 $81,634 $167,807 $278,438
Home equity 15,407 - - - - - - 15,407
Multifamily and nonresidential 392 300 37 1,085 1,498 11,413 3,966 18,691
Construction 1,697 55 - 33 88 1,295 7,173 10,341
Commercial loans 217 - 19 - 15 46 - 297
Consumer loans 1,695 473 531 824 672 213 - 4,408
---------------------------------------------------------------------------------
Total $20,546 $1,141 $972 $5,673 $25,703 $94,601 $178,946 $327,582
=================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans which
will become due more than one year from December 31, 1997, and which have
predetermined interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
December 31, 1997
----------------------------
(In thousands)
<S> <C>
Fixed interest rates $206,942
Adjustable interest rates 100,094
--------
$307,036
========
</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, 1997, the
Association's one- to four-family residential real estate loan portfolio was
$278.4 million, or 85% 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.
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
95% 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, 1997, the Association had $15.4 million, or 4.70% 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, 1997, loans secured by multifamily properties totaled
$8.2 million, or 2.49% of total loans.
Loans Secured by Nonresidential Real Estate. At December 31, 1997,
$10.5 million, or 3.21%, 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, 1997, the Association's loan portfolio
included $10.3 million in construction loans, or 3.16% of total loans, net
of undisbursed proceeds.
The Association's construction loan portfolio at December 31, 1997,
consisted primarily 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, 1997, loans for
the construction of nonresidential real estate totaled $376,000.
Construction loans, particularly loans involving nonresidential real
estate, 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, 1997, the Association's commercial loan
portfolio was $297,000, or 0.09% 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,
1997, the Association had $4.4 million, or 1.35% 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 or
Underwriting Committees. 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. The Association originates
both fixed-rate and ARM loans for its portfolio. 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"). In an effort to reduce interest rate
risk and due to the favorable market conditions to do so, it is the
intention of the Association to sell, beginning in the second quarter of
1998, a portion of the Association's fixed-rate loan originations in the
secondary market. The Association intends to continue to charge 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 for the past several years, 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, 1997, the Association had $4.8 million of
loans serviced for others.
The following table presents the Association's loan origination,
purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family residential $ 74,289 $58,626 $46,007 $50,809 $57,916
Multifamily residential 211 702 375 149 296
Nonresidential 817 957 848 446 272
Construction 22,911 18,751 17,478 15,986 12,791
Commercial 1,674 624 601 836 969
Consumer 2,891 2,572 2,568 2,627 1,867
----------------------------------------------------
Total loans originated 102,793 82,232 67,877 70,853 74,111
Loan participations purchased - - - - 25
Reductions:
Principal repayments 63,925 54,521 40,609 40,571 53,375
Loans sold - - 1,250 - -
Transfers from loans to real estate owned 71 - 33 276 48
----------------------------------------------------
Total reductions 63,996 54,521 41,892 40,847 53,423
Increase (decrease) in other items, net (1) 2,931 1,032 2,398 (530) 3,190
----------------------------------------------------
Net increase $ 35,866 $26,679 $23,587 $30,536 $17,523
====================================================
<FN>
- --------------------
<F1> Other items consist of the undisbursed portion of construction loans,
net loan origination fees, unearned interest and the allowance for
loan losses.
</FN>
</TABLE>
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
$5.6 million to one borrower at December 31, 1997. The largest amount the
Association had outstanding to one borrower and related persons or entities
at December 31, 1997, was $3.9 million, consisting of a number of
residential rental and condominium development projects 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 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.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
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 75 $2,019 0.62% 65 $1,267 0.43% 70 $1,238 0.47%
60 - 89 days 49 1,327 0.40 34 575 0.20 47 749 0.28
90 days and over 38 763 0.23 75 999 0.34 73 1,502 0.57
---------------------------------------------------------------------------------
Total delinquent loans 162 $4,109 1.25% 174 $2,841 0.97% 190 $3,489 1.32%
=================================================================================
<CAPTION>
At December 31,
-------------------------------------------------------
1994 1993
-------------------------- --------------------------
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 56 $1,394 0.58% 57 $1,380 0.66%
60 - 89 days 36 1,342 0.56 39 1,264 0.60
90 days and over 47 1,142 0.48 52 1,752 0.84
----------------------------------------------------
Total delinquent loans 139 $3,878 1.62% 148 $4,396 2.10%
====================================================
</TABLE>
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, 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,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90 days or more $ 294 $ 721 $ 939 $ 874 $ 325
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family 710 504 621 548 899
Multifamily - - - - 652
Nonresidential 10 - 7 63 43
Consumer 18 13 5 13 9
----------------------------------------------
Total nonaccrual loans 738 517 633 624 1,603
----------------------------------------------
Total nonperforming loans 1,032 1,238 1,572 1,498 1,928
Real estate owned 86 15 15 48 63
----------------------------------------------
Total nonperforming assets $1,118 $1,253 $1,587 $1,546 $1,991
==============================================
Allowance for loan losses $1,742 $1,557 $1,376 $1,209 $1,001
==============================================
Nonperforming assets as a percent of total assets 0.31% 0.38% 0.49% 0.58% 0.81%
Nonperforming loans as a percent of total loans 0.32% 0.42% 0.60% 0.62% 0.92%
Allowance for loan losses as a
percent of nonperforming loans 168.76% 125.77% 87.53% 80.71% 51.92%
</TABLE>
For the year ended December 31, 1997, gross interest income which
would have been recorded had nonaccruing loans been current in accordance
with their original terms was $33,000. Interest collected on such loans and
included in net income was $24,000.
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 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,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Substandard $786 $874 $1,408 $1,441 $1,654
Doubtful - - - - -
Loss 45 54 46 74 101
------------------------------------------
Total classified assets $831 $928 $1,454 $1,515 $1,755
==========================================
</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.
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,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,557 $1,376 $1,209 $1,001 $ 773
Charge-offs (2) - (17) (4) (18)
Recoveries 1 1 4 12 6
----------------------------------------------
Net (charge-offs) recoveries (1) 1 (13) 8 (12)
Provision for loan losses 186 180 180 200 240
----------------------------------------------
Balance at end of year $1,742 $1,557 $1,376 $1,209 $1,001
==============================================
Net (charge-offs) recoveries to
average loans 0.00% 0.00% (0.01)% 0.00% (0.01)%
Allowance for loan losses to
total loans 0.54% 0.53% 0.52% 0.50% 0.48%
</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>
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
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
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $1,303 99% $1,166 99% $1,036 98% $ 913 98% $ 765 98%
Commercial loans 34 - 30 - 27 - 23 - 18 -
Consumer loans 151 1 134 1 112 1 103 2 83 2
Unallocated 254 - 227 - 201 - 170 - 135 -
--------------------------------------------------------------------------------------------------
Total $1,742 100% $1,557 100% $1,376 100% $1,209 100% $1,001 100%
==================================================================================================
</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.
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,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
Carrying % of Fair % of Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total value total value total
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $ 3,499 11.30% $ 3,499 11.29% $ 2,101 7.03% $ 2,101 7.02% $ 4,894 9.10% $ 4,894 9.08%
Overnight deposits 6,000 19.38 6,000 19.35 4,000 13.38 4,000 13.36 21,000 39.05 21,000 38.97
---------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 9,499 30.68 9,499 30.64 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 16,048 51.82 16,048 51.76 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
U.S. agency securities:
Available for sale 3,011 9.72 3,011 9.71 - - - - - - - -
Equity securities (1) 1,971 6.37 1,971 6.36 1,298 4.34 1,298 4.33 984 1.83 984 1.83
---------------------------------------------------------------------------------------------------------
Total investment
securities 21,030 67.91 21,030 67.83 23,236 77.72 23,236 77.60 27,115 50.42 27,173 50.42
---------------------------------------------------------------------------------------------------------
Mortgage-backed
securities 437 1.41 474 1.53 561 1.87 608 2.02 767 1.43 826 1.53
---------------------------------------------------------------------------------------------------------
Total investments $30,966 100.00% $31,003 100.00% $29,898 100.00% $29,945 100.00% $53,776 100.00% $53,893 100.00%
=========================================================================================================
<FN>
- --------------------
<F1> Comprised of Federal Home Loan Mortgage Corporation preferred stock.
</FN>
</TABLE>
The maturities of the Association's interest-bearing deposits and
investment securities at December 31, 1997, are indicated in the following
table:
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
----------------- ----------------- ----------------- ----------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Weighted
value yield value yield value yield value yield value value average yield
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits $ 9,499 5.96% $ - -% $ - -% $ - -% $ 9,499 $ 9,499 5.96%
U.S. Treasury
securities 4,998 5.40 11,050 5.89 - - - - 16,048 16,048 5.74
U.S. agency
securities 1,000 5.84 2,011 6.09 - - - - 3,011 3,011 6.01
Mortgage-backed
securities - - 125 9.85 16 8.50 296 11.04 437 474 10.61
-------------------------------------------------------------------------------------------------------
Total $15,497 5.77% $13,186 5.96% $16 8.50% $296 11.04% $28,995 $29,032 5.91%
=======================================================================================================
</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, 1997, the Association's certificates of deposit
totaled $195.7 million, or 72.23% of total deposits. Of such amount,
approximately $131.3 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 $58.8 million at December
31, 1997.
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>
December 31,
--------------------------------------------------------------------------------
Weighted 1997 1996 1995
average rate at ------------------------- ------------------------- ------------------------
December 31, Percent of Percent of Percent of
1997 Amount total deposits Amount total deposits Amount total deposits
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Noninterest-bearing demand
deposits -% $ 3,287 1.21% $ 3,173 1.22% $ 2,910 1.22%
Passbook savings accounts 3.10 52,622 19.43 53,410 20.62 51,008 21.41
NOW accounts 2.50 15,277 5.64 14,321 5.53 12,692 5.33
Money market accounts 3.00 4,049 1.49 4,531 1.75 4,892 2.05
----------------------------------------------------------------------------
Total transaction accounts 75,235 27.77 75,435 29.12 71,502 30.01
Certificates of deposit:
4.01% - 6.00% 5.65 120,113 44.33 130,367 50.32 115,406 48.43
6.01% - 8.00% 6.26 51,020 18.83 28,962 11.18 28,759 12.07
8.01% - 10.00% - - 6 - 311 0.13
Adjustable-rate (1) 5.79 24,589 9.07 24,304 9.38 22,304 9.36
----------------------------------------------------------------------------
Total certificates of deposit 5.82 195,722 72.23 183,639 70.88 166,780 69.99
----------------------------------------------------------------------------
Total deposits 4.99% $270,957 100.0% $259,074 100.0% $238,282 100.0%
============================================================================
<FN>
- --------------------
<F1> Consists of IRA and Keogh accounts, the rates on which adjust monthly
at the discretion of the Association.
</FN>
</TABLE>
The Association bids on deposits of public funds from entities in its
primary market area. The amount of such deposits was approximately $17.1
million at December 31, 1997.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1997:
<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% $ 94,792 $15,818 $ 7,461 $2,042 $120,113
6.01% to 8.00% 20,152 15,393 9,581 5,894 51,020
Adjustable rate 16,322 8,267 - - 24,589
----------------------------------------------------------
Total certificates of deposit $131,266 $39,478 $17,042 $7,936 $195,722
==========================================================
</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, 1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- --------------
(In thousands)
<S> <C>
Three months or less $12,458
Over 3 months to 6 months 8,816
Over 6 months to 12 months 11,276
Over 12 months 6,835
-------
Total $39,385
=======
</TABLE>
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $259,074 $238,282 $231,966
Deposits 166,892 399,604 402,953
Withdrawals (165,456) (388,210) (405,184)
--------------------------------
Net deposits before interest credited 260,510 249,676 229,735
Interest credited 10,447 9,398 8,547
--------------------------------
Ending balance $270,957 $259,074 $238,282
================================
Net increase $ 11,883 $ 20,792 $ 6,316
Percent increase 4.6% 8.7% 2.7%
</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, 1997, 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,
------------------------------
1997 1996 1995
------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $29,000 $ 2,000 $ 15,000
Average balance 16,615 358 7,117
Average interest rate paid 6.38% 6.15% 6.64%
</TABLE>
At December 31, 1997, the Association had outstanding FHLB advances
totaling $29.0 million, with a weighted average interest rate of 6.20%.
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.
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, 1997, the Association had 83 full-time employees
and 7 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
As a savings and loan association incorporated under the laws of Ohio,
Industrial is subject to regulation, examination and oversight by the OTS
and 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 general oversight by the FDIC. Industrial must file periodic
reports with the OTS, the Ohio Superintendent and the FDIC 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 of Cincinnati.
The Holding Company is a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA") and is,
therefore, subject to regulation, examination, and oversight by the OTS and
is required to submit periodic reports to the OTS. Because the Holding
Company and Industrial are corporations organized under Ohio law, they are
also subject to the provisions of the Ohio Revised Code applicable to
corporations generally.
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 financial
institutions. Pursuant to such legislation, Congress may eliminate the OTS
and Industrial may be regulated under federal law as a bank or may 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 Holding Company might become subject to different holding
company regulations, including separate capital requirements. At this time,
the Holding Company cannot predict when or whether Congress may actually
pass legislation regarding the Holding Company's and Industrial's regulatory
requirements or charter. Although such legislation may change the
activities in which either the Holding Company and Industrial may engage, it
is not anticipated that the current activities of the Holding Company or
Industrial will be materially affected by those activity limits.
Ohio Savings and Loan Law
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. 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 and loan association.
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 Ohio Superintendent
may place an Ohio association in conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of Industrial
approximately once every eighteen months. Such examinations are usually
conducted jointly with one or both federal regulators. The Ohio
Superintendent imposes assessments on Ohio associations based on their asset
size to cover the cost of supervision and examination.
Office 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 and loan associations and all other savings and loan associations,
the deposits of which are insured by the FDIC. The OTS issues regulations
governing the operation of savings and loan associations, regularly examines
such associations and imposes assessments on savings associations based on
their asset size to cover the costs of this supervision and examination.
The OTS also may initiate enforcement actions against savings and loan
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 and loan 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.
Industrial has received a "satisfactory" examination rating under those
regulations.
Regulatory Capital Requirements. Industrial is required by OTS
regulations to meet certain minimum capital requirements. Current capital
requirements call for tangible capital of 1.5% of adjusted total assets,
core capital (which for Industrial consists solely of tangible capital) of
3.0% of adjusted total assets and risk-based capital (which for Industrial
consists of core capital and general valuation allowances) of 8.0% of risk-
weighted assets (assets, including certain off-balance sheet items, are
weighted at percentage levels ranging from 0% to 100% depending on the
relative risk).
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and 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.
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 that requirement a savings association would 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, Industrial 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 and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and 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: (i) well-capitalized associations
must 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%; (ii) 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; (iii) undercapitalized
associations are those that do not meet regulatory limits, but that are not
significantly undercapitalized; (iv) 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 (v) critically
undercapitalized associations are those with core capital of less than 2% 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. An undercapitalized association must submit a capital
restoration plan to the OTS within 45 days after it becomes
undercapitalized. Undercapitalized associations will be subject to
increased monitoring and asset growth restrictions and will be required to
obtain prior approval for acquisitions, branching and engaging in new lines
of business. 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, 1997, met the standards for a well-capitalized
institution.
Federal law prohibits a savings and loan 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 (i) an
amount equal to 5% of the association's total assets at the time the
association became undercapitalized or (ii) 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 savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits,
association's acceptances, and specified United States Government, state or
federal agency obligations) equal to a monthly average of not less than 4%
of its net withdrawable savings deposits plus borrowings payable in one year
or less. Monetary penalties may be imposed upon member institutions failing
to meet liquidity requirements. The eligible liquidity of Industrial at
December 31, 1997, was approximately $12.8 million, or 4.69%, which exceeded
the 4% liquidity requirement by approximately $1.9 million.
Qualified Thrift Lender 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 stock issued by any FHLB, the FHLMC or the
FNMA. Under this 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 9 out of every 12 months. Congress created a second QTL test,
effective September 30, 1996, pursuant to which a savings association may
also qualify as a QTL thrift if at least 60% of the institution's assets (on
a tax basis) consist of specified assets (generally loans secured by
residential real estate or deposits, educational loans, cash, 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, 1997, Industrial met the QTL test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower or group of related
borrowers 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 this limit. In applying this
limit, the regulations require that loans to certain related borrowers be
aggregated. An exception to this limit permits loans of any type to one
borrower up to $500,000.
Based on such limits, Industrial was able to lend approximately $5.6
million to one borrower at December 31, 1997. The largest amount Industrial
had outstanding to any group of affiliated borrowers at December 31, 1997,
was $3.9 million, which consisted of forty-four loans, secured by a number
of residential rental and condominium development projects. At December 31,
1997, such loans were performing in accordance with their terms.
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 Industrial'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 Industrial 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, 1997.
All transactions between a savings association and its 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 will be 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, purchase 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, 1997.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, according to ratings of associations based on their capital
level and supervisory condition. Capital distributions, for purposes of
such regulation, include, without limitation, payments of cash dividends,
repurchases, and certain other acquisitions by an association of its shares
and payments to stockholders of another association in an acquisition of
such other association.
For purposes of the capital distribution regulations, each institution
is categorized into one of three tiers. The first rating category is Tier
1, consisting of associations that, before and after the proposed capital
distribution, meet their fully phased-in capital requirement. Associations
in this category may make capital distributions during any calendar year
equal to the greater of (i) 100% of its 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, or (ii) the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the
proposed capital distribution, meet their current minimum, but not fully
phased-in, capital requirement. Associations in this category may make
capital distributions up to 75% of their net income over the most recent
four quarters. Tier 3 associations do not meet their current minimum
capital requirement and must obtain OTS approval of any capital
distribution. A Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be treated as a Tier 2 or a Tier 3 association.
Industrial is also prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of
Industrial would be reduced below the amount required to be maintained for
the liquidation account established in connection with the Conversion. In
addition, as a subsidiary of the Holding Company, Industrial is also
required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the dividend during that 30-day period
based on safety and soundness concerns. Moreover, the OTS may prohibit any
capital distribution otherwise permitted by regulation if the OTS determines
that such distribution would constitute an unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, an association which is not
owned by a holding company and which has an examination rating of 1 or 2
could make a capital distribution without notice to the OTS, if it remains
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
distributions would be permitted if it caused the association to become
undercapitalized.
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 and loan 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 and loan
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 and loan association for cash
without being deemed to control the association. 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 company's stock may also acquire control of any savings
institution, other than a subsidiary institution, or any other savings and
loan holding company.
The Holding Company is a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies and such companies are the only
financial institution holding companies which may engage in commercial,
securities, and insurance activities without limitation. The broad latitude
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 and loan
association. The OTS may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the
savings and loan association; (ii) transactions between the savings and loan
association and its affiliates; and (iii) any activities of the savings and
loan association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings and
loan association. Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings and loan association subsidiary of a holding company fails to meet
the QTL, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. At
December 31, 1997, Industrial met the QTL.
Congress is considering legislation which may limit the Holding
Company's ability to engage in these activities and the Holding Company
cannot predict if and in what form these proposals might become law.
However, such limits would not impact the Holding Company's initial activity
of holding the stock of Industrial.
If the Holding Company were to acquire 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 is an emergency thrift acquisition
and each subsidiary savings and loan association meets the QTL, the
activities of the Holding Company and any of its subsidiaries (other than
Industrial or other subsidiary savings and loan 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, and which have been
approved by the OTS prior to being engaged in by a multiple holding company.
The OTS may approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings and loan
associations in more than one state only if the multiple savings and loan
holding company involved controls a savings and loan association that
operated a home or branch office in the state of Industrial 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 and loan 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.
FDIC Regulations
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally-
insured banks and thrifts and safeguards the safety and soundness of the
banking and thrift industries. The FDIC administers two separate insurance
funds, Bank Insurance Fund (the "BIF") for commercial banks and state
savings banks and the SAIF for savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. Industrial's deposit
accounts are insured by the FDIC in the SAIF 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 each
fund. 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. BIF assessments for
healthy banks in 1997 were $.013 per $100 in deposits, and SAIF assessments
for healthy institutions in 1997 were $.064 per $100 in deposits.
FRB Regulations
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to
$49.3 million (subject to an exemption of up to $4.4 million), and of 10% of
net transaction accounts over $49.3 million. At December 31, 1997,
Industrial was in compliance with this reserve requirement.
Federal Home Loan Banks
The FHLBs 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% of the aggregate outstanding principal amount of
Industrial's residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, and 5% of its advances
from the FHLB. Industrial was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $2.9 million at
December 31, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati 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 U.S. 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 applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending
to first-time home buyers. All long-term advances by each FHLB must be made
only to provide funds for residential housing finance.
TAXATION
Federal Taxation
The Holding Company and Industrial are each 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 may be subject to
an alternative minimum tax. An alternative minimum tax 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. The Taxpayer Relief Act of 1997 repealed the alternative minimum tax
for certain "small corporations" for tax years beginning after December 31,
1997. A corporation initially qualifies as a small corporation if it had
average gross receipts of $5,000,000 or less for the three tax years ending
with its first tax year beginning after December 31, 1997. Once a
corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period do not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Based on Industrial's average gross receipts of $25.8 million for the
three tax years ending on December 31, 1997, Industrial would not qualify as
a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, 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 the 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.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective
for taxable years beginning after 1995. Thrift institutions that would be
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 debts 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 becomes 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 becomes a small 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 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 on or after January 1, 1996, 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 then 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 real and 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 Small Business 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
Industrial's gross income 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, 1997, Industrial's pre-
1988 reserves for tax purposes totaled approximately $4.2 million.
Industrial believes it had approximately $6.0 million of accumulated
earnings and profits for tax purposes as of December 31, 1997, 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 1994. 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.
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 and (ii) 0.582% times taxable net worth.
Under these alternative measures of computing tax liability, the states to
which a taxpayer's adjusted total net income and adjusted total net worth
are apportioned or allocated are determined by complex formulas. The
minimum tax is $50 per year.
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.
Ohio corporation franchise tax law is scheduled to change markedly as
a consequences of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In
general, tax liability will be the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.5% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.40% of taxable net worth. Under these
alternative measures of computing tax liability, the states to which total
net income and total net worth will be apportioned or allocated will
continue to be determined by complex formulas, but the formulas change. The
minimum tax will still be $50 per year and maximum tax liability as measured
by net worth will be limited to $150,000 per year. The special litter taxes
remain in effect. Various other changes in the tax law may affect the
Holding Company.
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
Industrial's apportioned book net worth, determined in accordance with GAAP,
less any statutory deduction. This rate of tax is scheduled to decrease in
each of the years 1999 and 2000. As a "financial institution," Industrial
is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
Item 2. Description of Property
The following table sets forth certain information at December 31,
1997, 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 $27,014 $1,178
203 North Sandusky Street (1)
Bellevue, Ohio 44811 Owned 02/25/93 - 65
211 North Sandusky Street
Bellevue, Ohio 44811 Owned 05/06/72 52,887 360
225 North Main Street
Clyde, Ohio 43410 Owned 06/05/75 13,802 107
1500 Bright Road
Findlay, Ohio 45840 Owned 01/29/93 18,706 1,068
321 West State Street
Fremont, Ohio 43420 Owned 06/30/87 16,957 241
2080 Ferguson Road
Mansfield, Ohio 44906 Leased - - -
50 West Main Street
Norwalk, Ohio 44857 Owned 08/06/76 39,215 111
51 West Main Street (2)
Norwalk, Ohio 44587 Owned 09/11/92 - 355
4112 Milan Road
Sandusky, Ohio 44870 Owned 02/29/88 12,750 445
48 East Market Street (3)
Tiffin, Ohio 44883 Owned 06/15/83 54,871 351
796 West Market Street (3)
Tiffin, Ohio 44883 Owned 12/18/90 - 230
301 Myrtle Avenue
Willard, Ohio 44890 Owned 05/07/77 34,755 147
<FN>
- --------------------
<F1> Office facility for the Association's appraisal staff.
<F2> Drive-up facility only.
<F3> Deposit totals are combined for the two Tiffin offices.
</FN>
</TABLE>
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.
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 1997 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 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the Annual Report under the caption
"Asset and Liability Management" 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, 1998, 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 1998 Annual
Meeting of Shareholders of the Company (the "Proxy Statement"), filed with
the Securities and Exchange Commission (the "Commission") on March 17, 1998,
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.
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 Incorporation
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 1998 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. There were no reports filed during 1997.
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.
/s/ David M. Windau /s/ Lawrence R. Rhoades
- ------------------------------------ -----------------------------------
David M. Windau, President, Lawrence R. Rhoades,
Chief Executive Officer and Director Chairman of the Board, Chief
Financial Officer and Director
Date: March 17, 1998 Date: March 17, 1998
/s/ Graydon H. Hayward /s/ Leon W. Maginnis
- ------------------------------------ -----------------------------------
Graydon H. Hayward, Director Leon W. Maginnis, Director
Date: March 17, 1998 Date: March 17, 1998
- ------------------------------------ -----------------------------------
Bob Moore, Director Fredric C. Spurck, Director
Date: March 17, 1998 Date: March 17, 1998
/s/ Roger O. Wilkinson
- ------------------------------------
Roger O. Wilkinson, Director
Date: March 17, 1998
INDEX TO EXHIBITS
Exhibit Number
- --------------
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 Incorporated by reference to the S-1,
Articles of Incorporation Exhibit 3.2
3(c) Code of Regulations Incorporated by reference to the S-1,
Exhibit 3.3
11 Statement Regarding Computation Incorporated by reference to Note 1 to
of Per Share Earnings 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 1998 Annual Incorporated by reference to the Proxy
Meeting of Shareholders Statement, filed with the Securities and
Exchange Commission on March 17, 1998
EXHIBIT 13
1997 ANNUAL REPORT TO SHAREHOLDERS
Contents
- --------
1 President's Message
2 Selected Consolidated Financial Data
3. Management's Discussion and Analysis of Financial Condition and
Results of Operations
14 Report of Independent Auditors
15 Consolidated Financial Statements
20 Notes to Consolidated Financial
Statements
35 Directors and Executive Officers
Company Profile
- ---------------
Industrial Bancorp, Inc. is a savings and loan holding company
headquartered in Bellevue, Ohio. Its sole subsidiary, Industrial Savings
and Loan Association, maintains ten full-service offices and one loan
production office serving communities in seven counties throughout north
central Ohio.
Founded in 1890, Industrial Savings and Loan is a state-chartered
savings and loan association with deposits insured by the FDIC. Industrial
Savings and Loan provides traditional banking services including a wide
selection of mortgage, loan and deposit products to local consumers and
businesses.
Dear Shareholders,
I am pleased to present our Annual Report to Shareholders for 1997.
This report will show that 1997 was yet another year of increased earnings,
continued growth and solid performance by Industrial Bancorp common stock.
The market value of our common stock rose $5.00 per share during 1997, an
increase of 39.2%. In addition, regular cash dividends increased to $0.48
per share during 1997.
Also during 1997, the Company applied for and received approval from
the Office of Thrift supervision to repurchase an additional 5% of its total
outstanding common shares. Under the repurchase program, which began late
in 1996, the Company has been able to purchase 451,700 shares of outstanding
stock as of year-end 1997, with additional stock yet to be purchased.
Our subsidiary, Industrial Savings and Loan Association, also
completed a very successful year in 1997. Having completed its 107th year
of operation, it continued to grow and prosper. One of the highlights of
1997 was the opening of our new loan production office in Mansfield, Ohio.
We are pleased to have the opportunity to offer our loan products and
services to the people of Mansfield and Richland County. Also during 1997,
we were recognized by the Office of Thrift Supervision as being one of the
nation's top 102 most consistently profitable thrift institutions. We are
very proud to be part of this prestigious group.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. We reached a record high of
$364.0 million in consolidated assets as of December 31, 1997, which
represents an 11.5% increase from December 31, 1996. Also, consolidated
earnings exceeded $5.1 million, or $1.04 per share. Lending remained very
strong in 1997, as we originated $102.8 million in new loans, which
represents a 25.0% increase over the previous year and the first time in the
Company's history we generated more than $100 million in loans during a one
year period. Savings deposits increased to $271.0 million as of year-end,
which is also a new record.
Your Board of Directors also made a commitment in excess of $600,000
to upgrade the teller terminals in all of our offices and the technology in
our appraisal office. Both of the upgrades will be completed in the first
half of 1998 and will enhance our ability to offer better service to our
customers. This new technology will not only assist us in preparing for
Year 2000 Compliance, but will also take us well into the next century. We
are very excited about these advancements in technology and look forward to
providing better service to our customers in the future.
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
SELECTED CONSOLIDATED FINANCIAL DATA
===========================================================================
<TABLE>
<CAPTION>
At or for the year ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected financial condition data:
Total assets $364,023 $326,613 $322,994 $268,041 $245,516
Investment securities 21,467 23,797 27,882 16,014 5,010
Loans receivable - net 321,669 285,803 259,124 235,537 205,001
Deposits 270,957 259,074 238,282 231,966 219,704
FHLB advances 29,000 2,000 - 6,000 -
Shareholders' equity (1) 60,862 62,104 81,055 27,616 23,430
Summary of earnings:
Interest income $ 27,805 $ 25,468 $ 22,858 $ 19,024 $ 18,113
Interest expense 14,065 11,863 11,236 9,181 8,620
--------------------------------------------------------
Net interest income 13,740 13,605 11,622 9,843 9,493
Provision for loan losses 186 180 180 200 240
--------------------------------------------------------
Net interest income after
provision for loan losses 13,554 13,425 11,442 9,643 9,253
Noninterest income 509 447 398 461 377
Noninterest expense 6,167 9,453 5,518 4,734 4,220
--------------------------------------------------------
Income before income tax and
effect of accounting change 7,896 4,419 6,322 5,370 5,410
Income tax expense 2,783 2,020 2,149 1,752 1,853
Effect of accounting change - - - - (166)
--------------------------------------------------------
Net income $ 5,113 $ 2,399 $ 4,173 $ 3,618 $ 3,391
========================================================
Basic earnings per share (2) $ 1.04 $ 0.47 $ 0.42 - -
Diluted earnings per share (2) 1.03 0.47 0.42 - -
Cash dividends per share (2) (3) 0.48 3.75 0.15 - -
Selected financial ratios:
Return on average assets 1.48% 0.75% 1.42% 1.42% 1.45%
Return on average equity 8.38 3.62 8.21 14.33 15.51
Average equity to average assets 17.63 20.59 17.29 9.88 9.36
Interest rate spread 3.13 3.26 3.26 3.55 3.76
Net interest margin 4.05 4.32 4.04 3.94 4.14
Efficiency ratio (4) 43.85 68.14 46.60 46.85 43.82
Noninterest expense to average assets 1.78 2.94 1.88 1.85 1.81
Nonperforming assets to total assets 0.31 0.38 0.49 0.58 0.81
Nonperforming loans to total loans 0.32 0.42 0.60 0.62 0.92
Allowance for loan losses to
total loans 0.54 0.53 0.52 0.50 0.48
Allowance for loan losses to
nonperforming loans 168.76 125.77 87.53 80.71 51.92
- --------------------
<F1> Shareholders' equity prior to the Conversion refers to members'
equity.
<F2> Per share data for 1995 is for the period from the date of the
Conversion, August 1, 1995, to December 31, 1995.
<F3> The amount for the year ended December 31, 1996, includes a $3.50 per
share special return of capital distribution.
<F4> Noninterest expense as a percentage of the sum of net interest income
after provision for loan losses and noninterest income.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
============================================================================
GENERAL
- ----------------------------------------------------------------------------
In August 1995, Industrial Bancorp, Inc. ("Industrial Bancorp"), acquired
all of the common shares issued by The Industrial Savings and Loan
Association ("Industrial Savings") upon its conversion from a mutual savings
and loan association to a stock savings and loan association (the
"Conversion"). Since the ownership of such shares constitutes Industrial
Bancorp's principal business, the consolidated financial condition and
results of operations discussed below focus principally on the financial
condition and results of operations of Industrial Savings.
The following discussion and analysis should be read in conjunction with and
with reference to the consolidated financial statements, and the notes
thereto, presented in this Annual Report beginning on page 15.
CHANGES IN FINANCIAL CONDITION
- ----------------------------------------------------------------------------
The total consolidated assets of Industrial Bancorp amounted to $364.0
million at December 31, 1997, an increase of $37.4 million from $326.6
million at December 31, 1996.
Loans receivable increased $35.9 million, or 13%, from $285.8 million at
December 31, 1996, to $321.7 million at December 31, 1997. Substantially
all of this increase was in one- to four-family residential real estate
loans and home equity loans, which represent 90% of the total loan portfolio
of Industrial Savings at December 31, 1997.
Investment securities totaled $21.5 million at December 31, 1997, compared
to $23.8 million at December 31, 1996. Proceeds of $12.0 million from the
maturities of U.S. Treasury securities were partially offset by purchases of
$9.0 million of investment securities. The excess funds were used to
originate loans.
Cash and cash equivalents were $3.4 million more at December 31, 1997 than
at December 31, 1996.
Office properties and equipment, net of accumulated depreciation, amounted
to $5.0 million at December 31, 1997 and 1996.
Total deposits increased $11.9 million, or 5%, to $271.0 million at December
31, 1997, from $259.1 million at December 31, 1996. Certificates of deposit
increased $12.1 million and passbook savings deposits decreased $788,000.
Due to the favorable interest rate environment, management has chosen to use
advances from the Federal Home Loan Bank ("FHLB") to fund loan growth in
excess of deposit growth. FHLB advances were $29.0 million at December 31,
1997 compared to $2.0 million at December 31, 1996.
Shareholders' equity was $60.9 million at December 31, 1997, $1.2 million
less than the $62.1 million reported at December 31, 1996. The decline was
primarily due to the purchase of 401,700 treasury shares at a cost of $5.7
million during 1997, partially offset by net income of $5.1 million in 1997.
The table on the following page presents certain average-balance
information, as well as average yields on interest-earning assets and
average costs 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>
Year ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
Weighted average ----------------------------- ----------------------------- -----------------------------
yield/rate at Average Average Average Average Average Average
December 31, 1997 Balance Interest yield/rate Balance Interest yield/rate Balance Interest yield/rate
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-bearing
deposits 5.96% $ 11,696 $ 436 3.73% $ 13,629 $ 649 4.76% $ 15,915 $ 861 5.41%
Investment securities(1) 5.78 23,053 1,539 6.68 28,289 1,712 6.05 22,544 1,288 5.71
Mortgage-back securities 10.61 497 51 10.26 660 67 10.15 897 91 10.14
Loans receivable(2) 8.73 304,397 25,779 8.47 271,998 23,040 8.47 248,012 20,618 8.31
----------------- ----------------- -----------------
Total interest-
earning assets 8.50 339,643 27,805 8.19 314,576 25,468 8.10 287,368 22,858 7.95
Non-interest-earning assets:
Cash and due from banks 1,051 933 847
Premises and equipment 4,983 5,019 4,419
Other nonearning assets 1,832 2,596 2,552
Allowance for loan losses (1,652) (1,557) (1,292)
-------- -------- --------
Total assets $345,857 $321,567 $293,894
======== ======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts 2.50 $ 14,084 327 2.32 $ 12,778 298 2.33 $ 11,358 264 2.32
Money market accounts 3.00 4,323 130 3.01 4,653 140 3.01 5,360 162 3.02
Passbook savings
accounts 3.10 53,079 1,644 3.10 52,872 1,631 3.08 55,559 1,719 3.09
Certificates of deposit 5.82 189,887 10,904 5.74 174,590 9,772 5.60 156,811 8,503 5.42
----------------- ----------------- -----------------
Total deposits 4.99 261,373 13,005 4.98 244,893 11,841 4.84 229,088 10,648 4.65
Conversion stock purchase
funds 3,838 117 3.05
FHLB advances 6.20 16,615 1,060 6.38 462 22 4.76 6,615 471 7.12
----------------- ----------------- -----------------
Total interest-bearing
liabilities 5.11 277,988 14,065 5.06 245,355 11,863 4.84 239,541 11,236 4.69
Non-interest-bearing
liabilities 6,882 10,005 3,526
-------- -------- --------
Total liabilities 284,870 255,360 243,067
Shareholders' equity(3) 60,987 66,207 50,827
-------- -------- --------
Total liabilities and
shareholders' equity $345,857 $321,567 $293,894
======== ======== ========
Net interest income $13,740 $13,605 $11,622
======= ======= =======
Interest rate spread 3.39% 3.13% 3.26% 3.26%
Net interest margin(4) 4.05% 4.32% 4.04%
Average interest-earning
assets to average interest-
bearing liabilities 122.18% 128.21% 119.97%
- --------------------
<F1> Average yields have been computed based on the amortized cost of the
investment security.
<F2> Net of deferred loan fees, loan discounts and loans in process. Loan
fees included in interest income amounted to $626,000, $625,000 and
$493,000 in 1997, 1996 and 1995, respectively.
<F3> Shareholders' equity prior to the Conversion refers to members'
equity.
<F4> Net interest income to average interest-earning assets.
</TABLE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning 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,
-----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- -------------------------------
Increase(decrease) Increase(decrease)
due to Total 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 $ (84) $(129) $ (213) $ (116) $ (96) $ (212)
Investment securities (338) 166 (172) 344 80 424
Mortgage-backed securities (17) 1 (16) (24) - (24)
Loans receivable 2,744 (5) 2,739 2,026 396 2,422
---------------------------------------------------------------
Total interest income 2,305 33 2,338 2,230 380 2,610
Interest expense attributable to:
- ---------------------------------
Deposits:
NOW accounts 30 (1) 29 33 1 34
Money market accounts (10) - (10) (21) (1) (22)
Passbook savings accounts 6 7 13 (83) (5) (88)
Certificates of deposit 873 259 1,132 988 281 1,269
---------------------------------------------------------------
Total deposits 899 265 1,164 917 276 1,193
Conversion stock purchase funds - - - (117) - (117)
FHLB advances 1,028 10 1,038 (331) (118) (449)
---------------------------------------------------------------
Total interest expense 1,927 275 2,202 469 158 627
---------------------------------------------------------------
Increase (decrease) in net
interest income $ 378 $(242) $ 136 $1,761 $ 222 $1,983
===============================================================
</TABLE>
COMPARISON OF OPERATING RESULTS
- ----------------------------------------------------------------------------
Earnings Summary. Industrial Bancorp had consolidated net income of $5.1
million for the year ended December 31, 1997, compared to $2.4 million for
1996 and $4.2 million for 1995. The reduced amount in 1996 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 ("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
("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 12 of the Notes to Consolidated Financial Statements.
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 to $13.7 million in 1997, compared to $13.6
million in 1996 and $11.6 million in 1995. The 1996 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 advances in 1996. The excess of average interest-earning assets
over average interest-bearing liabilities decreased to $61.7 million in 1997
as a result of the repurchase of treasury stock which replaced a
noninterest-bearing funding source with interest-bearing advances from the
FHLB.
Total interest income increased to $27.8 million in 1997, compared to $25.5
million in 1996 and $22.9 million in 1995. The increases were largely due
to average loans being $32.4 million higher in 1997 than in 1996 and $24.0
million higher in 1996 than in 1995. Interest and fees on loans totaled
$25.8 million in 1997, compared to $23.0 million in 1996 and $20.6 million
in 1995. The average yield earned on loans was 8.47% for both 1997 and
1996, and 8.31% for 1995. The moderately higher interest rate environment
experienced in 1996 compared to 1995, stabilized during 1997.
Interest earned on investment securities declined to $1.5 million in 1997,
compared to $1.7 million in 1996 as the investment portfolio decreased with
the maturities of U.S. Treasury securities. Additional investments were
limited during 1997 due to the excess growth of loans over deposits and the
resultant use of FHLB advances to fund the excess. The average yield earned
on investment securities increased to 6.68% for 1997, compared to 6.05% for
1996, as the maturing investment securities generally earned a rate of
interest lower than the remaining securities. Interest earned on investment
securities was $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 moderately higher interest rate environment.
Total interest expense increased to $14.1 million in 1997, compared to $11.9
million in 1996 and $11.2 million in 1995. The increase in 1997 compared to
1996 was primarily attributable to the increased use of FHLB advances, which
averaged $16.6 million in 1997, compared to $462,000 in 1996. Increased
reliance upon FHLB advances occurred as the growth in average deposits, from
$244.9 million in 1996 to $261.4 million in 1997, did not keep pace with
loan demand. The average rate paid for deposits increased to 4.98% in 1997
from 4.84% in 1996 as the mix in the deposit portfolio shifted to a greater
percentage of certificates of deposit. The increase in 1996 compared to
1995 was primarily attributable to growth in average deposits, from $229.1
million in 1995 to $244.9 million in 1996, coupled with the increase in
average weighted rate paid from 4.65% in 1995 to 4.84% in 1996.
Yields Earned and Rates Paid. The spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
was 3.13% for 1997, compared to 3.26% for both 1996 and 1995. The increase
in the average yield earned on interest-earning assets was exceeded by the
increase in the average rate paid on interest-bearing liabilities in 1997
compared to 1996, whereas the increase in the average yield earned on
interest-earning assets matched the increase in the average rate paid on
interest-bearing liabilities in 1996 compared to 1995.
The ratio of average interest-earning assets to average interest-bearing
liabilities was 122.18% at December 31, 1997, compared to 128.21% at
December 31, 1996 and 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 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 $186,000 in 1997, compared to $180,000 in
1996 and 1995. Industrial Savings had only $2,000 in charge-offs during
1997, compared to none in 1996 and $17,000 in 1995. Recoveries totaled
$1,000 in both 1997 and 1996 and $4,000 in 1995. Nonperforming loans were
$206,000 less at December 31, 1997 than at December 31, 1996, which was
$334,000 less than at December 31, 1995. At December 31, 1997, the
allowance for loan losses was 168.76% of nonperforming loans and .54% of
total loans. Management determined that a provision for loan losses was
warranted in 1997 based on the $35.9 million growth in loans receivable.
Noninterest Income. Noninterest income increased to $509,000 in 1997,
compared to $447,000 in 1996 and $398,000 in 1995. Service fees related to
the growing deposit base and expanding ATM usage contributed largely to
these increases.
Noninterest Expense. Noninterest expense amounted to $6.2 million in 1997
compared to $9.5 million in 1996 and $5.5 million in 1995. The amount for
1996 was significantly higher because of 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 $3.1 million in 1997, compared to $4.3
million in 1996 and $2.1 million in 1995, due principally to the recording
of $1.2 million in 1996 associated with the $3.50 per share special return
of capital distribution related to unallocated ESOP shares. Salaries and
employee benefits were also affected by the implementation of the MRP in
1996, increases in the number of full-time equivalent employees and normal
pay increases.
State franchise tax increased from $748,000 in 1995 to $843,000 in 1996 due
to an increase in capital at Industrial Savings during 1996, and decreased
to $524,000 in 1997, due to an intercompany transfer of capital from
Industrial Savings to Industrial Bancorp during 1997. In addition to
reducing the amount of state franchise tax paid, the transfer will provide
greater flexibility for the parent company.
Federal deposit insurance premiums were reduced to $135,000 in 1997, from
$2.1 million in 1996, which included the $1.5 million special assessment
upon SAIF-insured deposits, and $531,000 in 1995.
Data processing and related fees, which are based on the outstanding number
of loan and deposit accounts, increased to $370,000 in 1997 from $355,000 in
1996 and $339,000 in 1995. Total occupancy and equipment and depreciation
expense increased to $638,000 for 1997, compared to $601,000 for 1996 and
$591,000 in 1995. Other expenses increased $80,000 in 1997 compared to
1996, and $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 $7.9 million in 1997, compared to $4.4 million in 1996 and $6.3
million in 1995. Despite the lower income before taxes in 1996, the
provision for income taxes expense remained comparable for all three years
as the expense related to the special return of capital distribution as
applied to unallocated ESOP shares was not deductible for tax purposes in
1996.
ASSET QUALITY
- ----------------------------------------------------------------------------
Industrial Savings has consistently maintained a high quality loan
portfolio, as evidenced by its level of nonperforming assets which consists
of nonperforming loans and real estate acquired through foreclosure or by
deed-in-lieu thereof.
The following table summarizes Industrial Savings' nonperforming assets for
the periods indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent
90 days or more $ 294 $ 721 $ 939 $ 874 $ 325
Nonaccrual loans 738 517 633 624 1,603
----------------------------------------------
Total nonperforming loans 1,032 1,238 1,572 1,498 1,928
Real estate owned 86 15 15 48 63
----------------------------------------------
Total nonperforming assets $1,118 $1,253 $1,587 $1,546 $1,991
==============================================
Nonperforming assets to
total assets 0.31% 0.38% 0.49% 0.58% 0.81%
Nonperforming loans to
total loans 0.32% 0.42% 0.60% 0.62% 0.92%
</TABLE>
Industrial Savings' allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past five years and stood at $1.7
million at December 31, 1997 compared to $1.0 million at December 31, 1993.
As a percentage of nonperforming loans, the allowance for loan losses has
steadily increased from 51.92% at December 31, 1993 to 168.76% at December
31, 1997. Over the last five years, Industrial Savings has experienced
total charge-offs of $42,000 and total recoveries of $25,000.
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. Exposure to interest
rate risk is measured with the use of interest rate sensitivity analysis to
estimate the change in the Company's "net portfolio value" ("NPV") in the
event of hypothetical changes in interest rates.
As part of its efforts to monitor and manage interest rate risk, Industrial
Savings' asset and liability committee reviews with the Board of Directors,
on a quarterly basis, reports provided by the Office of Thrift Supervision
("OTS") and considers methods of maintaining acceptable levels of changes in
NPV. Industrial Savings' asset and liability management is designed to
minimize the impact of sudden and sustained changes in interest rates on
NPV. If estimated changes to NPV are not within the limits established by
the Board, the Board may direct management to adjust the asset and liability
mix to bring interest rate risk within board-approved limits.
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
in the event of a sudden and sustained 1 to 4 percent increase or decrease
in market rates.
The following table presents, at December 31, 1997, an analysis of the
interest rate risk of Industrial Savings, as measured by changes in NPV for
instantaneous and sustained parallel shifts of 1% to 4% 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>
Change in Net Portfolio Value
Board limit -----------------------------
Change in interest rate % change $ %
-----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
+ 4.0% 80% (29,387) (53)
+ 3.0% 60 (21,656) (39)
+ 2.0% 40 (13,815) (25)
+ 1.0% 20 (6,273) (11)
0 - - -
- 1.0% 20 3,511 6
- 2.0% 40 4,090 7
- 3.0% 60 4,728 9
- 4.0% 80 6,671 12
</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.
NPV is calculated by the OTS using information provided by the Company.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off, and should not be relied upon
as indicative of actual results. Further the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------------------------------
Industrial Bancorp's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing
activities. These activities, on a consolidated basis, are summarized in
the following table for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Net income $ 5,113 $ 2,399 $ 4,173
Adjustments to reconcile net income to
net cash from operating activities (34) 2,062 315
-----------------------------
Net cash from operating activities 5,079 4,461 4,488
Net cash from investment activities (32,584) (22,555) (32,850)
Net cash from financing activities 30,864 (1,204) 49,607
-----------------------------
Net change in cash and cash equivalents 3,359 (19,298) 21,245
Cash and cash equivalents at beginning of year 7,413 26,711 5,466
-----------------------------
Cash and cash equivalents at end of year $10,772 $ 7,413 $26,711
=============================
</TABLE>
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 generally having maturities of five years or less, in an amount
equal to 4% 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, 1997, the regulatory liquidity ratio of Industrial Savings was 4.69%.
At such date, Industrial Savings had commitments to originate loans and
loans in process totaling $24.2 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, 1997, 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, 1997:
<TABLE>
<CAPTION>
Amount Percent of assets
---------------------------------
(In thousands)
<S> <C> <C>
Tangible capital: (1)
Capital level $35,696 9.86%
Requirement 5,433 1.50
------------------------
Excess $30,263 8.36%
========================
Leverage capital: (1)
Capital level $35,696 9.86%
Requirement 10,866 3.00
------------------------
Excess $24,830 6.86%
========================
Risk-based capital: (2)
Capital level $37,392 19.03%
Requirement 15,718 8.00
------------------------
Excess $21,674 11.03%
========================
- --------------------
<F1> Tangible and leverage capital percentages are based on adjusted total
assets of $362.2 million.
<F2> Risk-based capital percentages are based on risk-weighted assets of
$196.5 million.
</TABLE>
MARKET PRICE OF COMMON SHARES AND RELATED SHAREHOLDER MATTERS
- ----------------------------------------------------------------------------
There were 5,102,800 common shares of Industrial Bancorp outstanding on
December 31, 1997, held of record by approximately 1,520 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. Also
reflected in the table are the amounts of dividends distributed in each
period indicated.
<TABLE>
<CAPTION>
High Low Period-end Dividend
--------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended:
March 31, 1996 $15.375 $13.250 $15.250 $.075
June 30, 1996 (1) 16.000 11.250 11.250 .075
September 30, 1996 12.375 9.875 12.250 .075
December 31, 1996 13.500 12.125 12.750 .10
March 31, 1997 13.000 12.500 12.625 .10
June 30, 1997 14.000 12.000 13.688 .12
September 30, 1997 18.000 13.625 18.000 .12
December 31, 1997 18.375 17.250 17.750 .14
- --------------------
<F1> In May 1996, Industrial Bancorp paid a $3.50 per share special return
of capital distribution.
</TABLE>
The income of Industrial Bancorp on an unconsolidated basis consists of
dividends, which may periodically be declared and paid on the common shares
of Industrial Savings held by Industrial Bancorp, and earnings on other
investments. At December 31, 1997, investments of Industrial Bancorp, other
than its investment in Industrial Savings, consisted of a $3.7 million loan
to the ESOP, a loan of $19.5 million to Industrial Savings to be used for
operations and investment purposes and $538,000 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 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.
YEAR 2000 COMPLIANCE ISSUES
- ----------------------------------------------------------------------------
Industrial Bancorp established a Year 2000 Committee, which includes senior
management representatives, to assess the risk of potential problems that
might arise from the failures of computer programming to recognize the year
2000 and to develop a plan to mitigate any such risk. Research by the
committee indicates that the greatest potential impact upon the Company is
the risk related to vendors used by the Company, particularly Industrial
Savings' data processing service bureau. Quarterly progress reports from
the service bureau indicate levels of manpower and expertise sufficient to
amend and test the adequacy of their computer programming and systems prior
to the arrival of the year 2000. All other vendors used by the Company have
been identified and requests for year 2000 certifications have been
forwarded.
The year 2000 compliance program established by the committee includes
quarterly progress reports submitted to the Board of Directors and a target
date of December 31, 1998 for required internal testing, which is expected
to be minimal. The committee estimates that the impact upon the Company's
results of operations, liquidity and capital resources will be immaterial.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------------------------------------------
Several new accounting standards have been issued by the Financial
Accounting Standards Board, which are effective for the Industrial Bancorp's
consolidated financial statements for the years ending on or after December
31, 1997.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," issued in 1996, revises the accounting for transfers of
financial assets, such as loans and securities, and for distinguishing
between sales and secured borrowings. It was originally effective for some
transactions in 1997 and others in 1998. SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," issued in
December 1996, defers, for one year, the effective date of provisions
related to securities lending, repurchase agreements and other similar
transactions. The remaining portions of SFAS No. 125 continued to be
effective January 1, 1997. This statement did not have a material impact on
the Company's financial statements.
SFAS No. 128, "Earnings Per Share," issued in March 1997, is effective for
financial statements for periods ending after December 15, 1997, including
interim periods. Two measures of earnings per share ("EPS") are defined
under the new statement. Basic EPS replaces "primary earnings per share,"
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period.
Basic EPS does not consider dilution from potentially dilutive securities
such as stock options, warrants, and convertible securities. Diluted EPS
replaces "fully diluted earnings per share" and assumes dilutive potential
common shares have been issued (e.g. through the exercise of dilutive
options, or the conversion of convertible preferred stock into common
shares). The statement further requires that all previously reported
earnings per share amounts be restated for prior periods. Adoption of the
provisions of SFAS No. 128 by Industrial Bancorp did not have any material
impact on current or prior period earnings per share amounts.
SFAS No. 129, "Disclosures of Information about Capital Structure," issued
in February 1997 and effective for financial statements for periods ending
after December 15, 1997, consolidated existing accounting guidance relating
to disclosure about a company's capital structure. Public companies
generally have been required to make disclosures now required by this
statement and, therefore, it had no impact on the Company.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997,
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. It
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," issued in June 1997, significantly changes the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is
based on reporting information the way the management organizes the segments
within the enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will likely
result in more segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each reportable segment
than is presently being reported in annual financial statements and also
requires that selected information be reported in interim financial
statements. This statement is effective for financial statements for periods
beginning after December 15, 1997.
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 1998
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits $ 1,273 $ 1,312
Interest-bearing demand deposits 3,499 2,101
Overnight deposits 6,000 4,000
--------------------
Cash and cash equivalents 10,772 7,413
Investment securities available for sale,
at fair value 21,030 23,236
Investment securities held to maturity
(fair value: 1997 - $474; 1996 - $608) 437 561
Loans receivable - net 321,669 285,803
Office properties and equipment - net 4,972 5,029
Accrued interest receivable and other assets 5,143 4,571
--------------------
Total assets $364,023 $326,613
====================
LIABILITIES
Deposits $270,957 $259,074
Federal Home Loan Bank advances 29,000 2,000
Accrued interest payable and other liabilities 3,204 3,435
--------------------
Total liabilities 303,161 264,509
--------------------
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized, 5,554,500 shares issued 34,669 34,669
Additional paid-in capital 1,879 1,669
Retained earnings 34,569 31,803
Treasury stock, at cost
(1997 - 451,700 shares; 1996 - 50,000 shares) (6,306) (634)
Unearned employee stock ownership plan shares (3,529) (3,974)
Unearned compensation (1,753) (2,279)
Unrealized gain on securities available for sale 1,333 850
--------------------
Total shareholders' equity 60,862 62,104
--------------------
Total liabilities and shareholders' equity $364,023 $326,613
====================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $25,779 $23,040 $20,618
Interest and dividends on investment securities 1,590 1,779 1,379
Interest on deposits 436 649 861
-----------------------------
27,805 25,468 22,858
-----------------------------
Interest expense
Interest on deposits 13,005 11,841 10,648
Interest on Federal Home Loan Bank advances 1,060 22 471
Interest on conversion stock purchase funds 117
-----------------------------
14,065 11,863 11,236
-----------------------------
Net interest income 13,740 13,605 11,622
Provision for loan losses 186 180 180
-----------------------------
Net interest income after provision for loan losses 13,554 13,425 11,442
-----------------------------
Noninterest income
Service fees and other charges 466 401 348
Other 43 46 50
-----------------------------
509 447 398
-----------------------------
Noninterest expense
Salaries and employee benefits 3,117 4,291 2,145
State franchise tax 524 843 748
Federal deposit insurance premiums 135 2,060 531
Occupancy and equipment 352 330 353
Data processing 370 355 339
Depreciation 286 271 238
Other 1,383 1,303 1,164
-----------------------------
6,167 9,453 5,518
-----------------------------
Income before income tax 7,896 4,419 6,322
Provision for income tax 2,783 2,020 2,149
-----------------------------
Net income $ 5,113 $ 2,399 $ 4,173
=============================
Basic earnings per share $ 1.04 $ 0.47 $ 0.42
Diluted earnings per share $ 1.03 $ 0.47 $ 0.42
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
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, 1995 $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 $54,110 54,110
Shares purchased under
Employee Stock Ownership
Plan $(4,436) (4,436)
Cash dividends declared
($.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
Net income 2,399 2,399
Capital distribution declared
($3.50 per share) (19,441) (19,441)
Purchase of treasury stock
(50,000 shares) $(634) (634)
Cash dividends declared
($.25 per share) (1,278) (1,278)
Employee Stock Ownership Plan:
Capital distribution on
unallocated shares $1,553 1,553
Shares released 116 462 578
Management Recognition Plan:
Shares purchased $(2,630) (2,630)
Compensation earned 351 351
Change in unrealized gain
on securities available
for sale 102 102
Change in minimum additional
pension liability 49 49
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 34,669 1,669 31,803 (634) (3,974) (2,279) - 850 62,104
Net income 5,113 5,113
Purchase of treasury stock
(401,700 shares) (5,672) (5,672)
Cash dividends declared
($.48 per share) (2,347) (2,347)
Employee Stock Ownership Plan:
Shares released 210 445 655
Management Recognition Plan:
Compensation earned 526 526
Change in unrealized gain
on securities available
for sale 483 483
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $34,669 $1,879 $34,569 $(6,306) $(3,529) $(1,753) $ - $1,333 $60,862
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,113 $ 2,399 $ 4,173
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 286 271 238
Provision for loan losses 186 180 180
Accretion of deferred loan fees (674) (639) (497)
FHLB stock dividends (200) (176) (153)
Net accretion on investment securities (50) (55) (50)
ESOP expense 655 1,794
MRP compensation expense 526 351
Change in
Deferred taxes 105 29 312
Accrued interest receivable and other assets (637) 96 (462)
Accrued interest payable and other liabilities (231) 211 747
-----------------------------
Net cash from operating activities 5,079 4,461 4,488
-----------------------------
Cash flows from investing activities
Net change in interest-bearing time deposits 2,500
Proceeds from maturities of investment securities
available for sale 12,000 10,000
Purchases of investment securities available for sale (9,008) (5,910)
Purchases of investment securities held to maturity (17,944)
Principal repayments and maturities of investment
securities held to maturity 124 205 6,720
Net increase in loans (35,378) (26,220) (23,303)
Proceeds from sale of real estate owned 60
FHLB stock purchases (93) (69) (241)
Properties and equipment expenditures, net (229) (561) (642)
-----------------------------
Net cash from investing activities (32,584) (22,555) (32,850)
-----------------------------
Cash flows from financing activities
Net increase in deposits 11,883 20,792 6,316
Proceeds from FHLB advances 33,000 2,000 11,000
Repayment of FHLB advances (6,000) (17,000)
Capital distribution to shareholders (19,071)
Purchase of MRP shares (2,630)
Proceeds from issuance of common stock, net of costs 54,110
Cash provided to ESOP (4,436)
Cash dividends paid (2,347) (1,661) (383)
Purchase of treasury stock (5,672) (634)
-----------------------------
Net cash from financing activities 30,864 (1,204) 49,607
-----------------------------
Net change in cash and cash equivalents 3,359 (19,298) 21,245
Cash and cash equivalents at beginning of year 7,413 26,711 5,466
-----------------------------
Cash and cash equivalents at end of year $10,772 $ 7,413 $26,711
=============================
Cash paid during the year for:
Interest $13,938 $11,655 $11,060
Income taxes 2,947 1,780 1,646
Noncash transactions:
Transfer of loans to real estate owned 71 33
Transfer of securities to available for sale, at fair value 16,144
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Real
estate loans make up approximately 99% of the Company's loan portfolio and
the remaining 1% 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, and the carrying
value of other real estate recognized in the Company's financial statements.
Estimates that are more susceptible to change in the near term include the
allowance for loan losses and the fair value of certain financial
instruments. 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.
Statement of Cash Flows: 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.
Investment Securities: 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.
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.
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.
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.
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 Accounting Principles Board 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 Statement of Financial Accounting Standards (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 14.
Earnings Per Share: Basic and diluted earnings per share are computed under
the provisions of SFAS No. 128, "Earnings Per Share," which was adopted
retroactively by the Company at the beginning of the fourth quarter of 1997.
Adoption of the Statement did not materially change prior period earnings
per share amounts. Basic earnings per share have been computed based on the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share have been computed based on the weighted
average number of shares of common stock considering the dilutive effect of
the assumed exercise of options outstanding during the period. ESOP shares
that have not been allocated to participants are not considered outstanding
for purposes of computing earnings per share. The number of shares used to
compute basic and diluted earnings per share were 4,901,711 and 4,964,415 in
1997, respectively, and 5,127,380 and 5,135,213 in 1996, respectively, and
5,110,890 in 1995. 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 and upon 5,110,890 weighted average shares outstanding
during the five month period.
Reclassifications: Certain items in the 1996 and 1995 financial statements
have been reclassified to correspond with the 1997 presentation.
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.
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1997, 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 $15,971 $ 78 $(1) $16,048
U.S. agency securities 2,993 18 3,011
Federal Home Loan Mortgage
Corporation preferred stock 46 1,925 1,971
-----------------------------------------------
Total $19,010 $2,021 $(1) $21,030
===============================================
Investment securities held to maturity
Mortgage-backed securities $ 437 $ 37 $ 474
=================== =======
</TABLE>
At December 31, 1996, 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 $21,902 $ 43 $(7) $21,938
Federal Home Loan Mortgage
Corporation preferred stock 46 1,252 1,298
-----------------------------------------------
Total $21,948 $1,295 $(7) $23,236
===============================================
Mortgage-backed securities $ 561 $ 47 $ 608
=================== =======
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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 $ 5,994 $ 5,998
Due after one year through five years 12,970 13,061
--------------------
18,964 19,059
Federal Home Loan Mortgage Corporation
preferred stock 46 1,971
--------------------
$19,010 $21,030
====================
Investment securities held to maturity
Mortgage-backed securities $ 437 $ 474
====================
</TABLE>
No investment securities were sold during 1997, 1996 or 1995. The par
values of securities pledged to collateralize public funds and for other
purposes were approximately $15.5 million and $15.0 million at December 31,
1997 and 1996, respectively.
NOTE 4 - LOANS RECEIVABLE
At December 31, 1997 and 1996, loans receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------
<S> <C> <C>
Real estate loans
Secured by one- to four-family residences $278,438 $248,694
Home equity 15,407 11,651
Multi-family 8,170 9,028
Nonresidential 10,521 8,842
--------------------
312,536 278,215
--------------------
Real estate construction loans 20,013 15,885
Undisbursed portion of construction loans (9,672) (7,120)
--------------------
Total construction loans 10,341 8,765
--------------------
Total real estate loans 322,877 286,980
--------------------
Commercial loans 297 398
--------------------
Consumer loans
Loans on deposit accounts 1,258 1,087
Automobile 1,189 773
Education 1,155 1,268
Other consumer 806 831
--------------------
Total consumer loans 4,408 3,959
--------------------
Total loans 327,582 291,337
Net deferred loan origination fees (4,171) (3,977)
Allowance for loan losses (1,742) (1,557)
--------------------
$321,669 $285,803
====================
</TABLE>
Loans serviced by the Company for other institutions totaled approximately
$4.8 million, $5.7 million and $7.1 million at December 31, 1997, 1996 and
1995, respectively.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,557 $1,376 $1,209
Provision for losses 186 180 180
Charge-offs (2) - (17)
Recoveries 1 1 4
--------------------------
Balance at end of year $1,742 $1,557 $1,376
==========================
</TABLE>
No loans were classified as impaired at December 31, 1997, 1996 and 1995 or
during the years then ended.
Industrial has granted loans to certain of its executive officers and
directors and their related business interests.
A summary of activity on related party loans aggregating $60,000 or more to
any one related party is as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Balance at beginning of year $ -
Loans originated 183
Repayments (88)
----
Balance at end of year $ 95
====
</TABLE>
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
----------------
<S> <C> <C>
Land $1,829 $1,718
Buildings and improvements 5,058 5,037
Furniture and equipment 1,083 1,026
----------------
Total cost 7,970 7,781
Accumulated depreciation 2,998 2,752
----------------
$4,972 $5,029
================
</TABLE>
NOTE 6 - DEPOSITS
A summary of deposits at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------
<S> <C> <C>
Noninterest-bearing demand deposits $ 3,287 $ 3,173
Passbook savings accounts 52,622 53,410
NOW accounts 15,277 14,321
Money market accounts 4,049 4,531
Certificates of deposit 195,722 183,639
--------------------
$270,957 $259,074
====================
</TABLE>
Deposit accounts with balances of $100,000 or more at December 31, 1997 and
1996 totaled approximately $44.3 million and $40.1 million, respectively.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1998 $131,266
1999 39,478
2000 17,042
2001 5,777
2002 1,586
Thereafter 573
--------
$195,722
========
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1997, advances from the Federal Home Loan Bank of Cincinnati
consisted of the following:
<TABLE>
<CAPTION>
Year of maturity Interest rate Amount
---------------------------------------------------------
<S> <C> <C>
1998 5.80 - 6.15% $ 4,000
1999 6.00 - 6.30 7,000
2000 6.30 - 6.60 7,000
2001 6.21 2,000
2002 5.95 - 6.25 9,000
-------
$29,000
=======
Weighted average interest rate 6.20%
</TABLE>
These advances are collateralized by residential mortgage loans totaling
$43.5 million under a blanket collateral agreement and by Federal Home Loan
Bank stock. At December 31, 1996 Industrial had one $2.0 million advance
outstanding with a 6.15% fixed interest rate, maturing in 1998.
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. Total contributions made during 1995 for the defined
benefit pension plan were $151,000.
Net pension expense for 1995 included the following:
<TABLE>
<S> <C>
Service cost - benefits earned $ 92
Interest cost on projected
benefit obligation 66
Actual return on plan assets (76)
Net amortization and deferral 45
----
Net pension expense $127
====
</TABLE>
In determining the net pension expense for 1995, the following assumptions
were used: a discount rate of 6.50%, a rate of increase in compensation
levels of 3.00% and a long-term rate of return on assets of 5.75%.
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN
In 1996, the Company 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.
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 related to the ESOP for the years ended December 31,
1997 and 1996 were approximately $655,000 and $1.8 million, respectively.
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, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------
<S> <C> <C>
Shares allocated to participants 90,728 46,218
Unreleased shares 352,882 397,392
--------------------
Total ESOP shares 443,610 443,610
====================
Fair value of unreleased shares (in thousands) $ 6,264 $ 5,067
====================
</TABLE>
NOTE 10 - STOCK OPTION AND INCENTIVE PLAN
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
granted during 1997 and 77,763 options were exercisable as of December 31,
1997.
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.
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 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 1997 and 1996
would have been:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
As reported Pro forma As reported Pro forma
---------------------------------------------------
<S> <C> <C> <C> <C>
Net income $5,113 $4,930 $2,399 $2,323
Basic earnings per share 1.04 1.01 0.47 0.45
Diluted earnings per share 1.03 0.99 0.47 0.44
</TABLE>
The following assumptions were used under the Black-Sholes option pricing
model for purposes of the pro forma disclosures above: a risk-free interest
rate of 6.34%, a dividend yield 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.
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. At December 31,
1997, there were 500 shares that had not been awarded. Compensation
expense, which is based upon the cost of the shares, was $526,000 and
$351,000 for the years ended December 31, 1997 and 1996, respectively.
NOTE 12 - 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. In 1996, the Omnibus Bill became law and 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 Company's
special assessment was paid in November of 1996, from working capital of
Industrial, and totaled $1.0 million after taxes. Following the special
assessment, the FDIC reduced the annual assessment rates for SAIF-insured
institutions to bring them in line with BIF assessment rates.
Industrial will continue to be subject to an assessment to fund the
repayment of the FICO obligations. The FICO assessment for SAIF-insured
institutions is approximately 6.5 cents per $100 of deposits while BIF-
insured institutions 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 13 - INCOME TAXES
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Current expense $2,678 $1,991 $1,837
Deferred expense 105 29 312
--------------------------
$2,783 $2,020 $2,149
==========================
</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>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate $2,685 $1,502 $2,149
Add tax effect of ESOP deduction 72 579
MRP awards expense (16)
Other 42 (61)
--------------------------
$2,783 $2,020 $2,149
==========================
</TABLE>
Deferred income taxes are provided for temporary differences. The
components of the Company's net deferred tax balance at December 31 consist
of the following:
<TABLE>
<CAPTION>
1997 1996
----------------
<S> <C> <C>
Deferred tax assets
Deferred loan fees $1,211 $1,337
Accrued MRP awards 119 119
Construction period interest 17 18
Accrued vacation 36 37
ESOP shares allocated 57 31
Other 10
----------------
1,450 1,542
----------------
Deferred tax liabilities
Bad debt deduction (350) (410)
FHLB stock dividends (515) (447)
Unrealized gain on investment securities available for sale (687) (438)
Depreciation expense (120) (120)
Accumulated accretion (38) (33)
----------------
(1,710) (1,448)
----------------
Net deferred tax (liability)/ asset $ (260) $ 94
================
</TABLE>
The Company has not established a valuation allowance as it is management's
belief that it has adequate taxable income and carrybacks to realize
recorded deferred tax assets.
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, 1997 includes approximately $4.2 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 $1.4 million at
December 31, 1997.
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.
As of December 31, 1997 and 1996, Industrial had commitments to make loans
at market rates and loans in process to be funded in six months or less
approximating $24.1 million and $20.8 million, respectively. Approximately
$11.4 million and $9.5 million of these commitments had fixed rates at
December 31, 1997 and 1996, respectively. The interest rates on these
commitments ranged from 6.75% to 8.00% for variable rate loans and from
6.75% to 8.75% for fixed rate loans at December 31, 1997. 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, 1997 and 1996, Industrial was required by the Federal
Reserve Bank of Cleveland to maintain cash reserves of $436,000 and
$417,000, 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 capital
components, risk weightings and other factors. 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, 1997. Management believes no conditions or events have
occurred since December 31, 1997 that would change Industrial's category.
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.
At December 31, 1997 and 1996, 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>
1997
- ----
Total capital
(to risk weighted assets) $37,392 19.03% $15,718 8.0% $19,648 10.0%
Tier 1 (core) capital
(to risk weighted assets) $35,696 18.17% $ 7,859 4.0% $11,789 6.0%
Tier 1 (core) capital
(to adjusted total assets) $35,696 9.86% $10,866 3.0% $18,110 5.0%
Tangible capital
(to adjusted total assets) $35,696 9.86% $ 5,433 1.5% N/A
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
</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, 1997 and 1996. Items that
are not financial instruments are not included.
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 10,772 $ 10,772 $ 7,413 $ 7,413
Investment securities 21,467 21,504 23,797 23,844
Loans receivable, net 321,669 324,187 285,803 287,168
Accrued interest receivable 1,985 1,985 1,784 1,784
Financial liabilities
Deposits $(270,957) $(271,716) $(259,074) $(259,603)
FHLB advances (29,000) (29,015) (2,000) (2,016)
Accrued interest payable (709) (709) (582) (582)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash
equivalents and accrued interest 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 and
FHLB advances is based on estimates of the rate Industrial would pay on such
deposits or advances 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, 1997 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, 1997 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.
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
(Dollars in thousands) 1997 1996
------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 538 $ 662
Investment in subsidiary 37,029 56,627
Loan receivable from ESOP 3,697 4,066
Loan receivable from subsidiary 19,500 700
Other assets 99 49
------------------
$60,863 $62,104
==================
LIABILITIES
Other liabilities $ 1
SHAREHOLDERS' EQUITY
Common stock 34,669 $34,669
Additional paid-in capital 1,879 1,669
Retained earnings 34,569 31,803
Treasury stock (6,306) (634)
Unearned employee stock ownership plan shares (3,529) (3,974)
Unearned compensation (1,753) (2,279)
Unrealized gain on securities available for sale 1,333 850
------------------
60,862 62,104
------------------
$60,863 $62,104
==================
</TABLE>
<TABLE>
<CAPTION>
For the five
For the year ended months ended
CONDENSED STATEMENTS OF INCOME December 31, December 31,
(Dollars in thousands) 1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Income
Interest $ 287 $ 791 $ 565
Cash dividends from subsidiary 26,500
-------------------------------
26,787 791 565
-------------------------------
Expenses
Management fees 60 60 25
Other operating expenses 123 167 14
-------------------------------
183 227 39
-------------------------------
Income before income taxes and equity in
undistributed earnings of subsidiary 26,604 564 526
Provision for income taxes 35 192 179
-------------------------------
Income before equity in undistributed earnings of subsidiary 26,569 372 347
Equity in undistributed earnings of subsidiary (21,456) 2,027 1,786
-------------------------------
Net income $ 5,113 $2,399 $2,133
===============================
</TABLE>
<TABLE>
<CAPTION>
For the five
For the year ended months ended
CONDENSED STATEMENTS OF CASH FLOWS December 31, December 31,
(Dollars in thousands) 1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,113 $ 2,399 $ 2,133
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed earnings of subsidiary 21,456 (2,027) (1,786)
Dividends on unallocated ESOP shares (194) (144) 32
Changes in other assets (50) (38) (11)
--------------------------------
Net cash from operating activities 26,325 190 368
--------------------------------
Cash flows from investing activities
Investment in subsidiary (27,121)
Loans to subsidiary (23,900) (22,600)
Principal repayment on loans to subsidiary 5,100 21,550 350
Loan to ESOP (4,436)
Principal repayment on loan to ESOP 370 370
--------------------------------
Net cash from investing activities (18,430) 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 (2,347) (1,661) (383)
Purchase of treasury stock (5,672) (634)
--------------------------------
Net cash from financing activities (8,019) (21,736) 53,727
--------------------------------
Net change in cash and cash equivalents (124) 374 288
Cash and cash equivalents at beginning of period 662 288
--------------------------------
Cash and cash equivalents at end of period $ 538 $ 662 $ 288
================================
</TABLE>
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>
1997
Interest income $6,581 $6,846 $ 7,084 $7,294
Interest expense 3,187 3,423 3,657 3,798
-----------------------------------------------
Net interest income 3,394 3,423 3,427 3,496
Provision for loan losses 49 47 45 45
Other income 111 111 120 167
Other expense 1,565 1,530 1,630 1,442
-----------------------------------------------
Income before taxes 1,891 1,957 1,872 2,176
Provision for incomes taxes 671 674 642 796
-----------------------------------------------
Net income $1,220 $1,283 $ 1,230 $1,380
===============================================
Basic EPS $ 0.24 $ 0.26 $ 0.25 $ 0.29
Diluted EPS 0.24 0.26 0.25 0.28
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
===============================================
Basic EPS $ 0.25 $ 0.24 $ (0.29) $ 0.26
Diluted EPS 0.25 0.24 (0.29) 0.26
</TABLE>
INDUSTRIAL BANCORP, INC.
Directors
- -------------------------------------------------
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
Fredric C. Spurck
President and Chief Executive Officer
Webster Industries, Inc.
Roger O. Wilkinson
Deputy Director
Huron County Alcohol, Drug Addiction
and Mental Health Services Board
Graydon H. Hayward
President
Hayward Rigging & Construction, Inc.
Leon W. Maginnis
Vice President - Finance
Hirt Publishing Company, Inc.
Bob Moore
President, Retired
Willard Foods
Executive Officers
- -------------------------------------------------
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
David W. Ball
Senior Vice President - Loans
Stephan S. Beal
Senior Vice President - Operations
Annual Meeting
- ------------------------------------------------------------------------------
The 1998 Annual Meeting of Shareholders of Industrial Bancorp, Inc. will be
held on April 21, 1998, at 2:30 p.m., local time, at the Bellevue Elks Lodge
#1013, located at 214 West 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 to shareholders at no
charge upon request to:
Industrial Bancorp, Inc.
211 N. Sandusky Street
Bellevue, Ohio 44811
Attn: Patrick S. Smith, Investor Relations
(419) 483-3375
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, New Jersey 07016-3572
(908) 272-8511
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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,273
<INT-BEARING-DEPOSITS> 9,499
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,030
<INVESTMENTS-CARRYING> 437
<INVESTMENTS-MARKET> 474
<LOANS> 323,411
<ALLOWANCE> 1,742
<TOTAL-ASSETS> 364,023
<DEPOSITS> 270,957
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,204
<LONG-TERM> 29,000
0
0
<COMMON> 34,669
<OTHER-SE> 26,193
<TOTAL-LIABILITIES-AND-EQUITY> 364,023
<INTEREST-LOAN> 25,779
<INTEREST-INVEST> 1,590
<INTEREST-OTHER> 436
<INTEREST-TOTAL> 27,805
<INTEREST-DEPOSIT> 13,005
<INTEREST-EXPENSE> 14,065
<INTEREST-INCOME-NET> 13,740
<LOAN-LOSSES> 186
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,167
<INCOME-PRETAX> 7,896
<INCOME-PRE-EXTRAORDINARY> 5,113
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,113
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.05
<LOANS-NON> 738
<LOANS-PAST> 294
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,557
<CHARGE-OFFS> 2
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,742
<ALLOWANCE-DOMESTIC> 1,742
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
