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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-026248
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) has 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 16, 1999, was
$81,922,859. (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 16, 1999, there were 4,730,886 of the Registrant's Common
Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1998 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the
1999 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 all
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 loans, 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. As an approved Federal Home
Loan Mortgage Corporation seller/servicer, the Association sells certain
residential real estate mortgage loans in the secondary market.
Loan Portfolio Composition. The following table presents certain
information regarding the composition of the Association's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
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 $279,237 83.87% $278,438 85.00% $248,694 85.35% $226,868 85.90% $207,943 86.61%
Home equity 16,624 4.99 15,407 4.70 11,651 4.00 8,546 3.24 5,509 2.29
Multifamily 9,165 2.75 8,170 2.49 9,028 3.10 8,213 3.11 8,019 3.35
Nonresidential 10,979 3.31 10,521 3.21 8,842 3.03 9,100 3.45 6,511 2.71
Construction (1) 11,607 3.49 10,341 3.16 8,765 3.01 6,746 2.55 7,187 2.99
-----------------------------------------------------------------------------------------------------
Total real estate
loans 327,612 98.41 322,877 98.56 286,980 98.49 259,473 98.25 235,169 97.95
Commercial loans 451 0.14 297 0.09 398 0.14 585 0.22 666 0.28
Consumer loans:
Education loans 1,073 0.32 1,155 0.35 1,268 0.44 1,456 0.55 1,650 0.68
Loans on deposits 1,307 0.39 1,258 0.39 1,087 0.37 987 0.38 1,032 0.43
Automobile loans 1,545 0.46 1,189 0.36 773 0.27 826 0.31 807 0.34
Other consumer loans 934 0.28 806 0.25 831 0.29 771 0.29 763 0.32
-----------------------------------------------------------------------------------------------------
Total consumer
loans 4,859 1.45 4,408 1.35 3,959 1.37 4,040 1.53 4,252 1.77
-----------------------------------------------------------------------------------------------------
Total loans 332,922 100.00% 327,582 100.00% 291,337 100.00% 264,098 100.00% 240,087 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
origination fees (4,020) (4,171) (3,977) (3,598) (3,341)
Allowance for
loan losses (1,930) (1,742) (1,557) (1,376) (1,209)
-------- -------- -------- -------- --------
Net loans $326,972 $321,669 $285,803 $259,124 $235,537
======== ======== ======== ======== ========
- --------------------
<F1> Net of the undisbursed portion of construction loans.
</TABLE>
Loan Maturity. The following table sets forth certain information as
of December 31, 1998, 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
----------------------------------------------------------------------------------
2002 2004 2009 2019
and through through and
1999 2000 2001 2003 2008 2018 After Total
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 1,028 $185 $ 575 $ 6,953 $26,561 $72,685 $171,250 $279,237
Home equity 16,624 - - - - - - 16,624
Multifamily and nonresidential 545 14 933 4,470 1,420 10,393 2,369 20,144
Construction 1,616 73 11 112 122 1,289 8,384 11,607
Commercial loans 442 - - 9 - - - 451
Consumer loans 1,799 430 656 1,001 804 158 11 4,859
----------------------------------------------------------------------------------
Total $22,054 $702 $2,175 $12,545 $28,907 $84,525 $182,014 $332,922
==================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans which
will become due more than one year after December 31, 1998, and which have
predetermined interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than
one year after
December 31, 1998
-----------------
(In thousands)
<S> <C>
Fixed interest rates $229,731
Adjustable interest rates 81,137
--------
$310,868
========
</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, 1998, the
Association's one- to four-family residential real estate loan portfolio was
$279.2 million, or 84% 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, 1998, the Association had $16.6 million, or 5% 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, 1998, loans secured by multifamily properties totaled
$9.2 million, or 3% of total loans.
Loans Secured by Nonresidential Real Estate. At December 31, 1998,
$11.0 million, or 3%, 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.
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, 1998, the Association's loan portfolio
included $11.6 million in construction loans, net of undisbursed proceeds,
or 3% of total loans.
The Association's construction loan portfolio at December 31, 1998,
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, 1998, loans for
the construction of nonresidential real estate totaled $595,000.
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, 1998, the Association's commercial loan
portfolio was $451,000, or less than 1% 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, 1998, the
Association had $4.9 million, or 1% of total loans, invested in consumer
loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail
greater risk than do residential real estate loans. Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. The risk of default on consumer
loans increases during periods of recession, high unemployment and other
adverse economic conditions.
Loan Solicitation and Processing. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Association's
lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel in the office where the loan is originated. The Association
typically obtains a credit report, verification of employment and other
documentation concerning the creditworthiness of the borrower. An appraisal
of the fair market value of the real estate which will be given as security
for the loan is prepared by a staff appraiser or a fee appraiser approved by
the Board of Directors. Upon the completion of the appraisal and the receipt
of information on the credit history of the borrower, the application for a
loan is submitted for review in accordance with the Association's
underwriting guidelines to the Association's Executive Committee or
Underwriting Committee. All loans are ratified by the full Board of
Directors.
Under the Association's current loan guidelines, if a real estate loan
application is approved, title insurance is usually obtained on the real
estate which will secure the mortgage loan. In the past, the Association
used an attorney's opinion for single-family loans, whereas title insurance
was typically used for nonresidential real estate loans. Borrowers are
required to carry satisfactory fire and casualty insurance and flood
insurance, if applicable, and to name the Association as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. 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, the Association,
beginning in the second quarter of 1998, initiated a program to sell 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. At December 31, 1998, the Association had $21.1 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,
-----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family residential $ 88,834 $ 74,289 $58,626 $46,007 $50,809
Multifamily residential 844 211 702 375 149
Nonresidential 2,335 817 957 848 446
Construction 21,298 22,911 18,751 17,478 15,986
Commercial 2,175 1,674 624 601 836
Consumer 3,327 2,891 2,572 2,568 2,627
-----------------------------------------------------
Total loans originated 118,813 102,793 82,232 67,877 70,853
Loan participations purchased 2,175 1,025 - - -
Reductions:
Principal repayments 101,360 64,950 54,521 40,609 40,571
Loans sold 17,663 - - 1,250 -
Transfers from loans to real estate owned 46 71 - 33 276
-----------------------------------------------------
Total reductions 119,069 65,021 54,521 41,892 40,847
Increase (decrease) in other items, net (1) (3,384) 2,931 1,032 2,398 (530)
-----------------------------------------------------
Net increase $ 5,303 $ 35,866 $26,679 $23,587 $30,536
=====================================================
- --------------------
<F1> Other items consist of the undisbursed portion of construction loans,
net loan origination fees, unearned interest and the allowance for
loan losses.
</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
$5.4 million to one borrower at December 31, 1998. The largest amount the
Association had outstanding to one borrower and related persons or entities
at December 31, 1998, 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,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
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 114 $2,336 0.70% 75 $2,019 0.62% 65 $1,267 0.43%
60 - 89 days 35 1,266 0.38 49 1,327 0.40 34 575 0.20
90 days and over 71 1,285 0.39 38 763 0.23 75 999 0.34
-----------------------------------------------------------------------------------------
Total delinquent loans 220 $4,887 1.47% 162 $4,109 1.25% 174 $2,841 0.97%
=========================================================================================
<CAPTION>
At December 31,
------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
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 70 $1,238 0.47% 56 $1,394 0.58%
60 - 89 days 47 749 0.28 36 1,342 0.56
90 days and over 73 1,502 0.57 47 1,142 0.48
----------------------------------------------------------
Total delinquent loans 190 $3,489 1.32% 139 $3,878 1.62%
==========================================================
</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,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90 days or more $ 512 $ 294 $ 721 $ 939 $ 874
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family 963 710 504 621 548
Multifamily - - - - -
Nonresidential - 10 - 7 63
Consumer 13 18 13 5 13
--------------------------------------------------
Total nonaccrual loans 976 738 517 633 624
--------------------------------------------------
Total nonperforming loans 1,488 1,032 1,238 1,572 1,498
Real estate owned 5 76 5 5 40
--------------------------------------------------
Total nonperforming assets $1,493 $1,108 $1,243 $1,577 $1,538
==================================================
Allowance for loan losses $1,930 $1,742 $1,557 $1,376 $1,209
==================================================
Nonperforming assets as a
percent of total assets 0.38% 0.31% 0.38% 0.49% 0.58%
Nonperforming loans as a
percent of total loans 0.45% 0.32% 0.42% 0.60% 0.62%
Allowance for loan losses as a
percent of nonperforming loans 129.72% 168.76% 125.77% 87.53% 80.71%
</TABLE>
For the year ended December 31, 1998, gross interest income which
would have been recorded had nonaccruing loans been current in accordance
with their original terms was $22,000. Interest collected on such loans and
included in net income was $12,000.
Real estate acquired by the Association as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. REO
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,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Substandard $1,482 $786 $874 $1,408 $1,441
Doubtful - - - - -
Loss 23 45 54 46 74
------------------------------------------
Total classified assets $1,505 $831 $928 $1,454 $1,515
==========================================
</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 probable 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,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,742 $1,557 $1,376 $1,209 $1,001
Charge-offs (14) (2) - (17) (4)
Recoveries 2 1 1 4 12
----------------------------------------------
Net (charge-offs) recoveries (12) (1) 1 (13) 8
Provision for loan losses 200 186 180 180 200
----------------------------------------------
Balance at end of year $1,930 $1,742 $1,557 $1,376 $1,209
==============================================
Net (charge-offs) recoveries to
average loans 0.00% 0.00% 0.00% (0.01)% 0.00%
Allowance for loan losses to
total loans 0.59% 0.54% 0.53% 0.52% 0.50%
</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>
1998 1997 1996
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
loans loans loans
in each in each in each
category to category to category to
Amount total loans Amount total loans Amount total loans
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $1,442 98% $1,303 99% $1,166 99%
Commercial loans 38 - 34 - 30 -
Consumer loans 164 2 151 1 134 1
Unallocated 286 - 254 - 227 -
-------------------------------------------------------------------
Total $1,930 100% $1,742 100% $1,557 100%
===================================================================
<CAPTION>
1995 1994
--------------------- ---------------------
Percent of Percent of
loans loans
in each in each
category to category to
Amount total loans Amount total loans
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $1,036 98% $ 913 98%
Commercial loans 27 - 23 -
Consumer loans 112 2 103 2
Unallocated 201 - 170 -
------------------------------------------
Total $1,376 100% $1,209 100%
==========================================
</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,
-------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total
-------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $ 5,469 11.16% $ 5,469 11.16% $ 3,499 11.30% $ 3,499 11.29%
Overnight deposits 22,000 44.91 22,000 44.89 6,000 19.38 6,000 19.35
-------------------------------------------------------------------------------------
Total interest-bearing deposits 27,469 56.07 27,469 56.05 9,499 30.68 9,499 30.64
Investment securities:
U.S. Treasury securities:
Available for sale 12,156 24.81 12,156 24.81 16,048 51.82 16,048 51.76
U.S. agency securities:
Available for sale 6,042 12.33 6,042 12.33 3,011 9.72 3,011 9.71
Equity securities (1) 3,037 6.20 3,037 6.20 1,971 6.37 1,971 6.36
-------------------------------------------------------------------------------------
Total investment securities 21,235 43.34 21,235 43.34 21,030 67.91 21,030 67.83
-------------------------------------------------------------------------------------
Mortgage-backed securities 283 0.59 302 0.61 437 1.41 474 1.53
-------------------------------------------------------------------------------------
Total investments $48,987 100.00% $49,006 100.00% $30,966 100.00% $31,003 100.00%
=====================================================================================
<CAPTION>
At December 31,
----------------------------------------
1996
----------------------------------------
Carrying % of Fair % of
value total value total
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $ 2,101 7.03% $ 2,101 7.02%
Overnight deposits 4,000 13.38 4,000 13.36
----------------------------------------
Total interest-bearing deposits 6,101 20.41 6,101 20.38
Investment securities:
U.S. Treasury securities:
Available for sale 21,938 73.38 21,938 73.27
U.S. agency securities:
Available for sale - - - -
Equity securities (1) 1,298 4.34 1,298 4.33
----------------------------------------
Total investment securities 23,236 77.72 23,236 77.60
----------------------------------------
Mortgage-backed securities 561 1.87 608 2.02
----------------------------------------
Total investments $29,898 100.00% $29,945 100.00%
========================================
- --------------------
<F1> Comprised of Federal Home Loan Mortgage Corporation preferred stock.
</TABLE>
The maturities of the Association's interest-bearing deposits,
investment securities and mortgage-backed securities at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years
------------------- ------------------- ------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $27,469 4.68% $ - -% $ - -% $ - -%
U.S. Treasury securities 6,018 5.52 6,138 6.33 - - - -
U.S. agency securities 4,014 5.87 2,028 6.09 - - - -
Mortgage-backed securities - - 58 9.82 12 8.50 213 10.76
---------------------------------------------------------------------------------------
Total $37,501 4.94% $8,224 6.30% $ 12 8.50% $213 10.76%
=======================================================================================
<CAPTION>
At December 31, 1998
------------------------------------
Total
------------------------------------
Carrying Market Weighted
value value average yield
------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-bearing deposits $27,469 $27,469 4.68%
U.S. Treasury securities 12,156 12,156 5.92
U.S. agency securities 6,042 6,042 5.94
Mortgage-backed securities 283 302 10.47
-------------------------------
Total $45,950 $45,969 5.21%
===============================
</TABLE>
Not included in the preceding table is $3.0 million of Federal Home Loan
Mortgage Corporation preferred stock which has no stated maturity.
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 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, 1998, the Association's certificates of deposit
totaled $207.9 million, or 72% of total deposits. Of such amount,
approximately $142.4 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 $69.1 million at December
31, 1998.
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 1998 1997 1996
average rate at ------------------------ ------------------------ -----------------------
December 31, Percent of Percent of Percent of
1998 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 -% $ 4,009 1.39% $ 3,287 1.21% $ 3,173 1.22%
Passbook savings accounts 3.10 54,258 18.80 52,622 19.43 53,410 20.62
NOW accounts 2.90 17,750 6.15 15,277 5.64 14,321 5.53
Money market accounts 3.00 4,713 1.63 4,049 1.49 4,531 1.75
---------------------------------------------------------------------------
Total transaction accounts 80,730 27.97 75,235 27.77 75,435 29.12
Certificates of deposit:
4.01% - 6.00% 5.42 149,696 51.87 120,113 44.33 130,367 50.32
6.01% - 8.00% 6.17 33,578 11.64 51,020 18.83 28,962 11.18
8.01% - 10.00% - - - - - 6 0.00
Adjustable-rate (1) 5.45 24,580 8.52 24,589 9.07 24,304 9.38
---------------------------------------------------------------------------
Total certificates
of deposit 5.54 207,854 72.03 195,722 72.23 183,639 70.88
---------------------------------------------------------------------------
Total deposits 4.80% $288,584 100.0% $270,957 100.0% $259,074 100.0%
==========================================================================
- --------------------
<F1> Consists of IRA and Keogh accounts, the rates on which adjust monthly
at the discretion of the Association.
</TABLE>
The Association bids on deposits of public funds from entities in its
primary market area. The amount of such deposits was approximately $20.8
million at December 31, 1998.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1998:
<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% $110,709 $18,155 $15,170 $5,662 $149,696
6.01% to 8.00% 15,622 11,332 4,958 1,666 33,578
Adjustable rate 16,065 8,515 - - 24,580
----------------------------------------------------------
Total certificates of deposit $142,396 $38,002 $20,128 $7,328 $207,854
==========================================================
</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, 1998:
<TABLE>
<CAPTION>
Maturity Amount
- ----------------------------------------
(In thousands)
<S> <C>
Three months or less $ 479
Over 3 months to 6 months 7,376
Over 6 months to 12 months 25,839
Over 12 months 12,201
-------
Total $45,895
=======
</TABLE>
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $270,957 $259,074 $238,282
Deposits 445,214 166,892 399,604
Withdrawals (438,622) (165,456) (388,210)
--------------------------------
Net deposits before interest credited 277,549 260,510 249,676
Interest credited 11,035 10,447 9,398
--------------------------------
Ending balance $288,584 $270,957 $259,074
================================
Net increase $ 17,627 $ 11,883 $ 20,792
Percent increase 6.5% 4.6% 8.7%
</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, 1998, 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,
----------------------------
1998 1997 1996
----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $37,000 $29,000 $2,000
Average balance 35,692 16,615 462
Average interest rate paid 6.15% 6.38% 4.76%
</TABLE>
At December 31, 1998, the Association had outstanding FHLB advances
totaling $35.0 million, with a weighted average interest rate of 6.11%.
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, 1998, the Association had 84 full-time employees
and 8 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. 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, 1998, 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, 1998, was approximately $31.1 million, or 7.90%, which exceeded
the 4% liquidity requirement by approximately $18.8 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, 1998, 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 $5.4
million to one borrower at December 31, 1998. The largest amount Industrial
had outstanding to any group of affiliated borrowers at December 31, 1998,
was $3.9 million, which consisted of forty-four loans, secured by a number
of residential rental and condominium development projects. At December 31,
1998, 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, 1998.
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, 1998.
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.
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, 1998, 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 $.012 per $100 in deposits, and SAIF assessments for healthy
institutions in 1997 were $.061 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
$46.5 million (subject to an exemption of up to $4.9 million), and of 10% of
net transaction accounts over $46.5 million. At December 31, 1998,
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 $3.3 million at
December 31, 1998.
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 $28.5 million for the
three tax years ending on December 31, 1998, 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, 1998, Industrial's pre-1988
reserves for tax purposes totaled approximately $4.2 million. Industrial
believes it had approximately $2.4 million of accumulated earnings and
profits for tax purposes as of December 31, 1998, 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,
1998, 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 Owned 11/04/94 $29,325 $1,137
Ashland, Ohio 44805
203 North Sandusky Street (1) Owned 02/25/93 - 64
Bellevue, Ohio 44811
211 North Sandusky Street Owned 05/06/72 56,034 349
Bellevue, Ohio 44811
225 North Main Street Owned 06/05/75 15,116 103
Clyde, Ohio 43410
1500 Bright Road Owned 01/29/93 20,783 1,027
Findlay, Ohio 45840
321 West State Street Owned 06/30/87 19,225 218
Fremont, Ohio 43420
2080 Ferguson Road Leased - - -
Mansfield, Ohio 44906
50 West Main Street Owned 08/06/76 43,056 261
Norwalk, Ohio 44857
51 West Main Street (2) Owned 09/11/92 - 193
Norwalk, Ohio 44587
4112 Milan Road Owned 02/29/88 14,242 429
Sandusky, Ohio 44870
48 East Market Street (3) Owned 06/15/83 55,006 335
Tiffin, Ohio 44883
796 West Market Street (3) Owned 12/18/90 - 227
Tiffin, Ohio 44883
301 Myrtle Avenue Owned 05/07/77 35,887 142
Willard, Ohio 44890
- --------------------
<F1> Office facility for the Association's appraisal staff.
<F2> Drive-up facility only.
<F3> Deposit totals are combined for the two Tiffin offices.
</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 1998 Annual Report to Shareholders of
the Corporation (the "Annual Report"), a copy of which is attached hereto as
Exhibit 13, under the caption "Common Stock Information," 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.
The dividend pay-out ratio (dividends declared per share as a percentage of
basic earnings per share) of the Company was 48.4% for 1998, 46.2% for 1997
and 53.2% for 1996. The dividend pay-out ratio for 1996 excludes the $3.50
per share special return of capital distribution.
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, 1999, 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 1999 Annual
Meeting of Shareholders of the Company (the "Proxy Statement"), filed with
the Securities and Exchange Commission (the "Commission") on March 16, 1999,
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" 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 1999 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 1998.
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, Chairman of the
Chief Executive Officer and Director Board, Chief Financial Officer and
Director
Date: March 16, 1999 Date: March 16, 1999
/s/ Graydon H. Hayward /s/ Leon W. Maginnis
- ----------------------------- -----------------------------------
Graydon H. Hayward, Director Leon W. Maginnis, Director
Date: March 16, 1999 Date: March 16, 1999
- ----------------------------- -----------------------------------
Bob Moore, Director Fredric C. Spurck, Director
Date: March 16, 1999 Date: March 16, 1999
/s/ Roger O. Wilkinson
- -----------------------------
Roger O. Wilkinson, Director
Date: March 16, 1999
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 Articles of Incorporation
3(c) Code of Regulations
Incorporated by reference to the S-1, Exhibit 3.2
Incorporated by reference to the S-1, Exhibit 3.3
11 Statement Regarding Computation of Per Share Earnings
Incorporated by reference to Note 1 to the Financial
Statements included in the Annual Report
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for 1999 Annual Meeting of Shareholders
Incorporated by reference to the Proxy Statement, filed
with the Securities and Exchange Commission on March 16, 1999
EXHIBIT 13
1998 ANNUAL REPORT OF SHAREHOLDERS
Contents
1 President' Message
2 Selected Consolidated Financial Data
3 Management's Discussion and Analysis of Financial Condition and Results
of Operations
14 Consolidated Financial Statements
18 Notes to Consolidated Financial Statements
32 Report of Independent Auditors
32 Common Stock Information
33 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 1998.
This report will show that 1998 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 $2.25 per share during 1998, an
increase of 13%. In addition, regular cash dividends increased to $0.59 per
share during 1998 from $0.48 per share during 1997, an increase of 23%.
Also during 1998, the Company continued its stock repurchase program
by authorizing the repurchase of 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 723,464 shares of outstanding stock as of
year-end 1998, with additional stock yet to be purchased.
Our subsidiary, Industrial Savings and Loan Association also completed
another very successful year in 1998. Having completed its 108th year of
operation, it continued to grow and prosper. One of the highlights of 1998
was the announcement of a new branch office to be located inside a local
grocery supercenter in Willard, Ohio. Construction is underway and should be
completed in the near future. We are excited about this opportunity to
expand our services to our existing customers and to add to our customer
base throughout the Willard area. Also during 1998, we upgraded all of our
teller equipment and computer software. This financial commitment, in excess
of $650,000, will enhance our ability to better serve our customers as well
as assist us in preparing for the year 2000 and beyond. This upgrade in
technology took place with very little disruption to our delivery of quality
service to our customers thanks to the hard work and dedication of all of
our employees. They are truly to be commended for their efforts.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. We reached a record high of
$388.1 million in consolidated assets as of year-end 1998, which represents
a 7% increase from year-end 1997. During 1998 we sold $17.5 million of fixed
rate loans in the secondary market. Also, consolidated earnings exceeded
$5.7 million for the year, compared to $5.1 million for last year, an
increase of 12%. Earnings per share amounted to $1.22 per share for 1998
compared to $1.04 per share for 1997, an increase of 17%. Lending remained
very strong in 1998, as we originated $118.8 million in new loans, which
represents a 16% increase over the previous year. Savings deposits increased
to $288.6 million as of year-end, which is also a new record.
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>
1998 1997 1996 1995 1994
--------------------------------------------------------
Selected financial condition data: (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total assets $388,059 $364,023 $326,613 $322,994 $268,041
Investment securities 21,518 21,467 23,797 27,882 16,014
Loans receivable - net 326,972 321,669 285,803 259,124 235,537
Deposits 288,584 270,957 259,074 238,282 231,966
FHLB advances 35,000 29,000 2,000 - 6,000
Shareholders' equity (1) 60,741 60,862 62,104 81,055 27,616
Summary of earnings:
Interest income $ 30,562 $ 27,805 $ 25,468 $ 22,858 $ 19,024
Interest expense 15,825 14,065 11,863 11,236 9,181
--------------------------------------------------------
Net interest income 14,737 13,740 13,605 11,622 9,843
Provision for loan losses 200 186 180 180 200
--------------------------------------------------------
Net interest income after
provision for loan losses 14,537 13,554 13,425 11,442 9,643
Noninterest income 858 509 447 398 461
Noninterest expense 6,663 6,167 9,453 5,518 4,734
--------------------------------------------------------
Income before income tax 8,732 7,896 4,419 6,322 5,370
Income tax expense 3,028 2,783 2,020 2,149 1,752
--------------------------------------------------------
Net income $ 5,704 $ 5,113 $ 2,399 $ 4,173 $ 3,618
========================================================
Basic earnings per share (2) $ 1.22 $ 1.04 $ 0.47 $ 0.42 -
Diluted earnings per share (2) 1.19 1.03 0.47 0.42 -
Cash dividends per share (2) (3) 0.59 0.48 3.75 0.15 -
Selected financial ratios:
Return on average assets 1.50% 1.48% 0.75% 1.42% 1.42%
Return on average equity 9.36 8.38 3.62 8.21 14.33
Average equity to average assets 16.03 17.63 20.59 17.29 9.88
Interest rate spread 3.11 3.13 3.26 3.26 3.55
Net interest margin 3.95 4.05 4.32 4.04 3.94
Efficiency ratio (4) 43.28 43.85 68.14 46.60 46.85
Noninterest expense to average assets 1.75 1.78 2.94 1.88 1.85
Nonperforming assets to total assets 0.38 0.31 0.38 0.49 0.58
Nonperforming loans to total loans 0.45 0.32 0.42 0.60 0.62
Allowance for loan losses to total loans 0.59 0.54 0.53 0.52 0.50
Allowance for loan losses to
nonperforming loans 129.72 168.76 125.77 87.53 80.71
- --------------------
<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 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
==============================================================================
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 the principal business of
Industrial Bancorp, the discussion below focuses principally on the
financial condition and results of operations of Industrial Savings.
The following discussion and analysis of Industrial Bancorp, Inc. and its
wholly-owned subsidiary, Industrial Savings and Loan Association, (together
referred to as the "Company") should be read in conjunction with and with
reference to the consolidated financial statements and accompanying notes
presented in this Annual Report beginning on page 14.
CHANGES IN FINANCIAL CONDITION
- ------------------------------------------------------------------------------
Total consolidated assets of the Company were $388.1 million at year-end
1998, an increase of $24.1 million from $364.0 million at year-end 1997.
Loans receivable increased $5.3 million to $327.0 million at year-end 1998
from $321.7 million at year-end 1997. Loan originations exceeded $100
million for the second year in a row, with 93% of the originations in the
one- to four-family residential mortgage and real estate construction loan
categories. Also during 1998, the Company experienced an unusual amount of
refinancings and sold $17.7 million of fixed-rate mortgage loans on the
secondary market. Investment securities held steady, totaling $21.5 million
at year-end in both 1998 and 1997. Maturities of U.S. Treasury and agency
securities totaling $6.0 million were replaced by purchases of the same
totaling $5.0 million and an increase of $768,000 in unrealized gains on
those securities during the year. Cash and cash equivalents were $28.5
million at year-end 1998, more than double the $10.8 million at year-end
1997. The Company has taken advantage of minor variations between long-term
and short-term interest rates to improve its liquidity position. Office
properties and equipment, net of accumulated depreciation, increased to $5.4
million at year-end 1998 from $5.0 million at year-end 1997. The increase is
principally due to the Company's substantial upgrade in technology,
primarily teller equipment and computer hardware and software.
Total deposits increased $17.6 million, or 6%, to $288.6 at year-end 1998
from $271.0 million at year-end 1997. Certificates of deposit increased
$12.1 million and transaction accounts, including passbook savings deposits,
increased $5.6 million. The Company has taken advantage of the favorable
interest rate environment and used advances from the Federal Home Loan Bank
("FHLB") to fund loan growth in excess of loan sales and deposit growth.
FHLB advances were $35.0 million at year-end 1998 compared to $29.0 million
at year-end 1997.
Shareholders' equity was $60.7 million at year-end 1998, compared to $60.9
million at year-end 1997. Net income of $5.7 million was offset by purchases
of 272,000 treasury shares at a cost of $5.5 million during 1998.
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>
1998 1997
Weighted average ---------------------------------- ----------------------------------
yield/rate at Average Average Average Average
12/31/98 balance Interest yield/rate balance Interest yield/rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 4.68% $ 18,656 $ 708 3.79% $ 11,696 $ 436 3.73%
Investment securities (1) 5.99 20,396 1,344 6.59 23,053 1,539 6.68
Mortgage-backed securities 10.48 345 34 9.98 497 51 10.26
Loans receivable (2) 8.04 333,775 28,476 8.53 304,397 25,779 8.47
------------------- -------------------
Total interest-earning assets 7.69 373,172 30,562 8.19 339,643 27,805 8.19
Noninterest-earning assets:
Cash and noninterest-bearing
deposits 1,109 1,051
Office properties and equipment 5,302 4,983
Other nonearning assets 2,371 1,832
Allowance for loan losses (1,832) (1,652)
-------- --------
Total assets $380,122 $345,857
======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts 2.90 $ 16,139 355 2.20 $ 14,084 327 2.32
Money market accounts 3.00 4,391 133 3.03 4,323 130 3.01
Passbook savings accounts 3.10 53,014 1,626 3.07 53,079 1,644 3.10
Certificates of deposit 5.54 202,198 11,516 5.70 189,887 10,904 5.74
------------------- -------------------
Total deposits 4.80 275,742 13,630 4.94 261,373 13,005 4.98
FHLB advances 6.09 35,692 2,195 6.15 16,615 1,060 6.38
------------------- -------------------
Total interest-bearing
liabilities 4.94 311,434 15,825 5.08 277,988 14,065 5.06
Noninterest-bearing liabilities 7,763 6,882
-------- --------
Total liabilities 319,197 284,870
======== ========
Shareholders' equity 60,925 60,987
-------- --------
Total liabilities and
shareholders' equity $380,122 $345,857
======== ========
Net interest income $14,737 $13,740
======= =======
Interest rate spread 2.75% 3.11% 3.13%
Net interest margin (4) 3.95% 4.05%
Average interest-earning assets
to average interest-bearing
liabilities 119.82% 122.18%
<CAPTION>
1996
----------------------------------
Average Average
balance Interest yield/rate
----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 13,629 $ 649 4.76%
Investment securities (1) 28,289 1,712 6.05
Mortgage-backed securities 660 67 10.15
Loans receivable (2) 271,998 23,040 8.47
-------------------
Total interest-earning assets 314,576 25,468 8.10
Noninterest-earning assets:
Cash and noninterest-bearing
deposits 933
Office properties and equipment 5,019
Other nonearning assets 2,596
Allowance for loan losses (1,557)
--------
Total assets $321,567
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 12,778 298 2.33
Money market accounts 4,653 140 3.01
Passbook savings accounts 52,872 1,631 3.08
Certificates of deposit 174,590 9,772 5.60
-------------------
Total deposits 244,893 11,841 4.84
FHLB advances 462 22 4.76
-------------------
Total interest-bearing
liabilities 245,355 11,863 4.84
Noninterest-bearing liabilities 10,005
--------
Total liabilities 255,360
Shareholders' equity 66,207
--------
Total liabilities and
shareholders' equity $321,567
========
Net interest income $13,605
=======
Interest rate spread 3.26%
Net interest margin (4) 4.32%
Average interest-earning assets
to average interest-bearing
liabilities 128.21%
- --------------------
<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 $1.0 million, $626,000
and $625,000 in 1998, 1997 and 1996.
<F3> 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 the
Company 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>
1998 vs. 1997 1997 vs. 1996
-------------------------------- -----------------------------
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 $ 265 $ 7 $ 272 $ (84) $(129) $ (213)
Investment securities (175) (20) (195) (338) 165 (173)
Mortgage-backed securities (16) (1) (17) (17) 1 (16)
Loans receivable 2,505 192 2,697 2,744 (5) 2,739
------------------------------------------------------------------
Total interest income 2,579 178 2,757 2,305 32 2,337
Interest expense attributable to:
- ---------------------------------
Deposits:
NOW accounts 46 (18) 28 30 (1) 29
Money market accounts 2 1 3 (10) - (10)
Passbook savings accounts (2) (16) (18) 6 7 13
Certificates of deposit 702 (90) 612 873 259 1,132
------------------------------------------------------------------
Total deposits 748 (123) 625 899 265 1,164
FHLB advances 1,175 (40) 1,135 1,028 10 1,038
------------------------------------------------------------------
Total interest expense 1,923 (163) 1,760 1,927 275 2,202
------------------------------------------------------------------
Increase(decrease) in net interest income $ 656 $341 $ 997 $ 378 $(243) $ 135
==================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS
- ------------------------------------------------------------------------------
Earnings Summary. The Company had consolidated net income of $5.7 million
for 1998, compared to $5.1 million for 1997 and $2.4 million for 1996. The
reduced amount in 1996 was due principally to two separate, but individually
significant, events that 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 the Company's Employee
Stock Ownership Plan ("ESOP") but not allocated to ESOP participants. The
Company recorded approximately $2.7 million in expense related to these two
events.
Net Interest Income. Net interest income of the Company 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 $14.7 million in 1998, compared to $13.7
million in 1997 and $13.6 million in 1996. Total interest income increased
to $30.6 million in 1998, compared to $27.8 million in 1997 and $25.5
million in 1996. The increases were largely due to average loans being $29.4
million higher in 1998 than in 1997 and $32.4 million higher in 1997 than in
1996. Interest and fees on loans totaled $28.5 million in 1998, compared to
$25.8 million in 1997 and $23.0 million in 1996. The average yield earned on
loans was 8.53% for 1998 and 8.47% for both 1997 and 1996. Interest earned
on investment securities declined to $1.3 million in 1998 compared to $1.5
million in 1997 and $1.7 million in 1996 while income from interest-bearing
deposits has increased to $708,000 in 1998 compared to $436,000 in 1997 and
$649,000 in 1996. The Company allowed the average balance of its investment
portfolio to decline in favor of shorter term, more liquid investments due
to the flat yield curve in 1998. Additional investments were limited during
1997 due to the excess growth of loans over deposits, without any loan
sales, and the resultant increased use of FHLB advances to fund the excess.
Total interest expense increased to $15.8 million in 1998, compared to $14.1
million in 1997 and $11.9 million in 1996. The increases were principally
due to the increased use of FHLB advances, which averaged $35.7 million in
1998, compared to $16.6 million in 1997 and $462,000 in 1996. Increased
reliance upon FHLB advances began in 1997 and continued in 1998 as the
growth in average deposits, from $244.9 million in 1996 to $261.4 million in
1997 and $275.7, did not keep pace with loan demand. The Company has
diminished some of its reliance upon FHLB advances by selling $17.7 million
of mortgage loans on the secondary market in 1998. The average rate paid for
deposits decreased to 4.94% in 1998 from 4.98% in 1997 as the maturity of
the deposit portfolio, particularly certificates of deposit, shifted to
shorter-term, lower yielding deposits. 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 higher yielding certificates of
deposit from lower yielding transaction accounts.
Yields Earned and Rates Paid. The spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
remained relatively stable, reflecting the interest rate environment,
declining only slightly to 3.11% in 1998 from 3.13% in 1997. The decline in
the interest rate spread from 3.26% in 1996 to 3.13% in 1997 was a result of
the initiation of treasury stock purchases, which replaced a noninterest-
bearing funding source with interest-bearing FHLB advances.
The excess of average interest-earning assets over average interest-bearing
liabilities remained steady at $61.7 million for both 1998 and 1997,
compared to $69.2 million for 1996. The ratio of average interest-earning
assets to average interest-bearing liabilities was 119.82% for 1998,
compared to 122.18% for 1997 and 128.21% for 1996.
Provision for Loan Losses. The Company maintains an allowance for loan
losses in an amount which, in management's judgment, is adequate to absorb
probable 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 $200,000 in 1998, compared to $186,000 in
1997 and $180,000 1996. The Company had $14,000 in charge-offs during 1998,
compared to $2,000 in 1997 and none in 1996. Recoveries totaled $2,000 in
1998 and $1,000 in both 1997 and 1996. Nonperforming loans were $1.5 million
at year-end 1998, compared to $1.0 million at year-end 1997 and $1.2 million
at year-end 1996. At year-end 1998, the allowance for loan losses was
129.72% of nonperforming loans and .59% of total loans compared to 168.76%
and .54% at year-end 1997. Management determined that a provision for loan
losses was warranted in 1998 based on the increased level of nonperforming
loans and the growth in loans receivable during 1998.
Noninterest Income. Noninterest income increased to $858,000 in 1998,
compared to $509,000 in 1997 and $447,000 in 1996. Service fees related to
the growing deposit base and expanding ATM usage contributed largely to
these increases during each of the three years. In 1998, income of $174,000
was recognized as a result of the sale of mortgage loans on the secondary
market.
Noninterest Expense. Noninterest expense amounted to $6.7 million in 1998,
compared to $6.2 million in 1997 and $9.5 million in 1996. 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 $3.4 million in 1998, compared to $3.1
million in 1997 and $4.3 million in 1996. The expense was higher in 1996
due principally to the recording of $1.2 million associated with the $3.50
per share special return of capital distribution related to unallocated ESOP
shares. Salaries and employee benefits were also affected by the
implementation of the MRP in 1996, by increases in ESOP expense as the value
of the Company's stock continues to rise, and by normal pay increases.
State franchise tax has decreased from $843,000 in 1996 to $524,000 in 1997
and $442,000 in 1998, due to intercompany transfers of capital from
Industrial Savings to Industrial Bancorp in 1998 and 1997. In addition to
reducing the amount of state franchise tax paid, the transfer will provide
the Company with greater flexibility in the future. Federal deposit
insurance premiums increased to $168,000 in 1998 compared to $135,000 in
1997, as a result of the growth in deposits. The $2.1 million of insurance
premiums in 1996 included the $1.5 million special assessment upon SAIF-
insured deposits.
Data processing and related fees, which are based on the outstanding number
of loan and deposit accounts, increased to $437,000 in 1998 from $370,000 in
1997 and $355,000 in 1996. Total occupancy and equipment and depreciation
expense increased to $757,000 for 1998, compared to $638,000 for 1997 and
$601,000 in 1996, due principally to the significant upgrade in technology
the Company made during 1998. Advertising expense has remained relatively
stable totaling $188,000 for 1998, down from $194,000 in 1997, which was up
from $186,000 in 1996. Other expenses increased $52,000 in 1998 compared to
1997, and $72,000 in 1997 compared to 1996, due principally to increases in
lending activity.
Income Tax Expense. Fluctuations in income tax expense are primarily
attributable to the change in income before taxes. Income before taxes
amounted to $8.7 million in 1998, compared to $7.9 million in 1997 and $4.4
million in 1996. The Company's effective tax rates were 34.7% in 1998,
compared to 35.2% in 1997 and 45.7% in 1996. The higher effective tax rate
in 1996 was because the special return of capital distribution as applied to
unallocated ESOP shares was not deductible for tax purposes.
ASSET QUALITY
- ------------------------------------------------------------------------------
The Company has consistently maintained a high quality loan portfolio, as
evidenced by its level of nonperforming assets which consists of loans
accounted for on a nonaccrual basis, accruing loans past due 90 days or
more, and real estate acquired through or instead of foreclosure.
Nonperforming assets were $1.4 million at year-end 1998, compared to $1.1
million at year-end 1997 and $1.2 million at year-end 1996. As a percentage
of year-end total assets, nonperforming assets were 0.38% in 1998, 0.31% in
1997 and 0.38% in 1996.
The Company's allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past five years and stood at $1.9
million at year-end 1998 compared to $1.2 million at year-end 1994. As a
percentage of nonperforming loans, the allowance for loan losses has
increased from 80.71% at year-end 1994 to 129.72% at year-end 1998. Over the
last five years, the Company has experienced total charge-offs of $38,000
and total recoveries of $21,000.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------------------------------------------------------
The Company 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, the
Company's 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. The Company's 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 year-end 1998, an analysis of the interest
rate risk of the Company, 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 as the
maximum change in NPV that the Board 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 the Company.
<TABLE>
<CAPTION>
Change in Net Portfolio Value
Board limit -----------------------------
Change in interest rate % change $ %
-----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
+ 4.0% 80% (26,680) (51)
+ 3.0% 60 (18,960) (36)
+ 2.0% 40 (11,274) (22)
+ 1.0% 20 (4,434) (9)
0 - - -
- 1.0% 20 1,857 4
- 2.0% 40 3,335 6
- 3.0% 60 5,676 11
- 4.0% 80 7,046 14
</TABLE>
Based on the above information, in the event that interest rates rise from
the recent low levels, the net interest income of the Company could be
negatively affected. Moreover, rising interest rates could negatively affect
the earnings of the Company due to diminished loan demand. The Company
attempts to mitigate interest rate risk by originating adjustable-rate loans
and by selling a portion of its of fixed-rate mortgage loans on the
secondary market to Freddie Mac.
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
- ------------------------------------------------------------------------------
The Company's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities, which are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
(In thousands)
<S> <C> <C> <C>
Net income $ 5,704 $ 5,113 $ 2,399
Adjustments 744 (34) 2,062
-----------------------------
Net cash from operating activities 6,448 5,079 4,461
Net cash from investment activities (4,186) (32,584) (22,555)
Net cash from financing activities 15,502 30,864 (1,204)
-----------------------------
Net change in cash and cash equivalents 17,764 3,359 (19,298)
Cash and cash equivalents at beginning of year 10,772 7,413 26,711
-----------------------------
Cash and cash equivalents at end of year $28,536 $10,772 $ 7,413
=============================
</TABLE>
The principal sources of funds for the Company are deposits, FHLB
borrowings, loan repayments, the sale of mortgage loans on the secondary
market, 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.
The Company 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 the
Company.
OTS regulations presently require the Company 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 the Company's 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 the Company may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At year-end 1998, the
regulatory liquidity ratio of the Company was 7.90%. At such date, the
Company had commitments to originate loans and loans in process totaling
$12.8 million and commitments to sell loans totaling $341,000. The Company
considers its liquidity and capital reserves sufficient to meet its
foreseeable short-term and long-term needs.
The Company's savings and loan association is required by OTS regulations to
maintain specified minimum amounts of capital. At year-end 1998, the
association exceeded all applicable minimum capital requirements. The
association's actual capital and regulatory capital requirements at year-end
1998 were as follows:
<TABLE>
<CAPTION>
Amount Percent of assets
----------------------------
(In thousands)
<S> <C> <C>
Tangible capital: (1)
Capital level $34,110 8.85%
Requirement 5,784 1.50
----------------------
Excess $28,326 7.35%
======================
Tier 1 (Core) capital: (1)
Capital level $34,110 8.85%
Requirement 11,569 3.00
----------------------
Excess $22,541 4.85%
======================
Risk-based capital: (2)
Capital level $36,018 17.21%
Requirement 16,740 8.00
----------------------
Excess $19,278 9.21%
======================
- --------------------
<F1> Tangible and Tier 1 (Core) capital percentages are based on adjusted
total assets of $385.6 million.
<F2> Risk-based capital percentages are based on risk-weighted assets of
$209.2 million.
</TABLE>
YEAR 2000 COMPLIANCE ISSUES
- ------------------------------------------------------------------------------
The Company began addressing the Year 2000 compliance issue in 1996, with
the review and analysis of its customer delivery system, specifically its
teller terminals and related equipment. Early in 1997, the Company formed a
Year 2000 Committee, which includes senior management representatives, to
assess the potential risk, establish a budget, and develop and implement a
plan to mitigate the risk that might arise from the failures of computer
programming to recognize the Year 2000. The Year 2000 compliance program
established by the committee includes quarterly progress reports submitted
to the Board of Directors, contingency planning, and the completion of all
internal testing by the end of the first quarter of 1999.
Included in the assessment was the identification of technology applications
and systems that could be impacted by the Year 2000 date change and the
identification of any third-party vendors that impact the daily operations
of the Company. The Committee acknowledged that the greatest potential
impact upon the Company is the risk related to the Company's data processing
service bureau. The Committee also determined that the teller terminals and
related equipment then in use were not Year 2000 compliant and that the
manufacturer had no plans to correct the problem. Various other in-house
applications and third-party dependent equipment were identified which would
require testing for Year 2000 compliance.
The budget established as part of the compliance program consisted mainly of
the hardware and software purchases necessary to replace the then existing
customer delivery system with new Year 2000 compliant technology, primarily
computers and the related equipment. The renovation of this technology was
estimated at approximately $600,000. Other factors, such as software update
purchases, training and additional employee hours were also considered.
Beyond the technology conversion to the new customer delivery system, which
was completed by mid-year 1998, the primary task of the Committee's Year
2000 compliance program was the validation, or testing, of any application,
system or equipment recognized during assessment. Subsequent to the
installation of the new teller terminals and platform system, which was
completed by mid-year 1998, testing was completed which verified that the
new system was Year 2000 compliant. The highest priority and effort has been
devoted to monitoring the progress of testing associated with Fiserv, the
nationally recognized data processing service bureau under contract with the
Company to perform transaction processing. The Company has continually
assessed the validation of the Year 2000 compliance of this application,
which has been identified as mission critical to the Company's operations.
Fiserv's validation efforts have included a date handling strategy of the
host software, client task force proxy testing, third party vendor interface
testing, and application review, testing, and programming changes to both
the base system and individualized client packages of the OnLine Financial
teller/platform system supported and maintained by Fiserv. By year-end 1998,
all in-house equipment identified during assessment had been tested, with
the exception of automated teller machines, which are scheduled to have
validation completed by the end of the first quarter of 1999.
Vendors used by the Company have been identified and assessed for the impact
upon operations of the Company if they would be unable to provide services
due to Year 2000 noncompliance. The Company has also reviewed the potential
impact of Year 2000 noncompliance of large borrowers or significant
employers in our primary market area. The loan portfolio of the Company is
highly diversified with regard to individual borrowers and types of
businesses, with the largest segment being to one- to four-family
residential mortgage loans. The primary market area is not significantly
dependent upon one employer or industry. The Company does not anticipate any
significant or prolonged Year 2000 related difficulties generated by the
identified vendors, large borrowers, or local employer base that would
materially affect the Company's net income or cash flow.
The Company has also considered the risk arising from relationships with
customers of Industrial Savings, both borrowers and depositors. As these
customers both provide (through deposits) and use (through loans) the
majority of the funds available to the Company, there is a potential risk
that the Year 2000 issue could lead to increased demand for credit,
increased levels of nonperforming loans, or increased demand upon the
Company's liquidity. The Company has developed and made available to
customers and other interested parties an informational brochure explaining
the possible impact of the Year 2000 problems and what the Company has done
to mitigate such potential problems.
A contingency plan has been developed to insure the necessary policies and
procedures are in effect to mitigate potential interruptions in service that
the Company may experience as the Year 2000 begins. The Company has had a
disaster recovery plan in effect for many years, which has worked well when
events required its use. The Year 2000 Contingency Plan approved by the
Board of Directors has expanded the basic disaster recovery plan and
addressed issues specific to the potential risk associated with the Year
2000 problems. The greatest concern the Company has related to contingency
planning is the possible interruption of electrical power, which is a
contingency faced by all businesses.
The Company's efforts to devise and implement the Year 2000 compliance
program has cost approximately $650,000 to date. These costs principally
represent the hardware and software purchases associated with the update and
conversion of teller terminals in bringing the customer delivery system Year
2000 compliant. While incidental expense is expected in 1999, and although
the Company anticipates and has planned for an increased demand for
liquidity, the Year 2000 Committee estimates that the impact upon the
Company's results of operations and capital resources will be minimal.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------------------------------------------
The Financial Accounting Standards Board has issued new accounting standards
that are effective for the Company's consolidated financial statements for
the years ending after December 31, 1998.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," issued in June 1998 and
effective for fiscal years beginning after June 15, 1999, addresses the
accounting for derivative instruments and certain derivative instruments
embedded in other contracts, and hedging activities. The statement
standardizes the accounting for derivative instruments by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," issued in October 1998, will allow, beginning in 1999, mortgage
loans that are securitized to be classified as trading, available for sale,
or in certain circumstances held to maturity. Currently these must be
classified as trading.
These statements are not expected to have a material effect on the Company's
consolidated financial position or results of operations since the Company
has not historically engaged in these activities.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits $ 1,067 $ 1,273
Interest-bearing demand deposits 5,469 3,499
Overnight deposits 22,000 6,000
--------------------
Cash and cash equivalents 28,536 10,772
Investment securities available for sale,
at fair value 21,235 21,030
Investment securities held to maturity
(fair value: 1998 - $302; 1997 - $474) 283 437
Loans receivable - net 326,972 321,669
Federal Home Loan Bank stock 3,256 2,938
Office properties and equipment - net 5,387 4,972
Accrued interest receivable 2,051 1,985
Other assets 339 220
--------------------
Total assets $388,059 $364,023
====================
LIABILITIES
Deposits $288,584 $270,957
Federal Home Loan Bank advances 35,000 29,000
Accrued interest payable and other liabilities 3,734 3,204
--------------------
Total liabilities 327,318 303,161
--------------------
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 2,472 1,879
Retained earnings 37,522 34,569
Accumulated other comprehensive income 2,101 1,333
Unearned employee stock ownership plan shares (3,100) (3,529)
Unearned compensation (1,227) (1,753)
Treasury stock, at cost (1998 - 723,464
shares; 1997 - 451,700 shares) (11,696) (6,306)
--------------------
Total shareholders' equity 60,741 60,862
--------------------
Total liabilities and shareholders' equity $388,059 $364,023
====================
</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, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $28,476 $25,779 $23,040
Interest and dividends on investment securities 1,378 1,590 1,779
Interest on deposits 708 436 649
-----------------------------
30,562 27,805 25,468
-----------------------------
Interest expense
Interest on deposits 13,630 13,005 11,841
Interest on Federal Home Loan Bank advances 2,195 1,060 22
-----------------------------
15,825 14,065 11,863
-----------------------------
Net interest income 14,737 13,740 13,605
Provision for loan losses 200 186 180
-----------------------------
Net interest income after provision for loan losses 14,537 13,554 13,425
-----------------------------
Noninterest income
Service fees and other charges 635 466 401
Other 223 43 46
-----------------------------
858 509 447
-----------------------------
Noninterest expense
Salaries and employee benefits 3,430 3,117 4,291
State franchise tax 442 524 843
Federal deposit insurance premiums 168 135 2,060
Occupancy and equipment 368 352 330
Data processing 437 370 355
Depreciation 389 286 271
Advertising 188 194 186
Other 1,241 1,189 1,117
-----------------------------
6,663 6,167 9,453
-----------------------------
Income before income tax 8,732 7,896 4,419
Provision for income tax 3,028 2,783 2,020
-----------------------------
Net income $ 5,704 $ 5,113 $ 2,399
=============================
Basic earnings per share $ 1.22 $ 1.04 $ 0.47
Diluted earnings per share $ 1.19 $ 1.03 $ 0.47
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $5,704 $5,113 $2,399
Other comprehensive income:
Unrealized gains/losses on securities, net of taxes 768 483 102
--------------------------
Comprehensive income $6,472 $5,596 $2,501
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Gain on
Additional Securities Unearned Unearned
Common Paid in Retained Available ESOP Compen- Treasury
Stock Capital Earnings for Sale Shares sation Stock Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $54,110 $30,633 $ 748 $(4,436) $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 $(2,630) (2,630)
Compensation earned 351 351
Change in unrealized gain on
securities available for sale 102 102
Other changes/adjustments 49 49
---------------------------------------------------------------------------------------------
Balance at December 31, 1996 34,669 1,669 31,803 850 (3,974) (2,279) (634) 62,104
Net income 5,113 5,113
Purchase of treasury stock
(401,700 shares) (5,672) (5,672)
Cash dividends declared
($.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 1,333 (3,529) (1,753) (6,306) 60,862
Net income 5,704 5,704
Purchase of treasury stock
(271,764 shares) (5,466) (5,466)
Cash dividends declared
($.59 per share) (2,751) (2,751)
Exercise of stock options 16 76 92
Employee Stock Ownership Plan:
Shares released 415 429 844
Management Recognition Plan:
Compensation earned 162 526 688
Change in unrealized gain on
securities available for sale 768 768
---------------------------------------------------------------------------------------------
Balance at December 31, 1998 $34,669 $2,472 $37,522 $2,101 $(3,100) $(1,227) $(11,696) $60,741
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,704 $ 5,113 $ 2,399
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 389 286 271
Provision for loan losses 200 186 180
Accretion of deferred loan fees (1,107) (674) (639)
FHLB stock dividends (224) (200) (176)
Net accretion on investment securities (41) (50) (55)
ESOP expense 844 655 1,794
MRP compensation expense 688 526 351
Net change in:
Deferred taxes 124 105 29
Accrued interest receivable and other assets (139) (637) 96
Accrued interest payable and other liabilities 10 (231) 211
-------------------------------
Net cash from operating activities 6,448 5,079 4,461
-------------------------------
Cash flows from investing activities
Proceeds from maturities of investment securities
available for sale 6,000 12,000 10,000
Purchases of investment securities available for sale (5,000) (9,008) (5,910)
Principal repayments and maturities of investment
securities held to maturity 154 124 205
Net increase in loans (4,442) (35,378) (26,220)
FHLB stock purchases (94) (93) (69)
Properties and equipment expenditures, net (804) (229) (561)
-------------------------------
Net cash from investing activities (4,186) (32,584) (22,555)
-------------------------------
Cash flows from financing activities
Net increase in deposits 17,627 11,883 20,792
Proceeds from FHLB advances 10,000 33,000 2,000
Repayment of FHLB advances (4,000) (6,000)
Capital distribution to shareholders (19,071)
Purchase of MRP shares (2,630)
Proceeds from exercise of stock options 92
Cash dividends paid (2,751) (2,347) (1,661)
Purchase of treasury stock (5,466) (5,672) (634)
-------------------------------
Net cash from financing activities 15,502 30,864 (1,204)
-------------------------------
Net change in cash and cash equivalents 17,764 3,359 (19,298)
Cash and cash equivalents at beginning of year 10,772 7,413 26,711
-------------------------------
Cash and cash equivalents at end of year $28,536 $10,772 $ 7,413
===============================
Cash paid during the year for:
Interest $15,765 $13,938 $11,655
Income taxes 2,707 2,947 1,780
Noncash transactions:
Transfer of loans to real estate owned 46 71
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include
Industrial Bancorp, Inc. and its wholly-owned subsidiary, Industrial Savings
and Loan Association, together referred to as "the Company". Intercompany
transactions and balances are eliminated.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and disclosures
provided, and future results could differ. The allowance for loan losses and
fair values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, demand deposits with
other financial institutions and overnight deposits. Net cash flows are
reported for loan and deposit transactions.
Investment Securities: Investment securities are classified as held to
maturity and carried at amortized cost when management has the positive
intent and ability to hold to maturity. Investment securities are classified
as available for sale when they might be sold before maturity. Investment
securities available for sale are carried at fair value, with unrealized
gains and losses reported in other comprehensive income. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount.
Loans Receivable: Loans are reported at the principal balance outstanding,
net of unearned interest, deferred loan fees and costs, and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or
market, on an aggregate basis.
Interest income is reported on the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Interest income is
not reported when full loan repayment is in doubt, typically when the loan
is impaired or payments are past due over 90 days.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, known and
inherent risks in the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
A loan is impaired if full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage or consumer loans, and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Servicing Rights: Servicing rights are recognized as assets for purchased
rights and for the allocated value of retained servicing rights on loans
sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the
fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Real Estate Owned: Real estate acquired through or instead of foreclosure
is initially recorded at the fair value when acquired, establishing a new
cost basis. If fair value declines, a valuation allowance is recorded
through expense. Costs after acquisition are expensed.
Office Properties and Equipment: Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed over the
estimated useful lives on an accelerated basis, except for buildings for
which the straight line basis is principally used.
Stock Compensation: Employee compensation expense under stock option plans
is reported if options are granted below market price at grant date. Pro
forma disclosures of net income and earnings per share are shown using the
fair value method of Statement of Financial Accounting Standards (SFAS)
No.123 to measure expense for options granted after 1994, using an option
pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for
the temporary differences between carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but
not yet allocated to participants, is shown as a reduction of shareholders'
equity. Compensation expense is based on the market price of shares as they
are committed to be released to participant accounts. Dividends on allocated
ESOP shares reduce retained earnings; dividends on unearned ESOP shares
reduce debt and accrued interest.
Financial Instruments: Financial instruments include credit instruments,
such as commitments to make loans, issued to meet customer financing needs.
The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay.
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.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income consists of unrealized
gains and losses on investment securities which are also recognized as
separate components of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior
information restated to be comparable.
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. ESOP
shares are considered outstanding for this calculation unless unearned.
Diluted earnings per share includes the dilutive effect of additional
potential common shares issuable under stock options.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe that there are now any
such matters that would have a material effect on the financial statements.
Reclassifications: Certain items in the 1997 and 1996 financial statements
have been reclassified to correspond with the 1998 presentation.
NOTE 2 - INVESTMENT SECURITIES
Investment securities as of the end of the year were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
1998
- ----
U.S. Treasury securities $12,003 $ 153 $12,156
U.S. agency securities 6,002 40 6,042
Federal Home Loan Mortgage
Corporation preferred stock 46 2,991 3,037
-------------------- -------
$18,051 $3,184 $21,235
==================== =======
1997
- ----
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
------------------------------------------------
$19,010 $2,021 $ (1) $21,030
================================================
Held to maturity
1998
- ----
Mortgage-backed securities $ 283 $ 19 $ 302
======= ====== =======
1997
- ----
Mortgage-backed securities $ 437 $ 37 $ 474
======= ====== =======
</TABLE>
Contractual maturities of debt securities at year-end 1998 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-----------------------
<S> <C> <C>
Available for sale
Due in one year or less $10,007 $10,033
Due after one year through five years 7,998 8,165
--------------------
18,005 18,198
Federal Home Loan Mortgage Corporation preferred stock 46 3,037
--------------------
$18,051 $21,235
====================
Held to maturity
Mortgage-backed securities $ 283 $ 302
====================
</TABLE>
No investment securities were sold during 1998, 1997 or 1996. Investment
securities pledged at year-end 1998 and 1997 had costs of $15.4 million and
$15.5 million and were pledged to secure public deposits.
NOTE 3 - LOANS RECEIVABLE
Loans receivable as of the end of the year were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------
<S> <C> <C>
Real estate loans:
One- to four-family $279,237 $278,438
Home equity 16,624 15,407
Construction 17,858 20,013
Multi-family 9,165 8,170
Nonresidential 10,979 10,521
---------------------
Total real estate loans 333,863 332,549
Commercial loans 451 297
Consumer loans 4,859 4,408
---------------------
Total loans 339,173 337,254
Less:
Undisbursed construction loan funds (6,251) (9,672)
Net deferred loan fees (4,020) (4,171)
Allowance for loan losses (1,930) (1,742)
---------------------
$326,972 $321,669
=====================
</TABLE>
Activity in the allowance for loan losses for the year was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,742 $1,557 $1,376
Provision for losses 200 186 180
Charge-offs (14) (2) -
Recoveries 2 1 1
----------------------------
Balance at end of year $1,930 $1,742 $1,557
============================
</TABLE>
No loans were classified as impaired at year-end 1998, 1997 and 1996 or
during the years then ended. Non-performing loans as of the end of the year
were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 976 $ 738
Accruing loans past due 90 days or more 512 294
----------------
Total non-performing loans $1,488 $1,032
================
</TABLE>
Loans serviced by others, which are not reported as assets, total $21.1
million and $4.8 million at year-end 1998 and 1997. Activity for capitalized
mortgage servicing rights was as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Balance at beginning of year $ -
Additions 177
Amortized to expense (8)
----
Balance at end of year $169
====
</TABLE>
Loans to principal officers, directors and their related businesses,
aggregating $60,000 or more to any one related party, were as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Balance at beginning of year $ 95
Loans originated 211
Repayments (107)
----
Balance at end of year $199
====
</TABLE>
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment as of the end of the year were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------
<S> <C> <C>
Land $1,932 $1,829
Buildings and improvements 5,065 5,058
Furniture and equipment 1,489 1,083
Construction in progress 20 -
----------------
Total cost 8,506 7,970
Accumulated depreciation 3,119 2,998
----------------
$5,387 $4,972
================
</TABLE>
NOTE 5 - DEPOSITS
Deposits as of the end of the year were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Noninterest-bearing demand deposits $ 4,009 $ 3,287
Money market accounts 4,713 4,049
NOW accounts 17,750 15,277
Passbook savings accounts 54,258 52,622
Certificates of deposit 207,854 195,722
--------------------
$288,584 $270,957
====================
</TABLE>
Certificates of deposit with balances of $100,000 or more were $51.7 million
and $44.3 million at year-end 1998 and 1997.
Scheduled maturities of certificates of deposit at year-end 1998 were as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
1999 $142,396
2000 38,002
2001 20,128
2002 3,995
2003 2,103
Thereafter 1,230
--------
$207,854
========
</TABLE>
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank at year-end were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Year of Maturity Interest Rate Amount Interest Rate Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 5.80 - 6.15% $ 4,000
1999 5.75 - 6.30% $ 7,000 6.00 - 6.30 7,000
2000 6.30 - 6.45 7,000 6.30 - 6.60 7,000
2001 5.73 - 6.21 9,000 6.21 2,000
2002 5.95 - 6.25 9,000 5.95 - 6.25 9,000
2003 5.83 3,000
------- -------
$35,000 $29,000
======= =======
Weighted average interest rate 6.11% 6.20%
</TABLE>
These advances were collateralized by $52.5 million and $43.5 million of
residential mortgage loans under a blanket lien agreement and by Federal
Home Loan Bank stock at year-end 1998 and 1997.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
Employees of the Company participate in an employee stock ownership plan
(ESOP). The ESOP borrowed from the Company to acquire 443,610 shares of
stock at $10 per share. The Company makes discretionary contributions to the
ESOP, as well as paying dividends on unallocated shares to the ESOP, and the
ESOP uses funds it receives to repay the loan. As loan payments are made,
ESOP shares are allocated to participants based on relative compensation and
expense is recorded. Dividends on allocated shares increase participant
accounts. Participants receive the shares at the end of employment.
Contributions to the ESOP during 1998, 1997 and 1996 were $398,000, $542,000
and $588,000. ESOP expense for 1998, 1997 and 1996 was $844,000, $655,000
and $1.8 million.
Shares held by the ESOP as of the end of the year were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Shares allocated to participants 133,585 90,728
Unearned shares 308,350 352,882
--------------------
Total ESOP shares 441,935 443,610
====================
Fair value of unearned shares (in thousands) $ 6,167 $ 6,264
</TABLE>
NOTE 8 - STOCK OPTION AND INCENTIVE PLAN
Options to buy stock of the Company are granted to directors and certain key
employees under the Stock Option and Incentive Plan, which provides for
issue of up to 555,450 options. Exercise price is the market price at date
of grant. The maximum option term is ten years, and options vest over five
years.
A summary of activity in the plan is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 388,815 388,815
Exercised (6,000) $11.00 -
------- -------
Outstanding at end of year 382,815 388,815
======= =======
Options exercisable at year-end 149,526 77,763
</TABLE>
No options were granted in 1998 or 1997. All options issued to date, and
therefore all outstanding or exercisable at year-end, have an exercise price
of $11.00 per share.
Had compensation cost for stock options been measured using FASB Statement
No. 123, net income and earnings per share would have been the pro forma
amounts indicated below. The pro forma effect may increase in the future if
more options are granted.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
As reported Pro forma As reported Pro forma
----------------------------------------------------
<S> <C> <C> <C> <C>
Net income $5,704 $5,521 $5,113 $4,930
Basic earnings per share 1.22 1.18 1.04 1.01
Diluted earnings per share 1.19 1.15 1.03 0.99
</TABLE>
The pro forma effects are computed using option pricing models which used
the following weighted-average assumptions as of grant date: 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.
NOTE 9 - MANAGEMENT RECOGNITION PLAN
The management recognition plan (MRP) provides to directors and certain key
employees an ownership interest in the Company designed to compensate such
directors and key employees for services to the Company. The Company
contributed sufficient funds to enable the MRP to purchase and issue as
awards 222,180 common shares of the Company. The shares awarded vest over a
five-year period beginning in 1996. Compensation expense, which is based
upon the cost of the shares, was $526,000 in both 1998 and 1997 and $351,000
in 1996.
NOTE 10 - INCOME TAXES
The provision for income tax was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Current expense $2,904 $2,678 $1,991
Deferred expense 124 105 29
--------------------------
$3,028 $2,783 $2,020
==========================
</TABLE>
Effective tax rates differ federal statutory rates applied to financial
statement income due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate $2,969 $2,685 $1,502
Effect of ESOP deduction 196 72 579
Effect of MRP awards expense (16) (16) -
Other (121) 42 (61)
--------------------------
$3,028 $2,783 $2,020
==========================
Effective tax rate 34.7% 35.2% 45.7%
</TABLE>
Deferred tax assets and liabilities as of the end of the year were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------
<S> <C> <C>
Deferred tax assets
Deferred loan fees $1,020 $1,211
Accrued MRP awards 119 119
Construction period interest 16 17
Accrued vacation 38 36
ESOP shares allocated 77 57
Other 8 10
----------------
1,278 1,450
----------------
Deferred tax liabilities
Bad debt deduction (186) (350)
FHLB stock dividends (590) (515)
Unrealized gain on investment securities available for sale (1,082) (687)
Depreciation expense (111) (120)
Loan servicing rights (57) -
Accumulated accretion (31) (38)
----------------
(2,057) (1,710)
----------------
Net deferred tax asset /(liability) $ 779 $ (260)
================
</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.
Federal income tax laws provided additional bad debt deductions through
1987, totaling $4.2 million. Accounting standards do not require a deferred
tax liability to be recorded on this amount, which liability otherwise would
total $1.4 million at December 31, 1998. If the Association were liquidated
or otherwise ceases to be a thrift or if tax laws were to change, this
amount would be expensed. Under 1996 tax law changes, bad debts are based on
actual loss experience and tax bad debt reserves accumulated since 1987 are
to be reduced. This requires payment of approximately $495,000 annually over
six years beginning in 1998.
NOTE 11 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
The Company's savings and loan association is subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt correction action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action. As of
December 31, 1998, the Company's savings and loan association is considered
well capitalized based on computed regulatory capital ratios.
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.
Actual and required capital amounts (in thousands) and ratios as of the end
of the year were as follows:
<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>
1998
- ----
Total capital
(to risk weighted assets) $36,018 17.21% $16,740 8.0% $20,925 10.0%
Tier 1 (core) capital
(to risk weighted assets) $34,110 16.30% $ 8,370 4.0% $12,555 6.0%
Tier 1 (core) capital
(to adjusted total assets) $34,110 8.85% $11,569 3.0% $19,282 5.0%
Tangible capital
(to adjusted total assets) $34,110 8.85% $ 5,784 1.5% N/A
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
</TABLE>
NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters
of credit and overdraft protection, are issued to meet customer financing
demands. These are agreements to provide credit or to support the credit of
others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
Financial instruments with off-balance-sheet risk as of the end of the year
were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------------------------------------
<S> <C> <C> <C> <C>
Commitments to make loans $4,882 $ 1,638 $4,360 $1,000
Undisbursed construction loan funds 5,357 894 7,022 2,650
Unused lines of credit - 12,228 26 9,124
</TABLE>
Commitments to make loans are generally made for 30 days or less. The fixed
rate loan commitments on mortgage loans have interest rates ranging from
6.25% to 9.75% and maturities ranging from 15 years to 30 years.
The Company was required by the Federal Reserve Bank to maintain cash
reserves of $500,000 and $436,000 as of year-end 1998 and 1997. These
reserves do not earn interest.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments as of the
end of the year were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 28,536 $ 28,536 $ 10,772 $ 10,772
Investment securities 21,518 21,537 21,467 21,504
Loans receivable, net 326,972 332,757 321,669 324,187
Federal Home Loan Bank stock 3,256 3,256 2,938 2,938
Accrued interest receivable 2,051 2,051 1,985 1,985
Financial liabilities
Deposits $(288,584) $(290,040) $(270,957) $(271,716)
FHLB advances (35,000) (35,581) (29,000) (29,015)
Accrued interest payable (769) (769) (709) (709)
</TABLE>
The methods and assumptions used to estimate fair value are described as
follows. Carrying amount is the estimated fair value for cash and cash
equivalents, Federal Home Loan Bank stock, accrued interest receivable and
payable, demand deposits and variable rate loans or deposits that reprice
frequently and fully. Investment securities fair values are based on market
prices. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk. Fair value of loans held for sale is based on market
quotes. Fair value of FHLB advances is based on current rates for similar
financing.
NOTE 14 - EARNINGS PER SHARE
The factors used in the earnings per share computation were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Net income (in thousands) $ 5,704 $ 5,113 $ 2,399
Basic:
- -----
Weighted average common shares outstanding 5,006,690 5,276,908 5,547,881
Less: Average unallocated ESOP shares 331,454 375,137 420,501
--------------------------------------
Average shares 4,675,236 4,901,771 5,127,380
======================================
Basic earnings per share $ 1.22 $ 1.04 $ 0.47
Diluted:
- -------
Weighted average common shares outstanding
for basic earnings per share 4,675,236 4,901,771 5,127,380
Add: Dilutive effects of assumed exercises of stock options 110,299 62,644 7,833
--------------------------------------
Average shares and dilutive potential common shares 4,785,535 4,964,415 5,135,213
======================================
Diluted earnings per share $ 1.19 $ 1.03 $ 0.47
</TABLE>
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(Dollars in thousands)
December 31, 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 87 $ 538
Investment in subsidiary 36,211 37,029
Loan receivable from ESOP 3,327 3,697
Loan receivable from subsidiary 21,000 19,500
Other assets 90 99
------------------
$60,715 $60,863
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ (26) $ 1
Shareholders' equity 60,741 60,862
------------------
$60,715 $60,863
==================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
For the year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on loan from subsidiary $1,030 $ 287 $ 791
Dividends from subsidiary 9,000 26,500 -
Management fees expense (900) (60) (60)
Other operating expenses (78) (123) (167)
---------------------------
Income before income tax and undistributed subsidiary income 9,052 26,604 564
Provision for income taxes 17 35 192
Equity in undistributed subsidiary income (3,331) (21,456) 2,027
---------------------------
Net income $5,704 $ 5,113 $2,399
===========================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $5,704 $ 5,113 $ 2,399
Adjustments:
Equity in undistributed subsidiary income 3,331 21,456 (2,027)
Dividends on unallocated ESOP shares (214) (194) (144)
Changes in other assets 9 (50) (38)
----------------------------
Net cash from operating activities 8,830 26,325 190
----------------------------
Cash flows from investing activities
Loans to subsidiary (9,000) (23,900) -
Principal repayment on loans to subsidiary 7,500 5,100 21,550
Principal repayment on loan to ESOP 370 370 370
----------------------------
Net cash from investing activities (1,130) (18,430) 21,920
----------------------------
Cash flows from financing activities
Capital distribution to shareholders - - (19,441)
Cash dividends paid (2,751) (2,347) (1,661)
Purchase of treasury stock (5,466) (5,672) (634)
Proceeds from exercise of stock options 66 - -
----------------------------
Net cash from financing activities (8,151) (8,019) (21,736)
----------------------------
Net change in cash and cash equivalents (451) (124) 374
Cash and cash equivalents at beginning of period 538 662 288
----------------------------
Cash and cash equivalents at end of period $ 87 $ 538 $ 662
============================
</TABLE>
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
--------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest income $7,407 $7,621 $7,750 $7,784
Interest expense 3,806 3,938 4,069 4,012
----------------------------------------------
Net interest income 3,601 3,683 3,681 3,772
Provision for loan losses 45 55 55 45
Other income 141 173 234 310
Other expense 1,637 1,685 1,637 1,704
----------------------------------------------
Income before taxes 2,060 2,116 2,223 2,333
Provision for incomes taxes 702 722 757 847
----------------------------------------------
Net income $1,358 $1,394 $1,466 $1,486
==============================================
Basic earnings per share $ 0.29 $ 0.30 $ 0.31 $ 0.32
Diluted earnings per share 0.28 0.29 0.31 0.32
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 earnings per share $ 0.24 $ 0.26 $ 0.25 $ 0.29
Diluted earnings per share 0.24 0.26 0.25 0.28
</TABLE>
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, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 1999
- ------------------------------------------------------------------------------
COMMON STOCK INFORMATION
The common shares of Industrial Bancorp are listed on the Nasdaq Stock
Market under the symbol "INBI". There were 4,831,036 common shares
outstanding at year-end 1998, held of record by approximately 1,450
shareholders. The following dividend and market price information includes
daily high, low and closing sales prices of the common shares of Industrial
Bancorp for each period indicated.
<TABLE>
<CAPTION>
Quarter ended High Low Last Dividend
-------------------------------------------------------
<S> <C> <C> <C> <C>
3/31/97 $13.00 $12.50 $12.63 $.10
6/30/97 14.00 12.00 13.69 .12
9/30/97 18.00 13.63 18.00 .12
12/31/97 18.38 17.25 17.75 .14
3/31/98 23.50 17.63 22.50 .14
6/30/98 25.25 18.31 19.00 .15
9/30/98 20.00 15.88 18.00 .15
12/31/98 20.25 17.00 20.00 .15
</TABLE>
INDUSTRIAL BANCORP, INC.
Directors Annual Meeting
- ------------------------------------- -----------------------------------
Lawrence R. Rhoades The 1999 Annual Meeting of Share-
Chairman of the Board and Chief holders of Industrial Bancorp, Inc.
Financial Officer will be held on April 20, 1999, at
2:30 p.m., local time, at the
David M. Windau Bellevue Elks Lodge #1013, located
President and Chief Executive Officer at 214 West Main Street, Bellevue,
Ohio 44811. Shareholders are
Fredric C. Spurck cordially invited to attend.
President and Chief Executive Officer
Webster Industries, Inc. Form 10-K
-----------------------------------
Roger O. Wilkinson A copy of Industrial Bancorp's
Deputy Director Annual Report on Form 10-K, as
Huron County Alcohol, Drug Addiction filed with the Securities and
and Mental Health Services Board Exchange Commission, will be
available to shareholders at no
Graydon H. Hayward change upon request to:
President
Hayward Rigging & Construction, Inc. Industrial Bancorp, Inc.
211 N. Sandusky Street
Leon W. Maginnis Bellevue, Ohio 44811
Vice President - Finance Attn: Patrick S. Smith,
Hirt Publishing Company, Inc. Investor Relations
(419) 483-3375
Bob Moore
President, Retired Shareholder Services
Willard Foods -----------------------------------
Registrar and Transfer Company
Executive Officers serves as transfer agent and
- ------------------------------------- dividend distributing agent for
Industrial Bancorp's shares.
Lawrence R. Rhoades Communications regarding change of
Chairman of the Board address, transfer of shares, lost
and Chief Financial Officer certificates and dividends should
be sent to:
David M. Windau
President and Chief Executive Officer Registrar and Transfer Company
10 Commerce Drive
David W. Ball Cranford, New Jersey 07016-3572
Senior Vice President - Loans (908) 272-8511
Stephan S. Beal
Senior Vice President - Operations
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Industrial Savings and Loan Association
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,067
<INT-BEARING-DEPOSITS> 27,469
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,235
<INVESTMENTS-CARRYING> 283
<INVESTMENTS-MARKET> 302
<LOANS> 328,902
<ALLOWANCE> 1,930
<TOTAL-ASSETS> 388,059
<DEPOSITS> 288,584
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,734
<LONG-TERM> 35,000
0
0
<COMMON> 34,669
<OTHER-SE> 26,072
<TOTAL-LIABILITIES-AND-EQUITY> 388,059
<INTEREST-LOAN> 28,476
<INTEREST-INVEST> 1,378
<INTEREST-OTHER> 708
<INTEREST-TOTAL> 30,562
<INTEREST-DEPOSIT> 13,630
<INTEREST-EXPENSE> 15,825
<INTEREST-INCOME-NET> 14,737
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,663
<INCOME-PRETAX> 8,732
<INCOME-PRE-EXTRAORDINARY> 5,704
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,704
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 3.95
<LOANS-NON> 976
<LOANS-PAST> 512
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,742
<CHARGE-OFFS> 14
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,930
<ALLOWANCE-DOMESTIC> 1,930
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
