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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File Number: 0-026248
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 21, 2000, was
$51,312,238. (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 21, 2000, there were 4,343,883 of the Registrant's Common
Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1999 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the
2000 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 eleven branch offices and its one
loan production office in the northern Ohio communities of Ashland,
Bellevue, Clyde, Findlay, Fremont, Lexington, 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 eleven branch offices in the northern Ohio cities of Ashland,
Clyde, Findlay, Fremont, Lexington, Norwalk, Sandusky, Tiffin and Willard.
The Association's primary market area for deposit and lending activity
consists of the seven counties in which the Association has its branch
offices.
The economy of the Association's primary market area is stable.
Population growth and household growth have occurred at rates comparable to
that in 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, Sprint, Therm-O-Disc
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. The Association also offers loans secured by multifamily
properties containing more than four units and nonresidential properties,
including construction loans. 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,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
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 $288,905 83.07% $279,237 83.87% $278,438 85.00% $248,694 85.35% $226,868 85.90%
Home equity 18,721 5.38 16,624 4.99 15,407 4.70 11,651 4.00 8,546 3.24
Multifamily 10,873 3.13 9,165 2.75 8,170 2.49 9,028 3.10 8,213 3.11
Nonresidential 11,956 3.44 10,979 3.31 10,521 3.21 8,842 3.03 9,100 3.45
Construction (1) 9,479 2.73 11,607 3.49 10,341 3.16 8,765 3.01 6,746 2.55
------------------------------------------------------------------------------------------------------
Total real estate
loans 339,934 97.74 327,612 98.41 322,877 98.56 286,980 98.49 259,473 98.25
Commercial loans 1,265 0.36 451 0.14 297 0.09 398 0.14 585 0.22
Consumer loans:
Education loans 927 0.27 1,073 0.32 1,155 0.35 1,268 0.44 1,456 0.55
Loans on deposits 1,084 0.31 1,307 0.39 1,258 0.39 1,087 0.37 987 0.38
Automobile loans 1,901 0.55 1,545 0.46 1,189 0.36 773 0.27 826 0.31
Other consumer loans 2,682 0.77 934 0.28 806 0.25 831 0.29 771 0.29
------------------------------------------------------------------------------------------------------
Total consumer
loans 6,594 1.90 4,859 1.45 4,408 1.35 3,959 1.37 4,040 1.53
------------------------------------------------------------------------------------------------------
Total loans 347,793 100.00% 332,922 100.00% 327,582 100.00% 291,337 100.00% 264,098 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
origination fees (3,500) (4,020) (4,171) (3,977) (3,598)
Allowance for
loan losses (2,017) (1,930) (1,742) (1,557) (1,376)
-------- -------- -------- -------- --------
Net loans $342,276 $326,972 $321,669 $285,803 $259,124
======== ======== ======== ======== ========
- --------------------
<F1> Net of the undisbursed portion of construction loans.
</TABLE>
Loan Maturity. The following table sets forth certain information as
of December 31, 1999, 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
-------------------------------------------------------------------------------------
2003 2005 2008 2020
and through through and
2000 2001 2002 2004 2007 2019 After Total
-------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 1,095 $ 298 $ 1,399 $ 7,754 $25,995 $69,627 $182,737 $288,905
Home equity 18,721 - - - - - - 18,721
Multifamily and nonresidential 704 631 416 7,544 3,871 7,707 1,956 22,829
Construction 1,320 60 9 92 99 1,052 6,847 9,479
Commercial loans 1,265 - - - - - - 1,265
Consumer loans 3,155 453 857 1,265 681 175 8 6,594
-------------------------------------------------------------------------------------
Total $26,260 $1,442 $2,681 $16,655 $30,646 $78,561 $191,548 $347,793
=====================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans which
will become due after December 31, 2000, and which have fixed interest rates
or adjustable interest rates:
<TABLE>
<CAPTION>
Due after
December 31, 2000
-----------------
(In thousands)
<S> <C>
Fixed interest rates 6
Adjustable interest rates 68,487
--------
$321,533
========
</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, 1999, the
Association's one- to four-family residential real estate loan portfolio was
$288.9 million, or 83% of total loans.
OTS regulations and Ohio law limit the amount that 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, 1999, the Association had $18.7 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 financial
statements annually to enable the Association to monitor such loans.
At December 31, 1999, loans secured by multifamily properties totaled
$10.9 million, or 3% of total loans.
Loans Secured by Nonresidential Real Estate. At December 31, 1999,
$12.0 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, 1999, the Association's loan portfolio
included $9.5 million in construction loans, net of undisbursed proceeds, or
3% of total loans.
The Association's construction loan portfolio at December 31, 1999,
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, 1999, loans for
the construction of nonresidential real estate totaled $372,000.
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 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, 1999, the Association's commercial loan
portfolio was $1.3 million, 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, 1999, the
Association had $6.6 million, or 2% of total loans, invested in consumer
loans.
Consumer loans, particularly consumer loans that 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 residential housing builders, solicitations by the
Association's lending staff and, to a limited extent, through the use of
local independent mortgage brokers, 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 that 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
initiated a program in 1998 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, 1999, the
Association had $27.3 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,
------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family residential $ 74,598 $ 88,834 $ 74,289 $58,626 $46,007
Multifamily residential 4,979 844 211 702 375
Nonresidential 1,707 2,335 817 957 848
Construction 20,213 21,298 22,911 18,751 17,478
Commercial 5,213 2,175 1,674 624 601
Consumer 5,806 3,327 2,891 2,572 2,568
------------------------------------------------------
Total loans originated 112,516 118,813 102,793 82,232 67,877
Loan participations purchased - 2,175 1,025 - -
Reductions:
Principal repayments 86,664 101,360 64,950 54,521 40,609
Loans sold 8,450 17,663 - - 1,250
Transfers from loans to real estate owned 89 46 71 - 33
------------------------------------------------------
Total reductions 95,203 119,069 65,021 54,521 41,892
Increase (decrease) in other items, net (1) 2,009 (3,384) 2,931 1,032 2,398
------------------------------------------------------
Net increase $ 15,304 $ 5,303 $ 35,866 $26,679 $23,587
======================================================
- --------------------
<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
$5.7 million to one borrower at December 31, 1999. The largest amount the
Association had outstanding to one borrower and related persons or entities
at December 31, 1999, was $3.5 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,
--------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 65 $1,818 0.52% 114 $2,336 0.70% 75 $2,019 0.62%
60 - 89 days 40 622 0.18 35 1,266 0.38 49 1,327 0.40
90 days and over 56 1,489 0.43 71 1,285 0.39 38 763 0.23
----------------------------------------------------------------------------------------
Total delinquent loans 161 $3,929 1.13% 220 $4,887 1.47% 162 $4,109 1.25%
========================================================================================
<CAPTION>
At December 31,
-----------------------------------------------------------
1996 1995
--------------------------- ----------------------------
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 65 $1,267 0.43% 70 $1,238 0.47%
60 - 89 days 34 575 0.20 47 749 0.28
90 days and over 75 999 0.34 73 1,502 0.57
--------------------------------------------------------
Total delinquent loans 174 $2,841 0.97% 190 $3,489 1.32%
========================================================
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans that
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,
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90 days or more $ 629 $ 512 $ 294 $ 721 $ 939
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family 914 963 710 504 621
Multifamily - - - - -
Nonresidential - - 10 - 7
Consumer 14 13 18 13 5
--------------------------------------------------
Total nonaccrual loans 928 976 738 517 633
--------------------------------------------------
Total nonperforming loans 1,557 1,488 1,032 1,238 1,572
Real estate owned 84 5 76 5 5
--------------------------------------------------
Total nonperforming assets $1,641 $1,493 $1,108 $1,243 $1,577
==================================================
Allowance for loan losses $2,017 $1,930 $1,742 $1,557 $1,376
==================================================
Nonperforming assets as a
percent of total assets 0.42% 0.38% 0.31% 0.38% 0.49%
Nonperforming loans as a
percent of total loans 0.45% 0.45% 0.32% 0.42% 0.60%
Allowance for loan losses as a
percent of nonperforming loans 129.55% 129.72% 168.76% 125.77% 87.53%
</TABLE>
For the year ended December 31, 1999, gross interest income which
would have been recorded had nonaccruing loans been current in accordance
with their original terms was $30,000. 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,
------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Substandard $1,623 $1,482 $786 $874 $1,408
Doubtful - - - - -
Loss 55 23 45 54 46
Total classified assets $1,678 $1,505 $831 $928 $1,454
</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 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,
----------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,930 $1,742 $1,557 $1,376 $1,209
Charge-offs (19) (14) (2) - (17)
Recoveries 3 2 1 1 4
----------------------------------------------
Net (charge-offs) recoveries (16) (12) (1) 1 (13)
Provision for loan losses 103 200 186 180 180
----------------------------------------------
Balance at end of year $2,017 $1,930 $1,742 $1,557 $1,376
==============================================
Net (charge-offs) recoveries to
average loans 0.00% 0.00% 0.00% 0.00% (0.01)%
Allowance for loan losses to
total loans 0.58% 0.59% 0.54% 0.53% 0.52%
</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>
1999 1998 1997
--------------------- --------------------- ---------------------
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 $1,507 98% $1,442 98% $1,303 99%
Commercial loans 40 - 38 - 34 -
Consumer loans 173 2 164 2 151 1
Unallocated 297 - 286 - 254 -
------------------------------------------------------------------
Total $2,017 100% $1,930 100% $1,742 100%
==================================================================
<CAPTION>
1996 1995
--------------------- ---------------------
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 $1,166 99% $1,036 98%
Commercial loans 30 - 27 -
Consumer loans 134 1 112 2
Unallocated 227 - 201 -
-----------------------------------------
Total $1,557 100% $1,376 100%
=========================================
</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,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
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(1):
Demand deposits $ 3,253 10.14% $ 3,253 10.13% $ 5,469 11.16% $ 5,469 11.16%
Overnight deposits 4,000 12.46 4,000 12.46 22,000 44.91 22,000 44.89
Time deposits 10,500 32.71 10,500 32.70 - - - -
-----------------------------------------------------------------------------------
Total interest-bearing deposits 17,753 55.31 17,753 55.29 27,469 56.07 27,469 56.05
Investment securities:
U.S. Treasury securities:
Available for sale 6,993 21.79 6,993 21.78 12,156 24.81 12,156 24.81
U.S. agency securities:
Available for sale 4,953 15.43 4,953 15.43 6,042 12.33 6,042 12.33
Equity securities (2) 2,195 6.84 2,195 6.84 3,037 6.20 3,037 6.20
------------------------------------------------------------------------------------
Total investment securities 14,141 44.06 14,141 44.05 21,235 43.34 21,235 43.34
------------------------------------------------------------------------------------
Mortgage-backed securities 202 0.63 212 0.66 283 0.59 302 0.61
------------------------------------------------------------------------------------
Total investments $32,096 100.00% $32,106 100.00% $48,987 100.00% $49,006 100.00%
====================================================================================
<CAPTION>
At December 31,
---------------------------------------
1997
---------------------------------------
Carrying % of Fair % of
value total value total
---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits(1):
Demand deposits $ 3,499 11.30% $ 3,499 11.29%
Overnight deposits 6,000 19.38 6,000 19.35
Time deposits - - - -
---------------------------------------
Total interest-bearing deposits 9,499 30.68 9,499 30.64
Investment securities:
U.S. Treasury securities:
Available for sale 16,048 51.82 16,048 51.76
U.S. agency securities:
Available for sale 3,011 9.72 3,011 9.71
Equity securities (2) 1,971 6.37 1,971 6.36
---------------------------------------
Total investment securities 21,030 67.91 21,030 67.83
---------------------------------------
Mortgage-backed securities 437 1.41 474 1.53
---------------------------------------
Total investments $30,966 100.00% $31,003 100.00%
=======================================
- --------------------
<F1> Total interest-bearing deposits held at the FHLB of Cincinnati totaled
$17,753 at December 31, 1999.
<F2> 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, 1999,
are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------------------------
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 $17,753 4.47% $ - -% $ - -% $ - -%
U.S. Treasury securities 6,993 6.08 - - - - - -
U.S. agency securities 3,970 5.59 983 5.00 - - - -
Mortgage-backed securities - - 25 9.70 8 8.50 169 10.62
---------------------------------------------------------------------------------------
Total $28,716 5.02% $1,008 5.11% $ 8 8.50% $169 10.62%
=======================================================================================
<CAPTION>
At December 31, 1999
-----------------------------------
Total
------------------------------------
Carrying Market Weighted
value value average yield
------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-bearing deposits $17,753 $17,753 4.47%
U.S. Treasury securities 6,993 6,993 6.08
U.S. agency securities 4,953 4,953 5.47
Mortgage-backed securities 202 212 10.42
-------------------------------
Total $29,901 $29,911 5.05%
===============================
</TABLE>
Not included in the preceding table is $2.2 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, 1999, the Association's certificates of deposit
totaled $203.3 million, or 69% of total deposits. Of such amount,
approximately $128.7 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 $69.8 million at December
31, 1999.
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 1999 1998 1997
average rate at ------------------------ ------------------------ ------------------------
December 31, Percent of Percent of Percent of
1999 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 -% $ 4,928 1.68% $ 4,009 1.39% $ 3,287 1.21%
Passbook savings accounts 3.10 57,861 19.66 54,258 18.80 52,622 19.43
NOW accounts 2.90 23,767 8.08 17,750 6.15 15,277 5.64
Money market accounts 3.00 4,364 1.48 4,713 1.63 4,049 1.49
--------------------------------------------------------------------------
Total transaction accounts 90,920 30.90 80,730 27.97 75,235 27.77
Certificates of deposit:
4.01% - 6.00% 5.25 153,450 52.15 149,696 51.87 120,113 44.33
6.01% - 8.00% 6.21 23,585 8.01 33,578 11.64 51,020 18.83
Adjustable-rate (1) 5.27 26,295 8.94 24,580 8.52 24,589 9.07
--------------------------------------------------------------------------
Total certificates
of deposit 5.37 203,330 69.10 207,854 72.03 195,722 72.23
--------------------------------------------------------------------------
Total deposits 4.60% $294,250 100.0% $288,584 100.0% $270,957 100.0%
=========================================================================
- --------------------
<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 $21.3
million at December 31, 1999.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1999:
<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% $ 97,458 $41,108 $10,544 $4,340 $153,450
6.01% to 8.00% 13,437 5,847 3,608 693 23,585
Adjustable rate 17,813 8,482 - - 26,295
----------------------------------------------------------
Total certificates of deposit $128,708 $55,437 $14,152 $5,033 $203,330
==========================================================
</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, 1999:
<TABLE>
<CAPTION>
Maturity Amount
- --------------------------------------------
(In thousands)
<S> <C>
Three months or less $12,719
Over 3 months to 6 months 14,101
Over 6 months to 12 months 12,703
Over 12 months 9,509
-------
Total $49,032
=======
</TABLE>
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1999 1998 1997
--------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $288,584 $270,957 $259,074
Deposits 529,012 445,214 166,892
Withdrawals (534,293) (438,622) (165,456)
--------------------------------
Net deposits before interest credited 283,303 277,549 260,510
Interest credited 10,947 11,035 10,447
--------------------------------
Ending balance $294,250 $288,584 $270,957
================================
Net increase $ 5,666 $ 17,627 $ 11,883
Percent increase 2.0% 6.5% 4.6%
</TABLE>
Borrowings. The FHLB system functions as a central reserve bank,
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, the
Association is authorized to apply for advances from the FHLB of Cincinnati,
provided certain standards of creditworthiness have been met. Under current
regulations, an association must meet certain qualifications to be eligible
for FHLB advances. The extent to which an association is eligible for such
advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL test"). If an association meets the QTL test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL test, it will be eligible for such
advances only to the extent it holds specified QTL test assets. At December
31, 1999, 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,
-----------------------------
1999 1998 1997
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance $37,000 $37,000 $29,000
Average balance 30,846 35,692 16,615
Average interest rate paid 5.91% 6.15% 6.38%
</TABLE>
At December 31, 1999, the Association had outstanding FHLB advances
totaling $37.0 million, with a weighted average interest rate of 5.88%.
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 that 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, 1999, the Association had 86 full-time employees
and 13 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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws which had generally
prevented banks from affiliating with securities and insurance firms and
made other significant changes in the financial services in which various
types of financial institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding
companies that were permitted to engage in any type of business activity,
whether or not the activity was a financial service. The GLB Act continues
those broad powers for unitary thrift holding companies in existence on May
4, 1999, including the Company. Any thrift holding company formed after May
4, 1999, however, will be subject to the same restrictions as multiple
thrift holding companies, which generally are limited to activities that are
considered incidental to banking.
The GLB authorizes a new "financial holding company," which can own
banks and thrifts and which are also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and
agency activities, as long as the depository institutions it owns are well
capitalized, well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the
activities in which the Holding Company and Industrial currently engage,
except to the extent that competition from other types of financial
institutions may increase as they engage in activities not permitted prior
to enactment of the GLB Act.
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
4.0% of adjusted total assets, except for institutions with the highest
examination rating and acceptable levels of risk, 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 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. 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, 1999, 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, 1999, was approximately $18.3 million, or 5.68%, which exceeded
the 4% liquidity requirement by approximately $6.1 million.
Qualified Thrift Lender Test. Savings associations must meet one of
two possible tests in order to be a qualified thrift lender ("QTL"). The
first test requires a savings association to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
("QTIs"), which are generally related to domestic residential real estate
and manufactured housing and include credit card, student and small business
loans and stock issued by any FHLB, the FHLMC or the FNMA. Under 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 nine out of every
12 months. The second test permits a savings association to qualify as a QTL
by meeting the definition of "domestic building and loan association" under
the Internal Revenue Code of 1986, as amended (the "Code"). In order for an
institution to meet the definition of a "domestic building and loan
association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain
governmental obligations. The OTS may grant exceptions to the QTL tests
under certain circumstances. If a savings association fails to meet one of
the QTL tests, the association and its holding company become subject to
certain operating and regulatory restrictions. A savings association that
fails to meet one of the QTL tests will not be eligible for new FHLB
advances. At December 31, 1999, Industrial qualified as a QTL.
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 $5.7
million to one borrower at December 31, 1999. The largest amount Industrial
had outstanding to any group of affiliated borrowers at December 31, 1999,
was $3.5 million, which consisted of seven loans, secured by a number of
residential rental and condominium development projects. At December 31,
1999, 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 deposits). 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, 1999.
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 is an affiliate of Industrial. Generally, Sections 23A
and 23B of the FRA (i) limit the extent to which a savings association or
its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such institution's capital stock and surplus,
(ii) limit the aggregate of all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus, and (iii) require
that all such transactions be on terms substantially the same, or at least
as favorable to the association, as those provided in transactions with a
non-affiliate. The term "covered transaction" includes the making of loans,
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, 1999.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions 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.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year
to exceed net income for that year to date plus the savings association's
retained net income for that year to date plus the retained net income for
the preceding two years; (ii) if the savings association will not be at
least adequately capitalized following the capital distribution; (iii) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association
and the OTS (or the FDIC), or violate a condition imposed on the savings
association in an OTS-approved application or notice. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice of the proposed capital distribution with
the OTS.
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 in existence on May 4, 1999 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, 1999, Industrial
met the QTL.
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 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.
FRB Regulations
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to
$44.3 million (subject to an exemption of up to $5.0 million), and of 10% of
net transaction accounts over $44.3 million. At December 31, 1999,
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 $3.5 million at December
31, 1999.
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 that 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 $30.0 million for the
three tax years ending on December 31, 1999, 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, 1999, Industrial's pre-1988 reserves
for tax purposes totaled approximately $4.2 million. Industrial believes it
had approximately $1.0 million of accumulated earnings and profits for tax
purposes as of December 31, 1999, 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 1995. 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 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) 0.400% 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.
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 1.4% of
Industrial's apportioned book net worth, determined in accordance with GAAP,
less any statutory deduction. This rate of tax will be 1.3% for tax year
2000 and years thereafter. 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,
1999, 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 $29,317 $1,103
Ashland, Ohio 44805
203 North Sandusky Street (1) Owned 02/25/93 - 61
Bellevue, Ohio 44811
211 North Sandusky Street Owned 05/06/72 64,354 350
Bellevue, Ohio 44811
225 North Main Street Owned 06/05/75 13,297 98
Clyde, Ohio 43410
1500 Bright Road Owned 01/29/93 18,441 990
Findlay, Ohio 45840
321 West State Street Owned 06/30/87 16,071 196
Fremont, Ohio 43420
40 E. Main Street Owned 02/13/99 845 373
Lexington, Ohio 44904
2080 Ferguson Road (2) Leased - - -
Mansfield, Ohio 44906
50 West Main Street Owned 08/06/76 45,380 252
Norwalk, Ohio 44857
51 West Main Street (3) Owned 09/11/92 - 194
Norwalk, Ohio 44587
4112 Milan Road Owned 02/29/88 13,770 413
Sandusky, Ohio 44870
48 East Market Street (4) Owned 06/15/83 56,995 325
Tiffin, Ohio 44883
796 West Market Street (4) Owned 12/18/90 - 211
Tiffin, Ohio 44883
301 Myrtle Avenue (5) Owned 05/07/77 35,780 147
Willard, Ohio 44890
121 Blossom Centre (5) Leased - - 94
Willard, Ohio 44890
- --------------------
<F1> Office facility for the Association's appraisal staff.
<F2> Loan production office.
<F3> Drive-up facility only.
<F4> Deposit totals are combined for the two Tiffin offices.
<F5> Deposit totals are combined for the two Willard 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 1999 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 53.7% for 1999, 48.4% for 1998,
and 46.2% for 1997.
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, 2000, 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 2000 Annual
Meeting of Shareholders of the Company (the "Proxy Statement"), filed with
the Securities and Exchange Commission (the "Commission") on March 21, 2000,
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 2000 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 on Form 8-K filed during
1999.
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 29, 2000 Date: March 29, 2000
/s/ Graydon H. Hayward /s/ Leon W. Maginnis
- ----------------------------- -------------------------------------
Graydon H. Hayward, Director Leon W. Maginnis, Director
Date: March 29, 2000 Date: March 29, 2000
/s/ Bob Moore /s/ Fredric C. Spurck
- ----------------------------- -------------------------------------
Bob Moore, Director Fredric C. Spurck, Director
Date: March 29, 2000 Date: March 29, 2000
/s/ Roger O. Wilkinson
- -----------------------------
Roger O. Wilkinson, Director
Date: March 29, 2000
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 2000 Annual Meeting of Shareholders
Incorporated by reference to the Proxy Statement, filed
with the Securities and Exchange Commission on March 21,
2000
EXHIBIT 13
1999 ANNUAL REPORT
INDUSTRIAL BANCORP, INC.
CONTENTS
1 President's Message
2 Selected Consolidated
Financial Data
3 Management's Discussion and
Analysis of Financial Condition
And Results of Operation
12 Consolidated Financial
Statements
16 Notes to Consolidated
Financial Statements
30 Report of Independent Auditors
31 Common Stock Information
32 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 twelve 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 1999.
This report will show that 1999 was another year of continued growth and
solid performance by Industrial Bancorp, Inc. As a result, the Board of
Directors increased cash dividends to $.66 per share during the year, an
increase of 12%. Also during the year, the Company continued its stock
repurchase program by authorizing the repurchase of an additional 10% of its
total outstanding common shares. Under the repurchase program, which began
late in 1996, the company has been able to purchase a total of 1,195,117
shares of outstanding stock as of year-end 1999. Under the right market
conditions, the Company intends to continue its repurchase program in the
year 2000.
Our subsidiary, Industrial Savings and Loan Association, also
completed another very successful year in 1999. Having completed its 109th
year of continuous operations, it continued to grow and prosper. Our year
was highlighted by the opening of two new full service offices. In April, we
opened our very first grocery store operation in Willard. This office will
compliment our existing branch office in Willard by offering extended hours
and an ATM machine. In June, we opened our eleventh full service branch
office in Lexington, Ohio. Lexington is located in Richland County where we
currently have a loan production office. With this new facility, we are now
able to expand the products and services we offer to the people of the
Richland County area. With this expansion, we were also able to increase our
loan origination staff in that area. We are very excited about these
expansions and the role they will play in increasing our market share in
those two areas and the continued growth of the entire company.
Also during 1999, our management team and staff spent a great deal of
time and effort in preparation for the change to the new century. I am
pleased to report that all the hard work and planning paid off by having no
disruptions to our computer systems as a result of the Y2K change over. We
entered the new century with no disruption of service to our customers.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. Total assets increased to a
record high of $389 million and total loans now exceed $342 million which is
also a new record. Savings deposits at year-end increased to $294 million.
Basic and diluted earnings per share amounted to $1.23 and $1.21
respectively, an increase from last year and also at record levels.
On behalf of the directors, management and employees, I would like to
express our appreciation to you, for your continued confidence and
investment in Industrial Bancorp, Inc., and to our valued customers for
their continued support of Industrial Savings and Loan.
/s/ David M. Windau
David M. Windau
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected financial condition data:
Total assets $389,003 $388,059 $364,023 $326,613 $322,994
Investment securities 14,343 21,518 21,467 23,797 27,882
Loans receivable - net 342,276 326,972 321,669 285,803 259,124
Deposits 294,250 288,584 270,957 259,074 238,282
FHLB advances 37,000 35,000 29,000 2,000 -
Shareholders' equity 54,586 60,741 60,862 62,104 81,055
Summary of earnings:
Interest income $ 29,442 $ 30,562 $ 27,805 $ 25,468 $ 22,858
Interest expense 15,048 15,825 14,065 11,863 11,236
------------------------------------------------------------
Net interest income 14,394 14,737 13,740 13,605 11,622
Provision for loan losses 103 200 186 180 180
------------------------------------------------------------
Net interest income after
provision for loan losses 14,291 14,537 13,554 13,425 11,442
Noninterest income 949 858 509 447 398
Noninterest expense 6,995 6,663 6,167 9,453 5,518
------------------------------------------------------------
Income before income tax 8,245 8,732 7,896 4,419 6,322
Income tax expense 2,935 3,028 2,783 2,020 2,149
------------------------------------------------------------
Net income $ 5,310 $ 5,704 $ 5,113 $ 2,399 $ 4,173
============================================================
Basic earnings per share (1) $ 1.23 $ 1.22 $ 1.04 $ 0.47 $ 0.42
Diluted earnings per share (1) 1.21 1.19 1.03 0.47 0.42
Cash dividends per share (1) (2) 0.66 0.59 0.48 3.75 0.15
Selected financial ratios:
Return on average assets 1.39% 1.50% 1.48% 0.75% 1.42%
Return on average equity 9.31 9.36 8.38 3.62 8.21
Average equity to average assets 14.94 16.03 17.63 20.59 17.29
Interest rate spread 3.11 3.11 3.13 3.26 3.26
Net interest margin 3.85 3.95 4.05 4.32 4.04
Efficiency ratio (3) 45.90 43.28 43.85 68.14 46.60
Noninterest expense to average assets 1.83 1.75 1.78 2.94 1.88
Nonperforming assets to total assets 0.42 0.38 0.31 0.38 0.49
Nonperforming loans to total loans 0.45 0.45 0.32 0.42 0.60
Allowance for loan losses to total loans 0.58 0.59 0.54 0.53 0.52
Allowance for loan losses to
nonperforming loans 129.55 129.72 168.76 125.77 87.53
<FN>
<F1> Per share data for 1995 is for the period from the date of the
Conversion, August 1, 1995, to December 31, 1995.
<F2> The amount for 1996 includes a $3.50 per share special return of
capital distribution.
<F3> Noninterest expense as a percentage of the sum of net interest income
after provision for loan losses and noninterest income.
</FN>
</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, and its
wholly-owned subsidiary, Industrial Savings, (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 12.
Changes In FINANCIAL CONDITION
Total consolidated assets of the Company were $389.0 million at year-
end 1999 compared to $388.1 million at year-end 1998.
Loans receivable increased $15.3 million to $342.3 million at year-end
1999 from $327.0 million at year-end 1998. Loan originations exceeded $100
million for the third year in a row, with 89% of the originations being in
the residential mortgage and real estate construction loan categories. Also
in 1999, the Company more than doubled its originations in the commercial
category and increased originations in the consumer category by 75%. Sales
of fixed-rate mortgage loans on the secondary market totaled $8.5 million in
1999. Investment securities were reduced to $14.3 million at year-end 1999
from $21.5 million at year-end 1998. Maturities of U.S. Treasury and agency
securities totaled $10.0 million and were replenished by purchases of the
same totaling $4.0 million and purchases of $10.5 million in long-term time
deposits. Unrealized gains on those securities decreased by $711,000 during
the year. Cash and cash equivalents were $10.0 million at year-end 1999
compared to $28.5 million at year-end 1998. The Company had $22.0 million in
overnight deposits at the end of the year in 1998, taking advantage of minor
variations between long-term and short-term interest rates. Office
properties and equipment, net of accumulated depreciation, increased to $5.7
million at year-end 1999 from $5.4 million at year-end 1998. The increase is
principally due to the Company's addition of two full-service offices during
1999.
Total deposits increased $5.7 million, or 2%, to $294.3 at year-end
1999 from $288.6 million at year-end 1998. Transaction accounts, including
passbook savings deposits, increased $10.2 million while certificates of
deposit decreased $4.5 million. The Company has used advances from the
Federal Home Loan Bank ("FHLB") to fund loan growth in excess of loan sales
and deposit growth. FHLB advances were $37.0 million at year-end 1999
compared to $35.0 million at year-end 1998.
Shareholders' equity was $54.6 million at year-end 1999, compared to
$60.7 million at year-end 1998. Net income of $5.3 million was offset by
dividends to shareholders of $2.8 million and purchases of treasury shares
at a cost of $9.5 million during 1999.
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>
1999 1998
----------------------------------------------------------------
Weighted average
yield/rate at Average Average Average Average
12/31/99 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 4.47% $ 27,968 $ 1,123 4.02% $ 18,656 $ 708 3.79%
Investment securities (1) 5.83 17,156 1,116 6.51 20,396 1,344 6.59
Mortgage-backed securities 10.42 239 24 10.04 345 34 9.98
Loans receivable (2) 7.92 328,583 27,179 8.27 333,775 28,476 8.53
-------------------------------------------------------------
Total interest-earning assets 7.68 373,946 29,442 7.87 373,172 30,562 8.19
Noninterest-earning assets:
Cash and noninterest-bearing deposits 1,407 1,109
Office properties and equipment 5,705 5,302
Other nonearning assets 2,699 2,371
Allowance for loan losses (1,984) (1,832)
-----------------------------------------
Total assets $381,773 $380,122
=========================================
Interest-bearing liabilities:
Deposits:
NOW accounts 2.90 $ 19,115 414 2.17 $ 16,139 355 2.20
Money market accounts 3.00 4,650 141 3.03 4,391 133 3.03
Passbook savings accounts 3.10 56,686 1,756 3.10 53,014 1,626 3.07
Certificates of deposit 5.37 204,696 10,914 5.33 202,198 11,516 5.70
-------------------------------------------------------------
Total deposits 4.60 285,147 13,225 4.64 275,742 13,630 4.94
FHLB advances 5.88 30,846 1,823 5.91 35,692 2,195 6.15
-------------------------------------------------------------
Total interest-bearing liabilities 4.74 315,993 15,048 4.76 311,434 15,825 5.08
Noninterest-bearing liabilities 8,731 7,763
-----------------------------------------
Total liabilities 324,724 319,197
Shareholders' equity 57,049 60,925
-----------------------------------------
Total liabilities and
shareholders' equity $381,773 $380,122
=========================================
Net interest income $14,394 $14,737
Interest rate spread 2.94% 3.11% 3.11%
Net interest margin (3) 3.85% 3.95%
Average interest-earning assets to
average interest-bearing liabilities 118.34% 119.82%
<CAPTION>
1997
-------------------------------
Average Average
balance Interest yield/rate
-------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 11,696 $ 436 3.73%
Investment securities (1) 23,053 1,539 6.68
Mortgage-backed securities 497 51 10.26
Loans receivable (2) 304,397 25,779 8.47
------------------
Total interest-earning assets 339,643 27,805 8.19
Noninterest-earning assets:
Cash and noninterest-bearing
deposits 1,051
Office properties and equipment 4,983
Other nonearning assets 1,832
Allowance for loan losses (1,652)
--------
Total assets $345,857
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 14,084 327 2.32
Money market accounts 4,323 130 3.01
Passbook savings accounts 53,079 1,644 3.10
Certificates of deposit 189,887 10,904 5.74
------------------
Total deposits 261,373 13,005 4.98
FHLB advances 16,615 1,060 6.38
------------------
Total interest-bearing liabilities 277,988 14,065 5.06
Noninterest-bearing liabilities 6,882
--------
Total liabilities 284,870
Shareholders' equity 60,987
--------
Total liabilities and
shareholders' equity $345,857
========
Net interest income $13,740
=======
Interest rate spread 3.13%
Net interest margin (3) 4.05%
Average interest-earning assets to
average interest-bearing liabilities 122.18%
<FN>
<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 $933,000, $1.0 million,
and $626,000 in 1999, 1998 and 1997.
<F3> Net interest income to average interest-earning assets.
</FN>
</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>
1999 vs. 1998 1998 vs. 1997
------------------------------------------------------------------
Increase (decrease) Total Increase (decrease) Total
due to increase due to increase
------------------ ------------------
Volume Rate (decrease) Volume Rate (decrease)
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 370 $ 45 $ 415 $ 265 $ 7 $ 272
Investment securities (211) (17) (228) (175) (20) (195)
Mortgage-backed securities (10) - (10) (16) (1) (17)
Loans receivable (438) (859) (1,297) 2,505 192 2,697
-------------------------------------------------------------
Total interest income (289) (831) (1,120) 2,579 178 2,757
Interest expense attributable to:
Deposits:
NOW accounts 65 (6) 59 46 (18) 28
Money market accounts 8 - 8 2 1 3
Passbook savings accounts 114 16 130 (2) (16) (18)
Certificates of deposit 141 (743) (602) 702 (90) 612
-------------------------------------------------------------
Total deposits 328 (733) (405) 748 (123) 625
FHLB advances (289) (83) (372) 1,175 (40) 1,135
-------------------------------------------------------------
Total interest expense 39 (816) (777) 1,923 (163) 1,760
-------------------------------------------------------------
Increase(decrease) in net interest
income $(328) $ (15) $ (343) $ 656 $ 341 $ 997
=============================================================
</TABLE>
COMPARISON OF OPERATING RESULTS
Earnings Summary. The Company had consolidated net income of $5.3
million for 1999, compared to $5.7 million for 1998 and $5.1 million for
1997. The primary reason for the change in net income between years was the
change in net interest income.
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 was $14.3 million in 1999, a decrease of $343,000
from $14.7 million in 1998, which was an increase of $997,000 over $13.7
million in 1997. The lower net interest income in 1999 was primarily a
result of reduced levels of average interest-bearing assets, particularly
loans and investment securities, coupled with the lower interest rate
environment during 1999. The primary reason for the increased net interest
income in 1998 over 1997 was the higher average balance in loans during
1998, especially prior to the implementation of the loan sales program which
was initiated mid-year.
Total interest income was $29.4 million in 1999 down from $30.6
million in 1998, which was up from $27.8 million in 1997. The significant
number of refinancings that took place in 1998 were not repeated in 1999
despite the continuation of the lower interest rate environment. Average
loans increased from $304.4 million in 1997 to $333.8 million in 1998, then
declined to $328.6 million in 1999. Competition increased for a reduced
level of loan demand in 1999, causing the Company to experience a 5% decline
in total loan originations that year. Interest and fees on loans totaled
$27.2 million in 1999, compared to $28.5 million in 1998 and $25.8 million
in 1997. The average yield earned on loans was 8.27% for 1999, compared to
8.53% for 1998 and 8.47% for 1997.
Interest earned on investment securities declined to $1.1 million in
1999 compared to $1.3 million in 1998 and $1.5 million in 1997 while income
from interest-bearing deposits increased to $1.1 million in 1999, compared
to $708,000 in 1998 and $436,000 in 1997. The Company allowed the average
balance of its investment portfolio to decline during 1999 and 1998 in favor
of shorter term, more liquid investments due to the flat yield curve
experienced in those years. Additional investments have also been limited
during the past three years due to the excess growth of loans over deposits
and the increased use of FHLB advances to fund the excess.
Total interest expense was $15.0 million in 1999, an decrease of
$777,000 from $15.8 million recorded in 1998, which was an increase of $1.8
million from $14.1 million recorded in 1997. The decrease during 1999 was
primarily the result of the lower interest rate environment experienced
throughout most of 1999. The increase in 1998 was principally due to the
increased use of FHLB advances, which averaged $35.7 million in 1998,
compared to $16.6 million in 1997. Reliance upon FHLB advances jumped in
1998 as the growth in average deposits, from $261.4 million in 1997 to
$275.7 million in 1998, did not keep pace with loan demand. In 1999, average
deposits totaled $285.1 million. The Company has diminished some of its
reliance upon FHLB advances by selling $25.7 million of mortgage loans on
the secondary market since the inception of the program mid-year 1998. The
average rate paid for deposits decreased to 4.74% in 1999 from 4.94% in 1998
and 4.98% in 1997 as the maturity of the deposit portfolio, particularly
certificates of deposit, shifted to shorter-term, lower yielding deposits.
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 1999 and 1998 from 3.13% in 1997.
The excess of average interest-earning assets over average interest-
bearing liabilities remained relatively steady at $58.0 million for 1999
compared to $61.7 million for both 1998 and 1997. The ratio of average
interest-earning assets to average interest-bearing liabilities was 118.34%
for 1999, compared to 119.82% for 1998 and 122.18% for 1997.
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 $103,000 in 1999, compared to
$200,000 in 1998 and $186,000 in 1997. The Company had $19,000 in charge-
offs during 1999, compared to $14,000 in 1998 and $2,000 in 1997. Recoveries
totaled $3,000 in 1999, $2,000 in 1998 and $1,000 in 1997. Nonperforming
loans were $1.6 million at year-end 1999, compared to $1.5 million at year-
end 1998. At year-end 1999, the allowance for loan losses was 129.55% of
nonperforming loans and .58% of total loans compared to 129.72% and .59% at
year-end 1998. Management determined that a provision for loan losses was
warranted in 1999 based on the sustained level of nonperforming loans and
the increase in loans receivable during 1999.
Noninterest Income. Noninterest income increased to $949,000 in 1999,
compared to $858,000 in 1998 and $509,000 in 1997. Service fees related to
the steadily growing deposit base and expanding ATM and debit card usage
contributed largely to these increases during each of the three years. In
1999 and 1998, income of $81,000 and $174,000 was recognized as a result of
the sale of mortgage loans on the secondary market.
Noninterest Expense. Noninterest expense amounted to $7.0 million in
1999, compared to $6.7 million in 1998 and $6.2 million in 1997. The largest
single item of noninterest expense, salaries and employee benefits, was held
in check during 1999, matching the $3.4 million recorded in 1998, compared
to $3.1 million in 1997.
State franchise tax has decreased from $524,000 in 1997 to $442,000 in
1998 and $329,000 in 1999, due to intercompany transfers of capital from
Industrial Savings to Industrial Bancorp. 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 $172,000 in 1999 compared to $168,000 in 1998 and $135,000 in
1997, as a result of the growth in deposits.
Data processing and related fees, which are based on the outstanding
number of loan and deposit accounts, increased to $503,000 in 1999 from
$437,000 in 1998 and $370,000 in 1997. Total occupancy and equipment and
depreciation expense increased to $892,000 for 1999, compared to $757,000
for 1998 and $638,000 in 1997, due principally to the addition of the two
new full-service offices in 1999 and the significant upgrade in technology
the Company made during 1998. Advertising expense increased in 1999, due to
marketing the opening of the two new offices, to $244,000 for 1999, up from
$188,000 for 1998, which was down from $194,000 in 1997. Other expenses
increased to $1.4 million in 1999, compared to $1.2 million in 1998 and
1997.
Income Tax Expense. Fluctuations in income tax expense are primarily
attributable to the change in income before taxes. Income before taxes
amounted to $8.2 million in 1999, compared to $8.7 million in 1998 and $7.9
million in 1997. The Company's effective tax rates were 35.6% in 1999,
compared to 34.7% in 1998 and 35.2% in 1997.
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 $1.6 million at year-end 1999, compared to $1.5
million at year-end 1998. As a percentage of year-end total assets,
nonperforming assets were and 0.42% in 1999 and 0.38% in 1998.
The Company's allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past two years and stood at $2.0
million at year-end 1999 compared to $1.9 million at year-end 1998. As a
percentage of nonperforming loans, the allowance for loan losses has
decreased from 129.72% at year-end 1998 to 129.55% at year-end 1999.
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 assets 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 3 percent increase or
decrease in market rates.
It is the intent of the Board not to exceed a moderate risk level, as
defined by the Office of Thrift Supervision in their Thrift Bulletin 13A
with a 200 basis point permanent spike in interest rates. As of December 31,
1999, the interest rate level was in the minimum range for a 100 basis point
permanent spike in interest rates, moderate range for a 200 basis point
permanent spike in interest rates and significant level for a 300 basis
point permanent spike in interest rates. In comparison, at December 31, 1998
permanent spikes in interest rates of 100, 200 and 300 basis points
represented interest rate risk levels of minimum, minimum and moderate,
respectively. In terms of relative impact on the Company's NPV, a 200 basis
point permanent spike in interest rates would have the effect of reducing
NPV by $17.0 million at December 31, 1999 compared to a reduction of $11.3
million at December 31, 1998. The Company's increased sensitivity to rising
interest rates is a result of an increase in the level of fixed rate loans
and a general shortening of the maturity structure of deposits and
borrowings. The Company attempts to mitigate interest rate risk by
originating adjustable-rate loans and by selling fixed-rate mortgage loans
in the secondary market to Freddie Mac, however customer preferences for
loan products may limit the Company's ability to achieve this objective.
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 include capital at the holding company level nor does it 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>
1999 1998 1997
---------------------------------
(In thousands)
<S> <C> <C> <C>
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments 277 744 (34)
---------------------------------
Net cash from operating activities 5,587 6,448 5,079
Net cash from investment activities (19,673) (4,186) (32,584)
Net cash from financing activities (4,498) 15,502 30,864
---------------------------------
Net change in cash and cash equivalents (18,584) 17,764 3,359
Cash and cash equivalents at beginning of year 28,536 10,772 7,413
---------------------------------
Cash and cash equivalents at end of year $ 9,952 $28,536 $ 10,772
=================================
</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 1999, the
regulatory liquidity ratio of the Company was 5.86%. At such date, the
Company had commitments to originate loans and loans in process totaling
$14.0 million and no commitments to sell loans. The Company considers its
liquidity and capital reserves sufficient to meet its foreseeable short-term
and long-term needs.
Industrial Savings is required by OTS regulations to maintain
specified minimum amounts of capital. At year-end 1999, the association
exceeded all applicable minimum capital requirements. The association's
actual capital and regulatory capital requirements at year-end 1999 were as
follows:
<TABLE>
<CAPTION>
Amount Percent of assets
----------------------------------
(In thousands)
<S> <C> <C>
Tangible capital: (1)
Capital level $35,115 9.07%
Requirement 5,805 1.50
------------------------
Excess $29,310 7.57%
========================
Tier 1 (Core) capital: (1)
Capital level $35,115 9.07%
Requirement 15,479 4.00
------------------------
Excess $19,636 5.07%
========================
Risk-based capital: (2)
Capital level $38,066 15.84%
Requirement 19,229 8.00
------------------------
Excess $18,837 7.84%
========================
<FN>
<F1> Tangible and Tier 1 (Core) capital percentages are based on adjusted
total assets of $387.0 million.
<F2> Risk-based capital percentages are based on risk-weighted assets of
$240.4 million.
</FN>
</TABLE>
YEAR 2000 COMPLIANCE ISSUES
From their inception in 1995 through January of this year, the
Company's efforts to devise and implement a Year 2000 compliance program
have cost approximately $700,000. 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. As a result of that upgrade in computer technology, and various
other efforts implemented during the preceding four years, the Company
experienced virtually no Year 2000 challenges.
The Company does not anticipate any future challenges with Year 2000
technology issues that would have a material impact upon the Company's
results of operations or capital resources.
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, 1999.
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, 2000,
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.
This statement is 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, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------------------
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits $ 2,699 $ 1,067
Interest-bearing demand deposits 3,253 5,469
Overnight deposits 4,000 22,000
-------------------
Cash and cash equivalents 9,952 28,536
Interest-bearing time deposits 10,500
Investment securities available for sale,
at fair value 14,141 21,235
Investment securities held to maturity
(fair value: 1999 - $212; 1998 - $302) 202 283
Loans receivable - net 342,276 326,972
Federal Home Loan Bank stock 3,490 3,256
Office properties and equipment - net 5,709 5,387
Accrued interest receivable 2,273 2,051
Other assets 460 339
-------------------
Total assets $389,003 $388,059
===================
LIABILITIES
Deposits $294,250 $288,584
Federal Home Loan Bank advances 37,000 35,000
Accrued interest payable and other liabilities 3,167 3,734
-------------------
Total liabilities 334,417 327,318
===================
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 2,955 2,472
Retained earnings 40,005 37,522
Accumulated other comprehensive income 1,390 2,101
Unearned employee stock ownership plan shares (2,688) (3,100)
Unearned compensation (701) (1,227)
Treasury stock, at cost
(1999 - 1,195,117 shares; 1998 - 723,464 shares) (21,044) (11,696)
-------------------
Total shareholders' equity 54,586 60,741
-------------------
Total liabilities and shareholders' equity $389,003 $388,059
===================
</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,
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $27,179 $28,476 $25,779
Interest and dividends on investment securities 1,140 1,378 1,590
Interest on deposits 1,123 708 436
-------------------------------
29,442 30,562 27,805
-------------------------------
Interest expense
Interest on deposits 13,225 13,630 13,005
Interest on Federal Home Loan Bank advances 1,823 2,195 1,060
-------------------------------
15,048 15,825 14,065
-------------------------------
Net interest income 14,394 14,737 13,740
Provision for loan losses 103 200 186
-------------------------------
Net interest income after provision for
loan losses 14,291 14,537 13,554
-------------------------------
Noninterest income
Service fees and other charges 839 635 466
Other 110 223 43
-------------------------------
949 858 509
-------------------------------
Noninterest expense
Salaries and employee benefits 3,436 3,430 3,117
State franchise tax 329 442 524
Federal deposit insurance premiums 172 168 135
Occupancy and equipment 437 368 352
Data processing 503 437 370
Depreciation 455 389 286
Advertising 244 188 194
Other 1,419 1,241 1,189
-------------------------------
6,995 6,663 6,167
-------------------------------
Income before income tax 8,245 8,732 7,896
Provision for income tax 2,935 3,028 2,783
-------------------------------
Net income $ 5,310 $ 5,704 $ 5,113
===============================
Basic earnings per share $ 1.23 $ 1.22 $ 1.04
Diluted earnings per share $ 1.21 $ 1.19 $ 1.03
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Net income $5,310 $5,704 $5,113
Other comprehensive income:
Unrealized gains (losses) on securities,
net of taxes (711) 768 483
Comprehensive income $4,599 $6,472 $5,596
============================
</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
Common Paid-in Retained Available ESOP Unearned Treasury
Stock Capital Earnings for Sale Shares Compensation Stock Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $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
($.59 per share) (2,751) (2,751)
Exercise of stock options 16 76 92
Employee Stock Ownership Plan:
Shares released 415 429 844
Management Recognition Plan:
Compensation earned 162 526 688
Change in unrealized gain on
securities available for sale 768 768
-------------------------------------------------------------------------------------------
Balance at December 31, 1998 34,669 2,472 37,522 2,101 (3,100) (1,227) (11,696) 60,741
Net income 5,310 5,310
Purchase of treasury stock
(471,653 shares) (9,517) (9,517)
Cash dividends declared
($.66 per share) (2,827) (2,827)
Exercise of stock options 11 169 180
Employee Stock Ownership Plan:
Shares released 357 412 769
Management Recognition Plan:
Compensation earned 115 526 641
Change in unrealized gain on
securities available for sale (711) (711)
-------------------------------------------------------------------------------------------
Balance at December 31, 1999 $34,669 $2,955 $40,005 $1,390 $(2,688) $ (701) $(21,044) $54,586
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 503 389 286
Provision for loan losses 103 200 186
Accretion of deferred loan fees (978) (1,107) (674)
FHLB stock dividends (234) (224) (200)
Net accretion on investment securities 16 (41) (50)
ESOP expense 769 844 655
MRP compensation expense 641 688 526
Net change in:
Deferred taxes (24) 124 105
Accrued interest receivable and other assets (343) (139) (637)
Accrued interest payable and other liabilities (176) 10 (231)
-------------------------------
Net cash from operating activities 5,587 6,448 5,079
-------------------------------
Cash flows from investing activities
Net increase in interest-bearing time deposits (10,500)
Proceeds from maturities of investment securities
available for sale 10,000 6,000 12,000
Purchases of investment securities available for sale (4,000) (5,000) (9,008)
Principal repayments and maturities of investment
securities held to maturity 81 154 124
Net increase in loans (14,429) (4,442) (35,378)
FHLB stock purchases (94) (93)
Properties and equipment expenditures, net (825) (804) (229)
-------------------------------
Net cash from investing activities (19,673) (4,186) (32,584)
-------------------------------
Cash flows from financing activities
Net increase in deposits 5,666 17,627 11,883
Proceeds from FHLB advances 9,000 10,000 33,000
Repayment of FHLB advances (7,000) (4,000) (6,000)
Proceeds from exercise of stock options 180 92
Cash dividends paid (2,827) (2,751) (2,347)
Purchase of treasury stock (9,517) (5,466) (5,672)
-------------------------------
Net cash from financing activities (4,498) 15,502 30,864
-------------------------------
Net change in cash and cash equivalents (18,584) 17,764 3,359
Cash and cash equivalents at beginning of year 28,536 10,772 7,413
-------------------------------
Cash and cash equivalents at end of year $ 9,952 $28,536 $ 10,772
===============================
Cash paid during the year for:
Interest $ 15,287 $15,765 $ 13,938
Income taxes 2,748 2,707 2,947
Noncash transactions:
Transfer of loans to real estate owned 89 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. Footnote tables are presented in
thousands, except per share data.
Nature of Operations: The Corporation provides financial services through
its offices in North Central Ohio. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential mortgage, commercial, and installment loans.
Substantially all loans are secured by specific items of collateral
including business assets, consumer assets and real estate. Commercial loans
are expected to be repaid from cash flow from operations of businesses. Real
estate loans are secured by both residential and commercial real estate.
Other financial instruments which potentially represent concentrations of
credit risk include deposit accounts in other financial institutions.
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. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is
not temporary.
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: 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.
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 1998 and 1997 financial statements
have been reclassified to correspond with the 1999 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
1999
- ----
U.S. Treasury securities $ 6,994 $ 10 $(11) $ 6,993
U.S. agency securities 4,995 (42) 4,953
Federal Home Loan Mortgage
Corporation preferred stock 46 2,149 2,195
---------------------------------------------------
$12,035 $2,159 $(53) $14,141
===================================================
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
===================================================
Held to maturity
1999
- ----
Mortgage-backed securities $ 202 $ 10 $ 212
===================================================
1998
- ----
Mortgage-backed securities $ 283 $ 19 $ 302
===================================================
</TABLE>
Contractual maturities of debt securities at year-end 1999 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------------------
<S> <C> <C>
Available for sale
Due in one year or less $10,990 $10,963
Due after one year through five years 999 983
---------------------
11,989 11,946
Federal Home Loan Mortgage Corporation
preferred stock 46 2,195
---------------------
$12,035 $14,141
=====================
Held to maturity
Mortgage-backed securities $ 202 $ 212
=====================
</TABLE>
No investment securities were sold during 1999, 1998 or 1997. Investment
securities pledged at year-end 1999 and 1998 had costs of $9.3 million and
$15.4 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>
1999 1998
---------------------
<S> <C> <C>
Real estate loans:
One- to four-family $288,905 $279,237
Home equity 18,721 16,624
Construction 18,172 17,858
Multi-family 10,873 9,165
Nonresidential 11,956 10,979
---------------------
Total real estate loans 348,627 333,863
Commercial loans 1,265 451
Consumer loans 6,594 4,859
---------------------
Total loans 356,486 339,173
Less:
Undisbursed construction loan funds (8,693) (6,251)
Net deferred loan fees (3,500) (4,020)
Allowance for loan losses (2,017) (1,930)
---------------------
$342,276 $326,972
=====================
</TABLE>
Activity in the allowance for loan losses for the year was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,930 $1,742 $1,557
Provision for losses 103 200 186
Charge-offs (19) (14) (2)
Recoveries 3 2 1
----------------------------
Balance at end of year $2,017 $1,930 $1,742
============================
</TABLE>
No loans were classified as impaired at year-end 1999, 1998 and 1997 or
during the years then ended. Non-performing loans as of the end of the year
were as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 928 $ 976
Accruing loans past due 90 days or more 629 512
-----------------
Total non-performing loans $1,557 $1,488
=================
</TABLE>
Loans serviced by others, which are not reported as assets, total $27.3
million and $21.1 million at year-end 1999 and 1998. Activity for
capitalized mortgage servicing rights was as follows:
<TABLE>
<CAPTION>
1998 1998
-------------
<S> <C> <C>
Balance at beginning of year $169 $ -
Additions 82 177
Amortized to expense (58) (8)
-------------
Balance at end of year $193 $169
=============
</TABLE>
Loans to principal officers, directors and their related businesses,
aggregating $60 thousand or more to any one related party, were as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Balance at beginning of year $199
Loans originated 80
Repayments (50)
----
Balance at end of year $229
====
</TABLE>
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment as of the end of the year were as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------
<S> <C> <C>
Land $2,044 $1,932
Buildings and improvements 5,434 5,065
Furniture and equipment 1,714 1,489
Leasehold improvements 103 7
Construction in progress 4 20
-----------------
Total cost 9,299 8,513
Accumulated depreciation 3,590 3,126
-----------------
$5,709 $5,387
=================
</TABLE>
NOTE 5 - DEPOSITS
Deposits as of the end of the year were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
Noninterest-bearing demand deposits $ 4,928 $ 4,009
Money market accounts 4,364 4,713
NOW accounts 23,767 17,750
Passbook savings accounts 57,861 54,258
Certificates of deposit 203,330 207,854
---------------------
$294,250 $288,584
=====================
</TABLE>
Certificates of deposit with balances of $100 thousand or more were $49.0
million and $45.9 million at year-end 1999 and 1998.
Scheduled maturities of certificates of deposit at year-end 1999 were as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
2000 $128,708
2001 55,437
2002 14,152
2003 2,573
2004 1,707
Thereafter 753
--------
$203,330
========
</TABLE>
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank at year-end were as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------
Year of Maturity Interest Rate Amount Interest Rate Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 5.75 - 6.30% $ 7,000
2000 4.70 - 6.60% $16,000 6.30 - 6.60% 7,000
2001 5.73 - 6.21% 9,000 5.73 - 6.21% 9,000
2002 5.95 - 6.25% 9,000 5.95 - 6.25% 9,000
2003 5.83 3,000 5.83 3,000
------- -------
$37,000 $35,000
======= =======
Weighted average interest rate 5.88% 6.11%
</TABLE>
These advances were collateralized by $55.5 million and $52.5 million of
residential mortgage loans under a blanket lien agreement and by Federal
Home Loan Bank stock at year-end 1999 and 1998.
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 1999, 1998 and 1997 were $374,000, $398,000
and $542,000. ESOP expense for 1999, 1998 and 1997 was $769,000, $844,000
and $655,000.
Shares held by the ESOP as of the end of the year were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
Shares allocated to participants 174,760 133,585
Unearned shares 249,779 308,350
---------------------
Total ESOP shares 424,539 441,935
---------------------
Fair value of unearned shares (in thousands) $ 3,715 $ 6,167
=====================
</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
award 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>
1999 1998
-----------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 382,815 388,815
Exercised (13,330) $11.00 (6,000) $11.00
------- -------
Outstanding at end of year 369,485 382,815
======= =======
Options exercisable at year-end 213,989 149,526
</TABLE>
No options were granted in 1999 or 1998. 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>
1999 1998 1997
---------------------------------------------------------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $5,310 $5,127 $5,704 $5,521 $5,113 $4,930
Basic earnings per share 1.23 1.19 1.22 1.18 1.04 1.01
Diluted earnings per share 1.21 1.16 1.19 1.15 1.03 .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 awards
for 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 each of 1999, 1998 and 1997.
NOTE 10 - INCOME TAXES
The provision for income tax was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Current expense $2,959 $2,904 $2,678
Deferred expense (24) 124 105
----------------------------
$2,935 $3,028 $2,783
============================
</TABLE>
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Income tax computed at the statutory federal rate $2,803 $2,969 $2,685
Effect of ESOP deduction 122 196 72
Effect of MRP awards expense - (16) (16)
Other 10 (121) 42
-----------------------------
$2,935 $3,028 $2,783
==============================
Effective tax rate 35.6% 34.7% 35.2%
</TABLE>
Deferred tax assets and liabilities as of the end of the year were as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 870 $ 1,020
Accrued MRP awards 126 119
Construction period interest 16 16
Accrued vacation 49 38
ESOP shares allocated 91 77
Bad debt deduction 13 -
Other 11 8
------------------
1,176 1,278
Deferred tax liabilities
Bad debt deduction - (186)
FHLB stock dividends (670) (590)
Unrealized gain on investment
securities available for sale (716) (1,082)
Depreciation expense (105) (111)
Loan servicing rights (66) (57)
Accumulated accretion (8) (31)
------------------
(1,565) (2,057)
------------------
Net deferred tax asset/(liability) $ (389) $ (779)
==================
</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, 1999. If Industrial Savings was
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, which began in 1998.
NOTE 11 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Industrial Savings 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, 1999,
Industrial Savings 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
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Total capital
(to risk weighted assets) $38,066 15.84% $19,229 8.0% $24,036 10.0%
Tier 1 (core) capital
(to risk weighted assets) $35,115 14.61% $ 9,614 4.0% $14,421 6.0%
Tier 1 (core) capital
(to adjusted total assets) $35,115 9.07% $15,479 4.0% $19,348 5.0%
Tangible capital
(to adjusted total assets) $35,115 9.07% $ 5,805 1.5% N/A
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 4.0% $19,282 5.0%
Tangible capital
(to adjusted total assets) $34,110 8.85% $ 5,784 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>
1999 1998
------------------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------------------------------
<S> <C> <C> <C> <C>
Commitments to make loans $3,939 $ 1,380 $4,882 $ 1,638
Undisbursed construction loan funds 7,633 1,060 5,357 894
Unused lines of credit 19 17,258 - 12,228
</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
7.25% to 9.00% and maturities ranging from 10 years to 30 years.
The Company was required by the Federal Reserve Bank to maintain cash
reserves of $640,000 and $500,000 as of year-end 1999 and 1998. 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>
1999 1998
------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 9,952 $ 9,952 $ 28,536 $ 28,536
Interest-bearing time deposits 10,500 10,500 - -
Investment securities 14,343 14,343 21,518 21,537
Loans receivable, net 342,276 335,314 326,972 332,757
Federal Home Loan Bank stock 3,490 3,490 3,256 3,256
Accrued interest receivable 2,273 2,273 2,051 2,051
Financial liabilities
Deposits $(294,250) $(294,647) $(288,584) $(290,040)
FHLB advances (37,000) (36,586) (35,000) (35,581)
Accrued interest payable (530) (530) (769) (769)
</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. Fair value of commitments is not materially different from the
nominal value.
NOTE 14 - EARNINGS PER SHARE
The factors used in the earnings per share computation were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net income (in thousands) $ 5,310 $ 5,704 $ 5,113
Basic:
Weighted average common shares outstanding 4,581,534 5,005,852 5,276,908
Less: Average unallocated ESOP shares 279,065 330,616 375,137
------------------------------------
Average shares 4,302,469 4,675,236 4,901,771
====================================
Basic earnings per share $ 1.23 $ 1.22 $ 1.04
Diluted:
Weighted average common shares outstanding
for basic earnings per share 4,302,469 4,675,236 4,901,771
Add: Dilutive effects of assumed exercises of stock options 103,525 110,299 62,644
------------------------------------
Average shares and dilutive potential common shares 4,405,994 4,785,535 4,964,415
====================================
Diluted earnings per share $ 1.21 $ 1.19 $ 1.03
</TABLE>
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
-------------------
(Dollars in thousands) 1999 1998
-------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 79 $ 87
Investment in subsidiary 36,505 36,211
Loan receivable from ESOP 2,957 3,327
Loan receivable from subsidiary 14,900 21,000
Other assets 80 90
-------------------
$54,521 $60,715
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ (65) $ (26)
Shareholders' equity 54,586 60,741
-------------------
$54,521 $60,715
===================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME For the year ended December 31,
--------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Interest income on loan from subsidiary $ 859 $ 1,030 $ 287
Dividends from subsidiary 6,000 9,000 26,500
Management fees expense (900) (900) (60)
Other operating expenses (70) (78) (123)
--------------------------------
Income before income tax and undistributed subsidiary income 5,889 9,052 26,604
Provision (benefit) for income taxes (36) 17 35
Equity in undistributed subsidiary income (615) (3,331) (21,456)
--------------------------------
Net income $ 5,310 $ 5,704 $ 5,113
================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS For the year ended December 31,
---------------------------------
(Dollars in thousands) 1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments:
Equity in undistributed subsidiary income 615 3,331 21,456
Dividends on unallocated ESOP shares (215) (214) (194)
Changes in other assets 10 9 (50)
---------------------------------
Net cash from operating activities 5,720 8,830 26,325
---------------------------------
Cash flows from investing activities
Loans to subsidiary (6,000) (9,000) (23,900)
Principal repayment on loans to subsidiary 12,100 7,500 5,100
Principal repayment on loan to ESOP 370 370 370
---------------------------------
Net cash from investing activities 6,470 (1,130) (18,430)
---------------------------------
Cash flows from financing activities
Cash dividends paid (2,827) (2,751) (2,347)
Purchase of treasury stock (9,517) (5,466) (5,672)
Proceeds from exercise of stock options 146 66 -
---------------------------------
Net cash from financing activities (12,198) (8,151) (8,019)
---------------------------------
Net change in cash and cash equivalents (8) (451) (124)
Cash and cash equivalents at beginning of period 87 538 662
---------------------------------
Cash and cash equivalents at end of period $ 79 $ 87 $ 538
=================================
</TABLE>
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-----------------------------------------------------
<S> <C> <C> <C> <C>
1999
Interest income $7,474 $7,377 $7,224 $7,367
Interest expense 3,833 3,796 3,677 3,742
-------------------------------------------------
Net interest income 3,641 3,581 3,547 3,625
Provision for loan losses 38 20 22 23
Other income 235 211 227 276
Other expense 1,738 1,798 1,826 1,633
-------------------------------------------------
Income before taxes 2,100 1,974 1,926 2,245
Provision for incomes taxes 729 696 712 798
-------------------------------------------------
Net income $1,371 $1,278 $1,214 $1,447
=================================================
Basic earnings per share $ 0.30 $ 0.29 $ 0.29 $ 0.35
Diluted earnings per share 0.30 0.29 0.28 0.34
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
</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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 2000
COMMON STOCK INFORMATION
The common shares of Industrial Bancorp are listed on the Nasdaq
National Market under the symbol "INBI". There were 4,359,383 common shares
outstanding at year-end 1999, held of record by approximately 1335
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>
3/31/98 $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
3/31/99 20.00 18.75 19.44 .16
6/30/99 21.00 16.00 20.25 .16
9/30/99 20.63 17.75 18.25 .17
12/31/99 18.50 13.88 14.88 .17
</TABLE>
DIRECTORS
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
Webster Industries, Inc.
Roger O. Wilkinson
Finance Directors
Huron County Alcohol, Drug Addiction
and Mental Health Services Board
Graydon H. Hayward
President
Hayward Rigging & Construction, Inc.
Leon W. Maginnis
Vice President - Finance
Hirt Publishing Company, Inc.
Bob Moore
President, Retired
Willard Foods
EXECUTIVE OFFICERS
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
Senior Vice President - Loans
Stephen S. Beal
Senior Vice President - Operations
ANNUAL MEETING
The 2000 Annual Meeting of Shareholders of Industrial Bancorp, Inc.
will be held on April 18, 2000, at 2:30 p.m., local time, at the Bellevue
Elks Lodge #1013, located at 214 West Main Street, Bellevue, Ohio 44811.
Shareholders are cordially invited to attend.
FORM 10-K
A copy of Industrial Bancorp's Annual Report on Form 10-k, as filed
with the Securities and Exchange Commission, will be available to
shareholders at no charge upon request to:
Industrial Bancorp, Inc.
211 N. Sandusky Street
Bellevue, Ohio 44811
Attn: Investor Relations
(419) 483-3375
SHAREHOLDER SERVICES
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for Industrial Bancorp's shares. Communications regarding
change of address, transfer of shares, lost certificates and dividends
should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800)368-5948
211 N. Sandusky St.
Bellevue, Ohio 44811
(419) 483-3375
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Industrial Savings and Loan Association
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,699
<INT-BEARING-DEPOSITS> 17,753
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,141
<INVESTMENTS-CARRYING> 202
<INVESTMENTS-MARKET> 212
<LOANS> 342,276
<ALLOWANCE> 2,017
<TOTAL-ASSETS> 389,003
<DEPOSITS> 294,250
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,167
<LONG-TERM> 37,000
0
0
<COMMON> 34,669
<OTHER-SE> 19,917
<TOTAL-LIABILITIES-AND-EQUITY> 389,003
<INTEREST-LOAN> 27,179
<INTEREST-INVEST> 1,140
<INTEREST-OTHER> 1,123
<INTEREST-TOTAL> 29,442
<INTEREST-DEPOSIT> 13,225
<INTEREST-EXPENSE> 15,048
<INTEREST-INCOME-NET> 14,394
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,995
<INCOME-PRETAX> 8,245
<INCOME-PRE-EXTRAORDINARY> 5,310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,310
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 3.85
<LOANS-NON> 928
<LOANS-PAST> 629
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,930
<CHARGE-OFFS> 19
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 2,017
<ALLOWANCE-DOMESTIC> 2,017
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
