River Valley Bancorp
P.O. Box 1590 Madison, Indiana 47250-0590 (812) 273-4949 Fax - (812) 273-2883
To Our Shareholders, Customers, and Friends:
It is my pleasure to present to you River Valley Bancorp's fourth Annual Report
to Shareholders covering the year ending December 31, 1999.
The world was enamored in 1999 as we waited, watched and anticipated change
associated with the passing of a century. In 1999, the impetus for change at
River Valley Bancorp came from new management and management philosophy. Many
will regard the passing of a century as a defining moment in time; history too
will decide if 1999 was a redefining moment in the life of this organization.
While our Corporation has its origins dating back nearly 125 years, we are very
mindful that our commitment to the future, not the past, will define our
successes in this new century. We are very proud of our heritage, but are
confident that we are using our past as an agent for change rather than a focus
for the future.
If 1999 is a defining moment for the future, it also marked the culmination of
an evolution in merging the cultures of two former banking organizations into
one. River Valley Bancorp reflects the strengths of what had been two distinct
entities. Today the organization is recognized in our communities as the only
locally owned and controlled bank. The Bank has developed a service
promise...Expect A Difference!..that reinforces our organization's commitment to
customer service and community involvement. Our employees are dedicated to the
premise that service is much more than a slogan, it's a commitment that stands
the test of time.
Operationally 1999 was a year of transitions as well, as net earnings for 1999
totaled $1,039,000, or basic earnings per share of $1.03, compared to
$1,253,000, or $1.13 basic earnings per share, reported in 1998. Current year
earnings were negatively impacted by decreased secondary market activity which
resulted in $74,000 in gains on sale of loans, compared to $339,000 in gains
recorded in 1998. The current year reflects a modest decrease in total operating
expenses while including a $150,000 pre-tax expense associated with a severance
agreement. During the fourth quarter of 1999, management implemented a
comprehensive plan to control operating expenses.
During 1999, and primarily in the last six months of the year, the Corporation
aggressively repurchased shares to be held as treasury shares. For the period
ended December 31, 1999, we repurchased a total of 202,943 shares for a total of
$2.7 million, or an average price of $13.42. The current book value of
outstanding shares as of December 31, 1999 was $17.33 compared to $15.86 as of
December 31, 1998. The Board of Directors declared dividends totaling $0.265 per
share during the year, an increase from the $0.22 recorded the year prior.
Additionally, during 1999, your Corporation diligently worked on nonperforming
assets. As of December 31, 1999, nonperforming assets totaled $857,000, or 0.62%
of total assets compared to $1.9 million, or 1.47% of total assets from the
prior year-end. The Corporation was able to reduce its nonperforming assets
without significantly raising its loan losses. Net losses for fiscal 1999
totaled $95,000 as compared to $74,000 in fiscal 1998. As a result of improving
trends and collection efforts, the Corporation was able to lower its provision
for losses on loans from $275,000 in fiscal 1998 to $140,000 in 1999.
While 1999 was a year marked by transitions and changes, we believe that these
changes have laid the foundation for significant improvements in the years to
come.
Respectfully,
/s/ Matthew P. Forrester
Matthew P. Forrester
President, CEO
River Valley Bancorp
BUSINESS OF RIVER VALLEY
River Valley Bancorp ("River Valley" or the "Corporation"), an Indiana
corporation, was formed in 1996 for the primary purpose of purchasing all of the
issued and outstanding common stock of River Valley Financial Bank ("River
Valley Financial" or the "Bank") in its conversion from mutual to stock form.
The conversion offering culminated with the sale of 1,190,250 common shares at
an initial offering price of $10.00 per share. In 1996, the Corporation utilized
approximately $3.0 million of the net conversion proceeds to purchase 95.6% of
the outstanding common shares of Citizens National Bank of Madison ("Citizens")
in a transaction that was accounted for using the purchase method of accounting.
River Valley Financial and Citizens merged in 1997. Future references to River
Valley, River Valley Financial and Citizens are utilized herein, as the context
requires.
The activities of River Valley have been limited primarily to holding the stock
of the Bank. River Valley Financial was organized in 1875 under the laws of the
United States of America. River Valley Financial conducts operations from its
five full-service office locations in Jefferson County and offers a variety of
deposit and lending services to consumer and commercial customers in Jefferson
and surrounding counties. The Corporation is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the U.S. Department of
Treasury (the "OTS"). River Valley Financial is subject to regulation,
supervision and examination by the OTS and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits in River Valley Financial are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
FDIC.
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS
There were 921,972 common shares of River Valley Bancorp outstanding at February
21, 2000, held of record by 402 shareholders. The number of shareholders does
not reflect the number of persons or entities who may hold stock in nominee or
"street name." The Corporation's common shares are listed on The Nasdaq SmallCap
Market ("Nasdaq"), under the symbol "RIVR".
Presented below are the high and low sale prices for the Corporation's common
shares, as well as cash distributions paid thereon for each quarter of 1999,
1998 and 1997. Such sales prices do not include retail financial markups,
markdowns or commissions. Information relating to sales prices has been obtained
from Nasdaq.
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS (CONTINUED)
Quarter Ended High Low Cash Distributions (1)
1999
December 31, 1999 $12.63 $11.50 $0.075
September 30, 1999 14.38 13.00 0.065
June 30, 1999 14.75 12.25 0.065
March 31, 1999 15.75 13.13 0.060
1998
December 31, 1998 $16.00 $13.25 $0.060
September 30, 1998 19.00 13.75 0.055
June 30, 1998 20.75 18.38 0.055
March 31, 1998 19.75 18.50 0.050
1997
December 31, 1997 $19.00 $16.25 $0.050
September 30, 1997 17.25 14.75 0.040
June 30, 1997 15.00 13.63 0.040
March 31, 1997 15.50 13.00 -
(1) River Valley Financial had filed a request with the Internal Revenue
Service ("IRS") in 1995 to deconsolidate the Bank's subsidiaries in future
federal income tax return filings. In August 1998, the Corporation
finalized a closing agreement with the IRS that enabled the Corporation and
each of its subsidiaries to file separate returns. By definition, the 1998
and 1997 cash distributions have been deemed a tax-free return of capital.
The high and low sales prices for River Valley's common shares between December
31, 1999 and February 21, 2000 were $12.63 and $12.00, respectively.
Under OTS regulations applicable to converted savings associations, River Valley
Financial is not permitted to pay a cash dividend on its common shares if the
regulatory capital of River Valley Financial would, as a result of the payment
of such dividend, be reduced below the amount required for the liquidation
account (which was established for the purpose of granting a limited priority
claim on the assets of River Valley Financial, in the event of a complete
liquidation, to those members of River Valley Financial before the Conversion
who maintain a savings account at River Valley Financial after the Conversion)
or applicable regulatory capital requirements prescribed by the OTS.
Regulations of the OTS impose limitations on the payment of dividends and other
capital distributions by savings associations. The OTS amended its capital
distribution regulation in a final rule which became effective on April 1, 1999.
Because the Bank is a subsidiary of a savings and loan holding company, it is
required to file a notice with the OTS 30 days before making any capital
distributions to the Holding Company. It may also have to file an application
for approval of a proposed capital distribution with the OTS if the Bank is not
eligible for expedited treatment under the OTS's application processing rules,
or the total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the Bank's net earnings for that year to date plus the Bank's retained net
earnings for the preceding two years. The Bank must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the Bank would not be at least adequately capitalized under the
OTS prompt corrective action regulations, or if the proposed distribution would
violate a prohibition contained in any applicable statute, regulation, or
agreement between the OTS or the FDIC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings, and other data regarding River Valley at the
dates and for the periods indicated. All financial information prior to 1996
relates to River Valley Financial as a mutual savings association.
Selected consolidated financial condition data: (1) At December 31,
1999 1998 1997 1996 1995
Total amount of: (In thousands)
Assets $138,695 $138,369 $136,933 $145,541 $86,604
Loans receivable - net (2) 115,131 112,385 111,887 108,994 57,945
Cash and cash equivalents (3) 8,052 12,307 5,765 8,785 2,689
Mortgage-backed and related securities (4) 4,209 5,986 8,978 12,846 9,917
Investment securities (4) 5,230 1,283 4,272 8,948 13,018
Deposits 114,251 118,151 114,955 125,656 75,233
FHLB advances and other borrowings 6,500 270 2,000 1,100 4,471
Shareholders' equity- net (5) 16,866 18,613 17,989 16,805 6,574
Summary of consolidated earnings data: (1) Year ended December 31,
1999 1998 1997 1996 1995
(In thousands, except share data)
Total interest income $9,734 $10,108 $10,362 $ 5,875 $ 5,794
Total interest expense 4,617 4,842 5,049 3,412 3,594
----- ------- ------- --------- -------
Net interest income 5,117 5,266 5,313 2,463 2,200
Provision for losses on loans 140 275 304 22 150
------ -------- -------- ----------- --------
Net interest income after provision for
losses on loans 4,977 4,991 5,009 2,441 2,050
Other income 844 1,188 1,134 578 362
General, administrative and other expense 4,080 4,093 4,003 2,870 1,966
----- ------- --------- --------- -------
Earnings before income tax expense 1,741 2,086 2,140 149 446
Income tax expense 702 833 830 76 188
------ -------- -------- ----------- --------
Net earnings $1,039 $ 1,253 $ 1,310 $ 73 $ 258
===== ======= ======= =========== ========
Basic earnings per share (6) $1.03 $1.13 $1.20 N/A N/A
==== ==== ==== === ===
Diluted earnings per share (6) $1.03 $1.12 $1.18 N/A N/A
==== ==== ==== === ===
(1) River Valley acquired Citizens National Bank as of December 20, 1996. The
acquisition was accounted for using the purchase method of accounting and,
therefore, the 1996 financial statements reflect only eleven days of
activity with respect to the acquisition.
(2) Includes loans held for sale.
(3) Includes certificates of deposit in other financial institutions.
(4) Includes securities designated as available for sale.
(5) Consists solely of retained earnings at December 31, 1995.
(6) Earnings per share is not applicable for the years ended December 31, 1996
and 1995 as River Valley converted to stock form in 1996.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
OTHER DATA (CONTINUED)
Selected financial ratios and other data:
Year ended December 31,
1999 1998 1997 1996 1995
Interest rate spread during period 3.63% 3.66% 3.64% 2.79% 2.36%
Net yield on interest-earning assets (1) 3.94 4.08 4.00 2.98 2.61
Return on assets (2) 0.76 0.92 0.99 0.08 0.30
Return on equity (3) 5.87 6.85 7.53 1.05 4.01
Equity to assets (4) 12.16 13.45 13.12 11.55 7.59
Average interest-earning assets to
average interest-bearing liabilities 108.81 111.07 109.56 104.64 105.62
Nonperforming assets to total assets (4) 0.62 1.47 0.58 0.56 0.01
Allowance for loan losses to total
loans outstanding (4) 1.28 1.33 1.13 1.06 0.70
Allowance for loan losses to
nonperforming loans (4) 164.41 75.78 177.72 145.30 5,087.50
Net charge-offs to average total
loans outstanding 0.08 0.06 0.20 0.01 0.01
General, administrative and other
expense to average assets (5) (6) 2.97 3.01 2.83 3.33 2.26
Dividends as percent of net earnings 26.66 20.33 11.83 N/A N/A
Numbers of full service offices 5 5 6 6 3
(1) Net interest income divided by average interest-earning assets.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average total equity.
(4) At end of period.
(5) General, administrative and other expense divided by average total assets.
(6) Includes a $503,000 charge (or .94% of weighted-average assets) in 1996
related to the SAIF recapitalization assessment.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
As discussed previously, River Valley was incorporated for the primary purpose
of owning all of the outstanding shares of River Valley Financial. As a result,
the discussion that follows focuses on River Valley Financial's financial
condition and results of operations for the periods presented. The following
discussion and analysis of the financial condition as of December 31, 1999 and
River Valley's results of operations for periods prior to that date should be
read in conjunction with the consolidated financial statements and the notes
thereto, included elsewhere in this Annual Report.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. River Valley's operations and River Valley's actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein but also include, but are not limited to, changes in the
economy and interest rates in the nation and River Valley's general market area.
The forward-looking statements contained herein include those with respect to
the following matters:
1. Management's determination as to the amount and adequacy of the loan loss
allowance;
2. The effect of changes in interest rates on financial condition and results
of operations;
3. Management's opinion as to the effect of recent accounting pronouncements
on River Valley's consolidated financial position and results of
operations.
Discussion of Changes in Financial Condition from December 31, 1998 to December
31, 1999
At December 31, 1999, River Valley's consolidated assets totaled $138.7 million,
representing an increase of $326,000, or .2%, over the December 31, 1998 total.
The modest increase in assets was funded primarily by a $6.2 million increase in
borrowings. Deposits decreased by $3.9 million from $118.2 million as of
December 31, 1998, to $114.3 million as of December 31, 1999. Shareholders'
equity totaled $16.9 million at December 31, 1999, a net decrease of $1.7
million from the $18.6 million total as of December 31, 1998. The decrease in
equity was attributed primarily to the repurchase of approximately $2.7 million,
or 202,943 shares of common stock held as treasury shares.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and
certificates of deposit) decreased by $4.2 million from December 31, 1998
levels, to a total of $8.1 million at December 31, 1999. Investment securities
totaled $5.2 million at December 31, 1999, an increase of $3.9 million over
December 31, 1998 levels. The increase was due to purchases of investment
securities totaling $21.5 million during 1999, which were partially offset by
maturities of $17.7 million. Mortgage-backed securities decreased by $1.8
million, or 29.7%, to a total of $4.2 million at December 31, 1999, primarily
due to principal repayments.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from December 31, 1998 to December
31, 1999 (continued)
Loans receivable, including loans held for sale, totaled $115.1 million at
December 31, 1999, an increase of $2.7 million, or 2.4%, over the $112.4 million
total at December 31, 1998. The increase resulted primarily from loan
originations during 1999 of $56.9 million, which were partially offset by
principal repayments of $39.6 million and sales of $14.2 million. Growth in the
loan portfolio was comprised primarily of a $7.4 million, or 11.9%, increase in
loans secured by one-to-four family residential real estate and an $8.9 million,
or 64.2%, increase in loans secured by nonresidential real estate, while
commercial and consumer loans declined by $2.7 million and $3.1 million,
respectively, year to year. Loan origination volume for 1998 exceeded that of
1999 by $12.7 million, or 18.2%. The volume of loan sales into the secondary
mortgage market decreased during 1999 by $3.0 million, or 17.3%, from 1998
volume.
River Valley's consolidated allowance for loan losses totaled approximately $1.5
million at both December 31, 1999 and 1998, which represented 1.28% and 1.33%,
respectively, of total loans at those dates. Nonperforming loans (defined as
loans delinquent greater than 90 days and loans on nonaccrual status) totaled
$857,000 and $1.9 million at December 31, 1999 and 1998, respectively. The
consolidated allowance for loan losses represented 178% and 76% of nonperforming
loans at December 31, 1999 and 1998, respectively.
Although management believes that its allowance for loan losses at December 31,
1999 was adequate based upon the available facts and circumstances, there can be
no assurance that additions to such allowance will not be necessary in future
periods, which could negatively affect the Corporation's results of operations.
Deposits decreased by $3.9 million, or 3.3%, to a total of $114.3 million at
December 31, 1999, compared to the $118.2 million total at December 31, 1998.
Savings and demand deposits increased by $3.6 million, or 6.9%, during 1999,
while certificates of deposit decreased by $7.5 million, or 11.4%. These
fluctuations in balances were attributed to management's efforts to lower its
funding costs for deposits.
Advances from the Federal Home Loan Bank and other borrowed money increased by
$6.2 million from the total at December 31, 1998, as current period borrowings
of $9.1 million were partially offset by repayments of $2.9 million. Proceeds
from advances were used to fund net deposit outflows and loan originations.
Shareholders' equity totaled $16.9 million at December 31, 1999, a decrease of
$1.7 million, or 9.1%, from the $18.6 million total at December 31, 1998. The
decrease resulted primarily from repurchases of shares totaling $2.7 million and
cash dividends of $277,000, which were partially offset by net earnings of $1.04
million and a net increase in shares for stock benefit plans of $232,000.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998
General
River Valley's net earnings for the year ended December 31, 1999 totaled $1.04
million, a decrease of $214,000, or 17.1%, from net earnings reported in 1998.
The decrease in net earnings in the 1999 period was primarily attributable to a
decrease in net interest income of $149,000 and a decrease of $344,000 in other
income, including a decrease of $265,000 in the gain on sale of loans year to
year. General, administrative and other expense for the year was marginally
lower, but included $150,000 in non-recurring expenses associated with severance
agreements. The provision for federal income taxes decreased by $131,000 in 1999
as compared to the same period in 1998. The provision for loan losses in 1999
was $140,000 as compared to $275,000 in 1998.
Net Interest Income
Total interest income for the year ended December 31, 1999, amounted to $9.7
million, a decrease of $374,000, or 3.7%, from the 1998 total, reflecting the
effects of a lower yield on average assets. While the average balance of average
interest-earning assets outstanding year-to-year increased by $823,000, the
yield on those assets decreased from an average yield of 7.82% in 1998 to 7.49%
in 1999. Interest income on loans and mortgage-backed securities totaled $9.0
million for 1999, a decrease of approximately $684,000, or 7.0%, from 1998.
Interest income on investments and interest-earning deposits increased by
$310,000, or 80.9%, due to an increase in the average balance outstanding of
$6.0 million associated with a modest decrease in the average yield of
approximately 4 basis points from the comparable 1998 period.
Interest expense on deposits decreased by $208,000, or 4.4%, to a total of $4.5
million for the year ended December 31, 1999, due primarily to a 30 basis point
decrease in the weighted average cost of deposits. The cost of deposits fell
from 4.12% in 1998 to 3.82% in 1999. Interest expense on borrowings totaled
$143,000 for the year ended December 31, 1999, a decrease of $17,000, or 10.6%,
from 1998. The decrease resulted primarily from lower average borrowings
year-to-year, partially offset by a 15 basis point increase in average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased during 1999 by $149,000, or 2.8%, compared to
1998. The interest rate spread decreased by three basis points for 1999 to 3.63%
from 3.66% in the 1998 period, while the net interest margin amounted to 3.94%
in 1999 and 4.08% in 1998.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
upon historical experience, the volume and type of lending conducted by River
Valley Financial, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
primary market area, and other factors related to the collectibility of the loan
portfolio. As a result of such analysis, management recorded a $140,000
provision for losses on loans in 1999, a decrease of $135,000, or 49.1%,
compared to the $275,000 provision recorded in 1998. The current period
provision generally reflects growth in the loan portfolio, coupled with a
decrease in the level of nonperforming loans year-to-year. Nonperforming loans
for the period ended December 31, 1999, were $857,000, a reduction of
approximately $1.0 million from the $1.9 million at December 31, 1998. Net
charge-offs amounted to $95,000 in 1999, compared to $74,000 in 1998. While
management believes that the allowance for losses on loans is adequate at
December 31, 1999, based upon available facts and circumstances, there can be no
assurance that the loan loss allowance will be adequate to cover losses on
nonperforming assets in the future.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998 (continued)
Other Income
Other income amounted to $844,000 for the year ended December 31, 1999, a
decrease of $344,000, or 29.0%, compared to 1998, due primarily to a $265,000,
or 78.2%, decrease in gain on sale of loans and a $33,000 decrease in service
fees, charges and other operating income.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.1 million for the year
ended December 31, 1999, a decrease of $13,000, or .3%, from the 1998 total.
Employee compensation and benefits decreased by $147,000, or 6.4%, in 1999 as
compared to 1998, primarily from the effects of a decrease in the Corporation's
stock price used to record expense for various stock compensation programs
coupled with a decrease in staffing levels. The current year's compensation
expense included $150,000 in non-recurring charges associated with a severance
agreement in a managerial restructuring completed in the third quarter of fiscal
1999. Occupancy and equipment expense increased by $80,000, or 16.5%, in 1999,
primarily from charges associated with equipment upgrades and expenses
associated with Year 2000 compliance. Other operating expenses increased by
$76,000, or 6.9%, due primarily to increases in advertising, office supplies and
educational expenses of staff.
Income Taxes
The provision for income taxes decreased by $131,000, or 15.7%, for the year
ended December 31, 1999, as compared to 1998. The decrease was due primarily to
a decrease in pretax earnings of $345,000, or 16.5%. The effective tax rates
were 40.3% and 39.9% for the years ended December 31, 1999 and 1998,
respectively.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
General
River Valley's net earnings for the year ended December 31, 1998, totaled $1.3
million, a decrease of $57,000, or 4.4%, from net earnings reported in 1997. The
decrease in net earnings in the 1998 period was primarily attributable to a
decrease in net interest income of $47,000, an increase in general,
administrative and other expense of $90,000 and an increase in the provision for
federal income taxes of $3,000, which were partially offset by a decrease in the
provision for losses on loans of $29,000 and an increase in other income of
$54,000.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
Net Interest Income
Total interest income for the year ended December 31, 1998, amounted to $10.1
million, a decrease of $254,000, or 2.5%, from the 1997 total, reflecting the
effects of a $3.5 million, or 2.6%, decline in the balance of average
interest-earning assets outstanding year-to-year. Interest income on loans and
mortgage-backed securities totaled $9.7 million for 1998, a decrease of $38,000,
or .4%, from 1997. The decrease resulted primarily from a $315,000, or .3%,
decrease in the average balance of loans and mortgage-backed securities
outstanding year-to-year, coupled with a one basis point decrease in yield to
7.97% in 1998. Interest income on investments and interest-earning deposits
decreased by $216,000, or 36.1%, due to a decrease in the average balance
outstanding of $3.2 million, coupled with an approximate 45 basis point decrease
in yield from the comparable 1997 period.
Interest expense on deposits decreased by $232,000, or 4.7%, to a total of $4.7
million for the year ended December 31, 1998, due primarily to a $5.1 million
decrease in the average balance of deposits outstanding, coupled with a one
basis point decline in the weighted-average cost of deposits to 4.12% in 1998.
Interest expense on borrowings totaled $160,000 for the year ended December 31,
1998, an increase of $25,000, or 18.5%, over 1997. The increase resulted
primarily from an increase in average borrowings outstanding year-to-year,
coupled with an increase in average cost.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased during 1998 by $47,000, or .9%, compared to 1997.
The interest rate spread increased by two basis points for 1998, to 3.66% from
3.64% in the 1997 period, while the net interest margin amounted to 4.08% in
1998 and 4.00% in 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
upon historical experience, the volume and type of lending conducted by River
Valley Financial, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
primary market area, and other factors related to the collectibility of the loan
portfolio. As a result of such analysis, management recorded a $275,000
provision for losses on loans in 1998, a decrease of $29,000, or 9.5%, compared
to the $304,000 provision recorded in 1997. The current period provision
generally reflects growth in the loan portfolio, coupled with an increase in the
level of nonperforming loans year-to-year. Net charge-offs amounted to $74,000
in 1998, compared to $218,000 in 1997.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997 (continued)
Other Income
Other income amounted to $1.2 million for the year ended December 31, 1998, an
increase of $54,000, or 4.8%, compared to 1997, due primarily to a $212,000, or
166.9%, increase in gain on sale of loans and a $57,000 gain on sale of office
premises and equipment, which were partially offset by a nonrecurring gain on
sale of branch office and related deposits in 1997 totaling $206,000. The 1997
gain on sale of office premises resulted from River Valley Financial's sale of
the Hanover branch facility, which was consummated in accordance with the terms
of regulatory approval of the Citizens acquisition.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.1 million for the year
ended December 31, 1998, an increase of $90,000, or 2.2%, over the 1997 total.
This increase resulted primarily from a $144,000, or 6.7%, increase in employee
compensation and benefits, and a $94,000, or 9.3%, increase in other operating
expense, which were partially offset by a $43,000, or 8.2%, decrease in
occupancy and equipment expense and a $97,000, or 43.3%, decrease in data
processing. The increase in employee compensation and benefits resulted
primarily from normal merit increases coupled with an increase in staffing
levels year to year. The increase in other operating expense resulted from
increases in advertising, office supplies and pro-rata increases in operating
expenses due to the Corporation's overall growth year-to-year. The decline in
occupancy and equipment resulted from reduced costs following the sale of the
Hanover branch location in 1997. The decrease in data processing was due to the
conversion to the in-house data processing system used by Citizens after the
merger in November 1997.
Income Taxes
The provision for income taxes increased by $3,000, or .4%, for the year ended
December 31, 1998, as compared to 1997. The effective tax rates were 39.9% and
38.8% for the years ended December 31, 1998 and 1997, respectively.
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents certain information relating to River Valley's
average balance sheet and reflects the average yield on interest-earning assets
and the average cost of interest-bearing liabilities for the periods indicated.
Such yields and costs are derived by dividing annual income or expense by the
average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the years presented. Average balances are derived
from month-end balances, which include nonaccruing loans in the loan portfolio.
Year ended December 31,
1999 1998 1997
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits and other $ 7,821 $ 417 5.34% $ 4,337 $ 233 5.37% $ 5,351 $ 322 6.02%
Investment securities (1) 5,347 276 5.17 2,871 150 5.22 5,043 277 5.49
Mortgage-backed and
related securities (1) 5,051 301 5.97 7,542 462 6.13 10,874 733 6.74
Loans receivable, net (2) 111,794 8,740 7.82 114,440 9,263 8.09 111,423 9,030 8.10
------- ----- ---- ------- ------- ------- ------- ------- ------
Total interest-earning
assets $130,013 9,735 7.49 $129,190 10,108 7.82 $132,691 10,362 7.81
======= ======= =======
Interest-bearing liabilities:
Deposits $117,258 $4,474 3.82 $113,770 4,682 4.12 $118,872 4,914 4.13
FHLB advances and other borrowings 2,228 143 6.43 2,549 160 6.28 2,244 135 6.02
--------- ------ ---- --------- -------- ------- --------- -------- ------
Total interest-bearing
liabilities $119,486 4,617 3.86 $116,319 4,842 4.16 $121,116 5,049 4.17
======= ----- ---- ======= ------- ------- ======= ------- ------
Net interest income $5,118 $ 5,266 $ 5,313
====== ======= =======
Interest rate spread (3) 3.63% 3.66% 3.64%
==== ===== =====
Net yield on weighted average 3.94% 4.08% 4.00%
interest-earning assets (4) ==== ===== =====
Average interest-earning
assets to average 108.81% 111.07% 109.56%
====== ====== ======
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process plus loans held for sale.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected River
Valley's interest income and expense during the years indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total changes in rate and volume.
The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate:
Year ended December 31,
1999 vs. 1998 1998 vs. 1997
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest-earning assets:
Interest-earning deposits and other $ 186 $ (2) $ 184 $ (57) $ (32) $ (89)
Investment securities 128 (2) 126 (114) (13) (127)
Mortgage-backed and related securities (149) (11) (160) (210) (61) (271)
Loans receivable, net (211) (312) (523) 244 (11) 233
---- ----- ----- ---- ----- ----
Total (46) (327) (373) (137) (117) (254)
Interest-bearing liabilities:
Deposits 151 (359) (208) (210) (22) (232)
FHLB advances and other borrowings (21) 4 (17) 19 6 25
----- ------- ----- ---- ------ -----
Total 130 (355) (225) (191) (16) (207)
----- ---- ---- --- ----- ----
Net change in interest income $ (176) $ 28 $(148) $ 54 $(101) $ (47)
====== ===== ==== ===== ==== =====
Asset and Liability Management
Like other financial institutions, River Valley Financial is subject to interest
rate risk to the extent that interest-earning assets reprice differently than
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, River Valley Financial is using the Net Portfolio Value
("NPV") methodology adopted by the OTS as part of its capital regulations.
Although River Valley Financial is not subject to the NPV regulation because
such regulation does not apply to institutions with less than $300 million in
assets and risk-based capital in excess of 12%, the application of the NPV
methodology can illustrate River Valley Financial's degree of interest rate
risk.
The following is an analysis of River Valley Financial's interest rate risk, as
of September 30, 1999 (the latest information available) and December 31, 1998,
as measured by changes in NPV for an instantaneous and sustained parallel shift
of 100 through 400 basis points in market interest rates.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
As illustrated below, River Valley Financial's NPV is more sensitive to
declining rates than rising rates in 1999. Such difference in sensitivity occurs
principally due to the Bank's preponderance of adjustable rate mortgage ("ARM")
loans in its loan portfolio. Generally, as rates decline, the interest rates on
ARM loans will adjust downward. Moreover, the interest River Valley Financial
would pay on deposits would decrease because the Bank's deposits generally have
shorter periods of repricing.
As of September 30, 1999
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
+300 $18,220 $(1,741) (9)%
+200 19,579 (382) (2)
+100 19,943 18 -
- 19,961 - -
- -100 19,553 (408) (2)
- -200 18,801 (1,160) (6)
- -300 18,065 (1,896) (9)
As of December 31, 1998
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
+300 $18,081 $ (405) (2)%
+200 18,690 204 (1)
+100 18,717 231 (1)
- 18,486 - -
- -100 17,916 (570) (3)
- -200 17,343 (1,143) (6)
- -300 17,034 (1,452) (8)
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
Liquidity and Capital Resources
The Corporation's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities, borrowings and
other funds provided by operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan and
mortgage-backed securities prepayments are more influenced by interest rates,
general economic conditions and competition. The Corporation maintains
investments in liquid assets based upon management's assessment of (1) the need
for funds, (2) expected deposit flows, (3) the yield available on short-term
liquid assets and (4) the objectives of the asset/liability management program.
OTS regulations presently require River Valley Financial to maintain an average
daily balance of cash, investments in United States government and agency
securities and other investments in an amount equal to 4% of the sum of River
Valley Financial's average daily balance of net withdrawable deposit accounts.
The liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which River Valley Financial may rely if necessary
to fund deposit withdrawals or other short-term funding needs. At December 31,
1999, River Valley Financial's regulatory liquidity ratio was 28.2%. At such
date, River Valley Financial had commitments to originate loans totaling $2.2
million and, in addition, had undisbursed loans in process, unused lines of
credit and standby letters of credit totaling $9.6 million. At December 31,
1999, River Valley Financial had no commitments to sell loans and no outstanding
commitments to purchase loans. The Corporation considers River Valley
Financial's liquidity and capital resources sufficient to meet outstanding
short- and long-term needs. At December 31, 1999, the Corporation had no
material commitments for capital expenditures.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of the funds provided by or used in the Corporation's operating,
investing and financing activities. These activities are summarized below for
the years ended December 31, 1999, 1998 and 1997:
Year ended December 31,
1999 1998 1997
(In thousands)
Cash flows from operating activities $ 5,382 $(1,913) $ 2,395
Cash flows from investing activities:
Investment maturities/sales (3,847) 3,000 4,698
Mortgage-backed securities purchases - - (1,350)
Mortgage-backed securities repayments 1,709 2,970 3,072
Net loan (originations) repayments (6,673) 2,145 (3,859)
Other (157) 731 1,374
Cash flows from financing activities:
Net increase (decrease) in deposits (3,900) 3,196 (10,701)
Net increase (decrease) in borrowings 6,000 (1,730) 900
Other (2,769) (960) (346)
------- ------- --------
Net increase (decrease) in cash and cash
equivalents $(4,255) $ 7,439 $ (3,817)
====== ====== ======
River Valley Financial is required by applicable law and regulation to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement, or leverage ratio, and a
risk-based capital requirement.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus
intangible assets. "Core capital" is comprised of common shareholders' equity
(including retained earnings), noncumulative preferred stock and related
surplus, minority interests in consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual associations. OTS
regulations require savings associations to maintain core capital generally
equal to 4% of the association's total assets except those associations with the
highest examination rating and acceptable levels of risk.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
OTS regulations require that savings associations maintain "risk-based capital"
in an amount not less than 8% of "risk-weighted assets." Risk-based capital is
defined as core capital plus certain additional items of capital, which in the
case of River Valley Financial includes a general loan loss allowance of $1.4
million at December 31, 1999.
River Valley Financial exceeded all of its regulatory capital requirements at
December 31, 1999. The following table summarizes River Valley Financial's
regulatory capital requirements and regulatory capital at December 31, 1999:
OTS Requirement Actual Amount
Percent of Percent of Amount
Assets Amount Assets (1) Amount of Excess
(Dollars in thousands)
Tangible capital 1.5% $2,086 12.1% $16,850 $14,764
Core capital (2) 4.0 5,563 12.1 16,850 11,287
Risk-based capital 8.0 7,615 19.0 18,040 10,425
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has adopted a core capital requirement for savings associations
comparable to that required by the OCC for national banks. The regulation
requires core capital of at least 3% of total adjusted assets for savings
associations that receive the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. River Valley
Financial is in compliance with this requirement.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
River Valley Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Corporation's consolidated financial statements.
Year 2000 Compliance Matters
As with all providers of financial services, the Bank's operations are heavily
dependent on information technology systems. During the three year period
leading up to January 1, 2000, the Bank addressed the potential problems
associated with the possibility that the computers that control or operate the
Bank's information technology system and infrastructure may not have been
programmed to read four-digit date codes and, upon arrival of the year 2000, may
have recognized the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
The Bank's core data processing relative to customer loan and deposit accounts,
as well as the general ledger, is performed in-house through use of a purchased
software product. Management had been advised, and certain testing had been
performed to verify, that the system would continue to function upon arrival of
the year 2000. The Bank experienced no technology-related difficulties upon
arrival of January 1, 2000, nor was there any interruption of services to its
customers.
Financial institutions may experience increases in problem loans and credit
losses in the event that borrowers failed to prepare properly for Year 2000.
Because the Bank's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Bank's primary market area
is not significantly dependent upon one employer or industry, the Bank does not
expect, and to date has not experienced, any significant or prolonged
difficulties that will affect net earnings or cash flow.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require River Valley to measure financial position and results of operations in
terms of historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well as changes in monetary and fiscal
policies.
Report of Independent Certified Public Accountants
Board of Directors
River Valley Bancorp
We have audited the accompanying consolidated statements of financial condition
of River Valley Bancorp as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of River Valley
Bancorp as of December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Grant Thornton
Cincinnati, Ohio
February 16, 2000
River Valley Bancorp
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1999 1998
Cash and due from banks $ 3,648 $ 4,014
Federal funds sold 1,550 825
Interest-earning deposits in other financial institutions 2,854 7,468
-------- ---------
Cash and cash equivalents 8,052 12,307
Investment securities designated as available for sale - at market 4,230 283
Investment securities held to maturity - at amortized cost, approximate
market value of $995 and $980 as of December 31, 1999 and 1998 1,000 1,000
Mortgage-backed and related securities designated as available
for sale - at market 2,071 2,796
Mortgage-backed and related securities held to maturity - at cost, approximate
market value of $2,147 and $3,220 as of December 31, 1999 and 1998 2,138 3,190
Loans receivable - net 115,131 108,684
Loans held for sale - at lower of cost or market - 3,701
Real estate acquired through foreclosure - 82
Office premises and equipment - at depreciated cost 1,980 2,023
Federal Home Loan Bank stock - at cost 943 943
Accrued interest receivable on loans 970 987
Accrued interest receivable on mortgage-backed and related securities 26 40
Accrued interest receivable on investments and interest-earning deposits 47 29
Goodwill - net of accumulated amortization 44 50
Cash surrender value of life insurance 854 818
Prepaid expenses and other assets 210 373
Prepaid federal income taxes 359 405
Deferred tax asset 640 658
--------- ----------
Total assets $138,695 $138,369
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
Deposits $114,251 $118,151
Advances from the Federal Home Loan Bank 6,000 -
Other borrowed money 500 270
Advances by borrowers for taxes and insurance 36 34
Accrued interest payable 330 468
Other liabilities 641 763
Dividends payable 71 70
---------- ----------
Total liabilities 121,829 119,756
Commitments - -
Shareholders' equity
Preferred stock - 2,000,000 shares without par value
authorized; no shares issued - -
Common stock - 5,000,000 shares without par value authorized;
1,190,250 shares issued - -
Additional paid in capital 11,314 11,288
Retained earnings - substantially restricted 9,551 8,789
Shares acquired by stock benefit plans (967) (1,199)
Less 219,753 and 16,810 treasury shares - at cost (2,976) (252)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax benefits (56) (13)
---------- -----------
Total shareholders' equity 16,866 18,613
------- --------
Total liabilities and shareholders' equity $138,695 $138,369
======= =======
The accompanying notes are an integral part of these statements.
River Valley Bancorp
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands, except share data)
1999 1998 1997
Interest income
Loans $8,740 $ 9,263 $ 9,030
Mortgage-backed and related securities 301 462 733
Investment securities 276 150 277
Interest-earning deposits and other 417 233 322
------ -------- --------
Total interest income 9,734 10,108 10,362
Interest expense
Deposits 4,474 4,682 4,914
Borrowings 143 160 135
------ -------- --------
Total interest expense 4,617 4,842 5,049
----- ------- -------
Net interest income 5,117 5,266 5,313
Provision for losses on loans 140 275 304
----- -------- --------
Net interest income after provision for losses on loans 4,977 4,991 5,009
Other income
Gain on sale of loans 74 339 127
Gain on sale of Hanover branch and related deposits - - 206
Loss on sale of investment, mortgage-backed and related securities - - (6)
Gain on sale of office premises 11 57 -
Service fees, charges and other operating 759 792 807
----- -------- --------
Total other income 844 1,188 1,134
General, administrative and other expense
Employee compensation and benefits 2,162 2,309 2,165
Occupancy and equipment 564 484 527
Federal deposit insurance premiums 42 42 50
Amortization of goodwill 6 27 27
Data processing 126 127 224
Other operating 1,180 1,104 1,010
----- ------- -------
Total general, administrative and other expense 4,080 4,093 4,003
----- ------- -------
Earnings before income taxes 1,741 2,086 2,140
Income taxes
Current 664 819 893
Deferred 38 14 (63)
------ --------- ---------
Total income taxes 702 833 830
----- -------- --------
NET EARNINGS $1,039 $ 1,253 $ 1,310
===== ======= =======
EARNINGS PER SHARE
Basic $1.03 $1.13 $1.20
==== ==== ====
Diluted $1.03 $1.12 $1.18
==== ==== ====
The accompanying notes are an integral part of these statements.
River Valley Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
(In thousands)
1999 1998 1997
Net earnings $1,039 $1,253 $1,310
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax benefits of $22, $10 and $8
in 1999, 1998 and 1997, respectively (43) 19 15
Reclassification adjustment for realized losses
included in earnings, net of tax benefit of $2 for the
year ended December 31, 1997 - - 4
----- ----- --------
Comprehensive income $ 996 $1,272 $1,329
====== ===== =====
Accumulated comprehensive loss $ (56) $ (13) $ (32)
===== ====== ======
The accompanying notes are an integral part of these statements.
River Valley Bancorp
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
Unrealized
Shares gains (losses)
acquired on securities
Additional by stock designated
Common paid-in benefit as available Retained Treasury
stock capital plans for sale earnings stock Total
Balance at January 1, 1997 $ - $11,173 $ (952) $ (51) $6,635 $ - $16,805
Purchase of shares for stock benefit plans - - (174) - - - (174)
Amortization of expense
related to stock benefit plans - 56 121 - 7 - 184
Cash dividends of $0.13 per common share - - - - (155) - (155)
Net earnings for the year
ended December 31, 1997 - - - - 1,310 - 1,310
Unrealized gains on securities designated as
available for sale,
net of related tax effects - - - - - - 19
--- ------- ------ ---- ----- ------- -------
Balance at December 31, 1997 - 11,229 (1,005) (32) 7,797 - 17,989
Purchase of treasury shares - - - - - (270) (270)
Issuance of shares under stock option plan - - - - - 18 18
Purchase of shares for stock benefit plans - - (428) - - - (428)
Amortization of expense related
to stock benefit plans - 59 234 - - - 293
Cash dividends of $0.22 per common share - - - - (261) - (261)
Net earnings for the year
ended December 31, 1998 - - - - 1,253 - 1,253
Unrealized gains on securities designated as
available for sale,
net of related tax effects - - - 19 - - 19
-- ------- ------ ---- ----- ---------- -------
Balance at December 31, 1998 - 11,288 (1,199) (13) 8,789 (252) 18,613
Purchase of treasury shares - - - - - (2,724) (2,724)
Amortization of expense related
to stock benefit plans - 26 232 - - - 258
Cash dividends of $0.265 per common share - - - - (277) - (277)
Net earnings for the year ended
December 31, 1999 - - - - 1,039 - 1,039
Unrealized losses on securities designated as
available for sale,
net of related tax effects - - - (43) - - (43)
--- ---- ------ --- ----- --------- -------
Balance at December 31, 1999 $ - $11,314 $ (967) $ (56) $9,551 $(2,976) $16,866
==== ====== ======== === ===== ====== ======
The accompanying notes are an integral part of these statements.
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1999 1998 1997
Cash flows from operating activities:
Net earnings for the year $ 1,039 $ 1,253 $ 1,310
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization (accretion) of premiums and discounts
on investments, mortgage-backed and related securities - net (95) 39 1
Loss on sale of investment, mortgage-backed and related securities
designated as available for sale - - 6
Depreciation and amortization 250 223 223
Gain on sale of office premises (11) (57) -
Gain on sale of Hanover branch and related deposits - - (206)
Loans originated for sale in the secondary market (10,552) (20,042) (6,538)
Proceeds from sale of loans in the secondary market 14,226 17,194 6,996
(Gain) loss on sale of loans in the secondary market 27 (169) (66)
Amortization of deferred loan origination costs 93 99 73
Provision for losses on loans 140 275 304
Amortization of goodwill 6 27 27
Amortization expense of stock benefit plans 258 293 184
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 17 (71) (97)
Accrued interest receivable on mortgage-backed and related securities 14 77 (39)
Accrued interest receivable on investments and interest-earning deposits (18) 36 106
Prepaid expenses and other assets 163 (232) 28
Accrued interest payable (138) 5 184
Other liabilities (121) (467) (47)
Income taxes
Current 46 (410) 9
Deferred 38 14 (63)
--------- ---------- ---------
Net cash provided by (used in) operating activities 5,382 (1,913) 2,395
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (21,537) - -
Proceeds from maturity of investment securities 17,690 3,000 2,000
Proceeds from sales of investment securities designated as available for sale - - 2,698
Purchase of mortgage-backed and related securities designated as available
for sale - - (1,350)
Principal repayments on mortgage-backed and related securities 1,709 2,970 3,072
Proceeds from sale of mortgage-backed and related securities designated as
available for sale - - 2,146
Loan principal repayments 39,640 51,624 43,220
Loan disbursements (46,313) (49,479) (47,079)
Proceeds from sale of real estate acquired through foreclosure 75 - -
Additions to real estate acquired through foreclosure - - (1)
Proceeds from sale of office premises and equipment 49 67 405
Purchase of office premises and equipment (245) (191) (430)
(Increase) decrease in certificates of deposit in other financial institutions - 897 (797)
Purchase of Federal Reserve Bank stock - - (64)
Proceeds from sale of Federal Reserve Bank stock - - 144
Increase in cash surrender value of life insurance (36) (42) (29)
---- ---- ----
Net cash provided by (used in) investing activities (8,968) 8,846 3,935
--------- ------- -------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (3,586) 6,933 6,330
--------- ------- -------
River Valley Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
1999 1998 1997
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ (3,586) $ 6,933 $ 6,330
Cash flows provided by (used in) financing activities:
Increase (decrease) in deposit accounts (3,900) 3,196 (3,913)
Decrease in deposit accounts due to the sale of a branch - - (6,788)
Proceeds from Federal Home Loan Bank advances 6,000 6,000 7,000
Repayment of Federal Home Loan Bank advances - (8,000) (6,100)
Proceeds from other borrowed money 3,131 270 -
Repayment of other borrowed money (2,901) - -
Advances by borrowers for taxes and insurance 2 (19) (17)
Purchase of shares (2,724) (270) -
Stock options exercised - 18 -
Acquisition of common stock for stock benefit plans - (428) (174)
Dividends on common stock (277) (261) (155)
-------- -------- --------
Net cash provided by (used in) financing activities (669) 506 (10,147)
-------- --------- ------
Net increase (decrease) in cash and cash equivalents (4,255) 7,439 (3,817)
Cash and cash equivalents at beginning of year 12,307 4,868 8,685
------ ------- -------
Cash and cash equivalents at end of year $ 8,052 $12,307 $ 4,868
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 469 $ 1,014 $ 618
====== ======= ========
Interest on deposits and borrowings $ 4,755 $ 4,837 $ 4,865
===== ======= =======
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ - $ - $ 81
====== ======= =========
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (43) $ 19 $ 19
======= ========= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 101 $ 170 $ 61
======= ======== =========
Exchange of office premises and equipment for similar assets $ 103 $ - $ -
======= ========== ======
The accompanying notes are an integral part of these statements.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
River Valley Bancorp (the "Corporation") is a savings and loan holding
company whose activities are primarily limited to holding the stock of River
Valley Financial Bank ("River Valley Financial" or the "Bank"). The Bank
conducts a general banking business in southeastern Indiana which consists
of attracting deposits from the general public and applying those funds to
the origination of loans for residential, consumer and commercial purposes.
River Valley Financial's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Bank can be significantly influenced by a number of
competitive factors, such as governmental monetary policy, that are outside
of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The following is a summary of significant accounting policies, which have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Bank and its subsidiary, Madison First
Service Corporation ("First Service"). All significant intercompany balances
and transactions have been eliminated in the accompanying consolidated
financial statements.
2. Investment Securities and Mortgage-Backed and Related Securities
The Corporation accounts for investment securities and mortgage-backed and
related securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that investments be categorized as
held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or shareholders'
equity, respectively. At December 31, 1999 and 1998, the Corporation's
shareholders' equity included unrealized losses on securities designated as
available for sale, net of related tax effects, of $56,000 and $13,000,
respectively. Realized gains and losses on sales of investment and
mortgage-backed and related securities are recognized using the specific
identification method.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for unamortized yield adjustments, including deferred loan
origination costs and capitalized mortgage servicing rights, and the
allowance for loan losses. The yield adjustments are amortized and accreted
to operations using the interest method over the average life of the
underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status.
Loans held for sale are carried at the lower of cost (less principal
payments received) or fair value (market value), calculated on an aggregate
basis. At December 31, 1999, the Corporation had not identified any loans as
held for sale. At December 31, 1998, loans held for sale were carried at
cost, which approximated fair value.
At December 31, 1999 and 1998, the Bank was servicing approximately $40.2
million and $34.3 million, respectively, of mortgage loans that have been
sold to the Federal Home Loan Mortgage Corporation.
The Bank retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. The Bank accounts
for mortgage servicing rights pursuant to the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Bank recognize as
separate assets, rights to service mortgage loans for others, regardless of
how those servicing rights are acquired. An institution that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells those loans with servicing rights retained must
allocate some of the cost of the loans to the mortgage servicing rights.
SFAS No. 125 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. The mortgage servicing rights
recorded by the Bank, calculated in accordance with the provisions of SFAS
No. 125, were segregated into pools for valuation purposes, using as pooling
criteria the loan term and coupon rate. Once pooled, each grouping of loans
was evaluated on a discounted earnings basis to determine the present value
of future earnings that a purchaser could expect to realize from each
portfolio. Earnings were projected from a variety of sources including loan
servicing fees, interest earned on float, net interest earned on escrows,
miscellaneous income, and costs to service the loans. The present value of
future earnings is the "economic" value for the pool, i.e., the net
realizable present value to an acquirer of the acquired servicing.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Bank recorded amortization related to mortgage servicing rights totaling
approximately $99,000, $34,000 and $18,000 for the years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, the carrying value
of the Corporation's mortgage servicing rights totaled approximately
$225,000 and the fair value totaled approximately $286,000. At December 31,
1998, the carrying value and fair value of the Corporation's mortgage
servicing rights totaled approximately $222,000.
4. Loan Origination Fees and Costs
The Corporation accounts for loan origination fees and costs in accordance
with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Pursuant to the provisions of SFAS No. 91, all loan origination fees
received, net of certain direct origination costs, are deferred on a
loan-by-loan basis and amortized to interest income using the interest
method, giving effect to actual loan prepayments. Additionally, SFAS No. 91
generally limits the definition of loan origination costs to the direct
costs attributable to originating a loan, i.e., principally actual personnel
costs.
Fees received for loan commitments that are expected to be drawn upon, based
on the Corporation's experience with similar commitments, are deferred and
amortized over the life of the related loan using the interest method. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
5. Allowance for Losses on Loans
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of
delinquent and specific problem loans, loan concentrations to single
borrowers, changes in the composition of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral and current and anticipated economic
conditions in its primary lending area. When the collection of a loan
becomes doubtful, or otherwise troubled, the Corporation records a loan loss
provision equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Such provision is based
upon management's estimate of the fair value of the underlying collateral,
taking into consideration the current and currently anticipated future
operating or sales conditions. As a result, such estimates are particularly
susceptible to changes that could result in a material adjustment to results
of operations in the near term.
The Corporation accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
Under SFAS No. 114, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Corporation's investment in nonresidential, commercial, and multifamily
residential real estate loans, and its evaluation of impairment thereof,
such loans are generally collateral dependent and, as a result, are carried
as a practical expedient at the lower of cost or fair value.
It is generally the Corporation's policy to charge off unsecured credits
that are more than ninety days delinquent. Similarly, collateral dependent
loans which are more than ninety days delinquent are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
At December 31, 1999 and 1998, the Corporation had approximately $600,000
and $1.3 million, respectively, of loans defined as impaired under SFAS No.
114.
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the property's fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are considered. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Depreciation of office premises and equipment is computed using the
straight-line method over the estimated useful lives of the assets,
estimated to be thirty to forty-five years for buildings, three to ten years
for furniture and equipment, and three years for automobiles.
8. Amortization of Goodwill
Amortization of goodwill, resulting from the acquisition of Citizens
National Bank of Madison ("Citizens"), is provided using the straight-line
method over an estimated life of ten years. During 1998, goodwill was
reduced by approximately $168,000 for the favorable resolution of certain
pre-acquisition contingencies, and for the purchase of minority interest
shares at a price below the assigned value at acquisition.
Management periodically evaluates the carrying value of goodwill in relation
to the continuing earnings capacity of the acquired assets and assumed
liabilities.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Income Taxes
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements that will result in net
taxable or deductible amounts in future periods. Deferred tax assets are
recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current
period earnings, carried back against prior years' earnings, offset against
taxable temporary differences reversing in future periods, or utilized to
the extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the value
of net deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from different methods of
accounting for deferred loan origination costs, the allowance for valuation
decline on mortgage-related securities, mortgage servicing rights, purchase
accounting adjustments, the general loan loss allowance, the percentage of
earnings bad debt deduction and certain components of retirement and benefit
plan expense. A temporary difference is also recognized for depreciation
expense computed using accelerated methods for federal income tax purposes.
10. Retirement and Incentive Plans
The Bank's employees are covered by a defined benefit non-contributory
pension plan administered by the Pentegra Group, previously the Financial
Institutions Retirement Fund (the "Fund"). Contributions are determined to
cover the normal cost of pension benefits, the one-year cost of the
pre-retirement death and disability benefits and the amortization of any
unfunded accrued liabilities.
The Fund had previously advised the Bank that the pension plan meets the
criteria of a multi-employer pension plan as defined in SFAS No. 87,
"Employers' Accounting for Pensions." In accordance with SFAS No. 87, net
pension cost is recognized for any required contribution for the period. A
liability is recognized for any contributions due and unpaid. Because of the
continuing overfunded status of the Fund, no contributions were made to the
pension plan during the years ended December 31, 1999, 1998, and 1997. The
provision for pension expense was computed by the Fund's actuaries utilizing
the projected unit credit cost method and assuming a 7.5% return on Fund
assets.
During 1997, the Corporation implemented a contributory 401(k) plan covering
all employees who have attained the age of 21 and have completed one year of
service. Contributions to the plan are voluntary and are subject to matching
by the employer. The Bank's contributions to the plan totaled approximately
$24,000, $28,000 and $48,000 for the years ended December 31, 1999, 1998,
and 1997, respectively.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans (continued)
The Bank has a supplemental retirement plan which provides retirement
benefits to all directors. The Bank's obligations under the plan have been
funded via the purchase of key man life insurance policies, of which the
Bank is the beneficiary. Expense recognized under the supplemental
retirement plan totaled approximately $32,000, $22,000 and $3,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Corporation has an Employee Stock Ownership Plan ("ESOP"), which
provides retirement benefits for substantially all employees who have
completed one year of service and have attained the age of 21. The
Corporation accounts for the ESOP in accordance with Statement of Position
(SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP
93-6 requires the measure of compensation expense recorded by employers to
equal the fair value of ESOP shares allocated to participants during the
year. Expense related to the ESOP totaled approximately $147,000, $200,000
and $200,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Corporation also has a Recognition and Retention Plan ("RRP") which
provides for the award and issuance of up to 47,610 shares of the
Corporation's stock to members of the Board of Directors and management.
During 1998 and 1997, the RRP purchased 32,316 shares of the Corporation's
common stock in the open market. At December 31, 1999, 31,271 shares had
been awarded. Common stock awarded under the RRP vests ratably over a
five-year period, commencing with the date of the award. Expense recognized
under the RRP plan totaled approximately $113,000, $113,000 and $61,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.
11. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated
and not committed to be released. Weighted-average common shares
outstanding, which gives effect to 71,730, 83,124 and 95,220 unallocated
ESOP shares, totaled 1,007,087, 1,105,930 and 1,095,030 for the years ended
December 31, 1999, 1998, and 1997, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,007,087, 1,121,986 and 1,106,858 for the years ended December 31, 1999,
1998, and 1997, respectively. There were 16,056 and 11,828 incremental
shares related to the assumed exercise of stock options included in the
computation of diluted earnings per share for the years ended December 31,
1998 and 1997, respectively. Options to purchase 93,959 shares of common
stock with a weighted-average exercise price of $14.70 were outstanding at
December 31, 1999, but were excluded from the computation of common share
equivalents because their exercise prices were greater than the average
market price of the common shares.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold, and interest-earning deposits
in other financial institutions with original maturities of less than ninety
days.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from the disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Investment and mortgage-backed and related securities: Fair
values for investment and mortgage-backed and related
securities are based on quoted market prices and dealer
quotes.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, multi-family residential and
nonresidential real estate. These categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts, and consumer
and other loans, fair values were deemed to equal the historic
carrying values.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair values of deposits with no stated maturity,
such as NOW and super NOW accounts, passbook accounts and
money market demand accounts are deemed to approximate the
amount payable on demand as of December 31, 1999 and 1998. The
fair values for fixed-rate certificates of deposit are based
on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
Advances from the Federal Home Loan Bank: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities or, when
available, quoted market prices.
Other borrowed money: The carrying value for these variable
rate borrowings is deemed to approximate fair value.
Advances by borrowers for taxes and insurance: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
December 31, 1999 and 1998, was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December
31:
1999 1998
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 8,052 $ 8,052 $ 12,307 $ 12,307
Investment securities designated as available for sale 4,230 4,230 283 283
Investment securities held to maturity 1,000 995 1,000 980
Mortgage-backed and related securities designated
as available for sale 2,071 2,071 2,796 2,796
Mortgage-backed and related securities held to
maturity 2,138 2,147 3,190 3,220
Loans receivable - net 115,131 112,633 112,385 120,163
Federal Home Loan Bank stock 943 943 943 943
-------- -------- -------- --------
$133,565 $131,071 $132,904 $140,692
======= ======= ======= =======
Financial liabilities
Deposits $114,251 $114,527 $118,151 $118,496
Advances from the Federal Home Loan Bank 6,000 6,000 - -
Other borrowed money 500 500 270 270
Advances by borrowers for taxes and insurance 36 36 34 34
-------- -------- -------- --------
$120,787 $121,063 $118,455 $118,800
======= ======= ======= =======
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities at
December 31 are summarized as follows:
1999 1998
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Held to maturity:
U.S. Government agency obligations $1,000 $ 995 $1,000 $ 980
Available for sale:
Commercial paper 2,972 2,957 - -
Corporate bonds 1,000 1,000 - -
Municipal obligations 276 273 276 283
------ ------ ------ ------
Total securities available for sale 4,248 4,230 276 283
----- ----- ------ ------
Total investment securities $5,248 $5,225 $1,276 $1,263
===== ===== ===== =====
At December 31, 1999 and 1998, the cost carrying value of the Corporation's
investment securities held to maturity exceeded fair value by $5,000 and
$20,000, respectively, comprised solely of gross unrealized losses.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of U. S. Government agency
obligations designated as held to maturity at December 31 by term to
maturity are shown below. Maturity dates do not reflect effects of call
provisions inherent in the bonds' contractual terms.
1999 1998
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due in one year or less $1,000 $995 $ - $ -
Due in one to three years - - 1,000 980
----- ----- ----- ----
$1,000 $995 $1,000 $980
===== === ===== ===
The amortized cost and estimated fair value of commercial paper, corporate
bonds and municipal obligations designated as available for sale at December
31, 1999 and 1998, by term to maturity are shown below.
1999 1998
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due in three to five years $4,072 $4,056 $100 $102
Due in five to ten years 176 174 176 181
----- ----- --- ---
$4,248 $4,230 $276 $283
===== ===== === ===
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities designated
as held to maturity at December 31, 1999 and 1998 are shown below.
1999
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage Corporation
participation certificates $ 856 $- $5 $ 851
Government National Mortgage Association
participation certificates 900 14 - 914
Federal National Mortgage Association
participation certificates 367 - 1 366
Interest-only certificates 15 1 - 16
------- --- -- -------
$2,138 $15 $6 $2,147
===== == = =====
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage Corporation
participation certificates $1,343 $- $2 $1,341
Government National Mortgage Association
participation certificates 1,190 22 - 1,212
Federal National Mortgage Association
participation certificates 639 10 - 649
Interest-only certificates 18 - - 18
------- -- -- -------
$3,190 $ 32 $2 $3,220
===== ==== = =====
The amortized cost of mortgage-backed and related securities held to
maturity at December 31, 1999, by contractual terms to maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
Amortized cost
(In thousands)
Due within one year $ 857
Due after one to three years 2
Due after three to five years 1
Due after ten to twenty years 746
Due after twenty years 532
-------
$2,138
======
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities designated
as available for sale at December 31, 1999 and 1998 are shown below.
1999
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage Corporation
participation certificates $ 330 $ - $ 5 $ 325
Government National Mortgage Association
participation certificates 186 - 4 182
Federal National Mortgage Association
participation certificates 995 - 36 959
Collateralized mortgage obligations 627 - 22 605
------ --- --- ------
$2,138 $ - $67 $2,071
===== ===== == =====
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Federal Home Loan Mortgage Corporation
participation certificates $ 644 $ 7 $ - $ 651
Government National Mortgage Association
participation certificates 277 1 1 277
Federal National Mortgage Association
participation certificates 1,275 3 29 1,249
Collateralized mortgage obligations 627 - 8 619
------ -- ---- ------
$2,823 $ 11 $ 38 $2,796
===== ==== === =====
The amortized cost of mortgage-backed and related securities designated as
available for sale at December 31, 1999, by contractual terms to maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
Amortized cost
(In thousands)
Due in one year or less $ 8
Due after one to three years 235
Due after five to ten years 286
Due after ten to twenty years 343
Due after twenty years 1,266
-----
$2,138
======
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 is as follows:
1999 1998
(In thousands)
Residential real estate
One-to-four family residential $ 69,588 $ 62,206
Multi-family residential 2,918 1,775
Construction 4,163 8,126
Nonresidential real estate and land 22,837 13,904
Commercial 9,780 12,461
Consumer and other 9,544 12,640
Deferred loan origination costs 245 200
--------- ----------
119,075 111,312
Less:
Undisbursed portion of loans in process 2,422 1,151
Allowance for loan losses 1,522 1,477
-------- ---------
$115,131 $108,684
======== ========
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Bank's lending efforts have historically focused on
one-to-four family residential real estate loans, multi-family residential
real estate loans and construction real estate loans, which comprise
approximately $74.3 million, or 64%, of the total loan portfolio at December
31, 1999 and approximately $71.0 million, or 65%, of the total loan
portfolio at December 31, 1998. Generally, such loans have been underwritten
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Bank with adequate collateral coverage in the
event of default. Nevertheless, the Bank, as with any lending institution,
is subject to the risk that residential real estate values could deteriorate
in its primary lending areas of southeastern Indiana and northwestern
Kentucky, thereby impairing collateral values. However, management is of the
belief that residential real estate values in the Bank's primary lending
areas are presently stable.
In the ordinary course of business, the Bank has granted loans to some of
its officers, directors and their related business interests. In the opinion
of management, such loans are consistent with sound lending practices and
are in accordance with applicable regulatory lending limitations. The
aggregate dollar amount of loans outstanding to related parties was
approximately $893,000 and $781,000 at December 31, 1999 and 1998,
respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
1999 1998 1997
(In thousands)
Balance at beginning of year $1,477 $1,276 $1,190
Provision for losses on loans 140 275 304
Charge-offs of loans (123) (223) (269)
Recoveries of loan losses 28 149 51
------- ------ -------
Balance at end of year $1,522 $1,477 $1,276
===== ===== =====
As of December 31, 1999, the Corporation's allowance for loan losses was
comprised of a general loan loss allowance of approximately $1.4 million,
which is includible as a component of regulatory risk-based capital, and a
specific loan loss allowance of $113,000.
The Corporation had nonperforming loans totaling $857,000, $1.9 million and
$718,000 at December 31, 1999, 1998 and 1997, respectively.
The Corporation would have recognized approximately $6,000 and $9,000 of
additional interest income related to such nonperforming loans had these
loans performed pursuant to contractual terms during the years ended
December 31, 1999 and 1998, respectively. The Corporation had no material
loss of interest income related to nonperforming loans during the year ended
December 31, 1997.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 are comprised of the following:
1999 1998
(In thousands)
Land and improvements $ 792 $ 675
Office buildings and improvements 1,724 1,758
Leasehold improvements 117 117
Furniture, fixtures and equipment 2,183 2,113
Automobiles 18 18
------- -------
4,834 4,681
Less accumulated depreciation 2,854 2,658
----- -----
$1,980 $2,023
===== =====
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
Deposit type and 1999 1998
weighted-average interest rate Amount % Amount %
(Dollars in thousands)
Non-interest bearing accounts $ 7,903 6.9% $ 8,365 7.0%
NOW accounts
1999 - 2.62% 14,329 12.6
1998 - 2.60% 14,417 12.2
Money market demand accounts
1999 - 4.10% 6,886 6.0
1998 - 2.92% 6,984 5.9
Savings accounts
1999 - 3.52% 26,640 23.3
1998 - 3.70% 22,378 19.0
------------- -------- -------- ------
Total demand, transaction and
savings deposits 55,758 48.8 52,144 44.1
Certificates of deposit
3.01% to 5.00%
4.39% in 1999 36,591 32.0
4.78% in 1998 23,200 19.6
5.01% to 6.00%
5.45% in 1999 14,250 12.5
5.34% in 1998 31,364 26.6
6.01% to 7.00%
6.14% in 1999 7,445 6.5
6.18% in 1998 11,229 9.5
7.01% to 8.00%
7.85% in 1999 207 .2
7.86% in 1998 214 .2
------------ -------- --------- ------
Total certificates of deposit 58,493 51.2 66,007 55.9
-------- ----- -------- ------
Total deposit accounts $114,251 100.0% $118,151 100.0%
======= ===== ======= ======
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 totaled approximately $11.2 million and $15.1 million at
December 31, 1999 and 1998, respectively.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1999 1998 1997
(In thousands)
Savings $1,028 $ 768 $ 708
NOW accounts 351 344 435
Money market deposit accounts 195 211 480
Certificates of deposit 2,900 3,359 3,291
----- ----- -----
$4,474 $4,682 $4,914
===== ===== =====
Maturities of outstanding certificates of deposit are summarized as follows
at December 31:
1999 1998
(In thousands)
Less than one year $45,784 $53,931
One year to three years 10,934 10,880
More than three years 1,775 1,196
------- -------
$58,493 $66,007
====== ======
As a result of the Corporation's acquisition of Citizen's, regulatory
authorities required the sale of one of the Bank's retail branches. A
definitive agreement was reached in 1996, which provided for the purchaser
to acquire the branch facility for a price approximating book value, while
assuming the branch deposits, which totaled $6.8 million, for a premium on
core deposits. The transaction was consummated in 1997 and resulted in an
approximate after-tax gain of $125,000.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances, collateralized at December 31, 1999, by
certain residential mortgage loans totaling $9.6 million and the Bank's
investment in Federal Home Loan Bank stock, consist of a $6.0 million
advance, bearing interest at a rate of 5.91%, which matures during the year
ended December 31, 2000.
NOTE H - OTHER BORROWED MONEY
Other borrowed money consists of a variable-rate two-year line of credit
advance, bearing interest at December 31, 1999 of 8.00%, scheduled to mature
in November 2000. The advance was collateralized by a pledge of the
Corporation's stock of River Valley Financial.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES
The provision for income taxes on earnings differs from that computed at the
expected statutory corporate tax rate for the years ended December 31 as
follows:
1999 1998 1997
(Dollars in thousands)
Federal income taxes computed at
expected statutory rate $592 $709 $728
State taxes, net of federal benefits 105 122 125
Increase (decrease) in taxes resulting from:
Amortization of goodwill 2 9 9
Other 3 (7) (32)
---- ----- ----
Income tax provision per consolidated
financial statements $702 $833 $830
=== === ===
Effective tax rate 40.3% 39.9% 38.8%
==== ==== ====
The composition of the Corporation's net deferred tax asset at December 31
is as follows:
Taxes (payable) refundable on temporary 1999 1998
differences at statutory rate: (In thousands)
Deferred tax liabilities:
Deferred loan origination costs $ (83) $ (68)
Difference between book and tax depreciation (93) (93)
Percentage of earnings bad debt deduction (178) (210)
Mortgage servicing rights (86) (85)
------- -------
Total deferred tax liabilities (440) (456)
Deferred tax assets:
Deferred compensation 106 97
Allowance for valuation decline on
mortgage-related securities 90 90
General loan loss allowance 647 628
Benefit plan expense 66 65
Unrealized loss on securities designated as
available for sale 29 7
Purchase accounting adjustments related to asset
valuation adjustments 142 227
------- ------
Total deferred tax assets 1,080 1,114
------ -----
Net deferred tax asset $ 640 $ 658
====== ======
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES (continued)
The Bank was allowed a special bad debt deduction based on a percentage of
earnings generally limited to 8% of otherwise taxable income, or the amount
of qualifying and nonqualifying loans outstanding, and subject to certain
limitations based on aggregate loans and savings account balances at the end
of the year. Retained earnings at December 31, 1999, includes approximately
$2.4 million for which federal income taxes have not been provided. If the
amounts that qualify as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $705,000 at December 31, 1999. The Bank is
required to recapture as taxable income approximately $600,000 of its bad
debt reserve, which represents the post-1987 additions to the reserve, and
is unable to utilize the percentage of earnings method to compute the
reserve in the future. The Bank has provided deferred taxes for this amount
and commencing in 1998, began amortizing the recapture of the bad debt
reserve into taxable income over a six year period.
NOTE J - LOAN COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1999, the Bank had outstanding commitments of approximately
$366,000 to originate residential one-to-four family variable-rate real
estate loans at interest rates ranging from 6.5% to 8.0%. The Bank had
outstanding commitments of approximately $244,000 to originate residential
one-to-four family fixed-rate real estate loans at interest rates ranging
from 7.75% to 8.25% at December 31, 1999. Additionally, the Bank had
commitments to originate loans secured by other real estate totaling $1.6
million as of December 31, 1999. The Bank also had unused lines of credit
under home equity loans and commercial loans of approximately $2.7 million
and $4.4 million, respectively, at December 31, 1999, and standby letters of
credit totaling $97,000 at that date. In the opinion of management, all loan
commitments equaled or exceeded prevalent market interest rates as of
December 31, 1999, and such commitments have been underwritten on the same
basis as that of the existing loan portfolio. Management believes that all
loan commitments are able to be funded through cash flows from operations
and existing excess liquidity. Fees received in connection with these
commitments have not been recognized in earnings.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE J - LOAN COMMITMENTS (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank, upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral on loans may vary but the preponderance of loans granted
generally include a mortgage interest in real estate as security.
NOTE K - LEASES
The Corporation leases a banking facility in the Wal-Mart Supercenter in
Madison, which required the Corporation to make payments totaling
approximately $23,000 in 1999. The original lease expired in September 1999
and the Corporation exercised the first of two five year renewal options.
The lease agreement for this option period requires the Corporation to make
payments of approximately $27,000 per year.
NOTE L - STOCK OPTION PLAN
In June 1997, the Corporation adopted the 1997 Stock Option Plan that
provided for the issuance of 119,025 shares of common stock. Options to
purchase 117,648 shares were granted during 1997 at an exercise price equal
to the fair value at the date of grant.
The Corporation accounts for its stock option plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service period,
which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue to account for stock options and similar equity
instruments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLAN (continued)
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
1999 1998 1997
Net earnings (in thousands) As reported $1,039 $1,253 $1,310
===== ===== =====
Pro-forma $1,038 $1,253 $1,269
===== ===== =====
Earnings per share
Basic As reported $1.03 $1.13 $1.20
==== ==== ====
Pro-forma $1.02 $1.13 $1.16
==== ==== ====
Diluted As reported $1.03 $1.12 $1.18
==== ==== ====
Pro-forma $1.02 $1.12 $1.15
===== ==== ====
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1999: dividend yield of
2.18%, expected volatility of 10.0%, a risk-free interest rate of 5.5% and
expected lives of ten years. Similar assumptions were used for the grants in
1997, with the exception of a 1.013% dividend yield.
A summary of the status of the Corporation's stock option plan as of
December 31, 1999, 1998 and 1997, and changes during the periods then ended
is presented below:
1999 1998 1997
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 103,959 $14.81 105,149 $14.81 - $ -
Granted 10,000 13.75 - - 117,648 14.81
Exercised - - (1,190) 14.78 - -
Forfeited (20,000) 14.78 - - (12,499) 14.81
------- ----- --------- ------- -------- -----
Outstanding at end of year 93,959 $14.70 103,959 $14.81 105,149 $14.81
======= ===== ======= ===== ======= =====
Options exercisable at year-end 39,787 19,834 -
====== ======== =======
Weighted-average fair value of
options granted during the year $ 2.79 N/A $ 4.85
====== === =====
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at December 31,
1999:
Number outstanding 93,959
Range of exercise prices $13.75-$17.875
Weighted-average exercise price $14.70
Weighted-average remaining contractual life 7.7 years
NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP
The following condensed financial statements summarize the financial
position of River Valley Bancorp at December 31, 1999 and 1998, and the
results of its operations and its cash flows for the years ended December
31, 1999, 1998 and 1997.
River Valley Bancorp
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1999 1998
Cash and interest-earning deposits $ 371 $ 198
Investment in River Valley Financial Bank 16,861 18,788
Prepaid expenses and other assets 134 84
-------- ---------
Total assets $17,366 $19,070
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ 500 $ 270
Other liabilities - 187
--------- --------
Total liabilities 500 457
Shareholders' equity
Preferred stock - -
Common stock - -
Additional paid in capital 11,314 11,288
Retained earnings 9,551 8,789
Shares acquired by stock benefit plans (967) (1,199)
Treasury shares (2,976) (252)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax effects (56) (13)
-------- ---------
Total shareholders' equity 16,866 18,613
------ ------
Total liabilities and shareholders' equity $17,366 $19,070
====== ======
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF RIVER VALLEY BANCORP (continued)
River Valley Bancorp
STATEMENTS OF EARNINGS
Years ended December 31,
(In thousands)
1999 1998 1997
Revenue
Interest income $ 62 $ 71 $ 81
Equity in earnings of subsidiaries 1,125 1,274 1,390
----- ----- -----
1,187 1,345 1,471
Expense
Interest expense 101 3 -
General, administrative and other expense 105 102 243
---- ------ -----
206 105 243
---- ---- -----
Earnings before income tax credits 981 1,240 1,228
Income tax credits 58 13 82
------ ------- ------
NET EARNINGS $1,039 $1,253 $1,310
===== ===== =====
River Valley Bancorp
STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
1999 1998 1997
Cash flows from operating activities:
Net earnings for the year $ 1,039 $1,253 $1,310
Excess distributions from (undistributed earnings of)
subsidiary 2,033 (1,274) (1,390)
Amortization expense of stock benefit plans 109 114 128
Decrease in cash due to changes in:
Prepaid expenses and other assets (50) (19) (65)
Other liabilities (187) (7) (109)
------- -------- -----
Net cash provided by (used in) operating activities 2,944 67 (126)
Cash flows from financing activities:
Purchase of shares (2,724) (270) -
Stock options exercised - 18 -
Proceeds from other borrowed money 3,131 270 -
Repayments of other borrowed money (2,901) - -
Dividends paid on common stock (277) (261) (155)
------- ------ ------
Net cash used in financing activities (2,771) (243) (155)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 173 (176) (281)
Cash and cash equivalents at beginning of year 198 374 655
------ ------ ------
Cash and cash equivalents at end of year $ 371 $ 198 $ 374
======= ====== ======
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE N - REGULATORY CAPITAL
The Bank is subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision (the "OTS"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, financial institutions must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors. The OTS's minimum capital standards generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for minimum tangible capital (defined as shareholders'
equity less all intangible assets) equal to 1.5% of adjusted total assets.
The core capital requirement provides for minimum core capital (tangible
capital plus certain forms of supervisory goodwill and other qualifying
intangible assets) generally equal to 4.0% of adjusted total assets except
for those associations with the highest examination rating and acceptable
levels of risk. The risk-based capital requirement currently provides for
the maintenance of core capital plus general loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Bank
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
During the calendar year, the Bank was notified from its regulator that it
was categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized" the Bank
must maintain minimum capital ratios as set forth in the following table.
At December 31, 1999 and 1998, management believes that the Bank met all
capital adequacy requirements to which it was subject.
1999: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $16,850 12.1% =>$2,086 =>1.5% =>$6,954 => 5.0%
Core capital $16,850 12.1% =>$5,563 =>4.0% =>$8,345 => 6.0%
Risk-based capital $18,040 19.0% =>$7,615 =>8.0% =>$9,518 => 10.0%
River Valley Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE N - REGULATORY CAPITAL (continued)
1998: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $18,729 13.5% =>$2,079 =>1.5% =>$6,931 => 5.0%
Core capital $18,729 13.5% =>$5,545 =>4.0% =>$8,318 => 6.0%
Risk-based capital $19,947 20.5% =>$7,793 =>8.0% =>$9,741 => 10.0%
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Bank,
such as increased interest rates or a downturn in the economy in the primary
market areas, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the amount
of capital distributions payable to the Corporation. Generally, the Bank's
payment of dividends is limited, without prior OTS approval, to net earnings
for the current calendar year plus the two preceding calendar years, less
capital distributions paid over the comparable time period. Insured
institutions are required to file an application with the OTS for capital
distributions in excess of this limitation.
GENERAL INFORMATION FOR SHAREHOLDERS
Transfer Agent and Registrar:
Corporate Trust Services
Fifth Third Center
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Tel: (513) 579-5417 Fax: (513) 744-6785
Corporate Counsel:
Lonnie D. Collins, Attorney
426 E. Main Street
Madison, Indiana 47250
Tel: (812) 265-3616 Fax: (812) 273-3143
Shareholder and General Inquiries:
River Valley Bancorp
Attn: Matthew P. Forrester, President
430 Clifty Drive, P.O. Box 1590
Madison, Indiana 47250
Tel: (812) 273-4949 Fax: (812) 273-2883
Special Counsel:
Barnes & Thornburg
11 S. Meridian Street
Indianapolis, Indiana 46204
Tel: (317) 236-1313 Fax: (317) 231-7433
Annual and Other Reports:
Additional copies of this Annual Report to Shareholders and copies of the most
recent Form 10-K may be obtained without charge by contacting the Corporation.
Offices of River Valley Financial Bank:
Hilltop: 303 Clifty Drive
430 Clifty Drive
Downtown: 233 East Main Street
Drive thru: 401 East Main Street
Wal-Mart: 567 Ivy Tech Drive
Hanover: 10 Medical Plaza
E-MAIL Address: rivervalleyfinancial.com
Annual Meeting:
The Annual Meeting of Shareholders of River Valley Bancorp will be held on
Wednesday, April 19, 2000, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250.
Memoriam
Director Cecil L. Dorten passed away on February 17, 2000. Cecil Dorten was a
valuable member of this organization, a major general (retired) in the Indiana
National Guard, and an outstanding civic citizen. His counsel and business savvy
will be greatly missed.
BOARD OF DIRECTORS
Fred W. Koehler
Chairman
Cecil L. Dorten
Vice Chairman
Earl W. Johann
Director
Michael J. Hensley
Director
Jonnie L. Davis
Director
Matthew P. Forrester
Director & President
Robert W. Anger
Director
********************
Lonnie D. Collins
Secretary
EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK
Matthew P. Forrester
Director & President
Mark A. Goley
Vice President of Lending
Robyne J. Hart
Vice President of Operations
Larry C. Fouse
Vice President of Finance
Deanna J. Liter
Vice President of Data Services
Loy M. Skirvin
Director of Human Resources
OFFICERS OF RIVER VALLEY FINANCIAL BANK
Barbara J. Eades
Assistant Vice President
Branch Manager
Robert J. Schoenstein, Jr.
Assistant Vice President
Loan Officer
Angela D. Adams
Branch Manager
James B. Allen
Branch Manager
Kenneth L. Cull
Loan Officer
Theresa A. Dryden
Loan Officer
V. Kay Kimmel
Loan Officer
Linda L. Ralston
Branch Manager
Rhonda E. Wingham
Branch Manager
ADVISORY BOARD MEMBERS
Burton P. Chambers
Advisory Director
Van E. Shelton
Advisory Director
Ralph E. Storm
Advisory Director