EXHIBIT 13
1999 ANNUAL REPORT
INDUSTRIAL BANCORP, INC.
CONTENTS
1 President's Message
2 Selected Consolidated
Financial Data
3 Management's Discussion and
Analysis of Financial Condition
And Results of Operation
12 Consolidated Financial
Statements
16 Notes to Consolidated
Financial Statements
30 Report of Independent Auditors
31 Common Stock Information
32 Directors and Executive Officers
COMPANY PROFILE
Industrial Bancorp, Inc. is a savings and loan holding company
headquartered in Bellevue, Ohio. Its sole subsidiary, Industrial Savings and
Loan Association, Maintains twelve full-service offices and one loan
production office serving communities in seven counties throughout north
central Ohio.
Founded in 1890, Industrial Savings and Loan is a state-chartered
savings and loan association with deposits insured by the FDIC. Industrial
Savings and Loan provides traditional banking services including a wide
selection of mortgage loan and deposit products to local consumers and
businesses.
Dear Shareholders
I am pleased to present our Annual Report to Shareholders for 1999.
This report will show that 1999 was another year of continued growth and
solid performance by Industrial Bancorp, Inc. As a result, the Board of
Directors increased cash dividends to $.66 per share during the year, an
increase of 12%. Also during the year, the Company continued its stock
repurchase program by authorizing the repurchase of an additional 10% of its
total outstanding common shares. Under the repurchase program, which began
late in 1996, the company has been able to purchase a total of 1,195,117
shares of outstanding stock as of year-end 1999. Under the right market
conditions, the Company intends to continue its repurchase program in the
year 2000.
Our subsidiary, Industrial Savings and Loan Association, also
completed another very successful year in 1999. Having completed its 109th
year of continuous operations, it continued to grow and prosper. Our year
was highlighted by the opening of two new full service offices. In April, we
opened our very first grocery store operation in Willard. This office will
compliment our existing branch office in Willard by offering extended hours
and an ATM machine. In June, we opened our eleventh full service branch
office in Lexington, Ohio. Lexington is located in Richland County where we
currently have a loan production office. With this new facility, we are now
able to expand the products and services we offer to the people of the
Richland County area. With this expansion, we were also able to increase our
loan origination staff in that area. We are very excited about these
expansions and the role they will play in increasing our market share in
those two areas and the continued growth of the entire company.
Also during 1999, our management team and staff spent a great deal of
time and effort in preparation for the change to the new century. I am
pleased to report that all the hard work and planning paid off by having no
disruptions to our computer systems as a result of the Y2K change over. We
entered the new century with no disruption of service to our customers.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. Total assets increased to a
record high of $389 million and total loans now exceed $342 million which is
also a new record. Savings deposits at year-end increased to $294 million.
Basic and diluted earnings per share amounted to $1.23 and $1.21
respectively, an increase from last year and also at record levels.
On behalf of the directors, management and employees, I would like to
express our appreciation to you, for your continued confidence and
investment in Industrial Bancorp, Inc., and to our valued customers for
their continued support of Industrial Savings and Loan.
/s/ David M. Windau
David M. Windau
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL DATA
1999 1998 1997 1996 1995
------------------------------------------------------------
(Dollars in thousands, except per share data)
Selected financial condition data:
Total assets $389,003 $388,059 $364,023 $326,613 $322,994
Investment securities 14,343 21,518 21,467 23,797 27,882
Loans receivable - net 342,276 326,972 321,669 285,803 259,124
Deposits 294,250 288,584 270,957 259,074 238,282
FHLB advances 37,000 35,000 29,000 2,000 -
Shareholders' equity 54,586 60,741 60,862 62,104 81,055
Summary of earnings:
Interest income $ 29,442 $ 30,562 $ 27,805 $ 25,468 $ 22,858
Interest expense 15,048 15,825 14,065 11,863 11,236
------------------------------------------------------------
Net interest income 14,394 14,737 13,740 13,605 11,622
Provision for loan losses 103 200 186 180 180
------------------------------------------------------------
Net interest income after
provision for loan losses 14,291 14,537 13,554 13,425 11,442
Noninterest income 949 858 509 447 398
Noninterest expense 6,995 6,663 6,167 9,453 5,518
------------------------------------------------------------
Income before income tax 8,245 8,732 7,896 4,419 6,322
Income tax expense 2,935 3,028 2,783 2,020 2,149
------------------------------------------------------------
Net income $ 5,310 $ 5,704 $ 5,113 $ 2,399 $ 4,173
============================================================
Basic earnings per share (1) $ 1.23 $ 1.22 $ 1.04 $ 0.47 $ 0.42
Diluted earnings per share (1) 1.21 1.19 1.03 0.47 0.42
Cash dividends per share (1) (2) 0.66 0.59 0.48 3.75 0.15
Selected financial ratios:
Return on average assets 1.39% 1.50% 1.48% 0.75% 1.42%
Return on average equity 9.31 9.36 8.38 3.62 8.21
Average equity to average assets 14.94 16.03 17.63 20.59 17.29
Interest rate spread 3.11 3.11 3.13 3.26 3.26
Net interest margin 3.85 3.95 4.05 4.32 4.04
Efficiency ratio (3) 45.90 43.28 43.85 68.14 46.60
Noninterest expense to average assets 1.83 1.75 1.78 2.94 1.88
Nonperforming assets to total assets 0.42 0.38 0.31 0.38 0.49
Nonperforming loans to total loans 0.45 0.45 0.32 0.42 0.60
Allowance for loan losses to total loans 0.58 0.59 0.54 0.53 0.52
Allowance for loan losses to
nonperforming loans 129.55 129.72 168.76 125.77 87.53
<FN>
<F1> Per share data for 1995 is for the period from the date of the
Conversion, August 1, 1995, to December 31, 1995.
<F2> The amount for 1996 includes a $3.50 per share special return of
capital distribution.
<F3> Noninterest expense as a percentage of the sum of net interest income
after provision for loan losses and noninterest income.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In August 1995, Industrial Bancorp, Inc. ("Industrial Bancorp")
acquired all of the common shares issued by The Industrial Savings and Loan
Association ("Industrial Savings") upon its conversion from a mutual savings
and loan association to a stock savings and loan association (the
"Conversion"). Since the ownership of such shares constitutes the principal
business of Industrial Bancorp, the discussion below focuses principally on
the financial condition and results of operations of Industrial Savings.
The following discussion and analysis of Industrial Bancorp, and its
wholly-owned subsidiary, Industrial Savings, (together referred to as the
"Company") should be read in conjunction with and with reference to the
consolidated financial statements and accompanying notes presented in this
Annual Report beginning on page 12.
Changes In FINANCIAL CONDITION
Total consolidated assets of the Company were $389.0 million at year-
end 1999 compared to $388.1 million at year-end 1998.
Loans receivable increased $15.3 million to $342.3 million at year-end
1999 from $327.0 million at year-end 1998. Loan originations exceeded $100
million for the third year in a row, with 89% of the originations being in
the residential mortgage and real estate construction loan categories. Also
in 1999, the Company more than doubled its originations in the commercial
category and increased originations in the consumer category by 75%. Sales
of fixed-rate mortgage loans on the secondary market totaled $8.5 million in
1999. Investment securities were reduced to $14.3 million at year-end 1999
from $21.5 million at year-end 1998. Maturities of U.S. Treasury and agency
securities totaled $10.0 million and were replenished by purchases of the
same totaling $4.0 million and purchases of $10.5 million in long-term time
deposits. Unrealized gains on those securities decreased by $711,000 during
the year. Cash and cash equivalents were $10.0 million at year-end 1999
compared to $28.5 million at year-end 1998. The Company had $22.0 million in
overnight deposits at the end of the year in 1998, taking advantage of minor
variations between long-term and short-term interest rates. Office
properties and equipment, net of accumulated depreciation, increased to $5.7
million at year-end 1999 from $5.4 million at year-end 1998. The increase is
principally due to the Company's addition of two full-service offices during
1999.
Total deposits increased $5.7 million, or 2%, to $294.3 at year-end
1999 from $288.6 million at year-end 1998. Transaction accounts, including
passbook savings deposits, increased $10.2 million while certificates of
deposit decreased $4.5 million. The Company has used advances from the
Federal Home Loan Bank ("FHLB") to fund loan growth in excess of loan sales
and deposit growth. FHLB advances were $37.0 million at year-end 1999
compared to $35.0 million at year-end 1998.
Shareholders' equity was $54.6 million at year-end 1999, compared to
$60.7 million at year-end 1998. Net income of $5.3 million was offset by
dividends to shareholders of $2.8 million and purchases of treasury shares
at a cost of $9.5 million during 1999.
The table on the following page presents certain average-balance
information, as well as average yields on interest-earning assets and
average costs of interest-bearing liabilities for the years indicated. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of interest-earning assets or interest-bearing liabilities,
respectively, for the years presented. Average balances are derived from
monthly ending balances, which do not vary significantly from daily average
balances.
1999 1998
----------------------------------------------------------------
Weighted average
yield/rate at Average Average Average Average
12/31/99 balance Interest yield/rate balance Interest yield/rate
-----------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits 4.47% $ 27,968 $ 1,123 4.02% $ 18,656 $ 708 3.79%
Investment securities (1) 5.83 17,156 1,116 6.51 20,396 1,344 6.59
Mortgage-backed securities 10.42 239 24 10.04 345 34 9.98
Loans receivable (2) 7.92 328,583 27,179 8.27 333,775 28,476 8.53
-------------------------------------------------------------
Total interest-earning assets 7.68 373,946 29,442 7.87 373,172 30,562 8.19
Noninterest-earning assets:
Cash and noninterest-bearing deposits 1,407 1,109
Office properties and equipment 5,705 5,302
Other nonearning assets 2,699 2,371
Allowance for loan losses (1,984) (1,832)
-----------------------------------------
Total assets $381,773 $380,122
=========================================
Interest-bearing liabilities:
Deposits:
NOW accounts 2.90 $ 19,115 414 2.17 $ 16,139 355 2.20
Money market accounts 3.00 4,650 141 3.03 4,391 133 3.03
Passbook savings accounts 3.10 56,686 1,756 3.10 53,014 1,626 3.07
Certificates of deposit 5.37 204,696 10,914 5.33 202,198 11,516 5.70
-------------------------------------------------------------
Total deposits 4.60 285,147 13,225 4.64 275,742 13,630 4.94
FHLB advances 5.88 30,846 1,823 5.91 35,692 2,195 6.15
-------------------------------------------------------------
Total interest-bearing liabilities 4.74 315,993 15,048 4.76 311,434 15,825 5.08
Noninterest-bearing liabilities 8,731 7,763
-----------------------------------------
Total liabilities 324,724 319,197
Shareholders' equity 57,049 60,925
-----------------------------------------
Total liabilities and
shareholders' equity $381,773 $380,122
=========================================
Net interest income $14,394 $14,737
Interest rate spread 2.94% 3.11% 3.11%
Net interest margin (3) 3.85% 3.95%
Average interest-earning assets to
average interest-bearing liabilities 118.34% 119.82%
1997
-------------------------------
Average Average
balance Interest yield/rate
-------------------------------
Interest-earning assets:
Interest-bearing deposits $ 11,696 $ 436 3.73%
Investment securities (1) 23,053 1,539 6.68
Mortgage-backed securities 497 51 10.26
Loans receivable (2) 304,397 25,779 8.47
------------------
Total interest-earning assets 339,643 27,805 8.19
Noninterest-earning assets:
Cash and noninterest-bearing
deposits 1,051
Office properties and equipment 4,983
Other nonearning assets 1,832
Allowance for loan losses (1,652)
--------
Total assets $345,857
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 14,084 327 2.32
Money market accounts 4,323 130 3.01
Passbook savings accounts 53,079 1,644 3.10
Certificates of deposit 189,887 10,904 5.74
------------------
Total deposits 261,373 13,005 4.98
FHLB advances 16,615 1,060 6.38
------------------
Total interest-bearing liabilities 277,988 14,065 5.06
Noninterest-bearing liabilities 6,882
--------
Total liabilities 284,870
Shareholders' equity 60,987
--------
Total liabilities and
shareholders' equity $345,857
========
Net interest income $13,740
=======
Interest rate spread 3.13%
Net interest margin (3) 4.05%
Average interest-earning assets to
average interest-bearing liabilities 122.18%
<FN>
<F1> Average yields have been computed based on the amortized cost of the
investment security.
<F2> Net of deferred loan fees, loan discounts and loans in process. Loan
fees included in interest income amounted to $933,000, $1.0 million,
and $626,000 in 1999, 1998 and 1997.
<F3> Net interest income to average interest-earning assets.
</FN>
The table below describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the interest income and interest expense of the
Company during the years indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided for changes
attributable to (i) increases and decreases in volume (change in volume
multiplied by prior year rate), (ii) increases and decreases in rate (change
in rate multiplied by prior year volume) and (iii) total increases and
decreases in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate.
1999 vs. 1998 1998 vs. 1997
------------------------------------------------------------------
Increase (decrease) Total Increase (decrease) Total
due to increase due to increase
------------------ ------------------
Volume Rate (decrease) Volume Rate (decrease)
-----------------------------------------------------------------
(In thousands)
Interest income attributable to:
Interest-bearing deposits $ 370 $ 45 $ 415 $ 265 $ 7 $ 272
Investment securities (211) (17) (228) (175) (20) (195)
Mortgage-backed securities (10) - (10) (16) (1) (17)
Loans receivable (438) (859) (1,297) 2,505 192 2,697
-------------------------------------------------------------
Total interest income (289) (831) (1,120) 2,579 178 2,757
Interest expense attributable to:
Deposits:
NOW accounts 65 (6) 59 46 (18) 28
Money market accounts 8 - 8 2 1 3
Passbook savings accounts 114 16 130 (2) (16) (18)
Certificates of deposit 141 (743) (602) 702 (90) 612
-------------------------------------------------------------
Total deposits 328 (733) (405) 748 (123) 625
FHLB advances (289) (83) (372) 1,175 (40) 1,135
-------------------------------------------------------------
Total interest expense 39 (816) (777) 1,923 (163) 1,760
-------------------------------------------------------------
Increase(decrease) in net interest
income $(328) $ (15) $ (343) $ 656 $ 341 $ 997
=============================================================
COMPARISON OF OPERATING RESULTS
Earnings Summary. The Company had consolidated net income of $5.3
million for 1999, compared to $5.7 million for 1998 and $5.1 million for
1997. The primary reason for the change in net income between years was the
change in net interest income.
Net Interest Income. Net interest income of the Company is a function
of the difference, or spread, between the average yield earned on loans and
other interest-earning assets and the average rate paid on deposits and
borrowings as well as the relative amounts of such assets and liabilities.
The interest rate spread is affected by the economic and competitive factors
that influence interest rates, loan demand and deposit flows.
Net interest income was $14.3 million in 1999, a decrease of $343,000
from $14.7 million in 1998, which was an increase of $997,000 over $13.7
million in 1997. The lower net interest income in 1999 was primarily a
result of reduced levels of average interest-bearing assets, particularly
loans and investment securities, coupled with the lower interest rate
environment during 1999. The primary reason for the increased net interest
income in 1998 over 1997 was the higher average balance in loans during
1998, especially prior to the implementation of the loan sales program which
was initiated mid-year.
Total interest income was $29.4 million in 1999 down from $30.6
million in 1998, which was up from $27.8 million in 1997. The significant
number of refinancings that took place in 1998 were not repeated in 1999
despite the continuation of the lower interest rate environment. Average
loans increased from $304.4 million in 1997 to $333.8 million in 1998, then
declined to $328.6 million in 1999. Competition increased for a reduced
level of loan demand in 1999, causing the Company to experience a 5% decline
in total loan originations that year. Interest and fees on loans totaled
$27.2 million in 1999, compared to $28.5 million in 1998 and $25.8 million
in 1997. The average yield earned on loans was 8.27% for 1999, compared to
8.53% for 1998 and 8.47% for 1997.
Interest earned on investment securities declined to $1.1 million in
1999 compared to $1.3 million in 1998 and $1.5 million in 1997 while income
from interest-bearing deposits increased to $1.1 million in 1999, compared
to $708,000 in 1998 and $436,000 in 1997. The Company allowed the average
balance of its investment portfolio to decline during 1999 and 1998 in favor
of shorter term, more liquid investments due to the flat yield curve
experienced in those years. Additional investments have also been limited
during the past three years due to the excess growth of loans over deposits
and the increased use of FHLB advances to fund the excess.
Total interest expense was $15.0 million in 1999, an decrease of
$777,000 from $15.8 million recorded in 1998, which was an increase of $1.8
million from $14.1 million recorded in 1997. The decrease during 1999 was
primarily the result of the lower interest rate environment experienced
throughout most of 1999. The increase in 1998 was principally due to the
increased use of FHLB advances, which averaged $35.7 million in 1998,
compared to $16.6 million in 1997. Reliance upon FHLB advances jumped in
1998 as the growth in average deposits, from $261.4 million in 1997 to
$275.7 million in 1998, did not keep pace with loan demand. In 1999, average
deposits totaled $285.1 million. The Company has diminished some of its
reliance upon FHLB advances by selling $25.7 million of mortgage loans on
the secondary market since the inception of the program mid-year 1998. The
average rate paid for deposits decreased to 4.74% in 1999 from 4.94% in 1998
and 4.98% in 1997 as the maturity of the deposit portfolio, particularly
certificates of deposit, shifted to shorter-term, lower yielding deposits.
Yields Earned and Rates Paid. The spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
remained relatively stable, reflecting the interest rate environment,
declining only slightly to 3.11% in 1999 and 1998 from 3.13% in 1997.
The excess of average interest-earning assets over average interest-
bearing liabilities remained relatively steady at $58.0 million for 1999
compared to $61.7 million for both 1998 and 1997. The ratio of average
interest-earning assets to average interest-bearing liabilities was 118.34%
for 1999, compared to 119.82% for 1998 and 122.18% for 1997.
Provision for Loan Losses. The Company maintains an allowance for loan
losses in an amount which, in management's judgment, is adequate to absorb
probable losses inherent in its loan portfolio. The amount of the provision
which is charged against earnings each year and added to the allowance is
based upon management's ongoing review of such factors as historical loss
performance, general prevailing economic conditions, changes in the size and
composition of the loan portfolio and considerations relating to specific
loans, including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking " statement within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Factors that could affect the
adequacy of the allowance for loan losses include, but are not limited to,
the following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which
may cause the value of real estate and other properties that secure
outstanding loans to decline; (2) unforeseen adverse changes in
circumstances with respect to certain large loans; (3) decreases in the
value of collateral securing consumer loans to amounts equal to less than
the outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that Industrial Savings must recognize additions
to its loan loss allowance based on such regulators' judgment of information
available to them at the time of their examinations.
The provision for loan losses was $103,000 in 1999, compared to
$200,000 in 1998 and $186,000 in 1997. The Company had $19,000 in charge-
offs during 1999, compared to $14,000 in 1998 and $2,000 in 1997. Recoveries
totaled $3,000 in 1999, $2,000 in 1998 and $1,000 in 1997. Nonperforming
loans were $1.6 million at year-end 1999, compared to $1.5 million at year-
end 1998. At year-end 1999, the allowance for loan losses was 129.55% of
nonperforming loans and .58% of total loans compared to 129.72% and .59% at
year-end 1998. Management determined that a provision for loan losses was
warranted in 1999 based on the sustained level of nonperforming loans and
the increase in loans receivable during 1999.
Noninterest Income. Noninterest income increased to $949,000 in 1999,
compared to $858,000 in 1998 and $509,000 in 1997. Service fees related to
the steadily growing deposit base and expanding ATM and debit card usage
contributed largely to these increases during each of the three years. In
1999 and 1998, income of $81,000 and $174,000 was recognized as a result of
the sale of mortgage loans on the secondary market.
Noninterest Expense. Noninterest expense amounted to $7.0 million in
1999, compared to $6.7 million in 1998 and $6.2 million in 1997. The largest
single item of noninterest expense, salaries and employee benefits, was held
in check during 1999, matching the $3.4 million recorded in 1998, compared
to $3.1 million in 1997.
State franchise tax has decreased from $524,000 in 1997 to $442,000 in
1998 and $329,000 in 1999, due to intercompany transfers of capital from
Industrial Savings to Industrial Bancorp. In addition to reducing the amount
of state franchise tax paid, the transfer will provide the Company with
greater flexibility in the future. Federal deposit insurance premiums
increased to $172,000 in 1999 compared to $168,000 in 1998 and $135,000 in
1997, as a result of the growth in deposits.
Data processing and related fees, which are based on the outstanding
number of loan and deposit accounts, increased to $503,000 in 1999 from
$437,000 in 1998 and $370,000 in 1997. Total occupancy and equipment and
depreciation expense increased to $892,000 for 1999, compared to $757,000
for 1998 and $638,000 in 1997, due principally to the addition of the two
new full-service offices in 1999 and the significant upgrade in technology
the Company made during 1998. Advertising expense increased in 1999, due to
marketing the opening of the two new offices, to $244,000 for 1999, up from
$188,000 for 1998, which was down from $194,000 in 1997. Other expenses
increased to $1.4 million in 1999, compared to $1.2 million in 1998 and
1997.
Income Tax Expense. Fluctuations in income tax expense are primarily
attributable to the change in income before taxes. Income before taxes
amounted to $8.2 million in 1999, compared to $8.7 million in 1998 and $7.9
million in 1997. The Company's effective tax rates were 35.6% in 1999,
compared to 34.7% in 1998 and 35.2% in 1997.
ASSET QUALITY
The Company has consistently maintained a high quality loan portfolio,
as evidenced by its level of nonperforming assets which consists of loans
accounted for on a nonaccrual basis, accruing loans past due 90 days or
more, and real estate acquired through or instead of foreclosure.
Nonperforming assets were $1.6 million at year-end 1999, compared to $1.5
million at year-end 1998. As a percentage of year-end total assets,
nonperforming assets were and 0.42% in 1999 and 0.38% in 1998.
The Company's allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past two years and stood at $2.0
million at year-end 1999 compared to $1.9 million at year-end 1998. As a
percentage of nonperforming loans, the allowance for loan losses has
decreased from 129.72% at year-end 1998 to 129.55% at year-end 1999.
ASSET AND LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. Exposure to interest rate risk is measured with the use of
interest rate sensitivity analysis to estimate the change in the Company's
"net portfolio value" ("NPV") in the event of hypothetical changes in
interest rates.
As part of its efforts to monitor and manage interest rate risk, the
Company's asset and liability committee reviews with the Board of Directors,
on a quarterly basis, reports provided by the Office of Thrift Supervision
("OTS") and considers methods of maintaining acceptable levels of changes in
NPV. The Company's assets and liability management is designed to minimize
the impact of sudden and sustained changes in interest rates on NPV. If
estimated changes to NPV are not within the limits established by the Board,
the Board may direct management to adjust the asset and liability mix to
bring interest rate risk within board-approved limits.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning assets and other assets and
outgoing cash flows on interest-bearing liabilities and other liabilities.
The application of the NPV methodology attempts to quantify interest rate
risk in the event of a sudden and sustained 1 to 3 percent increase or
decrease in market rates.
It is the intent of the Board not to exceed a moderate risk level, as
defined by the Office of Thrift Supervision in their Thrift Bulletin 13A
with a 200 basis point permanent spike in interest rates. As of December 31,
1999, the interest rate level was in the minimum range for a 100 basis point
permanent spike in interest rates, moderate range for a 200 basis point
permanent spike in interest rates and significant level for a 300 basis
point permanent spike in interest rates. In comparison, at December 31, 1998
permanent spikes in interest rates of 100, 200 and 300 basis points
represented interest rate risk levels of minimum, minimum and moderate,
respectively. In terms of relative impact on the Company's NPV, a 200 basis
point permanent spike in interest rates would have the effect of reducing
NPV by $17.0 million at December 31, 1999 compared to a reduction of $11.3
million at December 31, 1998. The Company's increased sensitivity to rising
interest rates is a result of an increase in the level of fixed rate loans
and a general shortening of the maturity structure of deposits and
borrowings. The Company attempts to mitigate interest rate risk by
originating adjustable-rate loans and by selling fixed-rate mortgage loans
in the secondary market to Freddie Mac, however customer preferences for
loan products may limit the Company's ability to achieve this objective.
NPV is calculated by the OTS using information provided by the
Company. Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of
market interest rates, loan prepayments and deposit run-off, and should not
be relied upon as indicative of actual results. Further, the computations do
not include capital at the holding company level nor does it contemplate any
actions the Company may undertake in response to changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing
activities, which are summarized as follows:
1999 1998 1997
---------------------------------
(In thousands)
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments 277 744 (34)
---------------------------------
Net cash from operating activities 5,587 6,448 5,079
Net cash from investment activities (19,673) (4,186) (32,584)
Net cash from financing activities (4,498) 15,502 30,864
---------------------------------
Net change in cash and cash equivalents (18,584) 17,764 3,359
Cash and cash equivalents at beginning of year 28,536 10,772 7,413
---------------------------------
Cash and cash equivalents at end of year $ 9,952 $28,536 $ 10,772
=================================
The principal sources of funds for the Company are deposits, FHLB
borrowings, loan repayments, the sale of mortgage loans on the secondary
market, maturity of investment securities and funds generated through
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and loan prepayments are more
influenced by interest rates, general economic conditions and competition.
The Company maintains a level of investment in liquid assets which is based
upon management's assessment of (i) the need for funds, (ii) expected
deposit flows, (iii) the yields available on short-term liquid assets and
(iv) the objectives of the asset and liability management program of the
Company.
OTS regulations presently require the Company to maintain an average
daily balance of liquid assets, which may include, but are not limited to,
investments in U. S. Treasury and federal agency obligations and other
investments generally having maturities of five years or less, in an amount
equal to 4% of the sum of the Company's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement, which may be changed from time to time by the OTS
to reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which the Company may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At year-end 1999, the
regulatory liquidity ratio of the Company was 5.86%. At such date, the
Company had commitments to originate loans and loans in process totaling
$14.0 million and no commitments to sell loans. The Company considers its
liquidity and capital reserves sufficient to meet its foreseeable short-term
and long-term needs.
Industrial Savings is required by OTS regulations to maintain
specified minimum amounts of capital. At year-end 1999, the association
exceeded all applicable minimum capital requirements. The association's
actual capital and regulatory capital requirements at year-end 1999 were as
follows:
Amount Percent of assets
----------------------------------
(In thousands)
Tangible capital: (1)
Capital level $35,115 9.07%
Requirement 5,805 1.50
------------------------
Excess $29,310 7.57%
========================
Tier 1 (Core) capital: (1)
Capital level $35,115 9.07%
Requirement 15,479 4.00
------------------------
Excess $19,636 5.07%
========================
Risk-based capital: (2)
Capital level $38,066 15.84%
Requirement 19,229 8.00
------------------------
Excess $18,837 7.84%
========================
<FN>
<F1> Tangible and Tier 1 (Core) capital percentages are based on adjusted
total assets of $387.0 million.
<F2> Risk-based capital percentages are based on risk-weighted assets of
$240.4 million.
</FN>
YEAR 2000 COMPLIANCE ISSUES
From their inception in 1995 through January of this year, the
Company's efforts to devise and implement a Year 2000 compliance program
have cost approximately $700,000. These costs principally represent the
hardware and software purchases associated with the update and conversion of
teller terminals in bringing the customer delivery system Year 2000
compliant. As a result of that upgrade in computer technology, and various
other efforts implemented during the preceding four years, the Company
experienced virtually no Year 2000 challenges.
The Company does not anticipate any future challenges with Year 2000
technology issues that would have a material impact upon the Company's
results of operations or capital resources.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued new accounting
standards that are effective for the Company's consolidated financial
statements for the years ending after December 31, 1999.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," issued in
June 1998 and effective for fiscal years beginning after June 15, 2000,
addresses the accounting for derivative instruments and certain derivative
instruments embedded in other contracts, and hedging activities. The
statement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value.
This statement is not expected to have a material effect on the
Company's consolidated financial position or results of operations since the
Company has not historically engaged in these activities.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
December 31,
-------------------
1999 1998
-------------------
ASSETS
Cash and noninterest-bearing deposits $ 2,699 $ 1,067
Interest-bearing demand deposits 3,253 5,469
Overnight deposits 4,000 22,000
-------------------
Cash and cash equivalents 9,952 28,536
Interest-bearing time deposits 10,500
Investment securities available for sale,
at fair value 14,141 21,235
Investment securities held to maturity
(fair value: 1999 - $212; 1998 - $302) 202 283
Loans receivable - net 342,276 326,972
Federal Home Loan Bank stock 3,490 3,256
Office properties and equipment - net 5,709 5,387
Accrued interest receivable 2,273 2,051
Other assets 460 339
-------------------
Total assets $389,003 $388,059
===================
LIABILITIES
Deposits $294,250 $288,584
Federal Home Loan Bank advances 37,000 35,000
Accrued interest payable and other liabilities 3,167 3,734
-------------------
Total liabilities 334,417 327,318
===================
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized, 5,554,500 shares issued 34,669 34,669
Additional paid-in capital 2,955 2,472
Retained earnings 40,005 37,522
Accumulated other comprehensive income 1,390 2,101
Unearned employee stock ownership plan shares (2,688) (3,100)
Unearned compensation (701) (1,227)
Treasury stock, at cost
(1999 - 1,195,117 shares; 1998 - 723,464 shares) (21,044) (11,696)
-------------------
Total shareholders' equity 54,586 60,741
-------------------
Total liabilities and shareholders' equity $389,003 $388,059
===================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
For the year ended December 31,
1999 1998 1997
-------------------------------
Interest income
Interest and fees on loans $27,179 $28,476 $25,779
Interest and dividends on investment securities 1,140 1,378 1,590
Interest on deposits 1,123 708 436
-------------------------------
29,442 30,562 27,805
-------------------------------
Interest expense
Interest on deposits 13,225 13,630 13,005
Interest on Federal Home Loan Bank advances 1,823 2,195 1,060
-------------------------------
15,048 15,825 14,065
-------------------------------
Net interest income 14,394 14,737 13,740
Provision for loan losses 103 200 186
-------------------------------
Net interest income after provision for
loan losses 14,291 14,537 13,554
-------------------------------
Noninterest income
Service fees and other charges 839 635 466
Other 110 223 43
-------------------------------
949 858 509
-------------------------------
Noninterest expense
Salaries and employee benefits 3,436 3,430 3,117
State franchise tax 329 442 524
Federal deposit insurance premiums 172 168 135
Occupancy and equipment 437 368 352
Data processing 503 437 370
Depreciation 455 389 286
Advertising 244 188 194
Other 1,419 1,241 1,189
-------------------------------
6,995 6,663 6,167
-------------------------------
Income before income tax 8,245 8,732 7,896
Provision for income tax 2,935 3,028 2,783
-------------------------------
Net income $ 5,310 $ 5,704 $ 5,113
===============================
Basic earnings per share $ 1.23 $ 1.22 $ 1.04
Diluted earnings per share $ 1.21 $ 1.19 $ 1.03
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the year ended December 31,
-------------------------------
1999 1998 1997
-------------------------------
Net income $5,310 $5,704 $5,113
Other comprehensive income:
Unrealized gains (losses) on securities,
net of taxes (711) 768 483
Comprehensive income $4,599 $6,472 $5,596
============================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Unrealized
Gain on
Additional Securities Unearned
Common Paid-in Retained Available ESOP Unearned Treasury
Stock Capital Earnings for Sale Shares Compensation Stock Total
-------------------------------------------------------------------------------------------
Balance at January 1, 1997 $34,669 $1,669 $31,803 $ 850 $(3,974) $(2,279) $ (634) $62,104
Net income 5,113 5,113
Purchase of treasury stock
(401,700 shares) (5,672) (5,672)
Cash dividends declared
($.48 per share) (2,347) (2,347)
Employee Stock Ownership Plan:
Shares released 210 445 655
Management Recognition Plan:
Compensation earned 526 526
Change in unrealized gain on
securities available for sale 483 483
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 34,669 1,879 34,569 1,333 (3,529) (1,753) (6,306) 60,862
Net income 5,704 5,704
Purchase of treasury stock
(271,764 shares) (5,466) (5,466)
Cash dividends declared
($.59 per share) (2,751) (2,751)
Exercise of stock options 16 76 92
Employee Stock Ownership Plan:
Shares released 415 429 844
Management Recognition Plan:
Compensation earned 162 526 688
Change in unrealized gain on
securities available for sale 768 768
-------------------------------------------------------------------------------------------
Balance at December 31, 1998 34,669 2,472 37,522 2,101 (3,100) (1,227) (11,696) 60,741
Net income 5,310 5,310
Purchase of treasury stock
(471,653 shares) (9,517) (9,517)
Cash dividends declared
($.66 per share) (2,827) (2,827)
Exercise of stock options 11 169 180
Employee Stock Ownership Plan:
Shares released 357 412 769
Management Recognition Plan:
Compensation earned 115 526 641
Change in unrealized gain on
securities available for sale (711) (711)
-------------------------------------------------------------------------------------------
Balance at December 31, 1999 $34,669 $2,955 $40,005 $1,390 $(2,688) $ (701) $(21,044) $54,586
===========================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the year ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
Cash flows from operating activities
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 503 389 286
Provision for loan losses 103 200 186
Accretion of deferred loan fees (978) (1,107) (674)
FHLB stock dividends (234) (224) (200)
Net accretion on investment securities 16 (41) (50)
ESOP expense 769 844 655
MRP compensation expense 641 688 526
Net change in:
Deferred taxes (24) 124 105
Accrued interest receivable and other assets (343) (139) (637)
Accrued interest payable and other liabilities (176) 10 (231)
-------------------------------
Net cash from operating activities 5,587 6,448 5,079
-------------------------------
Cash flows from investing activities
Net increase in interest-bearing time deposits (10,500)
Proceeds from maturities of investment securities
available for sale 10,000 6,000 12,000
Purchases of investment securities available for sale (4,000) (5,000) (9,008)
Principal repayments and maturities of investment
securities held to maturity 81 154 124
Net increase in loans (14,429) (4,442) (35,378)
FHLB stock purchases (94) (93)
Properties and equipment expenditures, net (825) (804) (229)
-------------------------------
Net cash from investing activities (19,673) (4,186) (32,584)
-------------------------------
Cash flows from financing activities
Net increase in deposits 5,666 17,627 11,883
Proceeds from FHLB advances 9,000 10,000 33,000
Repayment of FHLB advances (7,000) (4,000) (6,000)
Proceeds from exercise of stock options 180 92
Cash dividends paid (2,827) (2,751) (2,347)
Purchase of treasury stock (9,517) (5,466) (5,672)
-------------------------------
Net cash from financing activities (4,498) 15,502 30,864
-------------------------------
Net change in cash and cash equivalents (18,584) 17,764 3,359
Cash and cash equivalents at beginning of year 28,536 10,772 7,413
-------------------------------
Cash and cash equivalents at end of year $ 9,952 $28,536 $ 10,772
===============================
Cash paid during the year for:
Interest $ 15,287 $15,765 $ 13,938
Income taxes 2,748 2,707 2,947
Noncash transactions:
Transfer of loans to real estate owned 89 46 71
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include
Industrial Bancorp, Inc. and its wholly-owned subsidiary, Industrial Savings
and Loan Association, together referred to as "the Company". Intercompany
transactions and balances are eliminated. Footnote tables are presented in
thousands, except per share data.
Nature of Operations: The Corporation provides financial services through
its offices in North Central Ohio. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential mortgage, commercial, and installment loans.
Substantially all loans are secured by specific items of collateral
including business assets, consumer assets and real estate. Commercial loans
are expected to be repaid from cash flow from operations of businesses. Real
estate loans are secured by both residential and commercial real estate.
Other financial instruments which potentially represent concentrations of
credit risk include deposit accounts in other financial institutions.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and disclosures
provided, and future results could differ. The allowance for loan losses and
fair values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, demand deposits with
other financial institutions and overnight deposits. Net cash flows are
reported for loan and deposit transactions.
Investment Securities: Investment securities are classified as held to
maturity and carried at amortized cost when management has the positive
intent and ability to hold to maturity. Investment securities are classified
as available for sale when they might be sold before maturity. Investment
securities available for sale are carried at fair value, with unrealized
gains and losses reported in other comprehensive income. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is
not temporary.
Loans Receivable: Loans are reported at the principal balance outstanding,
net of unearned interest, deferred loan fees and costs, and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or
market, on an aggregate basis.
Interest income is reported on the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Interest income is
not reported when full loan repayment is in doubt, typically when the loan
is impaired or payments are past due over 90 days.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, known and
inherent risks in the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
A loan is impaired if full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage or consumer loans, and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Servicing Rights: Servicing rights are recognized as assets for purchased
rights and for the allocated value of retained servicing rights on loans
sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the
fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Real Estate Owned: Real estate acquired through or instead of foreclosure is
initially recorded at the fair value when acquired, establishing a new cost
basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
Office Properties and Equipment: Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed over the
estimated useful lives on an accelerated basis, except for buildings for
which the straight line basis is principally used.
Stock Compensation: Employee compensation expense under stock option plans
is reported if options are granted below market price at grant date. Pro
forma disclosures of net income and earnings per share are shown using the
fair value method of Statement of Financial Accounting Standards (SFAS)
No.123 to measure expense for options granted after 1994, using an option
pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for
the temporary differences between carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but
not yet allocated to participants, is shown as a reduction of shareholders'
equity. Compensation expense is based on the market price of shares as they
are committed to be released to participant accounts. Dividends on allocated
ESOP shares reduce retained earnings; dividends on unearned ESOP shares
reduce debt and accrued interest.
Financial Instruments: Fair values of financial instruments are estimated
using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters
of significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly
affect the estimates.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income consists of unrealized
gains and losses on investment securities, which are also recognized as
separate components of equity.
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. ESOP
shares are considered outstanding for this calculation unless unearned.
Diluted earnings per share includes the dilutive effect of additional
potential common shares issuable under stock options.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe that there are now any
such matters that would have a material effect on the financial statements.
Reclassifications: Certain items in the 1998 and 1997 financial statements
have been reclassified to correspond with the 1999 presentation.
NOTE 2 - INVESTMENT SECURITIES
Investment securities as of the end of the year were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
Available for sale
1999
- ----
U.S. Treasury securities $ 6,994 $ 10 $(11) $ 6,993
U.S. agency securities 4,995 (42) 4,953
Federal Home Loan Mortgage
Corporation preferred stock 46 2,149 2,195
---------------------------------------------------
$12,035 $2,159 $(53) $14,141
===================================================
1998
- ----
U.S. Treasury securities $12,003 $ 153 $12,156
U.S. agency securities 6,002 40 6,042
Federal Home Loan Mortgage
Corporation preferred stock 46 2,991 3,037
---------------------------------------------------
$18,051 $3,184 $21,235
===================================================
Held to maturity
1999
- ----
Mortgage-backed securities $ 202 $ 10 $ 212
===================================================
1998
- ----
Mortgage-backed securities $ 283 $ 19 $ 302
===================================================
Contractual maturities of debt securities at year-end 1999 were as follows:
Amortized Estimated
Cost Fair Value
------------------------
Available for sale
Due in one year or less $10,990 $10,963
Due after one year through five years 999 983
---------------------
11,989 11,946
Federal Home Loan Mortgage Corporation
preferred stock 46 2,195
---------------------
$12,035 $14,141
=====================
Held to maturity
Mortgage-backed securities $ 202 $ 212
=====================
No investment securities were sold during 1999, 1998 or 1997. Investment
securities pledged at year-end 1999 and 1998 had costs of $9.3 million and
$15.4 million and were pledged to secure public deposits.
NOTE 3 - LOANS RECEIVABLE
Loans receivable as of the end of the year were as follows:
1999 1998
---------------------
Real estate loans:
One- to four-family $288,905 $279,237
Home equity 18,721 16,624
Construction 18,172 17,858
Multi-family 10,873 9,165
Nonresidential 11,956 10,979
---------------------
Total real estate loans 348,627 333,863
Commercial loans 1,265 451
Consumer loans 6,594 4,859
---------------------
Total loans 356,486 339,173
Less:
Undisbursed construction loan funds (8,693) (6,251)
Net deferred loan fees (3,500) (4,020)
Allowance for loan losses (2,017) (1,930)
---------------------
$342,276 $326,972
=====================
Activity in the allowance for loan losses for the year was as follows:
1999 1998 1997
----------------------------
Balance at beginning of year $1,930 $1,742 $1,557
Provision for losses 103 200 186
Charge-offs (19) (14) (2)
Recoveries 3 2 1
----------------------------
Balance at end of year $2,017 $1,930 $1,742
============================
No loans were classified as impaired at year-end 1999, 1998 and 1997 or
during the years then ended. Non-performing loans as of the end of the year
were as follows:
1999 1998
-----------------
Loans accounted for on a nonaccrual basis $ 928 $ 976
Accruing loans past due 90 days or more 629 512
-----------------
Total non-performing loans $1,557 $1,488
=================
Loans serviced by others, which are not reported as assets, total $27.3
million and $21.1 million at year-end 1999 and 1998. Activity for
capitalized mortgage servicing rights was as follows:
1998 1998
-------------
Balance at beginning of year $169 $ -
Additions 82 177
Amortized to expense (58) (8)
-------------
Balance at end of year $193 $169
=============
Loans to principal officers, directors and their related businesses,
aggregating $60 thousand or more to any one related party, were as follows:
1999
----
Balance at beginning of year $199
Loans originated 80
Repayments (50)
----
Balance at end of year $229
====
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment as of the end of the year were as follows:
1999 1998
-----------------
Land $2,044 $1,932
Buildings and improvements 5,434 5,065
Furniture and equipment 1,714 1,489
Leasehold improvements 103 7
Construction in progress 4 20
-----------------
Total cost 9,299 8,513
Accumulated depreciation 3,590 3,126
-----------------
$5,709 $5,387
=================
NOTE 5 - DEPOSITS
Deposits as of the end of the year were as follows:
1999 1998
---------------------
Noninterest-bearing demand deposits $ 4,928 $ 4,009
Money market accounts 4,364 4,713
NOW accounts 23,767 17,750
Passbook savings accounts 57,861 54,258
Certificates of deposit 203,330 207,854
---------------------
$294,250 $288,584
=====================
Certificates of deposit with balances of $100 thousand or more were $49.0
million and $45.9 million at year-end 1999 and 1998.
Scheduled maturities of certificates of deposit at year-end 1999 were as
follows:
Amount
--------
2000 $128,708
2001 55,437
2002 14,152
2003 2,573
2004 1,707
Thereafter 753
--------
$203,330
========
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank at year-end were as follows:
1999 1998
-----------------------------------------------------------------------------------
Year of Maturity Interest Rate Amount Interest Rate Amount
-----------------------------------------------------------------------------------
1999 5.75 - 6.30% $ 7,000
2000 4.70 - 6.60% $16,000 6.30 - 6.60% 7,000
2001 5.73 - 6.21% 9,000 5.73 - 6.21% 9,000
2002 5.95 - 6.25% 9,000 5.95 - 6.25% 9,000
2003 5.83 3,000 5.83 3,000
------- -------
$37,000 $35,000
======= =======
Weighted average interest rate 5.88% 6.11%
These advances were collateralized by $55.5 million and $52.5 million of
residential mortgage loans under a blanket lien agreement and by Federal
Home Loan Bank stock at year-end 1999 and 1998.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
Employees of the Company participate in an employee stock ownership plan
(ESOP). The ESOP borrowed from the Company to acquire 443,610 shares of
stock at $10 per share. The Company makes discretionary contributions to the
ESOP, as well as paying dividends on unallocated shares to the ESOP, and the
ESOP uses funds it receives to repay the loan. As loan payments are made,
ESOP shares are allocated to participants based on relative compensation and
expense is recorded. Dividends on allocated shares increase participant
accounts. Participants receive the shares at the end of employment.
Contributions to the ESOP during 1999, 1998 and 1997 were $374,000, $398,000
and $542,000. ESOP expense for 1999, 1998 and 1997 was $769,000, $844,000
and $655,000.
Shares held by the ESOP as of the end of the year were as follows:
1999 1998
---------------------
Shares allocated to participants 174,760 133,585
Unearned shares 249,779 308,350
---------------------
Total ESOP shares 424,539 441,935
---------------------
Fair value of unearned shares (in thousands) $ 3,715 $ 6,167
=====================
NOTE 8 - STOCK OPTION AND INCENTIVE PLAN
Options to buy stock of the Company are granted to directors and certain key
employees under the Stock Option and Incentive Plan, which provides for
award of up to 555,450 options. Exercise price is the market price at date
of grant. The maximum option term is ten years, and options vest over five
years.
A summary of activity in the plan is as follows:
1999 1998
-----------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-----------------------------------------------
Outstanding at beginning of year 382,815 388,815
Exercised (13,330) $11.00 (6,000) $11.00
------- -------
Outstanding at end of year 369,485 382,815
======= =======
Options exercisable at year-end 213,989 149,526
No options were granted in 1999 or 1998. All options issued to date, and
therefore all outstanding or exercisable at year-end, have an exercise price
of $11.00 per share.
Had compensation cost for stock options been measured using FASB Statement
No. 123, net income and earnings per share would have been the pro forma
amounts indicated below. The pro forma effect may increase in the future if
more options are granted.
1999 1998 1997
---------------------------------------------------------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
---------------------------------------------------------------------------
Net income $5,310 $5,127 $5,704 $5,521 $5,113 $4,930
Basic earnings per share 1.23 1.19 1.22 1.18 1.04 1.01
Diluted earnings per share 1.21 1.16 1.19 1.15 1.03 .99
The pro forma effects are computed using option pricing models which used
the following weighted-average assumptions as of grant date: a risk-free
interest rate of 6.34%, a dividend yield of 3.86%, volatility factors of the
expected market price of the Company's common stock of 40.8%, and an
expected life of the option of 7.5 years. Based on these assumptions the
estimated fair value of the options granted during 1996 was $3.57 per share.
NOTE 9 - MANAGEMENT RECOGNITION PLAN
The management recognition plan (MRP) provides to directors and certain key
employees an ownership interest in the Company designed to compensate such
directors and key employees for services to the Company. The Company
contributed sufficient funds to enable the MRP to purchase and issue awards
for 222,180 common shares of the Company. The shares awarded vest over a
five-year period beginning in 1996. Compensation expense, which is based
upon the cost of the shares, was $526,000 in each of 1999, 1998 and 1997.
NOTE 10 - INCOME TAXES
The provision for income tax was as follows:
1999 1998 1997
----------------------------
Current expense $2,959 $2,904 $2,678
Deferred expense (24) 124 105
----------------------------
$2,935 $3,028 $2,783
============================
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
1999 1998 1997
-----------------------------
Income tax computed at the statutory federal rate $2,803 $2,969 $2,685
Effect of ESOP deduction 122 196 72
Effect of MRP awards expense - (16) (16)
Other 10 (121) 42
-----------------------------
$2,935 $3,028 $2,783
==============================
Effective tax rate 35.6% 34.7% 35.2%
Deferred tax assets and liabilities as of the end of the year were as
follows:
1999 1998
------------------
Deferred tax assets
Deferred loan fees $ 870 $ 1,020
Accrued MRP awards 126 119
Construction period interest 16 16
Accrued vacation 49 38
ESOP shares allocated 91 77
Bad debt deduction 13 -
Other 11 8
------------------
1,176 1,278
Deferred tax liabilities
Bad debt deduction - (186)
FHLB stock dividends (670) (590)
Unrealized gain on investment
securities available for sale (716) (1,082)
Depreciation expense (105) (111)
Loan servicing rights (66) (57)
Accumulated accretion (8) (31)
------------------
(1,565) (2,057)
------------------
Net deferred tax asset/(liability) $ (389) $ (779)
==================
The Company has not established a valuation allowance, as it is management's
belief that it has adequate taxable income and carrybacks to realize
recorded deferred tax assets.
Federal income tax laws provided additional bad debt deductions through
1987, totaling $4.2 million. Accounting standards do not require a deferred
tax liability to be recorded on this amount, which liability otherwise would
total $1.4 million at December 31, 1999. If Industrial Savings was
liquidated or otherwise ceases to be a thrift or if tax laws were to change,
this amount would be expensed. Under 1996 tax law changes, bad debts are
based on actual loss experience and tax bad debt reserves accumulated since
1987 are to be reduced. This requires payment of approximately $495,000
annually over six years, which began in 1998.
NOTE 11 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Industrial Savings is subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt correction action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action. As of December 31, 1999,
Industrial Savings is considered well capitalized based on computed
regulatory capital ratios.
Federal regulations limit all capital distributions, including cash
dividends, by savings associations. The regulation establishes a three-
tiered system of restrictions, with the greatest flexibility afforded to
thrifts which are both well-capitalized and given favorable qualitative
examination ratings.
Actual and required capital amounts (in thousands) and ratios as of the end
of the year were as follows:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
--------------------------------------------------------------
1999
Total capital
(to risk weighted assets) $38,066 15.84% $19,229 8.0% $24,036 10.0%
Tier 1 (core) capital
(to risk weighted assets) $35,115 14.61% $ 9,614 4.0% $14,421 6.0%
Tier 1 (core) capital
(to adjusted total assets) $35,115 9.07% $15,479 4.0% $19,348 5.0%
Tangible capital
(to adjusted total assets) $35,115 9.07% $ 5,805 1.5% N/A
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
1998
Total capital
(to risk weighted assets) $36,018 17.21% $16,740 8.0% $20,925 10.0%
Tier 1 (core) capital
(to risk weighted assets) $34,110 16.30% $ 8,370 4.0% $12,555 6.0%
Tier 1 (core) capital
(to adjusted total assets) $34,110 8.85% $11,569 4.0% $19,282 5.0%
Tangible capital
(to adjusted total assets) $34,110 8.85% $ 5,784 1.5% N/A
NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters
of credit and overdraft protection, are issued to meet customer financing
demands. These are agreements to provide credit or to support the credit of
others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
Financial instruments with off-balance-sheet risk as of the end of the year
were as follows:
1999 1998
------------------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------------------------------------
Commitments to make loans $3,939 $ 1,380 $4,882 $ 1,638
Undisbursed construction loan funds 7,633 1,060 5,357 894
Unused lines of credit 19 17,258 - 12,228
Commitments to make loans are generally made for 30 days or less. The fixed
rate loan commitments on mortgage loans have interest rates ranging from
7.25% to 9.00% and maturities ranging from 10 years to 30 years.
The Company was required by the Federal Reserve Bank to maintain cash
reserves of $640,000 and $500,000 as of year-end 1999 and 1998. These
reserves do not earn interest.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments as of the
end of the year were as follows:
1999 1998
------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------------------
Financial assets
Cash and cash equivalents $ 9,952 $ 9,952 $ 28,536 $ 28,536
Interest-bearing time deposits 10,500 10,500 - -
Investment securities 14,343 14,343 21,518 21,537
Loans receivable, net 342,276 335,314 326,972 332,757
Federal Home Loan Bank stock 3,490 3,490 3,256 3,256
Accrued interest receivable 2,273 2,273 2,051 2,051
Financial liabilities
Deposits $(294,250) $(294,647) $(288,584) $(290,040)
FHLB advances (37,000) (36,586) (35,000) (35,581)
Accrued interest payable (530) (530) (769) (769)
The methods and assumptions used to estimate fair value are described as
follows. Carrying amount is the estimated fair value for cash and cash
equivalents, Federal Home Loan Bank stock, accrued interest receivable and
payable, demand deposits and variable rate loans or deposits that reprice
frequently and fully. Investment securities fair values are based on market
prices. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk. Fair value of loans held for sale is based on market
quotes. Fair value of FHLB advances is based on current rates for similar
financing. Fair value of commitments is not materially different from the
nominal value.
NOTE 14 - EARNINGS PER SHARE
The factors used in the earnings per share computation were as follows:
1999 1998 1997
------------------------------------
Net income (in thousands) $ 5,310 $ 5,704 $ 5,113
Basic:
Weighted average common shares outstanding 4,581,534 5,005,852 5,276,908
Less: Average unallocated ESOP shares 279,065 330,616 375,137
------------------------------------
Average shares 4,302,469 4,675,236 4,901,771
====================================
Basic earnings per share $ 1.23 $ 1.22 $ 1.04
Diluted:
Weighted average common shares outstanding
for basic earnings per share 4,302,469 4,675,236 4,901,771
Add: Dilutive effects of assumed exercises of stock options 103,525 110,299 62,644
------------------------------------
Average shares and dilutive potential common shares 4,405,994 4,785,535 4,964,415
====================================
Diluted earnings per share $ 1.21 $ 1.19 $ 1.03
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS December 31,
-------------------
(Dollars in thousands) 1999 1998
-------------------
ASSETS
Cash and cash equivalents $ 79 $ 87
Investment in subsidiary 36,505 36,211
Loan receivable from ESOP 2,957 3,327
Loan receivable from subsidiary 14,900 21,000
Other assets 80 90
-------------------
$54,521 $60,715
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ (65) $ (26)
Shareholders' equity 54,586 60,741
-------------------
$54,521 $60,715
===================
CONDENSED STATEMENTS OF INCOME For the year ended December 31,
--------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------
Interest income on loan from subsidiary $ 859 $ 1,030 $ 287
Dividends from subsidiary 6,000 9,000 26,500
Management fees expense (900) (900) (60)
Other operating expenses (70) (78) (123)
--------------------------------
Income before income tax and undistributed subsidiary income 5,889 9,052 26,604
Provision (benefit) for income taxes (36) 17 35
Equity in undistributed subsidiary income (615) (3,331) (21,456)
--------------------------------
Net income $ 5,310 $ 5,704 $ 5,113
================================
CONDENSED STATEMENTS OF CASH FLOWS For the year ended December 31,
---------------------------------
(Dollars in thousands) 1999 1998 1997
---------------------------------
Cash flows from operating activities
Net income $ 5,310 $ 5,704 $ 5,113
Adjustments:
Equity in undistributed subsidiary income 615 3,331 21,456
Dividends on unallocated ESOP shares (215) (214) (194)
Changes in other assets 10 9 (50)
---------------------------------
Net cash from operating activities 5,720 8,830 26,325
---------------------------------
Cash flows from investing activities
Loans to subsidiary (6,000) (9,000) (23,900)
Principal repayment on loans to subsidiary 12,100 7,500 5,100
Principal repayment on loan to ESOP 370 370 370
---------------------------------
Net cash from investing activities 6,470 (1,130) (18,430)
---------------------------------
Cash flows from financing activities
Cash dividends paid (2,827) (2,751) (2,347)
Purchase of treasury stock (9,517) (5,466) (5,672)
Proceeds from exercise of stock options 146 66 -
---------------------------------
Net cash from financing activities (12,198) (8,151) (8,019)
---------------------------------
Net change in cash and cash equivalents (8) (451) (124)
Cash and cash equivalents at beginning of period 87 538 662
---------------------------------
Cash and cash equivalents at end of period $ 79 $ 87 $ 538
=================================
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
March 31 June 30 September 30 December 31
-----------------------------------------------------
1999
Interest income $7,474 $7,377 $7,224 $7,367
Interest expense 3,833 3,796 3,677 3,742
-------------------------------------------------
Net interest income 3,641 3,581 3,547 3,625
Provision for loan losses 38 20 22 23
Other income 235 211 227 276
Other expense 1,738 1,798 1,826 1,633
-------------------------------------------------
Income before taxes 2,100 1,974 1,926 2,245
Provision for incomes taxes 729 696 712 798
-------------------------------------------------
Net income $1,371 $1,278 $1,214 $1,447
=================================================
Basic earnings per share $ 0.30 $ 0.29 $ 0.29 $ 0.35
Diluted earnings per share 0.30 0.29 0.28 0.34
1998
Interest income $7,407 $7,621 $7,750 $7,784
Interest expense 3,806 3,938 4,069 4,012
-------------------------------------------------
Net interest income 3,601 3,683 3,681 3,772
Provision for loan losses 45 55 55 45
Other income 141 173 234 310
Other expense 1,637 1,685 1,637 1,704
-------------------------------------------------
Income before taxes 2,060 2,116 2,223 2,333
Provision for incomes taxes 702 722 757 847
-------------------------------------------------
Net income $1,358 $1,394 $1,466 $1,486
=================================================
Basic earnings per share $ 0.29 $ 0.30 $ 0.31 $ 0.32
Diluted earnings per share 0.28 0.29 0.31 0.32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Industrial Bancorp, Inc.
Bellevue, Ohio
We have audited the accompanying consolidated balance sheets of
Industrial Bancorp, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Industrial Bancorp, Inc. as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 2000
COMMON STOCK INFORMATION
The common shares of Industrial Bancorp are listed on the Nasdaq
National Market under the symbol "INBI". There were 4,359,383 common shares
outstanding at year-end 1999, held of record by approximately 1335
shareholders. The following dividend and market price information includes
daily high, low and closing sales prices of the common shares of Industrial
Bancorp for each period indicated.
Quarter ended High Low Last Dividend
------------------------------------------------------
3/31/98 $23.50 $17.63 $22.50 $.14
6/30/98 25.25 18.31 19.00 .15
9/30/98 20.00 15.88 18.00 .15
12/31/98 20.25 17.00 20.00 .15
3/31/99 20.00 18.75 19.44 .16
6/30/99 21.00 16.00 20.25 .16
9/30/99 20.63 17.75 18.25 .17
12/31/99 18.50 13.88 14.88 .17
DIRECTORS
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
Webster Industries, Inc.
Roger O. Wilkinson
Finance Directors
Huron County Alcohol, Drug Addiction
and Mental Health Services Board
Graydon H. Hayward
President
Hayward Rigging & Construction, Inc.
Leon W. Maginnis
Vice President - Finance
Hirt Publishing Company, Inc.
Bob Moore
President, Retired
Willard Foods
EXECUTIVE OFFICERS
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
Senior Vice President - Loans
Stephen S. Beal
Senior Vice President - Operations
ANNUAL MEETING
The 2000 Annual Meeting of Shareholders of Industrial Bancorp, Inc.
will be held on April 18, 2000, at 2:30 p.m., local time, at the Bellevue
Elks Lodge #1013, located at 214 West Main Street, Bellevue, Ohio 44811.
Shareholders are cordially invited to attend.
FORM 10-K
A copy of Industrial Bancorp's Annual Report on Form 10-k, as filed
with the Securities and Exchange Commission, will be available to
shareholders at no charge upon request to:
Industrial Bancorp, Inc.
211 N. Sandusky Street
Bellevue, Ohio 44811
Attn: Investor Relations
(419) 483-3375
SHAREHOLDER SERVICES
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for Industrial Bancorp's shares. Communications regarding
change of address, transfer of shares, lost certificates and dividends
should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800)368-5948
211 N. Sandusky St.
Bellevue, Ohio 44811
(419) 483-3375