EXHIBIT 13
1997 ANNUAL REPORT TO SHAREHOLDERS
Contents
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1 President's Message
2 Selected Consolidated Financial Data
3. Management's Discussion and Analysis of Financial Condition and
Results of Operations
14 Report of Independent Auditors
15 Consolidated Financial Statements
20 Notes to Consolidated Financial
Statements
35 Directors and Executive Officers
Company Profile
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Industrial Bancorp, Inc. is a savings and loan holding company
headquartered in Bellevue, Ohio. Its sole subsidiary, Industrial Savings
and Loan Association, maintains ten full-service offices and one loan
production office serving communities in seven counties throughout north
central Ohio.
Founded in 1890, Industrial Savings and Loan is a state-chartered
savings and loan association with deposits insured by the FDIC. Industrial
Savings and Loan provides traditional banking services including a wide
selection of mortgage, loan and deposit products to local consumers and
businesses.
Dear Shareholders,
I am pleased to present our Annual Report to Shareholders for 1997.
This report will show that 1997 was yet another year of increased earnings,
continued growth and solid performance by Industrial Bancorp common stock.
The market value of our common stock rose $5.00 per share during 1997, an
increase of 39.2%. In addition, regular cash dividends increased to $0.48
per share during 1997.
Also during 1997, the Company applied for and received approval from
the Office of Thrift supervision to repurchase an additional 5% of its total
outstanding common shares. Under the repurchase program, which began late
in 1996, the Company has been able to purchase 451,700 shares of outstanding
stock as of year-end 1997, with additional stock yet to be purchased.
Our subsidiary, Industrial Savings and Loan Association, also
completed a very successful year in 1997. Having completed its 107th year
of operation, it continued to grow and prosper. One of the highlights of
1997 was the opening of our new loan production office in Mansfield, Ohio.
We are pleased to have the opportunity to offer our loan products and
services to the people of Mansfield and Richland County. Also during 1997,
we were recognized by the Office of Thrift Supervision as being one of the
nation's top 102 most consistently profitable thrift institutions. We are
very proud to be part of this prestigious group.
The strength and vitality of Industrial Bancorp, Inc. continues, as
evidenced by the year-end financial report. We reached a record high of
$364.0 million in consolidated assets as of December 31, 1997, which
represents an 11.5% increase from December 31, 1996. Also, consolidated
earnings exceeded $5.1 million, or $1.04 per share. Lending remained very
strong in 1997, as we originated $102.8 million in new loans, which
represents a 25.0% increase over the previous year and the first time in the
Company's history we generated more than $100 million in loans during a one
year period. Savings deposits increased to $271.0 million as of year-end,
which is also a new record.
Your Board of Directors also made a commitment in excess of $600,000
to upgrade the teller terminals in all of our offices and the technology in
our appraisal office. Both of the upgrades will be completed in the first
half of 1998 and will enhance our ability to offer better service to our
customers. This new technology will not only assist us in preparing for
Year 2000 Compliance, but will also take us well into the next century. We
are very excited about these advancements in technology and look forward to
providing better service to our customers in the future.
On behalf of the directors, management and employees, I would like to
express our appreciation to you, our shareholders, for your confidence and
investment in Industrial Bancorp, Inc. and to our valued customers for their
continued support of Industrial Savings and Loan Association.
David M. Windau
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL DATA
===========================================================================
At or for the year ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands, except per share data)
Selected financial condition data:
Total assets $364,023 $326,613 $322,994 $268,041 $245,516
Investment securities 21,467 23,797 27,882 16,014 5,010
Loans receivable - net 321,669 285,803 259,124 235,537 205,001
Deposits 270,957 259,074 238,282 231,966 219,704
FHLB advances 29,000 2,000 - 6,000 -
Shareholders' equity (1) 60,862 62,104 81,055 27,616 23,430
Summary of earnings:
Interest income $ 27,805 $ 25,468 $ 22,858 $ 19,024 $ 18,113
Interest expense 14,065 11,863 11,236 9,181 8,620
--------------------------------------------------------
Net interest income 13,740 13,605 11,622 9,843 9,493
Provision for loan losses 186 180 180 200 240
--------------------------------------------------------
Net interest income after
provision for loan losses 13,554 13,425 11,442 9,643 9,253
Noninterest income 509 447 398 461 377
Noninterest expense 6,167 9,453 5,518 4,734 4,220
--------------------------------------------------------
Income before income tax and
effect of accounting change 7,896 4,419 6,322 5,370 5,410
Income tax expense 2,783 2,020 2,149 1,752 1,853
Effect of accounting change - - - - (166)
--------------------------------------------------------
Net income $ 5,113 $ 2,399 $ 4,173 $ 3,618 $ 3,391
========================================================
Basic earnings per share (2) $ 1.04 $ 0.47 $ 0.42 - -
Diluted earnings per share (2) 1.03 0.47 0.42 - -
Cash dividends per share (2) (3) 0.48 3.75 0.15 - -
Selected financial ratios:
Return on average assets 1.48% 0.75% 1.42% 1.42% 1.45%
Return on average equity 8.38 3.62 8.21 14.33 15.51
Average equity to average assets 17.63 20.59 17.29 9.88 9.36
Interest rate spread 3.13 3.26 3.26 3.55 3.76
Net interest margin 4.05 4.32 4.04 3.94 4.14
Efficiency ratio (4) 43.85 68.14 46.60 46.85 43.82
Noninterest expense to average assets 1.78 2.94 1.88 1.85 1.81
Nonperforming assets to total assets 0.31 0.38 0.49 0.58 0.81
Nonperforming loans to total loans 0.32 0.42 0.60 0.62 0.92
Allowance for loan losses to
total loans 0.54 0.53 0.52 0.50 0.48
Allowance for loan losses to
nonperforming loans 168.76 125.77 87.53 80.71 51.92
- --------------------
<F1> Shareholders' equity prior to the Conversion refers to members'
equity.
<F2> Per share data for 1995 is for the period from the date of the
Conversion, August 1, 1995, to December 31, 1995.
<F3> The amount for the year ended December 31, 1996, includes a $3.50 per
share special return of capital distribution.
<F4> Noninterest expense as a percentage of the sum of net interest income
after provision for loan losses and noninterest income.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
============================================================================
GENERAL
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In August 1995, Industrial Bancorp, Inc. ("Industrial Bancorp"), acquired
all of the common shares issued by The Industrial Savings and Loan
Association ("Industrial Savings") upon its conversion from a mutual savings
and loan association to a stock savings and loan association (the
"Conversion"). Since the ownership of such shares constitutes Industrial
Bancorp's principal business, the consolidated financial condition and
results of operations discussed below focus principally on the financial
condition and results of operations of Industrial Savings.
The following discussion and analysis should be read in conjunction with and
with reference to the consolidated financial statements, and the notes
thereto, presented in this Annual Report beginning on page 15.
CHANGES IN FINANCIAL CONDITION
- ----------------------------------------------------------------------------
The total consolidated assets of Industrial Bancorp amounted to $364.0
million at December 31, 1997, an increase of $37.4 million from $326.6
million at December 31, 1996.
Loans receivable increased $35.9 million, or 13%, from $285.8 million at
December 31, 1996, to $321.7 million at December 31, 1997. Substantially
all of this increase was in one- to four-family residential real estate
loans and home equity loans, which represent 90% of the total loan portfolio
of Industrial Savings at December 31, 1997.
Investment securities totaled $21.5 million at December 31, 1997, compared
to $23.8 million at December 31, 1996. Proceeds of $12.0 million from the
maturities of U.S. Treasury securities were partially offset by purchases of
$9.0 million of investment securities. The excess funds were used to
originate loans.
Cash and cash equivalents were $3.4 million more at December 31, 1997 than
at December 31, 1996.
Office properties and equipment, net of accumulated depreciation, amounted
to $5.0 million at December 31, 1997 and 1996.
Total deposits increased $11.9 million, or 5%, to $271.0 million at December
31, 1997, from $259.1 million at December 31, 1996. Certificates of deposit
increased $12.1 million and passbook savings deposits decreased $788,000.
Due to the favorable interest rate environment, management has chosen to use
advances from the Federal Home Loan Bank ("FHLB") to fund loan growth in
excess of deposit growth. FHLB advances were $29.0 million at December 31,
1997 compared to $2.0 million at December 31, 1996.
Shareholders' equity was $60.9 million at December 31, 1997, $1.2 million
less than the $62.1 million reported at December 31, 1996. The decline was
primarily due to the purchase of 401,700 treasury shares at a cost of $5.7
million during 1997, partially offset by net income of $5.1 million in 1997.
The table on the following page presents certain average-balance
information, as well as average yields on interest-earning assets and
average costs of interest-bearing liabilities for the years indicated. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of interest-earning assets or interest-bearing liabilities,
respectively, for the years presented. Average balances are derived from
monthly ending balances, which do not vary significantly from daily average
balances.
Year ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
Weighted average ----------------------------- ----------------------------- -----------------------------
yield/rate at Average Average Average Average Average Average
December 31, 1997 Balance Interest yield/rate Balance Interest yield/rate Balance Interest yield/rate
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets
Interest-bearing
deposits 5.96% $ 11,696 $ 436 3.73% $ 13,629 $ 649 4.76% $ 15,915 $ 861 5.41%
Investment securities(1) 5.78 23,053 1,539 6.68 28,289 1,712 6.05 22,544 1,288 5.71
Mortgage-back securities 10.61 497 51 10.26 660 67 10.15 897 91 10.14
Loans receivable(2) 8.73 304,397 25,779 8.47 271,998 23,040 8.47 248,012 20,618 8.31
----------------- ----------------- -----------------
Total interest-
earning assets 8.50 339,643 27,805 8.19 314,576 25,468 8.10 287,368 22,858 7.95
Non-interest-earning assets:
Cash and due from banks 1,051 933 847
Premises and equipment 4,983 5,019 4,419
Other nonearning assets 1,832 2,596 2,552
Allowance for loan losses (1,652) (1,557) (1,292)
-------- -------- --------
Total assets $345,857 $321,567 $293,894
======== ======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts 2.50 $ 14,084 327 2.32 $ 12,778 298 2.33 $ 11,358 264 2.32
Money market accounts 3.00 4,323 130 3.01 4,653 140 3.01 5,360 162 3.02
Passbook savings
accounts 3.10 53,079 1,644 3.10 52,872 1,631 3.08 55,559 1,719 3.09
Certificates of deposit 5.82 189,887 10,904 5.74 174,590 9,772 5.60 156,811 8,503 5.42
----------------- ----------------- -----------------
Total deposits 4.99 261,373 13,005 4.98 244,893 11,841 4.84 229,088 10,648 4.65
Conversion stock purchase
funds 3,838 117 3.05
FHLB advances 6.20 16,615 1,060 6.38 462 22 4.76 6,615 471 7.12
----------------- ----------------- -----------------
Total interest-bearing
liabilities 5.11 277,988 14,065 5.06 245,355 11,863 4.84 239,541 11,236 4.69
Non-interest-bearing
liabilities 6,882 10,005 3,526
-------- -------- --------
Total liabilities 284,870 255,360 243,067
Shareholders' equity(3) 60,987 66,207 50,827
-------- -------- --------
Total liabilities and
shareholders' equity $345,857 $321,567 $293,894
======== ======== ========
Net interest income $13,740 $13,605 $11,622
======= ======= =======
Interest rate spread 3.39% 3.13% 3.26% 3.26%
Net interest margin(4) 4.05% 4.32% 4.04%
Average interest-earning
assets to average interest-
bearing liabilities 122.18% 128.21% 119.97%
- --------------------
<F1> Average yields have been computed based on the amortized cost of the
investment security.
<F2> Net of deferred loan fees, loan discounts and loans in process. Loan
fees included in interest income amounted to $626,000, $625,000 and
$493,000 in 1997, 1996 and 1995, respectively.
<F3> Shareholders' equity prior to the Conversion refers to members'
equity.
<F4> Net interest income to average interest-earning assets.
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing
liabilities have affected the interest income and interest expense of
Industrial Savings during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided for changes attributable to (i) increases and decreases in volume
(change in volume multiplied by prior year rate), (ii) increases and
decreases in rate (change in rate multiplied by prior year volume) and (iii)
total increases and decreases in rate and volume. The combined effects of
changes in both volume and rate, which cannot be separately identified, have
been allocated proportionately to the change due to volume and the change
due to rate.
Year ended December 31,
-----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- -------------------------------
Increase(decrease) Increase(decrease)
due to Total due to Total
------------------ increase ------------------ increase
Volume Rate (decrease) Volume Rate (decrease)
-----------------------------------------------------------------
(In thousands)
Interest income attributable to:
- --------------------------------
Interest-bearing deposits $ (84) $(129) $ (213) $ (116) $ (96) $ (212)
Investment securities (338) 166 (172) 344 80 424
Mortgage-backed securities (17) 1 (16) (24) - (24)
Loans receivable 2,744 (5) 2,739 2,026 396 2,422
---------------------------------------------------------------
Total interest income 2,305 33 2,338 2,230 380 2,610
Interest expense attributable to:
- ---------------------------------
Deposits:
NOW accounts 30 (1) 29 33 1 34
Money market accounts (10) - (10) (21) (1) (22)
Passbook savings accounts 6 7 13 (83) (5) (88)
Certificates of deposit 873 259 1,132 988 281 1,269
---------------------------------------------------------------
Total deposits 899 265 1,164 917 276 1,193
Conversion stock purchase funds - - - (117) - (117)
FHLB advances 1,028 10 1,038 (331) (118) (449)
---------------------------------------------------------------
Total interest expense 1,927 275 2,202 469 158 627
---------------------------------------------------------------
Increase (decrease) in net
interest income $ 378 $(242) $ 136 $1,761 $ 222 $1,983
===============================================================
COMPARISON OF OPERATING RESULTS
- ----------------------------------------------------------------------------
Earnings Summary. Industrial Bancorp had consolidated net income of $5.1
million for the year ended December 31, 1997, compared to $2.4 million for
1996 and $4.2 million for 1995. The reduced amount in 1996 was due
principally to two separate, but individually significant, events which
occurred during 1996. The first was the special assessment levied by the
Federal Deposit Insurance Corporation upon institutions with deposits
insured by the Savings Association Insurance Fund ("SAIF"). The second was
the impact of the $3.50 per share special return of capital distribution on
shares held in trust for Industrial Bancorp's Employee Stock Ownership Plan
("ESOP") but not allocated to ESOP participants. Industrial Bancorp
recorded approximately $2.7 million in expense related to these two events.
See Notes 9 and 12 of the Notes to Consolidated Financial Statements.
Net Interest Income. The consolidated net interest income of Industrial
Bancorp is primarily dependent upon the net interest income of Industrial
Savings, which is a function of the difference, or spread, between the
average yield earned on loans and other interest-earning assets and the
average rate paid on deposits and borrowings as well as the relative amounts
of such assets and liabilities. The interest rate spread is affected by the
economic and competitive factors that influence interest rates, loan demand
and deposit flows.
Net interest income increased to $13.7 million in 1997, compared to $13.6
million in 1996 and $11.6 million in 1995. The 1996 increase was primarily
attributable to an increase in the excess of average interest-earning assets
over average interest-bearing liabilities to $69.2 million in 1996 from
$47.8 million in 1995, due to the growth in loans receivable and the reduced
use of FHLB advances in 1996. The excess of average interest-earning assets
over average interest-bearing liabilities decreased to $61.7 million in 1997
as a result of the repurchase of treasury stock which replaced a
noninterest-bearing funding source with interest-bearing advances from the
FHLB.
Total interest income increased to $27.8 million in 1997, compared to $25.5
million in 1996 and $22.9 million in 1995. The increases were largely due
to average loans being $32.4 million higher in 1997 than in 1996 and $24.0
million higher in 1996 than in 1995. Interest and fees on loans totaled
$25.8 million in 1997, compared to $23.0 million in 1996 and $20.6 million
in 1995. The average yield earned on loans was 8.47% for both 1997 and
1996, and 8.31% for 1995. The moderately higher interest rate environment
experienced in 1996 compared to 1995, stabilized during 1997.
Interest earned on investment securities declined to $1.5 million in 1997,
compared to $1.7 million in 1996 as the investment portfolio decreased with
the maturities of U.S. Treasury securities. Additional investments were
limited during 1997 due to the excess growth of loans over deposits and the
resultant use of FHLB advances to fund the excess. The average yield earned
on investment securities increased to 6.68% for 1997, compared to 6.05% for
1996, as the maturing investment securities generally earned a rate of
interest lower than the remaining securities. Interest earned on investment
securities was $1.3 million in 1995. The average yield earned on investment
securities increased to 6.05% for 1996, compared to 5.71% for 1995, as a
result of the moderately higher interest rate environment.
Total interest expense increased to $14.1 million in 1997, compared to $11.9
million in 1996 and $11.2 million in 1995. The increase in 1997 compared to
1996 was primarily attributable to the increased use of FHLB advances, which
averaged $16.6 million in 1997, compared to $462,000 in 1996. Increased
reliance upon FHLB advances occurred as the growth in average deposits, from
$244.9 million in 1996 to $261.4 million in 1997, did not keep pace with
loan demand. The average rate paid for deposits increased to 4.98% in 1997
from 4.84% in 1996 as the mix in the deposit portfolio shifted to a greater
percentage of certificates of deposit. The increase in 1996 compared to
1995 was primarily attributable to growth in average deposits, from $229.1
million in 1995 to $244.9 million in 1996, coupled with the increase in
average weighted rate paid from 4.65% in 1995 to 4.84% in 1996.
Yields Earned and Rates Paid. The spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
was 3.13% for 1997, compared to 3.26% for both 1996 and 1995. The increase
in the average yield earned on interest-earning assets was exceeded by the
increase in the average rate paid on interest-bearing liabilities in 1997
compared to 1996, whereas the increase in the average yield earned on
interest-earning assets matched the increase in the average rate paid on
interest-bearing liabilities in 1996 compared to 1995.
The ratio of average interest-earning assets to average interest-bearing
liabilities was 122.18% at December 31, 1997, compared to 128.21% at
December 31, 1996 and 119.97% at December 31, 1995.
Provision for Loan Losses. Industrial Savings maintains an allowance for
loan losses in an amount which, in management's judgment, is adequate to
absorb reasonably foreseeable losses inherent in its loan portfolio. The
amount of the provision which is charged against earnings each year and
added to the allowance is based upon management's ongoing review of such
factors as historical loss performance, general prevailing economic
conditions, changes in the size and composition of the loan portfolio and
considerations relating to specific loans, including the ability of the
borrower to repay the loan and the estimated value of the underlying
collateral.
The foregoing statement regarding the adequacy of the allowance for loan
losses is a "forward-looking " statement within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Factors that could affect the adequacy of
the allowance for loan losses include, but are not limited to, the
following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which
may cause the value of real estate and other properties that secure
outstanding loans to decline; (2) unforeseen adverse changes in
circumstances with respect to certain large loans; (3) decreases in the
value of collateral securing consumer loans to amounts equal to less than
the outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that Industrial Savings must recognize additions
to its loan loss allowance based on such regulators' judgment of information
available to them at the time of their examinations.
The provision for loan losses was $186,000 in 1997, compared to $180,000 in
1996 and 1995. Industrial Savings had only $2,000 in charge-offs during
1997, compared to none in 1996 and $17,000 in 1995. Recoveries totaled
$1,000 in both 1997 and 1996 and $4,000 in 1995. Nonperforming loans were
$206,000 less at December 31, 1997 than at December 31, 1996, which was
$334,000 less than at December 31, 1995. At December 31, 1997, the
allowance for loan losses was 168.76% of nonperforming loans and .54% of
total loans. Management determined that a provision for loan losses was
warranted in 1997 based on the $35.9 million growth in loans receivable.
Noninterest Income. Noninterest income increased to $509,000 in 1997,
compared to $447,000 in 1996 and $398,000 in 1995. Service fees related to
the growing deposit base and expanding ATM usage contributed largely to
these increases.
Noninterest Expense. Noninterest expense amounted to $6.2 million in 1997
compared to $9.5 million in 1996 and $5.5 million in 1995. The amount for
1996 was significantly higher because of the industry-wide special SAIF
assessment and the employee benefits expense associated with accounting for
the special return of capital distribution on unallocated ESOP shares.
Salaries and employee benefits were $3.1 million in 1997, compared to $4.3
million in 1996 and $2.1 million in 1995, due principally to the recording
of $1.2 million in 1996 associated with the $3.50 per share special return
of capital distribution related to unallocated ESOP shares. Salaries and
employee benefits were also affected by the implementation of the MRP in
1996, increases in the number of full-time equivalent employees and normal
pay increases.
State franchise tax increased from $748,000 in 1995 to $843,000 in 1996 due
to an increase in capital at Industrial Savings during 1996, and decreased
to $524,000 in 1997, due to an intercompany transfer of capital from
Industrial Savings to Industrial Bancorp during 1997. In addition to
reducing the amount of state franchise tax paid, the transfer will provide
greater flexibility for the parent company.
Federal deposit insurance premiums were reduced to $135,000 in 1997, from
$2.1 million in 1996, which included the $1.5 million special assessment
upon SAIF-insured deposits, and $531,000 in 1995.
Data processing and related fees, which are based on the outstanding number
of loan and deposit accounts, increased to $370,000 in 1997 from $355,000 in
1996 and $339,000 in 1995. Total occupancy and equipment and depreciation
expense increased to $638,000 for 1997, compared to $601,000 for 1996 and
$591,000 in 1995. Other expenses increased $80,000 in 1997 compared to
1996, and $139,000 in 1996 compared to 1995, due principally to increased
lending activity.
Income Tax Expense. Fluctuations in income tax expense are primarily
attributable to the change in net income before taxes. Income before taxes
amounted to $7.9 million in 1997, compared to $4.4 million in 1996 and $6.3
million in 1995. Despite the lower income before taxes in 1996, the
provision for income taxes expense remained comparable for all three years
as the expense related to the special return of capital distribution as
applied to unallocated ESOP shares was not deductible for tax purposes in
1996.
ASSET QUALITY
- ----------------------------------------------------------------------------
Industrial Savings has consistently maintained a high quality loan
portfolio, as evidenced by its level of nonperforming assets which consists
of nonperforming loans and real estate acquired through foreclosure or by
deed-in-lieu thereof.
The following table summarizes Industrial Savings' nonperforming assets for
the periods indicated:
At December 31,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars in thousands)
Accruing loans delinquent
90 days or more $ 294 $ 721 $ 939 $ 874 $ 325
Nonaccrual loans 738 517 633 624 1,603
----------------------------------------------
Total nonperforming loans 1,032 1,238 1,572 1,498 1,928
Real estate owned 86 15 15 48 63
----------------------------------------------
Total nonperforming assets $1,118 $1,253 $1,587 $1,546 $1,991
==============================================
Nonperforming assets to
total assets 0.31% 0.38% 0.49% 0.58% 0.81%
Nonperforming loans to
total loans 0.32% 0.42% 0.60% 0.62% 0.92%
Industrial Savings' allowance for loan losses has increased, consistent with
growth in the loan portfolio, over the past five years and stood at $1.7
million at December 31, 1997 compared to $1.0 million at December 31, 1993.
As a percentage of nonperforming loans, the allowance for loan losses has
steadily increased from 51.92% at December 31, 1993 to 168.76% at December
31, 1997. Over the last five years, Industrial Savings has experienced
total charge-offs of $42,000 and total recoveries of $25,000.
ASSET AND LIABILITY MANAGEMENT
- ----------------------------------------------------------------------------
Industrial Savings, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. Exposure to interest
rate risk is measured with the use of interest rate sensitivity analysis to
estimate the change in the Company's "net portfolio value" ("NPV") in the
event of hypothetical changes in interest rates.
As part of its efforts to monitor and manage interest rate risk, Industrial
Savings' asset and liability committee reviews with the Board of Directors,
on a quarterly basis, reports provided by the Office of Thrift Supervision
("OTS") and considers methods of maintaining acceptable levels of changes in
NPV. Industrial Savings' asset and liability management is designed to
minimize the impact of sudden and sustained changes in interest rates on
NPV. If estimated changes to NPV are not within the limits established by
the Board, the Board may direct management to adjust the asset and liability
mix to bring interest rate risk within board-approved limits.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the NPV methodology attempts to quantify interest rate risk
in the event of a sudden and sustained 1 to 4 percent increase or decrease
in market rates.
The following table presents, at December 31, 1997, an analysis of the
interest rate risk of Industrial Savings, as measured by changes in NPV for
instantaneous and sustained parallel shifts of 1% to 4% increments in market
interest rates. The table also contains the policy limits set by the Board
of Directors of Industrial Savings as the maximum change in NPV that the
Board of Directors deems advisable in the event of various changes in
interest rates. Such limits have been established with consideration of the
dollar impact of various rate changes and the strong capital position of
Industrial Savings.
Change in Net Portfolio Value
Board limit -----------------------------
Change in interest rate % change $ %
-----------------------------------------------------------------------
(In thousands)
+ 4.0% 80% (29,387) (53)
+ 3.0% 60 (21,656) (39)
+ 2.0% 40 (13,815) (25)
+ 1.0% 20 (6,273) (11)
0 - - -
- 1.0% 20 3,511 6
- 2.0% 40 4,090 7
- 3.0% 60 4,728 9
- 4.0% 80 6,671 12
Based on the information presented in the foregoing table, in the event that
interest rates rise from the recent low levels, the net interest income of
Industrial Savings could be negatively affected. Moreover, rising interest
rates could negatively affect the earnings of Industrial Savings due to
diminished loan demand. Industrial Savings attempts to mitigate interest
rate risk by originating adjustable-rate loans and by maintaining its status
as an approved Federal Home Loan Mortgage Corporation seller/servicer. The
ability to sell certain loans will provide Industrial Savings the
opportunity to continue to offer fixed-rate mortgage loans to its customers
without retaining all of the interest rate risk associated with fixed-rate
loans.
NPV is calculated by the OTS using information provided by the Company.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off, and should not be relied upon
as indicative of actual results. Further the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------------------------------
Industrial Bancorp's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing
activities. These activities, on a consolidated basis, are summarized in
the following table for the years indicated:
Year ended December 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
Net income $ 5,113 $ 2,399 $ 4,173
Adjustments to reconcile net income to
net cash from operating activities (34) 2,062 315
-----------------------------
Net cash from operating activities 5,079 4,461 4,488
Net cash from investment activities (32,584) (22,555) (32,850)
Net cash from financing activities 30,864 (1,204) 49,607
-----------------------------
Net change in cash and cash equivalents 3,359 (19,298) 21,245
Cash and cash equivalents at beginning of year 7,413 26,711 5,466
-----------------------------
Cash and cash equivalents at end of year $10,772 $ 7,413 $26,711
=============================
The principal sources of funds for Industrial Savings are deposits, FHLB
borrowings, loan repayments, maturity of investment securities and funds
generated through operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayments
are more influenced by interest rates, general economic conditions and
competition. Industrial Savings maintains a level of investment in liquid
assets which is based upon management's assessment of (i) the need for
funds, (ii) expected deposit flows, (iii) the yields available on short-term
liquid assets and (iv) the objectives of the asset and liability management
program of Industrial Savings.
OTS regulations presently require Industrial Savings to maintain an average
daily balance of liquid assets, which may include, but are not limited to,
investments in U. S. Treasury and federal agency obligations and other
investments generally having maturities of five years or less, in an amount
equal to 4% of the sum of Industrial Savings' average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement, which may be changed from time to time by the OTS
to reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which Industrial Savings may rely if necessary
to fund deposit withdrawals or other short-term funding needs. At December
31, 1997, the regulatory liquidity ratio of Industrial Savings was 4.69%.
At such date, Industrial Savings had commitments to originate loans and
loans in process totaling $24.2 million and no commitments to purchase or
sell loans. Industrial Savings considers its liquidity and capital reserves
sufficient to meet its foreseeable short-term and long-term needs.
Industrial Savings is required by OTS regulations to maintain specified
minimum amounts of capital. At December 31, 1997, Industrial Savings
exceeded all applicable minimum capital requirements. The following table
summarizes the regulatory capital requirements and actual capital of
Industrial Savings at December 31, 1997:
Amount Percent of assets
---------------------------------
(In thousands)
Tangible capital: (1)
Capital level $35,696 9.86%
Requirement 5,433 1.50
------------------------
Excess $30,263 8.36%
========================
Leverage capital: (1)
Capital level $35,696 9.86%
Requirement 10,866 3.00
------------------------
Excess $24,830 6.86%
========================
Risk-based capital: (2)
Capital level $37,392 19.03%
Requirement 15,718 8.00
------------------------
Excess $21,674 11.03%
========================
- --------------------
<F1> Tangible and leverage capital percentages are based on adjusted total
assets of $362.2 million.
<F2> Risk-based capital percentages are based on risk-weighted assets of
$196.5 million.
MARKET PRICE OF COMMON SHARES AND RELATED SHAREHOLDER MATTERS
- ----------------------------------------------------------------------------
There were 5,102,800 common shares of Industrial Bancorp outstanding on
December 31, 1997, held of record by approximately 1,520 shareholders. The
common shares of Industrial Bancorp are listed on the Nasdaq National Market
("Nasdaq") under the symbol "INBI".
The following table sets forth the high and low sales prices of the common
shares of Industrial Bancorp during the periods indicated, as reported by
Nasdaq. These quotations reflect inter-dealer prices, without retail mark-
up, mark-down or commission, and may not represent actual transactions. Also
reflected in the table are the amounts of dividends distributed in each
period indicated.
High Low Period-end Dividend
--------------------------------------------
Quarter ended:
March 31, 1996 $15.375 $13.250 $15.250 $.075
June 30, 1996 (1) 16.000 11.250 11.250 .075
September 30, 1996 12.375 9.875 12.250 .075
December 31, 1996 13.500 12.125 12.750 .10
March 31, 1997 13.000 12.500 12.625 .10
June 30, 1997 14.000 12.000 13.688 .12
September 30, 1997 18.000 13.625 18.000 .12
December 31, 1997 18.375 17.250 17.750 .14
- --------------------
<F1> In May 1996, Industrial Bancorp paid a $3.50 per share special return
of capital distribution.
The income of Industrial Bancorp on an unconsolidated basis consists of
dividends, which may periodically be declared and paid on the common shares
of Industrial Savings held by Industrial Bancorp, and earnings on other
investments. At December 31, 1997, investments of Industrial Bancorp, other
than its investment in Industrial Savings, consisted of a $3.7 million loan
to the ESOP, a loan of $19.5 million to Industrial Savings to be used for
operations and investment purposes and $538,000 on deposit with Industrial
Savings.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital
distributions by savings associations. Under OTS regulations applicable to
converted savings associations, Industrial Savings is not permitted to pay a
cash dividend on its common shares if the regulatory capital of Industrial
Savings would, as a result of the payment of such dividend, be reduced below
the amount required for the liquidation account (which was established for
the purpose of granting a limited priority claim on the assets of Industrial
Savings, in the event of a complete liquidation, to those members of
Industrial Savings before the Conversion who maintain a savings account at
Industrial Savings after the Conversion) or applicable regulatory capital
requirements prescribed by the OTS. OTS regulations applicable to all
savings associations provide that a savings association which immediately
prior to, and on a pro forma basis after giving effect to, a proposed
capital distribution (including a dividend) has total capital (as defined by
OTS regulations) that is equal to or greater than the amount of its capital
requirements is generally permitted without OTS approval (but subsequent to
30 days' prior notice to the OTS) to make capital distributions, including
dividends, during a calendar year in an amount not to exceed the greater of
(1) 100% of its net earnings to date during the calendar year, plus an
amount equal to one-half the amount by which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-
quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in
need of more than normal supervision will be subject to restrictions on
dividends. A savings association that fails to meet current minimum capital
requirements is prohibited from making any capital distributions without the
prior approval of the OTS.
Industrial Savings currently meets all of its regulatory capital
requirements and, unless the OTS determines that Industrial Savings is an
institution requiring more than normal supervision, Industrial Savings may
pay dividends in accordance with the foregoing provisions of the OTS
regulations.
YEAR 2000 COMPLIANCE ISSUES
- ----------------------------------------------------------------------------
Industrial Bancorp established a Year 2000 Committee, which includes senior
management representatives, to assess the risk of potential problems that
might arise from the failures of computer programming to recognize the year
2000 and to develop a plan to mitigate any such risk. Research by the
committee indicates that the greatest potential impact upon the Company is
the risk related to vendors used by the Company, particularly Industrial
Savings' data processing service bureau. Quarterly progress reports from
the service bureau indicate levels of manpower and expertise sufficient to
amend and test the adequacy of their computer programming and systems prior
to the arrival of the year 2000. All other vendors used by the Company have
been identified and requests for year 2000 certifications have been
forwarded.
The year 2000 compliance program established by the committee includes
quarterly progress reports submitted to the Board of Directors and a target
date of December 31, 1998 for required internal testing, which is expected
to be minimal. The committee estimates that the impact upon the Company's
results of operations, liquidity and capital resources will be immaterial.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------------------------------------------
Several new accounting standards have been issued by the Financial
Accounting Standards Board, which are effective for the Industrial Bancorp's
consolidated financial statements for the years ending on or after December
31, 1997.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," issued in 1996, revises the accounting for transfers of
financial assets, such as loans and securities, and for distinguishing
between sales and secured borrowings. It was originally effective for some
transactions in 1997 and others in 1998. SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," issued in
December 1996, defers, for one year, the effective date of provisions
related to securities lending, repurchase agreements and other similar
transactions. The remaining portions of SFAS No. 125 continued to be
effective January 1, 1997. This statement did not have a material impact on
the Company's financial statements.
SFAS No. 128, "Earnings Per Share," issued in March 1997, is effective for
financial statements for periods ending after December 15, 1997, including
interim periods. Two measures of earnings per share ("EPS") are defined
under the new statement. Basic EPS replaces "primary earnings per share,"
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period.
Basic EPS does not consider dilution from potentially dilutive securities
such as stock options, warrants, and convertible securities. Diluted EPS
replaces "fully diluted earnings per share" and assumes dilutive potential
common shares have been issued (e.g. through the exercise of dilutive
options, or the conversion of convertible preferred stock into common
shares). The statement further requires that all previously reported
earnings per share amounts be restated for prior periods. Adoption of the
provisions of SFAS No. 128 by Industrial Bancorp did not have any material
impact on current or prior period earnings per share amounts.
SFAS No. 129, "Disclosures of Information about Capital Structure," issued
in February 1997 and effective for financial statements for periods ending
after December 15, 1997, consolidated existing accounting guidance relating
to disclosure about a company's capital structure. Public companies
generally have been required to make disclosures now required by this
statement and, therefore, it had no impact on the Company.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997,
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. It
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," issued in June 1997, significantly changes the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is
based on reporting information the way the management organizes the segments
within the enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will likely
result in more segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each reportable segment
than is presently being reported in annual financial statements and also
requires that selected information be reported in interim financial
statements. This statement is effective for financial statements for periods
beginning after December 15, 1997.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Industrial Bancorp, Inc.
Bellevue, Ohio
We have audited the accompanying consolidated balance sheets of Industrial
Bancorp, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Industrial Bancorp, Inc. as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 15, 1998
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, 1997 1996
- -----------------------------------------------------------------------
ASSETS
Cash and noninterest-bearing deposits $ 1,273 $ 1,312
Interest-bearing demand deposits 3,499 2,101
Overnight deposits 6,000 4,000
--------------------
Cash and cash equivalents 10,772 7,413
Investment securities available for sale,
at fair value 21,030 23,236
Investment securities held to maturity
(fair value: 1997 - $474; 1996 - $608) 437 561
Loans receivable - net 321,669 285,803
Office properties and equipment - net 4,972 5,029
Accrued interest receivable and other assets 5,143 4,571
--------------------
Total assets $364,023 $326,613
====================
LIABILITIES
Deposits $270,957 $259,074
Federal Home Loan Bank advances 29,000 2,000
Accrued interest payable and other liabilities 3,204 3,435
--------------------
Total liabilities 303,161 264,509
--------------------
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized, 5,554,500 shares issued 34,669 34,669
Additional paid-in capital 1,879 1,669
Retained earnings 34,569 31,803
Treasury stock, at cost
(1997 - 451,700 shares; 1996 - 50,000 shares) (6,306) (634)
Unearned employee stock ownership plan shares (3,529) (3,974)
Unearned compensation (1,753) (2,279)
Unrealized gain on securities available for sale 1,333 850
--------------------
Total shareholders' equity 60,862 62,104
--------------------
Total liabilities and shareholders' equity $364,023 $326,613
====================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
For the year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
Interest income
Interest and fees on loans $25,779 $23,040 $20,618
Interest and dividends on investment securities 1,590 1,779 1,379
Interest on deposits 436 649 861
-----------------------------
27,805 25,468 22,858
-----------------------------
Interest expense
Interest on deposits 13,005 11,841 10,648
Interest on Federal Home Loan Bank advances 1,060 22 471
Interest on conversion stock purchase funds 117
-----------------------------
14,065 11,863 11,236
-----------------------------
Net interest income 13,740 13,605 11,622
Provision for loan losses 186 180 180
-----------------------------
Net interest income after provision for loan losses 13,554 13,425 11,442
-----------------------------
Noninterest income
Service fees and other charges 466 401 348
Other 43 46 50
-----------------------------
509 447 398
-----------------------------
Noninterest expense
Salaries and employee benefits 3,117 4,291 2,145
State franchise tax 524 843 748
Federal deposit insurance premiums 135 2,060 531
Occupancy and equipment 352 330 353
Data processing 370 355 339
Depreciation 286 271 238
Other 1,383 1,303 1,164
-----------------------------
6,167 9,453 5,518
-----------------------------
Income before income tax 7,896 4,419 6,322
Provision for income tax 2,783 2,020 2,149
-----------------------------
Net income $ 5,113 $ 2,399 $ 4,173
=============================
Basic earnings per share $ 1.04 $ 0.47 $ 0.42
Diluted earnings per share $ 1.03 $ 0.47 $ 0.42
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Unearned Unrealized
Employee Minimum Gain on
Additional Stock Additional Securities
Common Paid in Retained Treasury Ownership Unearned Pension Available
Stock Capital Earnings Stock Plan Shares Compensation Liability for Sale Total
-----------------------------------------------------------------------------------------------------
Balance at January 1, 1995 $27,276 $(15) $ 355 $27,616
Net income 4,173 4,173
Sale of 5,554,500 shares
of no par common stock,
net of conversion costs $54,110 54,110
Shares purchased under
Employee Stock Ownership
Plan $(4,436) (4,436)
Cash dividends declared
($.15 per share) (767) (767)
Change in unrealized gain
on securities available
for sale 393 393
Change in minimum additional
pension liability (34) (34)
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 54,110 30,682 (4,436) (49) 748 81,055
Net income 2,399 2,399
Capital distribution declared
($3.50 per share) (19,441) (19,441)
Purchase of treasury stock
(50,000 shares) $(634) (634)
Cash dividends declared
($.25 per share) (1,278) (1,278)
Employee Stock Ownership Plan:
Capital distribution on
unallocated shares $1,553 1,553
Shares released 116 462 578
Management Recognition Plan:
Shares purchased $(2,630) (2,630)
Compensation earned 351 351
Change in unrealized gain
on securities available
for sale 102 102
Change in minimum additional
pension liability 49 49
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 34,669 1,669 31,803 (634) (3,974) (2,279) - 850 62,104
Net income 5,113 5,113
Purchase of treasury stock
(401,700 shares) (5,672) (5,672)
Cash dividends declared
($.48 per share) (2,347) (2,347)
Employee Stock Ownership Plan:
Shares released 210 445 655
Management Recognition Plan:
Compensation earned 526 526
Change in unrealized gain
on securities available
for sale 483 483
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $34,669 $1,879 $34,569 $(6,306) $(3,529) $(1,753) $ - $1,333 $60,862
=====================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 5,113 $ 2,399 $ 4,173
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 286 271 238
Provision for loan losses 186 180 180
Accretion of deferred loan fees (674) (639) (497)
FHLB stock dividends (200) (176) (153)
Net accretion on investment securities (50) (55) (50)
ESOP expense 655 1,794
MRP compensation expense 526 351
Change in
Deferred taxes 105 29 312
Accrued interest receivable and other assets (637) 96 (462)
Accrued interest payable and other liabilities (231) 211 747
-----------------------------
Net cash from operating activities 5,079 4,461 4,488
-----------------------------
Cash flows from investing activities
Net change in interest-bearing time deposits 2,500
Proceeds from maturities of investment securities
available for sale 12,000 10,000
Purchases of investment securities available for sale (9,008) (5,910)
Purchases of investment securities held to maturity (17,944)
Principal repayments and maturities of investment
securities held to maturity 124 205 6,720
Net increase in loans (35,378) (26,220) (23,303)
Proceeds from sale of real estate owned 60
FHLB stock purchases (93) (69) (241)
Properties and equipment expenditures, net (229) (561) (642)
-----------------------------
Net cash from investing activities (32,584) (22,555) (32,850)
-----------------------------
Cash flows from financing activities
Net increase in deposits 11,883 20,792 6,316
Proceeds from FHLB advances 33,000 2,000 11,000
Repayment of FHLB advances (6,000) (17,000)
Capital distribution to shareholders (19,071)
Purchase of MRP shares (2,630)
Proceeds from issuance of common stock, net of costs 54,110
Cash provided to ESOP (4,436)
Cash dividends paid (2,347) (1,661) (383)
Purchase of treasury stock (5,672) (634)
-----------------------------
Net cash from financing activities 30,864 (1,204) 49,607
-----------------------------
Net change in cash and cash equivalents 3,359 (19,298) 21,245
Cash and cash equivalents at beginning of year 7,413 26,711 5,466
-----------------------------
Cash and cash equivalents at end of year $10,772 $ 7,413 $26,711
=============================
Cash paid during the year for:
Interest $13,938 $11,655 $11,060
Income taxes 2,947 1,780 1,646
Noncash transactions:
Transfer of loans to real estate owned 71 33
Transfer of securities to available for sale, at fair value 16,144
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Industrial Bancorp, Inc. (Company) and its wholly-
owned subsidiary, Industrial Savings and Loan Association (Industrial). All
significant intercompany transactions have been eliminated.
Industry Segment Information: The Company grants residential, consumer and
commercial loans to customers located primarily in north-central Ohio.
These loans account for substantially all of the Company's revenues. Real
estate loans make up approximately 99% of the Company's loan portfolio and
the remaining 1% is made up of consumer and commercial loans.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Areas involving the use of management's
estimates and assumptions include the allowance for loan losses, the
realization of deferred tax assets, the determination and carrying value of
impaired loans, depreciation of premises and equipment, and the carrying
value of other real estate recognized in the Company's financial statements.
Estimates that are more susceptible to change in the near term include the
allowance for loan losses and the fair value of certain financial
instruments. Actual results could differ from those estimates.
Fair Values of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
more fully disclosed separately. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing
on- and off-balance sheet financial instruments do not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
Statement of Cash Flows: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, demand deposits with financial
institutions and overnight deposits. Overnight deposits are sold for one-
day periods. The Company reports net cash flows for customer loan
transactions, deposit transactions and time deposits made with other
financial institutions.
Investment Securities: Securities classified as held to maturity are those
that management has the positive intent and ability to hold to maturity.
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts. Securities classified as available for
sale are those that have no stated maturity or those that management intends
to sell or that could be sold for liquidity, investment management, or
similar reasons, even if there is not a present intention for such a sale.
Securities available for sale are carried at fair value with unrealized
gains and losses included as a separate component of shareholders' equity,
net of tax.
Gains or losses on dispositions are based on net proceeds and the adjusted
carrying amount of securities sold, using the specific identification
method.
Office Properties and Equipment: Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed principally
on the straight-line and declining-balance methods over the estimated useful
lives of the respective properties and equipment. Maintenance and repairs
are charged to expense as incurred and improvements are capitalized.
Real Estate Owned: Real estate acquired through foreclosure or deed-in-
lieu-of-foreclosure is initially recorded at the estimated fair value less
estimated selling expenses. The costs of preparing properties for their
intended use are capitalized, whereas costs relating to the holding of
properties are expensed. Any subsequent reductions in the estimated fair
value are reflected through a charge to operations.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on
past loss experience, general economic conditions, information about
specific borrower situations, including their financial position and
collateral values, and other factors and estimates which are subject to
change over time. While management may periodically allocate portions of
the allowance for specific problem loans, the whole allowance is available
for any loan charge-offs that occur. A loan is charged off by management as
a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair
value of the collateral if the loan is collateral dependent. A portion of
the allowance for loan losses is allocated to impaired loans.
Smaller balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one- to four-
family residences, residential construction loans, and automobile, home
equity and second mortgage loans. Mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt
service requirements, the loan is evaluated for impairment. Loans are
generally moved to nonaccrual status when 90 days or more past due. These
loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans
delinquent 90 days or more to determine if the interest accrual should be
discontinued. The carrying value of impaired loans reflects cash payments,
revised estimates of future cash flows, and increases in the present value
of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such and other cash payments
are reported as reductions in carrying value. Increases or decreases in
carrying value due to changes in estimates of future payments or the passage
of time are reported as reductions or increases in bad debt expense.
Loan Fees and Costs: The Company defers loan origination fees, net of
direct loan origination costs, and recognizes them over the life of the loan
as a yield adjustment. The net amount deferred is reported as a reduction
of loans.
Employee Stock Ownership Plan: The Company has established an employee
stock ownership plan (ESOP) for the benefit of substantially all employees
of the Company and Industrial. The ESOP borrowed funds from the Company
with which to acquire common shares of the Company. The loan is secured by
the shares purchased with the loan proceeds and will be repaid by the ESOP
with funds from Industrial's discretionary contributions to the ESOP and
earnings on ESOP assets. All dividends on unallocated shares received by
the ESOP are used to pay debt service, or, at the Company's discretion, may
be allocated to the ESOP participants and recorded as compensation expense.
The shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid. As payments are
made, the shares are released from the suspense account and allocated to the
participants. As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and
the shares become outstanding for earnings per share computations.
Stock Compensation: Expense for employee compensation under stock option
plans is based on Accounting Principles Board Opinion No. 25, with expense
reported only if options are granted below market price at grant date. Pro
forma disclosures of net income and earnings per share are provided as if
the fair value method of Statement of Financial Accounting Standards (SFAS)
No.123 were used for stock-based compensation.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities, using currently
enacted tax rates, adjusted for allowances made for uncertainty regarding
the realization of net tax assets.
Commitments and Financial Instruments With Off-Balance-Sheet Risk: The
Company, in the normal course of business, makes commitments to extend
credit which are not reflected in the financial statements. A summary of
these commitments is disclosed in Note 14.
Earnings Per Share: Basic and diluted earnings per share are computed under
the provisions of SFAS No. 128, "Earnings Per Share," which was adopted
retroactively by the Company at the beginning of the fourth quarter of 1997.
Adoption of the Statement did not materially change prior period earnings
per share amounts. Basic earnings per share have been computed based on the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share have been computed based on the weighted
average number of shares of common stock considering the dilutive effect of
the assumed exercise of options outstanding during the period. ESOP shares
that have not been allocated to participants are not considered outstanding
for purposes of computing earnings per share. The number of shares used to
compute basic and diluted earnings per share were 4,901,711 and 4,964,415 in
1997, respectively, and 5,127,380 and 5,135,213 in 1996, respectively, and
5,110,890 in 1995. Earnings per share for 1995 are based on the earnings
for the period in which the stock was actually outstanding, August 1, 1995
to December 31, 1995 and upon 5,110,890 weighted average shares outstanding
during the five month period.
Reclassifications: Certain items in the 1996 and 1995 financial statements
have been reclassified to correspond with the 1997 presentation.
NOTE 2 -CONVERSION TO STOCK FORM OF OWNERSHIP
On January 17, 1995, the Board of Directors of Industrial unanimously
adopted a Plan of Conversion to convert from a state-chartered mutual
savings and loan association to a state chartered stock savings and loan
association with the concurrent formation of a holding company, Industrial
Bancorp, Inc. The conversion was consummated on August 1, 1995 by amending
Industrial's articles of incorporation and issuing the Company's common
stock in an amount equal to the market value of Industrial after giving
effect to the conversion. A total of 5,554,500 shares of the Company's
common stock were sold at $10 per share and net proceeds from the sale were
$54.1 million after deducting the costs of the conversion.
The Company retained 50% of the net proceeds from the sale of common stock.
The remainder of the net proceeds was invested in the capital stock issued
by Industrial to the Company in connection with the conversion.
At the time of the conversion, Industrial established a liquidation account
in the amount of $29.7 million, which was equal to its regulatory capital as
of the latest practicable date prior to the conversion. The liquidation
account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at Industrial after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases in
deposit accounts will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each
eligible depositor will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. Industrial may not pay
dividends that would reduce shareholders' equity below the required
liquidation account balance.
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1997, the amortized cost and estimated fair value of debt
and equity securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
Investment securities available for sale
U.S. Treasury securities $15,971 $ 78 $(1) $16,048
U.S. agency securities 2,993 18 3,011
Federal Home Loan Mortgage
Corporation preferred stock 46 1,925 1,971
-----------------------------------------------
Total $19,010 $2,021 $(1) $21,030
===============================================
Investment securities held to maturity
Mortgage-backed securities $ 437 $ 37 $ 474
=================== =======
At December 31, 1996, the amortized cost and estimated fair value of debt
and equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
Investment securities available for sale
U.S. Treasury securities $21,902 $ 43 $(7) $21,938
Federal Home Loan Mortgage
Corporation preferred stock 46 1,252 1,298
-----------------------------------------------
Total $21,948 $1,295 $(7) $23,236
===============================================
Mortgage-backed securities $ 561 $ 47 $ 608
=================== =======
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
-----------------------
Investment securities available for sale
Due in one year or less $ 5,994 $ 5,998
Due after one year through five years 12,970 13,061
--------------------
18,964 19,059
Federal Home Loan Mortgage Corporation
preferred stock 46 1,971
--------------------
$19,010 $21,030
====================
Investment securities held to maturity
Mortgage-backed securities $ 437 $ 474
====================
No investment securities were sold during 1997, 1996 or 1995. The par
values of securities pledged to collateralize public funds and for other
purposes were approximately $15.5 million and $15.0 million at December 31,
1997 and 1996, respectively.
NOTE 4 - LOANS RECEIVABLE
At December 31, 1997 and 1996, loans receivable consisted of the following:
1997 1996
--------------------
Real estate loans
Secured by one- to four-family residences $278,438 $248,694
Home equity 15,407 11,651
Multi-family 8,170 9,028
Nonresidential 10,521 8,842
--------------------
312,536 278,215
--------------------
Real estate construction loans 20,013 15,885
Undisbursed portion of construction loans (9,672) (7,120)
--------------------
Total construction loans 10,341 8,765
--------------------
Total real estate loans 322,877 286,980
--------------------
Commercial loans 297 398
--------------------
Consumer loans
Loans on deposit accounts 1,258 1,087
Automobile 1,189 773
Education 1,155 1,268
Other consumer 806 831
--------------------
Total consumer loans 4,408 3,959
--------------------
Total loans 327,582 291,337
Net deferred loan origination fees (4,171) (3,977)
Allowance for loan losses (1,742) (1,557)
--------------------
$321,669 $285,803
====================
Loans serviced by the Company for other institutions totaled approximately
$4.8 million, $5.7 million and $7.1 million at December 31, 1997, 1996 and
1995, respectively.
Activity in the allowance for loan losses is as follows:
1997 1996 1995
--------------------------
Balance at beginning of year $1,557 $1,376 $1,209
Provision for losses 186 180 180
Charge-offs (2) - (17)
Recoveries 1 1 4
--------------------------
Balance at end of year $1,742 $1,557 $1,376
==========================
No loans were classified as impaired at December 31, 1997, 1996 and 1995 or
during the years then ended.
Industrial has granted loans to certain of its executive officers and
directors and their related business interests.
A summary of activity on related party loans aggregating $60,000 or more to
any one related party is as follows:
1997
----
Balance at beginning of year $ -
Loans originated 183
Repayments (88)
----
Balance at end of year $ 95
====
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1997 and 1996 consisted of
the following:
1997 1996
----------------
Land $1,829 $1,718
Buildings and improvements 5,058 5,037
Furniture and equipment 1,083 1,026
----------------
Total cost 7,970 7,781
Accumulated depreciation 2,998 2,752
----------------
$4,972 $5,029
================
NOTE 6 - DEPOSITS
A summary of deposits at December 31, 1997 and 1996 is as follows:
1997 1996
--------------------
Noninterest-bearing demand deposits $ 3,287 $ 3,173
Passbook savings accounts 52,622 53,410
NOW accounts 15,277 14,321
Money market accounts 4,049 4,531
Certificates of deposit 195,722 183,639
--------------------
$270,957 $259,074
====================
Deposit accounts with balances of $100,000 or more at December 31, 1997 and
1996 totaled approximately $44.3 million and $40.1 million, respectively.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
Amount
--------
1998 $131,266
1999 39,478
2000 17,042
2001 5,777
2002 1,586
Thereafter 573
--------
$195,722
========
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1997, advances from the Federal Home Loan Bank of Cincinnati
consisted of the following:
Year of maturity Interest rate Amount
---------------------------------------------------------
1998 5.80 - 6.15% $ 4,000
1999 6.00 - 6.30 7,000
2000 6.30 - 6.60 7,000
2001 6.21 2,000
2002 5.95 - 6.25 9,000
-------
$29,000
=======
Weighted average interest rate 6.20%
These advances are collateralized by residential mortgage loans totaling
$43.5 million under a blanket collateral agreement and by Federal Home Loan
Bank stock. At December 31, 1996 Industrial had one $2.0 million advance
outstanding with a 6.15% fixed interest rate, maturing in 1998.
NOTE 8 - PENSION PLAN
Prior to January 1, 1996, the Company sponsored a defined benefit pension
plan for all eligible employees. Retirement benefits were based on years of
service and the employee's compensation. On February 20, 1996, the Board of
Directors approved a resolution to terminate the pension plan effective
December 31, 1995. This eliminated the accrual of benefits for future
services, except for additional benefits that accrued for employees during
the Plan year beginning in 1995. The nonvested accumulated benefit
obligation as of December 31, 1995 became vested. The vested benefit
obligation was settled by a lump-sum payment to each covered employee in
December, 1996. Total contributions made during 1995 for the defined
benefit pension plan were $151,000.
Net pension expense for 1995 included the following:
Service cost - benefits earned $ 92
Interest cost on projected
benefit obligation 66
Actual return on plan assets (76)
Net amortization and deferral 45
----
Net pension expense $127
====
In determining the net pension expense for 1995, the following assumptions
were used: a discount rate of 6.50%, a rate of increase in compensation
levels of 3.00% and a long-term rate of return on assets of 5.75%.
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN
In 1996, the Company established an ESOP for the benefit of substantially
all employees of the Company and Industrial. The ESOP borrowed funds from
the Company with which to acquire common shares of the Company. The loan is
secured by the shares purchased with the loan proceeds and will be repaid by
the ESOP with funds from Industrial's discretionary contributions to the
ESOP and earnings on ESOP assets. The shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as
the loan is repaid.
The Company accounts for its ESOP in accordance with Statement of Position
93-6 of the American Institute of Certified Public Accountants.
Accordingly, the shares pledged as collateral are reported as unearned ESOP
shares in the balance sheet. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are reported as a
reduction of retained earnings. Dividends on unallocated ESOP shares are
recorded as a reduction of debt, or, at the Company's discretion, may be
allocated to the ESOP participants and recorded as compensation expense.
Compensation expense related to the ESOP for the years ended December 31,
1997 and 1996 were approximately $655,000 and $1.8 million, respectively.
Approximately $1.2 million of the 1996 ESOP expense was related to the $3.50
per share return of capital. Of the return of capital corresponding to ESOP
shares, approximately 25% was recorded as a reduction of debt while the
remainder was allocated to the participants and, therefore, recorded as
compensation expense.
ESOP shares as of December 31, 1997 and 1996 were as follows:
1997 1996
--------------------
Shares allocated to participants 90,728 46,218
Unreleased shares 352,882 397,392
--------------------
Total ESOP shares 443,610 443,610
====================
Fair value of unreleased shares (in thousands) $ 6,264 $ 5,067
====================
NOTE 10 - STOCK OPTION AND INCENTIVE PLAN
The Company sponsors a stock option plan which authorizes the Stock Option
and Incentive Plan Committee of the Board of Directors to grant options to
certain officers and directors of Industrial and the Company. A total of
555,450 common shares were reserved for issuance under the Plan. Options
may be granted at a price not less than fair market value at the date of
grant. Options to purchase 388,815 shares were granted during 1996 at an
exercise price of $11.00 per share. One-fifth of the options awarded become
exercisable on each of the first five anniversaries of the date of grant.
The option period expires 10 years from the date of grant. No options were
granted during 1997 and 77,763 options were exercisable as of December 31,
1997.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its plans. Accordingly, no compensation cost has been recognized for
its stock option plans as the market value of the Company's common stock was
less than the exercise price of the options at the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, entities to use a "fair value based method" to account for
stock-based compensation plans. If the fair value accounting encouraged by
SFAS No. 123 is not adopted, entities must disclose the pro forma effect on
net income and on earnings per share had the fair value accounting been
adopted. The fair value of a stock option is estimated using an option
pricing model which considers the current price of the stock, expected price
volatility, expected dividends on the stock and the risk-free interest rate.
Once estimated, the fair value of an option is not later changed. Had
compensation cost been determined based on the fair value guidelines of SFAS
No. 123, the Company's net income and earnings per share for 1997 and 1996
would have been:
1997 1996
------------------------ ------------------------
As reported Pro forma As reported Pro forma
---------------------------------------------------
Net income $5,113 $4,930 $2,399 $2,323
Basic earnings per share 1.04 1.01 0.47 0.45
Diluted earnings per share 1.03 0.99 0.47 0.44
The following assumptions were used under the Black-Sholes option pricing
model for purposes of the pro forma disclosures above: a risk-free interest
rate of 6.34%, a dividend yield of 3.86%, volatility factors of the expected
market price of the Company's common stock of 40.8%, and an expected life of
the option of 7.5 years. Based on these assumptions the estimated fair
value of the options granted during 1996 was $3.57 per share.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
In future years, the pro forma effect of not applying SFAS No. 123 is
expected to increase as additional options are granted and as outstanding
options continue to vest.
NOTE 11 - MANAGEMENT RECOGNITION PLAN
A management recognition plan (MRP) was adopted by the Board of Directors on
February 20, 1996 and approved by the shareholders of the Company on April
16, 1996. The MRP will be used as a means of providing directors and
certain key employees of Industrial with an ownership interest in the
Company in a manner designed to compensate such directors and key employees
for services to Industrial. Industrial contributed sufficient funds to
enable the MRP to purchase a number of common shares in the open market
which is equal to 4% of the common shares sold in connection with the
Conversion.
On May 1, 1996, the Management Recognition Plan Committee of the Board of
Directors awarded 222,180 shares to certain directors and officers of
Industrial and the Company. No shares had been previously awarded. One-
fifth of such shares will be earned and nonforfeitable on each of the first
five anniversaries of the date of the awards. In the event of the death or
disability of a participant, however, the participant's shares will be
deemed to be earned and nonforfeitable upon such date. At December 31,
1997, there were 500 shares that had not been awarded. Compensation
expense, which is based upon the cost of the shares, was $526,000 and
$351,000 for the years ended December 31, 1997 and 1996, respectively.
NOTE 12 - FDIC INSURANCE
The deposits of savings associations such as Industrial are presently
insured by the Savings Association Insurance Fund (the SAIF), which, along
with the Bank Insurance Fund (the BIF), is one of the two insurance funds
administered by the FDIC. Financial institutions which are members of the
BIF had historically experienced substantially lower deposit insurance
premiums because the BIF had achieved its required level of reserves, while
the SAIF had not. In 1996, the Omnibus Bill became law and included
provisions designed to recapitalize the SAIF and to mitigate the BIF/SAIF
premium disparity. As a result, the FDIC levied a special assessment of 65.7
cents per $100 of SAIF insured deposits at March 31, 1995. The Company's
special assessment was paid in November of 1996, from working capital of
Industrial, and totaled $1.0 million after taxes. Following the special
assessment, the FDIC reduced the annual assessment rates for SAIF-insured
institutions to bring them in line with BIF assessment rates.
Industrial will continue to be subject to an assessment to fund the
repayment of the FICO obligations. The FICO assessment for SAIF-insured
institutions is approximately 6.5 cents per $100 of deposits while BIF-
insured institutions pay approximately 1.5 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all
FDIC-insured institutions.
NOTE 13 - INCOME TAXES
The provision for income tax consists of the following:
1997 1996 1995
--------------------------
Current expense $2,678 $1,991 $1,837
Deferred expense 105 29 312
--------------------------
$2,783 $2,020 $2,149
==========================
The differences between the financial statement provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before taxes are as follows:
1997 1996 1995
--------------------------
Income tax computed at the
statutory federal rate $2,685 $1,502 $2,149
Add tax effect of ESOP deduction 72 579
MRP awards expense (16)
Other 42 (61)
--------------------------
$2,783 $2,020 $2,149
==========================
Deferred income taxes are provided for temporary differences. The
components of the Company's net deferred tax balance at December 31 consist
of the following:
1997 1996
----------------
Deferred tax assets
Deferred loan fees $1,211 $1,337
Accrued MRP awards 119 119
Construction period interest 17 18
Accrued vacation 36 37
ESOP shares allocated 57 31
Other 10
----------------
1,450 1,542
----------------
Deferred tax liabilities
Bad debt deduction (350) (410)
FHLB stock dividends (515) (447)
Unrealized gain on investment securities available for sale (687) (438)
Depreciation expense (120) (120)
Accumulated accretion (38) (33)
----------------
(1,710) (1,448)
----------------
Net deferred tax (liability)/ asset $ (260) $ 94
================
The Company has not established a valuation allowance as it is management's
belief that it has adequate taxable income and carrybacks to realize
recorded deferred tax assets.
In years prior to 1996, Industrial was permitted to determine taxable income
after deducting a provision for bad debts in excess of such provision
recorded in the financial statements. Accordingly, retained earnings at
December 31, 1997 includes approximately $4.2 million for which no provision
for federal income taxes has been made. If this portion of retained
earnings is used in the future for any purpose other than to absorb bad
debts, it will be added to future taxable income. The related amount of
unrecognized deferred tax liability was approximately $1.4 million at
December 31, 1997.
NOTE 14 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Industrial is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans. Industrial's
exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans is represented by the
contractual amount of those instruments. Industrial follows the same credit
policy to make such commitments as is followed for those loans recorded in
the financial statements.
As of December 31, 1997 and 1996, Industrial had commitments to make loans
at market rates and loans in process to be funded in six months or less
approximating $24.1 million and $20.8 million, respectively. Approximately
$11.4 million and $9.5 million of these commitments had fixed rates at
December 31, 1997 and 1996, respectively. The interest rates on these
commitments ranged from 6.75% to 8.00% for variable rate loans and from
6.75% to 8.75% for fixed rate loans at December 31, 1997. Loan commitments
are generally for 30 days from the time management approves the loan. Since
loan commitments may expire without being used, the amount does not
necessarily represent future cash commitments.
At December 31, 1997 and 1996, Industrial was required by the Federal
Reserve Bank of Cleveland to maintain cash reserves of $436,000 and
$417,000, respectively. These reserves do not earn interest.
NOTE 15 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Industrial is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory actions that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Industrial must meet specific capital
guidelines that involve quantitative measures of Industrial's assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices.
Industrial's capital amounts and classifications are also subject to
qualitative judgments by the regulators about Industrial's capital
components, risk weightings and other factors. Based on Industrial's
computed regulatory capital ratios, Industrial is considered well
capitalized under Section 38 of the Federal Deposit Insurance Act at
December 31, 1997. Management believes no conditions or events have
occurred since December 31, 1997 that would change Industrial's category.
Federal regulations limit all capital distributions, including cash
dividends, by savings associations. The regulation establishes a three-
tiered system of restrictions, with the greatest flexibility afforded to
thrifts which are both well-capitalized and given favorable qualitative
examination ratings.
At December 31, 1997 and 1996, Industrial's actual capital levels (in
thousands) and minimum required levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
---------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------
1997
- ----
Total capital
(to risk weighted assets) $37,392 19.03% $15,718 8.0% $19,648 10.0%
Tier 1 (core) capital
(to risk weighted assets) $35,696 18.17% $ 7,859 4.0% $11,789 6.0%
Tier 1 (core) capital
(to adjusted total assets) $35,696 9.86% $10,866 3.0% $18,110 5.0%
Tangible capital
(to adjusted total assets) $35,696 9.86% $ 5,433 1.5% N/A
1996
- ----
Total capital
(to risk weighted assets) $57,291 32.78% $13,984 8.0% $17,480 10.0%
Tier 1 (core) capital
(to risk weighted assets) $55,777 31.91% $ 6,992 4.0% $10,488 6.0%
Tier 1 (core) capital
(to adjusted total assets) $55,777 17.14% $ 9,763 3.0% $16,271 5.0%
Tangible capital
(to adjusted total assets) $55,777 17.14% $ 4,881 1.5% N/A
NOTE 16 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair
values of financial instruments at December 31, 1997 and 1996. Items that
are not financial instruments are not included.
1997 1996
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------------------------------------------------
Financial assets
Cash and cash equivalents $ 10,772 $ 10,772 $ 7,413 $ 7,413
Investment securities 21,467 21,504 23,797 23,844
Loans receivable, net 321,669 324,187 285,803 287,168
Accrued interest receivable 1,985 1,985 1,784 1,784
Financial liabilities
Deposits $(270,957) $(271,716) $(259,074) $(259,603)
FHLB advances (29,000) (29,015) (2,000) (2,016)
Accrued interest payable (709) (709) (582) (582)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash
equivalents and accrued interest is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or for equivalent securities. The estimated fair
value for commercial loans is based on estimates of the difference in the
interest rate Industrial would charge borrowers for similar loans with
similar maturities made at December 31, applied for an estimated time period
until the loan is assumed to reprice or be repaid. The estimated fair value
for other loans is based on estimates of the rate Industrial would charge
for similar loans at December 31, applied over estimated payment periods.
The estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for certificates of deposit and
FHLB advances is based on estimates of the rate Industrial would pay on such
deposits or advances at December 31, applied for the time period until
maturity. The estimated fair value of commitments is not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that were Industrial to have
disposed of such items at December 31, 1997 the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December
31, 1997 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of Industrial that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements may nevertheless have value, but are not
included in the above disclosures. These include, among other items, the
estimated earning power of core deposit accounts, the earning potential of
loan servicing rights, the value of a trained work force, customer goodwill
and similar items.
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS December 31,
(Dollars in thousands) 1997 1996
------------------
ASSETS
Cash and cash equivalents $ 538 $ 662
Investment in subsidiary 37,029 56,627
Loan receivable from ESOP 3,697 4,066
Loan receivable from subsidiary 19,500 700
Other assets 99 49
------------------
$60,863 $62,104
==================
LIABILITIES
Other liabilities $ 1
SHAREHOLDERS' EQUITY
Common stock 34,669 $34,669
Additional paid-in capital 1,879 1,669
Retained earnings 34,569 31,803
Treasury stock (6,306) (634)
Unearned employee stock ownership plan shares (3,529) (3,974)
Unearned compensation (1,753) (2,279)
Unrealized gain on securities available for sale 1,333 850
------------------
60,862 62,104
------------------
$60,863 $62,104
==================
For the five
For the year ended months ended
CONDENSED STATEMENTS OF INCOME December 31, December 31,
(Dollars in thousands) 1997 1996 1995
----------------------------------
Income
Interest $ 287 $ 791 $ 565
Cash dividends from subsidiary 26,500
-------------------------------
26,787 791 565
-------------------------------
Expenses
Management fees 60 60 25
Other operating expenses 123 167 14
-------------------------------
183 227 39
-------------------------------
Income before income taxes and equity in
undistributed earnings of subsidiary 26,604 564 526
Provision for income taxes 35 192 179
-------------------------------
Income before equity in undistributed earnings of subsidiary 26,569 372 347
Equity in undistributed earnings of subsidiary (21,456) 2,027 1,786
-------------------------------
Net income $ 5,113 $2,399 $2,133
===============================
For the five
For the year ended months ended
CONDENSED STATEMENTS OF CASH FLOWS December 31, December 31,
(Dollars in thousands) 1997 1996 1995
----------------------------------
Cash flows from operating activities
Net income $ 5,113 $ 2,399 $ 2,133
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed earnings of subsidiary 21,456 (2,027) (1,786)
Dividends on unallocated ESOP shares (194) (144) 32
Changes in other assets (50) (38) (11)
--------------------------------
Net cash from operating activities 26,325 190 368
--------------------------------
Cash flows from investing activities
Investment in subsidiary (27,121)
Loans to subsidiary (23,900) (22,600)
Principal repayment on loans to subsidiary 5,100 21,550 350
Loan to ESOP (4,436)
Principal repayment on loan to ESOP 370 370
--------------------------------
Net cash from investing activities (18,430) 21,920 (53,807)
--------------------------------
Cash flows from financing activities
Proceeds from sale of stock, net of offering costs 54,110
Capital distribution to shareholders (19,441)
Cash dividends paid (2,347) (1,661) (383)
Purchase of treasury stock (5,672) (634)
--------------------------------
Net cash from financing activities (8,019) (21,736) 53,727
--------------------------------
Net change in cash and cash equivalents (124) 374 288
Cash and cash equivalents at beginning of period 662 288
--------------------------------
Cash and cash equivalents at end of period $ 538 $ 662 $ 288
================================
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a consolidated summary of quarterly financial information:
March 31 June 30 September 30 December 31
--------------------------------------------------
1997
Interest income $6,581 $6,846 $ 7,084 $7,294
Interest expense 3,187 3,423 3,657 3,798
-----------------------------------------------
Net interest income 3,394 3,423 3,427 3,496
Provision for loan losses 49 47 45 45
Other income 111 111 120 167
Other expense 1,565 1,530 1,630 1,442
-----------------------------------------------
Income before taxes 1,891 1,957 1,872 2,176
Provision for incomes taxes 671 674 642 796
-----------------------------------------------
Net income $1,220 $1,283 $ 1,230 $1,380
===============================================
Basic EPS $ 0.24 $ 0.26 $ 0.25 $ 0.29
Diluted EPS 0.24 0.26 0.25 0.28
1996
Interest income $6,344 $6,377 $ 6,332 $6,415
Interest expense 2,832 2,887 3,011 3,133
-----------------------------------------------
Net interest income 3,512 3,490 3,321 3,282
Provision for loan losses 45 45 45 45
Other income 96 99 104 148
Other expense 1,664 1,658 4,786 1,345
-----------------------------------------------
Income before taxes 1,899 1,886 (1,406) 2,040
Provision for incomes taxes 645 637 55 683
-----------------------------------------------
Net income $1,254 $1,249 $(1,461) $1,357
===============================================
Basic EPS $ 0.25 $ 0.24 $ (0.29) $ 0.26
Diluted EPS 0.25 0.24 (0.29) 0.26
INDUSTRIAL BANCORP, INC.
Directors
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Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
Fredric C. Spurck
President and Chief Executive Officer
Webster Industries, Inc.
Roger O. Wilkinson
Deputy Director
Huron County Alcohol, Drug Addiction
and Mental Health Services Board
Graydon H. Hayward
President
Hayward Rigging & Construction, Inc.
Leon W. Maginnis
Vice President - Finance
Hirt Publishing Company, Inc.
Bob Moore
President, Retired
Willard Foods
Executive Officers
- -------------------------------------------------
Lawrence R. Rhoades
Chairman of the Board and Chief Financial Officer
David M. Windau
President and Chief Executive Officer
David W. Ball
Senior Vice President - Loans
Stephan S. Beal
Senior Vice President - Operations
Annual Meeting
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The 1998 Annual Meeting of Shareholders of Industrial Bancorp, Inc. will be
held on April 21, 1998, at 2:30 p.m., local time, at the Bellevue Elks Lodge
#1013, located at 214 West Main Street, Bellevue, Ohio 44811. Shareholders
are cordially invited to attend.
Form 10-K
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A copy of Industrial Bancorp's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be available to shareholders at no
charge upon request to:
Industrial Bancorp, Inc.
211 N. Sandusky Street
Bellevue, Ohio 44811
Attn: Patrick S. Smith, Investor Relations
(419) 483-3375
Shareholder Services
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Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for Industrial Bancorp's shares. Communications
regarding change of address, transfer of shares, lost certificates and
dividends should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(908) 272-8511