UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-026248
INDUSTRIAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Ohio 34-1800830
- ------------------------------- ----------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
211 North Sandusky Street, Bellevue, Ohio 44811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (419) 483-3375
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Securities registered pursuant to Section 12(b) of the Act:
None None
- ---------------- -------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
-------------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such requirements for the
past 90 days. Yes X No
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Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of issuer's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on The Nasdaq National Market as of March 16, 1999, was
$81,922,859. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
As of March 16, 1999, there were 4,730,886 of the Registrant's Common
Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Portions of 1998 Annual Report to Shareholders
Part III of Form 10-K - Portions of Proxy Statement for the
1999 Annual Meeting of Shareholders
PART I
Item 1. Description of Business
General
Industrial Bancorp, Inc. (the "Holding Company" or the "Corporation")
was incorporated in the State of Ohio in February 1995 for the purpose of
owning all of the outstanding capital stock of The Industrial Savings and
Loan Association ("Industrial" or the "Association") issued upon the
conversion of the Association from a mutual savings association to a
permanent capital stock savings association (the "Conversion"). On August 1,
1995, the effective date of the Conversion, the Holding Company acquired all
100 shares of the capital stock of the Association.
The Association was organized as a mutual savings association under
Ohio law in 1890. As an Ohio savings association, the Association is subject
to supervision and regulation by the Office of Thrift Supervision (the
"OTS"), the Ohio Department of Commerce, Division of Financial Institutions
(the "Division") and the Federal Deposit Insurance Corporation (the "FDIC").
The Association is a member of the Federal Home Loan Bank (the "FHLB") of
Cincinnati and the deposits of the Association are insured up to applicable
limits by the FDIC in the Savings Association Insurance Fund (the "SAIF").
The Association conducts business from its main office at 211 N.
Sandusky Street in Bellevue, Ohio, its nine branch offices and its one loan
production office in the northern Ohio communities of Ashland, Bellevue,
Clyde, Findlay, Fremont, Mansfield, Norwalk, Sandusky, Tiffin and Willard.
The Association is principally engaged in the business of originating
construction and permanent mortgage loans secured by first mortgages on one-
to four-family residential real estate located in the Association's primary
market area, which consists of the seven Ohio counties in which its offices
are located: Ashland, Erie, Hancock, Huron, Richland, Sandusky and Seneca.
The Association also originates construction and permanent mortgage loans
secured by multifamily real estate (over four units) and nonresidential real
estate in its primary market area. In addition to real estate loans, the
Association originates a limited number of commercial loans and secured and
unsecured consumer loans. For liquidity and interest rate risk management
purposes, the Association invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations, mortgage-
backed securities and other investments permitted by applicable law. Funds
for lending and other investment activities are obtained primarily from
savings deposits and loan principal repayments. Advances from the FHLB of
Cincinnati are also utilized as an additional source of funds.
Interest on loans and investments is the Association's primary source
of income. The Association's principal expense is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the
"net interest income" of the Association, which is the difference between
interest income earned on loans, mortgage-backed securities and other
interest-earning assets and interest paid on deposits and borrowings. Like
most thrift institutions, the Association's interest income and interest
expense are significantly affected by general economic conditions and by the
policies of various regulatory authorities.
Market Area
The Association conducts business from its main office in Bellevue,
Ohio, and its nine branch offices in Bellevue and the northern Ohio cities
of Ashland, Clyde, Findlay, Fremont, Norwalk, Sandusky, Tiffin and Willard.
The Association's primary market area for lending and deposit activity
consists of the six counties in which the Association has its branch
offices. The Association's lending activity also reaches into Richland
County through a loan production office in Mansfield, Ohio.
The economy of the Association's primary market area is stable.
Population growth and household growth have occurred at slightly slower
rates than the State of Ohio as a whole. The principal segments of the local
economy are manufacturing, wholesale/retail trade, tourism and other service
industries. Erie and Sandusky Counties include popular tourist attractions
along Lake Erie, such as Cedar Point, which provide a significant number of
jobs during the summer season and draw large numbers of visitors to the
area. Other major employers in the Association's primary market area include
Whirlpool Corporation, Cooper Tire & Rubber Company, Consolidated Biscuit
Co., General Motors, Ford Motor Company, Marathon Oil and R.R. Donnelly Co.
There are also several colleges and universities in the Association's
primary market area.
Lending Activities
General. The Association's principal lending activity is the
origination of conventional real estate loans, including construction loans,
secured by one- to four-family homes located in the Association's primary
market area. Loans secured by multifamily properties containing more than
four units and nonresidential properties, including construction loans, are
also offered by the Association. The Association does not originate first
mortgage loans insured by the Federal Housing Authority or guaranteed by the
Veterans Administration. In addition to real estate lending, the Association
originates a limited number of commercial loans and consumer loans,
including education loans, loans secured by deposit accounts, automobile
loans and a limited number of unsecured loans. As an approved Federal Home
Loan Mortgage Corporation seller/servicer, the Association sells certain
residential real estate mortgage loans in the secondary market.
Loan Portfolio Composition. The following table presents certain
information regarding the composition of the Association's loan portfolio at
the dates indicated:
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
One- to four-family $279,237 83.87% $278,438 85.00% $248,694 85.35% $226,868 85.90% $207,943 86.61%
Home equity 16,624 4.99 15,407 4.70 11,651 4.00 8,546 3.24 5,509 2.29
Multifamily 9,165 2.75 8,170 2.49 9,028 3.10 8,213 3.11 8,019 3.35
Nonresidential 10,979 3.31 10,521 3.21 8,842 3.03 9,100 3.45 6,511 2.71
Construction (1) 11,607 3.49 10,341 3.16 8,765 3.01 6,746 2.55 7,187 2.99
-----------------------------------------------------------------------------------------------------
Total real estate
loans 327,612 98.41 322,877 98.56 286,980 98.49 259,473 98.25 235,169 97.95
Commercial loans 451 0.14 297 0.09 398 0.14 585 0.22 666 0.28
Consumer loans:
Education loans 1,073 0.32 1,155 0.35 1,268 0.44 1,456 0.55 1,650 0.68
Loans on deposits 1,307 0.39 1,258 0.39 1,087 0.37 987 0.38 1,032 0.43
Automobile loans 1,545 0.46 1,189 0.36 773 0.27 826 0.31 807 0.34
Other consumer loans 934 0.28 806 0.25 831 0.29 771 0.29 763 0.32
-----------------------------------------------------------------------------------------------------
Total consumer
loans 4,859 1.45 4,408 1.35 3,959 1.37 4,040 1.53 4,252 1.77
-----------------------------------------------------------------------------------------------------
Total loans 332,922 100.00% 327,582 100.00% 291,337 100.00% 264,098 100.00% 240,087 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
origination fees (4,020) (4,171) (3,977) (3,598) (3,341)
Allowance for
loan losses (1,930) (1,742) (1,557) (1,376) (1,209)
-------- -------- -------- -------- --------
Net loans $326,972 $321,669 $285,803 $259,124 $235,537
======== ======== ======== ======== ========
- --------------------
<F1> Net of the undisbursed portion of construction loans.
Loan Maturity. The following table sets forth certain information as
of December 31, 1998, regarding the dollar amount of loans maturing in the
Association's portfolio based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of
repayments or no stated maturity are reported as due in one year or less.
Due in years
----------------------------------------------------------------------------------
2002 2004 2009 2019
and through through and
1999 2000 2001 2003 2008 2018 After Total
----------------------------------------------------------------------------------
(In thousands)
Real estate loans:
One- to four-family $ 1,028 $185 $ 575 $ 6,953 $26,561 $72,685 $171,250 $279,237
Home equity 16,624 - - - - - - 16,624
Multifamily and nonresidential 545 14 933 4,470 1,420 10,393 2,369 20,144
Construction 1,616 73 11 112 122 1,289 8,384 11,607
Commercial loans 442 - - 9 - - - 451
Consumer loans 1,799 430 656 1,001 804 158 11 4,859
----------------------------------------------------------------------------------
Total $22,054 $702 $2,175 $12,545 $28,907 $84,525 $182,014 $332,922
==================================================================================
The following table sets forth the dollar amount of all loans which
will become due more than one year after December 31, 1998, and which have
predetermined interest rates or adjustable interest rates:
Due more than
one year after
December 31, 1998
-----------------
(In thousands)
Fixed interest rates $229,731
Adjustable interest rates 81,137
--------
$310,868
========
Loans Secured by One- to Four-Family Real Estate. The principal
lending activity of the Association is the origination of permanent
conventional loans secured by one- to four-family residences, primarily
single-family residences, located within the Association's primary market
area. Each of such loans is secured by a first mortgage on the underlying
real estate and improvements thereon, if any. At December 31, 1998, the
Association's one- to four-family residential real estate loan portfolio was
$279.2 million, or 84% of total loans.
OTS regulations and Ohio law limit the amount which the Association
may lend in relationship to the appraised value of the real estate and
improvements at the time of loan origination. In accordance with such
regulations and laws, the Association typically makes loans on one- to four-
family residences for up to 80% of the value of the real estate and
improvements (the "LTV") and occasionally makes loans with up to a 95% LTV.
The principal amount of any loan which exceeds an 80% LTV at the time of
origination is usually covered by private mortgage insurance at the expense
of the borrower.
Fixed-rate one- to four-family loans are offered by the Association,
currently for terms of up to 30 years. Adjustable-rate one- to four-family
real estate loans ("ARMs") are also offered by the Association for terms of
up to 30 years. The interest rate adjustment periods on such ARMs are one
year and the rates are tied to the one-year U.S. Treasury bill rate. The new
interest rate at each change date is determined by adding a specified
margin, typically between 2.75% and 3.75%, to the prevailing index. The
maximum allowable adjustment at each adjustment date is 1% or 2% with a
maximum adjustment of 6% over the term of the loan. The initial rate on an
ARM with a 1% cap is typically higher than the initial rate on an ARM with a
2% cap to compensate for the reduced interest rate sensitivity. The initial
rate on ARMs originated by the Association is sometimes less than the sum of
the index at the time of origination plus the specified margin. Such loans
may be subject to greater risk of default as the interest rate adjusts to
the fully-indexed level. The Association attempts to reduce the risks by
underwriting such loans on the basis of the payment amount the borrower will
be required to pay during the second year of the loan, assuming the maximum
possible rate increase.
Adjustable-rate loans decrease the Association's interest rate risk
but involve other risks, primarily credit risk, because as interest rates
rise the payment by the borrower rises to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time,
the marketability of the underlying property may be adversely affected by
higher interest rates. The Association believes that these risks have not
had a material adverse effect on the Association to date.
Home Equity Loans. In recent years, lines of credit secured by the
equity in a borrower's principal residence have become increasingly popular.
The Association offers home equity lines of credit in an amount which, when
added to any prior indebtedness secured by the real estate, does not exceed
95% of the appraised value of the real estate. The Association's home equity
loans have terms of up to 30 years. The borrower can draw on the line of
credit during the first 15 years and must repay the loan during the second
15 years. Home equity loans are typically secured by a second mortgage on
the real estate. The Association frequently holds the first mortgage,
although the Association will make home equity loans in cases where another
lender holds the first mortgage. The interest rates charged by the
Association on home equity loans adjust quarterly and are tied to the
composite prime rate of 75% of the thirty largest U.S. banks, as published
in The Wall Street Journal.
At December 31, 1998, the Association had $16.6 million, or 5% of
total loans, in home equity loans.
Loans Secured by Multifamily Real Estate. In addition to loans on one-
to four-family properties, the Association originates loans secured by
multifamily properties containing over four units. Multifamily loans are
offered with adjustable rates for terms of up to 30 years and have a maximum
LTV of 80%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the
control of the borrower. The Association attempts to reduce the risk
associated with multifamily lending by evaluating the creditworthiness of
the borrower and the projected income from the project and by obtaining
personal guarantees on loans made to corporations and partnerships. The
Association requests that borrowers submit rent rolls and that all borrowers
submit financial statements annually to enable the Association to monitor
such loans.
At December 31, 1998, loans secured by multifamily properties totaled
$9.2 million, or 3% of total loans.
Loans Secured by Nonresidential Real Estate. At December 31, 1998,
$11.0 million, or 3%, of the Association's total loans were secured by
permanent mortgages on nonresidential real estate. Such loans have
adjustable rates, terms of up to 25 years and LTVs of up to 75%. Among the
properties securing nonresidential real estate loans are office buildings
and motel and retail properties located in the Association's primary market
area.
Although the loans secured by nonresidential real estate typically
have higher interest rates than one- to four-family residential real estate
loans, nonresidential real estate lending is generally considered to involve
a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. The Association has
endeavored to reduce such risk by evaluating the credit history and past
performance of the borrower, the location of the real estate, the financial
condition of the borrower, the quality and characteristics of the income
stream generated by the property and appraisals supporting the property's
valuation. The Association also makes loans for the construction of
nonresidential real estate.
Construction Loans. The Association makes loans for the construction
of single-family houses, multifamily properties and nonresidential real
estate projects. At December 31, 1998, the Association's loan portfolio
included $11.6 million in construction loans, net of undisbursed proceeds,
or 3% of total loans.
The Association's construction loan portfolio at December 31, 1998,
consisted primarily of loans to individuals and builders for the
construction and permanent financing of single-family residences. Such loans
are offered with fixed or adjustable rates for terms of up to 30 years.
During the first year, while the residence is being constructed, the
borrower is required to pay interest only. At December 31, 1998, loans for
the construction of nonresidential real estate totaled $595,000.
Construction loans, particularly loans involving nonresidential real
estate, generally involve greater underwriting and default risks than do
loans secured by mortgages on existing properties. Loan funds are advanced
upon the security of the project under construction, which is more difficult
to value before the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTV and the total loan funds required
to complete a project. In the event a default on a construction loan occurs
and foreclosure follows, the Association would have to take control of the
project and attempt either to arrange for completion of construction or
dispose of the unfinished project. All of the Association's construction
loans are secured by property in the Association's primary market area.
Commercial Loans. The Association occasionally makes commercial loans
to businesses in its primary market area. Such loans are typically secured
by a security interest in inventory, accounts receivable or other assets of
the borrower. At December 31, 1998, the Association's commercial loan
portfolio was $451,000, or less than 1% of total loans.
Consumer Loans. The Association makes various types of consumer loans,
including education loans, loans made to depositors on the security of their
deposit accounts, automobile loans and other secured loans and unsecured
personal loans. Consumer loans are made at fixed rates of interest and for
varying terms based on the type of loan. At December 31, 1998, the
Association had $4.9 million, or 1% of total loans, invested in consumer
loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail
greater risk than do residential real estate loans. Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. The risk of default on consumer
loans increases during periods of recession, high unemployment and other
adverse economic conditions.
Loan Solicitation and Processing. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Association's
lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel in the office where the loan is originated. The Association
typically obtains a credit report, verification of employment and other
documentation concerning the creditworthiness of the borrower. An appraisal
of the fair market value of the real estate which will be given as security
for the loan is prepared by a staff appraiser or a fee appraiser approved by
the Board of Directors. Upon the completion of the appraisal and the receipt
of information on the credit history of the borrower, the application for a
loan is submitted for review in accordance with the Association's
underwriting guidelines to the Association's Executive Committee or
Underwriting Committee. All loans are ratified by the full Board of
Directors.
Under the Association's current loan guidelines, if a real estate loan
application is approved, title insurance is usually obtained on the real
estate which will secure the mortgage loan. In the past, the Association
used an attorney's opinion for single-family loans, whereas title insurance
was typically used for nonresidential real estate loans. Borrowers are
required to carry satisfactory fire and casualty insurance and flood
insurance, if applicable, and to name the Association as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. The Association originates
both fixed-rate and ARM loans for its portfolio. A majority of the loans in
the Association's portfolio conform to the secondary market standards of the
Federal Home Loan Mortgage Corporation (the "FHLMC") or the Federal National
Mortgage Association (the "FNMA"). In an effort to reduce interest rate risk
and due to the favorable market conditions to do so, the Association,
beginning in the second quarter of 1998, initiated a program to sell a
portion of the Association's fixed-rate loan originations in the secondary
market. The Association intends to continue to charge a higher interest rate
on loans that do not conform to FHLMC or FNMA standards to mitigate the
increased interest rate risk associated with loans that cannot be readily
sold. At December 31, 1998, the Association had $21.1 million of loans
serviced for others.
The following table presents the Association's loan origination,
purchase and sale activity for the periods indicated:
Year ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
(In thousands)
Loans originated:
One- to four-family residential $ 88,834 $ 74,289 $58,626 $46,007 $50,809
Multifamily residential 844 211 702 375 149
Nonresidential 2,335 817 957 848 446
Construction 21,298 22,911 18,751 17,478 15,986
Commercial 2,175 1,674 624 601 836
Consumer 3,327 2,891 2,572 2,568 2,627
-----------------------------------------------------
Total loans originated 118,813 102,793 82,232 67,877 70,853
Loan participations purchased 2,175 1,025 - - -
Reductions:
Principal repayments 101,360 64,950 54,521 40,609 40,571
Loans sold 17,663 - - 1,250 -
Transfers from loans to real estate owned 46 71 - 33 276
-----------------------------------------------------
Total reductions 119,069 65,021 54,521 41,892 40,847
Increase (decrease) in other items, net (1) (3,384) 2,931 1,032 2,398 (530)
-----------------------------------------------------
Net increase $ 5,303 $ 35,866 $26,679 $23,587 $30,536
=====================================================
- --------------------
<F1> Other items consist of the undisbursed portion of construction loans,
net loan origination fees, unearned interest and the allowance for
loan losses.
Federal Lending Limit. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based
capital purposes plus any loan loss reserves not already included in total
capital (the "Lending Limit Capital"). A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." An exception to this limit permits loans of any
type to one borrower of up to $500,000. In addition, the OTS, under certain
circumstances, may permit exceptions to the lending limit on a case-by-case
basis. In applying these limits, the regulations require that loans to
certain related or affiliated borrowers be aggregated.
Based on such limits, the Association was able to lend approximately
$5.4 million to one borrower at December 31, 1998. The largest amount the
Association had outstanding to one borrower and related persons or entities
at December 31, 1998, was $3.9 million, consisting of a number of
residential rental and condominium development projects in the Association's
primary market area.
Loan Origination and Other Fees. The Association realizes loan
origination fee and other fee income from its lending activities and also
realizes income from late payment charges, application fees and fees for
other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement
of Financial Accounting Standards No. 91 as an adjustment to yield over the
life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets.
Delinquent loans are loans for which payment has not been received within 30
days of the payment due date. Loan payments are due on the first day of the
month with the interest portion of the payment applicable to interest
accrued during the prior month. When loan payments have not been made by the
thirtieth of the month, late notices are sent to the borrower. If payment is
not received by the sixtieth day, second notices are sent and telephone
calls are made. Each loan bears a late payment penalty which is assessed as
soon as such loan is more than 15 days delinquent. The late penalty is 5% of
the payment due.
When a loan secured by real estate becomes delinquent more than 90
days, the Board of Directors reviews the loan and foreclosure proceedings
are instituted if the Board determines that the delinquency is not likely to
be resolved in a reasonable period of time. An appraisal of the security is
performed when foreclosure proceedings are initiated. If the appraisal
indicates that the value of the collateral is less than the book value of
the loan, a valuation allowance is established for such loan.
When a consumer loan becomes more than 120 days past due, the loan is
classified loss and a specific reserve is established for the book balance
of the loan.
The following table reflects the amount of loans in a delinquent
status as of the dates indicated:
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of Total of Total of Total
Number Amount loans Number Amount loans Number Amount loans
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans delinquent for:
30 - 59 days 114 $2,336 0.70% 75 $2,019 0.62% 65 $1,267 0.43%
60 - 89 days 35 1,266 0.38 49 1,327 0.40 34 575 0.20
90 days and over 71 1,285 0.39 38 763 0.23 75 999 0.34
-----------------------------------------------------------------------------------------
Total delinquent loans 220 $4,887 1.47% 162 $4,109 1.25% 174 $2,841 0.97%
=========================================================================================
At December 31,
------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
Percent Percent
of Total of Total
Number Amount loans Number Amount loans
------------------------------------------------------------
(Dollars in thousands)
Loans delinquent for:
30 - 59 days 70 $1,238 0.47% 56 $1,394 0.58%
60 - 89 days 47 749 0.28 36 1,342 0.56
90 days and over 73 1,502 0.57 47 1,142 0.48
----------------------------------------------------------
Total delinquent loans 190 $3,489 1.32% 139 $3,878 1.62%
==========================================================
Nonperforming assets include nonaccruing loans, accruing loans which
are delinquent 90 days or more, real estate acquired by foreclosure or by
deed-in-lieu thereof, and repossessed assets. The Association ceases to
accrue interest on real estate loans if the collateral value is not
adequate, in the opinion of management, to cover the outstanding principal
and interest.
The following table sets forth information with respect to the accrual
and nonaccrual status of the Association's loans and other nonperforming
assets at the dates indicated:
At December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
(Dollars in thousands)
Accruing loans delinquent 90 days or more $ 512 $ 294 $ 721 $ 939 $ 874
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family 963 710 504 621 548
Multifamily - - - - -
Nonresidential - 10 - 7 63
Consumer 13 18 13 5 13
--------------------------------------------------
Total nonaccrual loans 976 738 517 633 624
--------------------------------------------------
Total nonperforming loans 1,488 1,032 1,238 1,572 1,498
Real estate owned 5 76 5 5 40
--------------------------------------------------
Total nonperforming assets $1,493 $1,108 $1,243 $1,577 $1,538
==================================================
Allowance for loan losses $1,930 $1,742 $1,557 $1,376 $1,209
==================================================
Nonperforming assets as a
percent of total assets 0.38% 0.31% 0.38% 0.49% 0.58%
Nonperforming loans as a
percent of total loans 0.45% 0.32% 0.42% 0.60% 0.62%
Allowance for loan losses as a
percent of nonperforming loans 129.72% 168.76% 125.77% 87.53% 80.71%
For the year ended December 31, 1998, gross interest income which
would have been recorded had nonaccruing loans been current in accordance
with their original terms was $22,000. Interest collected on such loans and
included in net income was $12,000.
Real estate acquired by the Association as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. REO
is recorded by the Association at the estimated fair value of the real
estate at the date of acquisition, less estimated selling expenses, and any
write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual, if any, ceases no later than the date of acquisition of
the real estate, and all costs incurred from such date in maintaining the
property are expensed. Costs relating to the development and improvement of
the property are capitalized to the extent of fair value.
The Association classifies its own assets on a monthly basis in
accordance with federal regulations. Problem assets are classified as
"substandard," "doubtful" or "loss." "Substandard" assets have one or more
defined weaknesses and are characterized by the distinct possibility that
the Association will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard"
assets, with the additional characteristics that (i) the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and (ii) there is a high possibility of
loss. An asset classified "loss" is considered uncollectible and of such
little value that its continuance as an asset of the Association is not
warranted.
The aggregate amounts of the Association's classified assets at the
dates indicated were as follows:
At December 31,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
(In thousands)
Substandard $1,482 $786 $874 $1,408 $1,441
Doubtful - - - - -
Loss 23 45 54 46 74
------------------------------------------
Total classified assets $1,505 $831 $928 $1,454 $1,515
==========================================
The Association establishes general allowances for loan losses for any
loan classified as substandard or doubtful. If an asset, or portion thereof,
is classified as loss, the Association establishes specific allowances for
losses in the amount of 100% of the portion of the asset classified loss.
Generally, the Association charges off the portion of any real estate loan
deemed to be uncollectible.
The Association analyzes each classified asset on a monthly basis to
determine whether a change in its classification is appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the
use of the real estate securing the loan, the status of the borrower and the
appraised value of the real estate. As such factors change, the
classification of the asset will change accordingly.
Allowance for Loan Losses. Senior management, with oversight by the
Board, reviews on a monthly basis the allowance for loan losses as it
relates to a number of relevant factors, including but not limited to,
trends in the level of delinquent and nonperforming assets and classified
loans, current and anticipated economic conditions in the primary lending
area, past loss experience and probable losses arising from specific problem
assets. To a lesser extent, management also considers loan concentrations to
single borrowers and changes in the composition of the loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking" statement within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Factors that could affect the
adequacy of the loan loss allowance include, but are not limited to, the
following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which
may cause the value of real estate and other properties that secure
outstanding loans to decline; (2) unforeseen adverse changes in
circumstances with respect to certain large loans; (3) decreases in the
value of collateral securing consumer loans to amounts less than the
outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that the Association must recognize additions to
its loan loss allowance based on such regulators' judgment of information
available to them at the time of their examinations.
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated:
Year ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
(Dollars in thousands)
Balance at beginning of period $1,742 $1,557 $1,376 $1,209 $1,001
Charge-offs (14) (2) - (17) (4)
Recoveries 2 1 1 4 12
----------------------------------------------
Net (charge-offs) recoveries (12) (1) 1 (13) 8
Provision for loan losses 200 186 180 180 200
----------------------------------------------
Balance at end of year $1,930 $1,742 $1,557 $1,376 $1,209
==============================================
Net (charge-offs) recoveries to
average loans 0.00% 0.00% 0.00% (0.01)% 0.00%
Allowance for loan losses to
total loans 0.59% 0.54% 0.53% 0.52% 0.50%
The following table sets forth the allocation of the Association's
allowance for loan losses by type of loan at the dates indicated:
1998 1997 1996
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
loans loans loans
in each in each in each
category to category to category to
Amount total loans Amount total loans Amount total loans
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at year end
applicable to:
Real estate loans $1,442 98% $1,303 99% $1,166 99%
Commercial loans 38 - 34 - 30 -
Consumer loans 164 2 151 1 134 1
Unallocated 286 - 254 - 227 -
-------------------------------------------------------------------
Total $1,930 100% $1,742 100% $1,557 100%
===================================================================
1995 1994
--------------------- ---------------------
Percent of Percent of
loans loans
in each in each
category to category to
Amount total loans Amount total loans
----------------------------------------------
(Dollars in thousands)
Balance at year end
applicable to:
Real estate loans $1,036 98% $ 913 98%
Commercial loans 27 - 23 -
Consumer loans 112 2 103 2
Unallocated 201 - 170 -
------------------------------------------
Total $1,376 100% $1,209 100%
==========================================
Because the loan loss allowance is based on estimates, it is monitored
monthly and adjusted as necessary to provide an adequate allowance.
Investment Activities
Federal regulation and Ohio law permit the Association to invest in
various types of investments, including interest- bearing deposits in other
financial institutions, U.S. Treasury and agency obligations, mortgage-
backed securities and certain other specified investments. The Board of
Directors of the Association has adopted an investment policy which
authorizes management to make investments in U.S. Government and agency
securities, deposits in the FHLB, certificates of deposit in federally-
insured financial institutions, banker's acceptances issued by major U.S.
banks, corporate debt securities rated at least "AA," or equivalent, by a
major statistical rating firm and municipal or other tax free obligations.
The Association's investment policy is designed primarily to provide and
maintain liquidity within regulatory guidelines, to maintain a balance of
high quality investments to minimize risk and to maximize return without
sacrificing liquidity and safety.
The following table sets forth the composition of the Association's
interest-bearing deposits, investment securities and mortgage-backed
securities at the dates indicated:
At December 31,
-------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total
-------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits:
Demand deposits $ 5,469 11.16% $ 5,469 11.16% $ 3,499 11.30% $ 3,499 11.29%
Overnight deposits 22,000 44.91 22,000 44.89 6,000 19.38 6,000 19.35
-------------------------------------------------------------------------------------
Total interest-bearing deposits 27,469 56.07 27,469 56.05 9,499 30.68 9,499 30.64
Investment securities:
U.S. Treasury securities:
Available for sale 12,156 24.81 12,156 24.81 16,048 51.82 16,048 51.76
U.S. agency securities:
Available for sale 6,042 12.33 6,042 12.33 3,011 9.72 3,011 9.71
Equity securities (1) 3,037 6.20 3,037 6.20 1,971 6.37 1,971 6.36
-------------------------------------------------------------------------------------
Total investment securities 21,235 43.34 21,235 43.34 21,030 67.91 21,030 67.83
-------------------------------------------------------------------------------------
Mortgage-backed securities 283 0.59 302 0.61 437 1.41 474 1.53
-------------------------------------------------------------------------------------
Total investments $48,987 100.00% $49,006 100.00% $30,966 100.00% $31,003 100.00%
=====================================================================================
At December 31,
----------------------------------------
1996
----------------------------------------
Carrying % of Fair % of
value total value total
----------------------------------------
(Dollars in thousands)
Interest-bearing deposits:
Demand deposits $ 2,101 7.03% $ 2,101 7.02%
Overnight deposits 4,000 13.38 4,000 13.36
----------------------------------------
Total interest-bearing deposits 6,101 20.41 6,101 20.38
Investment securities:
U.S. Treasury securities:
Available for sale 21,938 73.38 21,938 73.27
U.S. agency securities:
Available for sale - - - -
Equity securities (1) 1,298 4.34 1,298 4.33
----------------------------------------
Total investment securities 23,236 77.72 23,236 77.60
----------------------------------------
Mortgage-backed securities 561 1.87 608 2.02
----------------------------------------
Total investments $29,898 100.00% $29,945 100.00%
========================================
- --------------------
<F1> Comprised of Federal Home Loan Mortgage Corporation preferred stock.
The maturities of the Association's interest-bearing deposits,
investment securities and mortgage-backed securities at December 31, 1998,
are as follows:
At December 31, 1998
----------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years
------------------- ------------------- ------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits $27,469 4.68% $ - -% $ - -% $ - -%
U.S. Treasury securities 6,018 5.52 6,138 6.33 - - - -
U.S. agency securities 4,014 5.87 2,028 6.09 - - - -
Mortgage-backed securities - - 58 9.82 12 8.50 213 10.76
---------------------------------------------------------------------------------------
Total $37,501 4.94% $8,224 6.30% $ 12 8.50% $213 10.76%
=======================================================================================
At December 31, 1998
------------------------------------
Total
------------------------------------
Carrying Market Weighted
value value average yield
------------------------------------
(Dollars in thousands)
Interest-bearing deposits $27,469 $27,469 4.68%
U.S. Treasury securities 12,156 12,156 5.92
U.S. agency securities 6,042 6,042 5.94
Mortgage-backed securities 283 302 10.47
-------------------------------
Total $45,950 $45,969 5.21%
===============================
Not included in the preceding table is $3.0 million of Federal Home Loan
Mortgage Corporation preferred stock which has no stated maturity.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments
and principal repayments on loans and income on interest-earning assets.
Loan payments are a relatively stable source of funds, while deposit inflows
and outflows fluctuate more in response to general interest rates and money
market conditions. The Association also utilizes FHLB advances as an
alternative source of funds.
Deposits. Deposits are attracted principally from within the
Association's primary market area through the offering of a broad selection
of deposit instruments, including NOW accounts, demand deposit accounts,
money market accounts, regular passbook savings accounts, term certificate
accounts, IRAs and Keogh accounts. Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management based on the Association's liquidity
requirements, growth goals and interest rates paid by competitors. The
Association does not use brokers to attract deposits. The amount of deposits
from outside the Association's primary market area is not significant.
At December 31, 1998, the Association's certificates of deposit
totaled $207.9 million, or 72% of total deposits. Of such amount,
approximately $142.4 million in certificates of deposit mature within one
year. Based on past experience and the Association's prevailing pricing
strategies, management believes that a substantial percentage of such
certificates will be renewed with the Association at maturity. If deviation
from historical experience occurs, the Association can utilize borrowings
from the FHLB of Cincinnati as an alternative source of funds, up to the
Association's limit on such borrowings, which was $69.1 million at December
31, 1998.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Association at the dates indicated:
December 31,
------------------------------------------------------------------------------------------------
Weighted 1998 1997 1996
average rate at ------------------------ ------------------------ -----------------------
December 31, Percent of Percent of Percent of
1998 Amount total deposits Amount total deposits Amount total deposits
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Transaction accounts:
Noninterest-bearing demand
deposits -% $ 4,009 1.39% $ 3,287 1.21% $ 3,173 1.22%
Passbook savings accounts 3.10 54,258 18.80 52,622 19.43 53,410 20.62
NOW accounts 2.90 17,750 6.15 15,277 5.64 14,321 5.53
Money market accounts 3.00 4,713 1.63 4,049 1.49 4,531 1.75
---------------------------------------------------------------------------
Total transaction accounts 80,730 27.97 75,235 27.77 75,435 29.12
Certificates of deposit:
4.01% - 6.00% 5.42 149,696 51.87 120,113 44.33 130,367 50.32
6.01% - 8.00% 6.17 33,578 11.64 51,020 18.83 28,962 11.18
8.01% - 10.00% - - - - - 6 0.00
Adjustable-rate (1) 5.45 24,580 8.52 24,589 9.07 24,304 9.38
---------------------------------------------------------------------------
Total certificates
of deposit 5.54 207,854 72.03 195,722 72.23 183,639 70.88
---------------------------------------------------------------------------
Total deposits 4.80% $288,584 100.0% $270,957 100.0% $259,074 100.0%
==========================================================================
- --------------------
<F1> Consists of IRA and Keogh accounts, the rates on which adjust monthly
at the discretion of the Association.
The Association bids on deposits of public funds from entities in its
primary market area. The amount of such deposits was approximately $20.8
million at December 31, 1998.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1998:
Amount Due
----------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
- -------------------------------------------------------------------------------------------
(In thousands)
4.01% to 6.00% $110,709 $18,155 $15,170 $5,662 $149,696
6.01% to 8.00% 15,622 11,332 4,958 1,666 33,578
Adjustable rate 16,065 8,515 - - 24,580
----------------------------------------------------------
Total certificates of deposit $142,396 $38,002 $20,128 $7,328 $207,854
==========================================================
The following table presents the amount of the Association's
certificates of deposit of $100,000 or more, by the time remaining until
maturity, at December 31, 1998:
Maturity Amount
- ----------------------------------------
(In thousands)
Three months or less $ 479
Over 3 months to 6 months 7,376
Over 6 months to 12 months 25,839
Over 12 months 12,201
-------
Total $45,895
=======
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
Year ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
(Dollars in thousands)
Beginning balance $270,957 $259,074 $238,282
Deposits 445,214 166,892 399,604
Withdrawals (438,622) (165,456) (388,210)
--------------------------------
Net deposits before interest credited 277,549 260,510 249,676
Interest credited 11,035 10,447 9,398
--------------------------------
Ending balance $288,584 $270,957 $259,074
================================
Net increase $ 17,627 $ 11,883 $ 20,792
Percent increase 6.5% 4.6% 8.7%
Borrowings. The FHLB system functions as a central reserve bank,
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, the
Association is authorized to apply for advances from the FHLB of Cincinnati,
provided certain standards of creditworthiness have been met. Under current
regulations, an association must meet certain qualifications to be eligible
for FHLB advances. The extent to which an association is eligible for such
advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL test"). If an association meets the QTL test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL test, it will be eligible for such
advances only to the extent it holds specified QTL test assets. At December
31, 1998, the Association was in compliance with the QTL test.
The following table sets forth the maximum month-end balance and
average balance of the Association's FHLB advances during the periods
indicated:
Year ended December 31,
----------------------------
1998 1997 1996
----------------------------
(Dollars in thousands)
Maximum balance $37,000 $29,000 $2,000
Average balance 35,692 16,615 462
Average interest rate paid 6.15% 6.38% 4.76%
At December 31, 1998, the Association had outstanding FHLB advances
totaling $35.0 million, with a weighted average interest rate of 6.11%.
Competition
The Association competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, the Association competes
with other savings banks, savings associations, commercial banks, mortgage
brokers, consumer finance companies, credit unions, leasing companies and
other lenders. The Association competes for loan originations primarily
through the interest rates and loan fees it charges and through the
efficiency and quality of services it provides to borrowers. Competition is
intense and is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable. The Association
does not offer all of the products and services offered by some of its
competitors, particularly commercial banks. The Association monitors the
product offerings of its competitors and adds new products when it can do so
competitively and cost effectively.
The size of financial institutions competing with the Association is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching
and acquisitions. Such increased competition may have an adverse effect upon
the Association.
Employees
As of December 31, 1998, the Association had 84 full-time employees
and 8 part-time employees. The Association believes that relations with its
employees are excellent. The Association offers health and disability
benefits, life insurance and an employee stock ownership plan. None of the
employees of the Association are represented by a collective bargaining
unit.
REGULATION
General
As a savings and loan association incorporated under the laws of Ohio,
Industrial is subject to regulation, examination and oversight by the OTS
and the Superintendent of the Division of Financial Institutions of the
Department of Commerce of the State of Ohio (the "Ohio Superintendent").
Because Industrial's deposits are insured by the FDIC, Industrial also is
subject to general oversight by the FDIC. Industrial must file periodic
reports with the OTS, the Ohio Superintendent and the FDIC concerning its
activities and financial condition. Examinations are conducted periodically
by federal and state regulators to determine whether Industrial is in
compliance with various regulatory requirements and is operating in a safe
and sound manner. Industrial is a member of the FHLB of Cincinnati.
The Holding Company is a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA") and is,
therefore, subject to regulation, examination, and oversight by the OTS and
is required to submit periodic reports to the OTS. Because the Holding
Company and Industrial are corporations organized under Ohio law, they are
also subject to the provisions of the Ohio Revised Code applicable to
corporations generally.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS
and Industrial may be regulated under federal law as a bank or may be
required to change its charter. Such change in regulation or charter would
likely change the range of activities in which Industrial may engage and
would probably subject Industrial to more regulation by the FDIC. In
addition, the Holding Company might become subject to different holding
company regulations, including separate capital requirements. At this time,
the Holding Company cannot predict when or whether Congress may actually
pass legislation regarding the Holding Company's and Industrial's regulatory
requirements or charter. Although such legislation may change the activities
in which either the Holding Company and Industrial may engage, it is not
anticipated that the current activities of the Holding Company or Industrial
will be materially affected by those activity limits.
Ohio Savings and Loan Law
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the
laws of the State of Ohio. Ohio law prescribes the permissible investments
and activities of Ohio savings and loan associations, including the types of
lending that such associations may engage in and the investments in real
estate, subsidiaries, and corporate or government securities that such
associations may make. The ability of Ohio associations to engage in these
state-authorized investments and activities is subject to oversight and
approval by the FDIC, if such investments or activities are not permissible
for a federally-chartered savings and loan association.
The Ohio Superintendent also has approval authority over any mergers
involving, or acquisitions of control of, Ohio savings and loan
associations. The Ohio Superintendent may initiate certain supervisory
measures or formal enforcement actions against Ohio associations.
Ultimately, if the grounds provided by law exist, the Ohio Superintendent
may place an Ohio association in conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of Industrial
approximately once every eighteen months. Such examinations are usually
conducted jointly with one or both federal regulators. The Ohio
Superintendent imposes assessments on Ohio associations based on their asset
size to cover the cost of supervision and examination.
Office of Thrift Supervision
General. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings and loan associations and all other savings and loan associations,
the deposits of which are insured by the FDIC. The OTS issues regulations
governing the operation of savings and loan associations, regularly examines
such associations and imposes assessments on savings associations based on
their asset size to cover the costs of this supervision and examination. The
OTS also may initiate enforcement actions against savings and loan
associations and certain persons affiliated with them for violations of laws
or regulations or for engaging in unsafe or unsound practices. If the
grounds provided by law exist, the OTS may appoint a conservator or receiver
for a savings and loan association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community
reinvestment regulations evaluate how well and to what extent an institution
lends and invests in its designated service area, with particular emphasis
on low- to moderate-income communities and borrowers in that area.
Industrial has received a "satisfactory" examination rating under those
regulations.
Regulatory Capital Requirements. Industrial is required by OTS
regulations to meet certain minimum capital requirements. Current capital
requirements call for tangible capital of 1.5% of adjusted total assets,
core capital (which for Industrial consists solely of tangible capital) of
3.0% of adjusted total assets and risk-based capital (which for Industrial
consists of core capital and general valuation allowances) of 8.0% of risk-
weighted assets (assets, including certain off-balance sheet items, are
weighted at percentage levels ranging from 0% to 100% depending on the
relative risk).
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and an
acceptable level of risk will be required to maintain core capital of from
4% to 5%, depending on the association's examination rating and overall
risk. Industrial does not anticipate that it will be adversely affected if
the core capital requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates
on the value of its portfolio as determined under the methodology of the
OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, Industrial will be required to deduct one-half of such
excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets
and a risk-based capital ratio in excess of 12% will not be subject to the
interest rate risk component. Pending implementation of the interest rate
risk component, the OTS has the authority to impose a higher individualized
capital requirement on any savings association it deems to have excess
interest rate risk. The OTS also may adjust the risk-based capital
requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility
in determining how to resolve the problems of the institution. The OTS has
defined these capital levels as follows: (i) well-capitalized associations
must have total risk-based capital of at least 10%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of at
least 6% and core capital of at least 5%; (ii) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4%, and core capital of 4% (except
for associations receiving the highest examination rating, in which case the
level is 3%) but are not well-capitalized; (iii) undercapitalized
associations are those that do not meet regulatory limits, but that are not
significantly undercapitalized; (iv) significantly undercapitalized
associations have total risk-based capital of less than 6%, core risk-based
capital of less than 3% or core capital of less than 3%; and (v) critically
undercapitalized associations are those with core capital of less than 2% of
total assets. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association is deemed to be engaging in an
unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on
matters other than capital or it is deemed to be in an unsafe or unsound
condition. An undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized.
Undercapitalized associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Critically
undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except
under limited circumstances. Industrial's capital at December 31, 1998, met
the standards for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a
capital distribution to anyone or paying management fees to any person
having control of the association if, after such distribution or payment,
the association would be undercapitalized. In addition, each company
controlling an undercapitalized association must guarantee that the
association will comply with its capital plan until the association has been
adequately capitalized on an average during each of four preceding calendar
quarters and must provide adequate assurances of performance. The aggregate
liability pursuant to such guarantee is limited to the lesser of (i) an
amount equal to 5% of the association's total assets at the time the
association became undercapitalized or (ii) the amount that is necessary to
bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its
capital restoration plan.
Liquidity. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits,
association's acceptances, and specified United States Government, state or
federal agency obligations) equal to a monthly average of not less than 4%
of its net withdrawable savings deposits plus borrowings payable in one year
or less. Monetary penalties may be imposed upon member institutions failing
to meet liquidity requirements. The eligible liquidity of Industrial at
December 31, 1998, was approximately $31.1 million, or 7.90%, which exceeded
the 4% liquidity requirement by approximately $18.8 million.
Qualified Thrift Lender Test. Prior to September 30, 1996, the QTL
test required savings associations to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
("QTI"), which are generally related to domestic residential real estate and
manufactured housing and include stock issued by any FHLB, the FHLMC or the
FNMA. Under this test 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct
business, and 20% of liquid assets) must consist of QTI on a monthly average
basis in 9 out of every 12 months. Congress created a second QTL test,
effective September 30, 1996, pursuant to which a savings association may
also qualify as a QTL thrift if at least 60% of the institution's assets (on
a tax basis) consist of specified assets (generally loans secured by
residential real estate or deposits, educational loans, cash, and certain
governmental obligations). The OTS may grant exceptions to the QTL test
under certain circumstances. If a savings association fails to meet the QTL
test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to
meet the QTL test will not be eligible for new FHLB advances. At
December 31, 1998, Industrial met the QTL test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower or group of related
borrowers to an amount equal to 15% of the association's Lending Limit
Capital. A savings association may lend to one borrower an additional amount
not to exceed 10% of the association's Lending Limit Capital, if the
additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral."
Certain types of loans are not subject to this limit. In applying this
limit, the regulations require that loans to certain related borrowers be
aggregated. An exception to this limit permits loans of any type to one
borrower up to $500,000.
Based on such limits, Industrial was able to lend approximately $5.4
million to one borrower at December 31, 1998. The largest amount Industrial
had outstanding to any group of affiliated borrowers at December 31, 1998,
was $3.9 million, which consisted of forty-four loans, secured by a number
of residential rental and condominium development projects. At December 31,
1998, such loans were performing in accordance with their terms.
Transactions with Insiders and Affiliates. Loans to executive
officers, directors, and principal shareholders and their related interests
must conform to the lending limit on loans to one borrower, and the total of
such loans to executive officers, directors, principal shareholders, and
their related interests cannot exceed Industrial's Lending Limit Capital (or
200% of Lending Limit Capital for qualifying institutions with less than
$100 million in assets). Most loans to directors, executive officers, and
principal shareholders must be approved in advance by a majority of the
"disinterested" members of the board of directors of Industrial with any
"interested" director not participating. All loans to directors, executive
officers, and principal shareholders must be made on terms substantially the
same as offered in comparable transactions with the general public or as
offered to all employees in a company-wide benefit program, and loans to
executive officers are subject to additional limitations. Industrial was in
compliance with such restrictions at December 31, 1998.
All transactions between a savings association and its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls,
is controlled by or is under common control with, the savings association.
The Holding Company will be an affiliate of Industrial. Generally, Sections
23A and 23B of the FRA (i) limit the extent to which a savings association
or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, (ii) limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(iii) require that all such transactions be on terms substantially the same,
or at least as favorable to the association, as those provided in
transactions with a non-affiliate. The term "covered transaction" includes
the making of loans, purchase of assets, issuance of a guarantee, and other
similar types of transactions. In addition to the limits in Sections 23A and
23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Industrial was in
compliance with these requirements and restrictions at December 31, 1998.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, according to ratings of associations based on their capital
level and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
repurchases, and certain other acquisitions by an association of its shares
and payments to stockholders of another association in an acquisition of
such other association.
For purposes of the capital distribution regulations, each institution
is categorized into one of three tiers. The first rating category is Tier 1,
consisting of associations that, before and after the proposed capital
distribution, meet their fully phased-in capital requirement. Associations
in this category may make capital distributions during any calendar year
equal to the greater of (i) 100% of its net income, current year-to-date,
plus 50% of the amount by which the lesser of the association's tangible,
core or risk-based capital exceeds its fully phased-in capital requirement
for such capital component, as measured at the beginning of the calendar
year, or (ii) the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the
proposed capital distribution, meet their current minimum, but not fully
phased-in, capital requirement. Associations in this category may make
capital distributions up to 75% of their net income over the most recent
four quarters. Tier 3 associations do not meet their current minimum capital
requirement and must obtain OTS approval of any capital distribution. A Tier
1 association deemed to be in need of more than normal supervision by the
OTS may be treated as a Tier 2 or a Tier 3 association.
Industrial is also prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of
Industrial would be reduced below the amount required to be maintained for
the liquidation account established in connection with the Conversion. In
addition, as a subsidiary of the Holding Company, Industrial is also
required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the dividend during that 30-day period
based on safety and soundness concerns. Moreover, the OTS may prohibit any
capital distribution otherwise permitted by regulation if the OTS determines
that such distribution would constitute an unsafe or unsound practice.
Holding Company Regulation. The Holding Company is a savings and loan
holding company within the meaning of the HOLA. As such, the Holding Company
has registered with the OTS and is subject to OTS regulations, examination,
supervision, and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan
holding company, without prior approval of the OTS, or from acquiring or
retaining more than 5% of the voting shares of a savings and loan
association or holding company thereof which is not a subsidiary. Under
certain circumstances, a savings and loan holding company is permitted to
acquire, with the approval of the OTS, up to 15% of the previously unissued
voting shares of an undercapitalized savings and loan association for cash
without being deemed to control the association. Except with the prior
approval of the OTS, no director or officer of a savings and loan
holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock may also acquire control of any savings
institution, other than a subsidiary institution, or any other savings and
loan holding company.
The Holding Company is a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies and such companies are the only
financial institution holding companies which may engage in commercial,
securities, and insurance activities without limitation. The broad latitude
under current law can be restricted if the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings and loan
association. The OTS may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the
savings and loan association; (ii) transactions between the savings and loan
association and its affiliates; and (iii) any activities of the savings and
loan association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings and
loan association. Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings and loan association subsidiary of a holding company fails to meet
the QTL, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. At
December 31, 1998, Industrial met the QTL.
Congress is considering legislation which may limit the Holding
Company's ability to engage in these activities and the Holding Company
cannot predict if and in what form these proposals might become law.
However, such limits would not impact the Holding Company's initial activity
of holding the stock of Industrial.
If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with
Industrial, the Holding Company would become a multiple savings and loan
holding company. Unless the acquisition is an emergency thrift acquisition
and each subsidiary savings and loan association meets the QTL, the
activities of the Holding Company and any of its subsidiaries (other than
Industrial or other subsidiary savings and loan associations) would
thereafter be subject to activity restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or
subsidiary thereof that is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing or liquidating assets owned by or acquired from a
subsidiary savings institution; (iv) holding or managing properties used or
occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities previously directly authorized by
federal regulation as of March 5, 1987, to be engaged in by multiple holding
companies; or (vii) those activities authorized by the FRB as permissible
for bank holding companies, unless the OTS by regulation prohibits or limits
such activities for savings and loan holding companies, and which have been
approved by the OTS prior to being engaged in by a multiple holding company.
The OTS may approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings and loan
associations in more than one state only if the multiple savings and loan
holding company involved controls a savings and loan association that
operated a home or branch office in the state of Industrial to be acquired
as of March 5, 1987, or if the laws of the state in which the institution to
be acquired is located specifically permit institutions to be acquired by
state-chartered institutions or savings and loan holding companies located
in the state where the acquiring entity is located (or by a holding company
that controls such state-chartered savings institutions). As under prior
law, the OTS may approve an acquisition resulting in a multiple savings and
loan holding company controlling savings and loan associations in more than
one state in the case of certain emergency thrift acquisitions. Bank holding
companies have had more expansive authority to make interstate acquisitions
than savings and loan holding companies since August 1995.
FDIC Regulations
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally-
insured banks and thrifts and safeguards the safety and soundness of the
banking and thrift industries. The FDIC administers two separate insurance
funds, Bank Insurance Fund (the "BIF") for commercial banks and state
savings banks and the SAIF for savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. Industrial's deposit
accounts are insured by the FDIC in the SAIF up to the prescribed limits.
The FDIC has examination authority over all insured depository institutions,
including Industrial, and has authority to initiate enforcement actions
against federally-insured savings associations if the FDIC does not believe
the OTS has taken appropriate action to safeguard safety and soundness and
the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level
has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the
risk the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution. BIF assessments for healthy banks
in 1997 were $.012 per $100 in deposits, and SAIF assessments for healthy
institutions in 1997 were $.061 per $100 in deposits.
FRB Regulations
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to
$46.5 million (subject to an exemption of up to $4.9 million), and of 10% of
net transaction accounts over $46.5 million. At December 31, 1998,
Industrial was in compliance with this reserve requirement.
Federal Home Loan Banks
The FHLBs provide credit to their members in the form of advances.
Industrial is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal
to the greater of 1% of the aggregate outstanding principal amount of
Industrial's residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, and 5% of its advances
from the FHLB. Industrial was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $3.3 million at
December 31, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed,
whole first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the U.S. Government or an agency thereof; deposits in any
FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending
to first-time home buyers. All long-term advances by each FHLB must be made
only to provide funds for residential housing finance.
TAXATION
Federal Taxation
The Holding Company and Industrial are each subject to the federal tax
laws and regulations which apply to corporations generally. In addition to
the regular income tax, the Holding Company and Industrial may be subject to
an alternative minimum tax. An alternative minimum tax is imposed at a
minimum tax rate of 20% on "alternative minimum taxable income" (which is
the sum of a corporation's regular taxable income, with certain adjustments,
and tax preference items), less any available exemption. Such tax preference
items include interest on certain tax-exempt bonds issued after August 7,
1986. In addition, 75% of the amount by which a corporation's "adjusted
current earnings" exceeds its alternative minimum taxable income computed
without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. The
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average
gross receipts of $5,000,000 or less for the three tax years ending with its
first tax year beginning after December 31, 1997. Once a corporation is
recognized as a small corporation, it will continue to be exempt from the
alternative minimum tax for as long as its average gross receipts for the
prior three-year period do not exceed $7,500,000. In determining if a
corporation meets this requirement, the first year that it achieved small
corporation status is not taken into consideration.
Based on Industrial's average gross receipts of $28.5 million for the
three tax years ending on December 31, 1998, Industrial would not qualify as
a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, were allowed deductions for bad debts under methods
more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the
specific charge off method of Section 166 of the Code, or one of the two
reserve methods of Section 593 of the Code. The reserve methods under
Section 593 of the Code permitted a thrift institution annually to elect to
deduct bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was
generally allowed a deduction for an addition to its bad debt reserve equal
to the greater of (i) an amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the
experience method or the percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective
for taxable years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated
as large banks are required to use only the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent
of the Secretary of the Treasury. Section 481(a) of the Code requires
certain amounts to be recaptured with respect to such change. Generally, the
amounts to be recaptured will be determined solely with respect to the
"applicable excess reserves" of the taxpayer. The amount of the applicable
excess reserves will be taken into account ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject
to the residential loan requirement described below. In the case of a thrift
institution that becomes a large bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of
its reserve for losses on qualifying real property loans (generally loans
secured by improved real estate) and its reserve for losses on nonqualifying
loans (all other types of loans) as of the close of its last taxable year
beginning before January 1, 1996, over (ii) the balances of such reserves as
of the close of its last taxable year beginning before January 1, 1988
(i.e., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for
losses on qualifying real property loans and its reserve for losses on
nonqualifying loans as of the close of its last taxable year beginning
before January 1, 1996, over (ii) the greater of the balance of (a) its pre-
1988 reserves or (b) what the thrift's reserves would have been at the close
of its last year beginning before January 1, 1996, had the thrift always
used the experience method.
For taxable years that begin on or after January 1, 1996, and before
January 1, 1998, if a thrift meets the residential loan requirement for a
tax year, the recapture of the applicable excess reserves otherwise required
to be taken into account as a Code Section 481(a) adjustment for the year
will be suspended. A thrift meets the residential loan requirement if, for
the tax year, the principal amount of residential loans made by the thrift
during the year is not less then its base amount. The "base amount"
generally is the average of the principal amounts of the residential loans
made by the thrift during the six most recent tax years beginning before
January 1, 1996. A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential real and church
property and certain mobile homes), but only to the extent that the loan is
made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture
in the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and third, out
of such other accounts as may be proper. To the extent a distribution by
Industrial to the Holding Company is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and
Industrial's gross income for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid
out of the pre-1988 reserves. As of December 31, 1998, Industrial's pre-1988
reserves for tax purposes totaled approximately $4.2 million. Industrial
believes it had approximately $2.4 million of accumulated earnings and
profits for tax purposes as of December 31, 1998, which would be available
for dividend distributions, provided regulatory restrictions applicable to
the payment of dividends are met. No representation can be made as to
whether Industrial will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Industrial have been audited or closed without
audit through fiscal year 1994. In the opinion of management, any
examination of open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of Industrial.
Ohio Taxation
The Holding Company is subject to the Ohio corporation franchise tax,
which, as applied to the Holding Company, is a tax measured by both net
earnings and net worth. The rate of tax is the greater of (i) 5.1% on the
first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio
taxable income in excess of $50,000 and (ii) 0.582% times taxable net worth.
Under these alternative measures of computing tax liability, the states to
which a taxpayer's adjusted total net income and adjusted total net worth
are apportioned or allocated are determined by complex formulas. The minimum
tax is $50 per year.
A special litter tax is also applicable to all corporations, including
the Holding Company, subject to the Ohio corporation franchise tax other
than "financial institutions." If the franchise tax is paid on the net
income basis, the litter tax is equal to .11% of the first $50,000 of
computed Ohio taxable income and .22% of computed Ohio taxable income in
excess of $50,000. If the franchise tax is paid on the net worth basis, the
litter tax is equal to .014% times taxable net worth.
Ohio corporation franchise tax law is scheduled to change markedly as
a consequences of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In
general, tax liability will be the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.5% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.40% of taxable net worth. Under these
alternative measures of computing tax liability, the states to which total
net income and total net worth will be apportioned or allocated will
continue to be determined by complex formulas, but the formulas change. The
minimum tax will still be $50 per year and maximum tax liability as measured
by net worth will be limited to $150,000 per year. The special litter taxes
remain in effect. Various other changes in the tax law may affect the
Holding Company.
Industrial is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of
Industrial's apportioned book net worth, determined in accordance with GAAP,
less any statutory deduction. This rate of tax is scheduled to decrease in
each of the years 1999 and 2000. As a "financial institution," Industrial is
not subject to any tax based upon net income or net profits imposed by the
State of Ohio.
Item 2. Description of Property
The following table sets forth certain information at December 31,
1998, regarding the office facilities of the Association:
Owned or Date Net book
Location leased acquired Deposits value
-----------------------------------------------------------------
(In thousands)
30 East Main Street Owned 11/04/94 $29,325 $1,137
Ashland, Ohio 44805
203 North Sandusky Street (1) Owned 02/25/93 - 64
Bellevue, Ohio 44811
211 North Sandusky Street Owned 05/06/72 56,034 349
Bellevue, Ohio 44811
225 North Main Street Owned 06/05/75 15,116 103
Clyde, Ohio 43410
1500 Bright Road Owned 01/29/93 20,783 1,027
Findlay, Ohio 45840
321 West State Street Owned 06/30/87 19,225 218
Fremont, Ohio 43420
2080 Ferguson Road Leased - - -
Mansfield, Ohio 44906
50 West Main Street Owned 08/06/76 43,056 261
Norwalk, Ohio 44857
51 West Main Street (2) Owned 09/11/92 - 193
Norwalk, Ohio 44587
4112 Milan Road Owned 02/29/88 14,242 429
Sandusky, Ohio 44870
48 East Market Street (3) Owned 06/15/83 55,006 335
Tiffin, Ohio 44883
796 West Market Street (3) Owned 12/18/90 - 227
Tiffin, Ohio 44883
301 Myrtle Avenue Owned 05/07/77 35,887 142
Willard, Ohio 44890
- --------------------
<F1> Office facility for the Association's appraisal staff.
<F2> Drive-up facility only.
<F3> Deposit totals are combined for the two Tiffin offices.
Item 3. Legal Proceedings
The Association is not presently involved in any material legal
proceedings. From time to time, the Association is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by the Association.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The information contained in the 1998 Annual Report to Shareholders of
the Corporation (the "Annual Report"), a copy of which is attached hereto as
Exhibit 13, under the caption "Common Stock Information," is incorporated
herein by reference.
Item 6. Selected Financial Data
The information contained in the Annual Report under the caption
"Selected Consolidated Financial Data" is incorporated herein by reference.
The dividend pay-out ratio (dividends declared per share as a percentage of
basic earnings per share) of the Company was 48.4% for 1998, 46.2% for 1997
and 53.2% for 1996. The dividend pay-out ratio for 1996 excludes the $3.50
per share special return of capital distribution.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the Annual Report under the caption
"Asset and Liability Management" is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The Consolidated Financial Statements appearing in the Annual Report
and the report of Crowe, Chizek and Company LLP dated January 15, 1999, are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Proxy Statement for the 1999 Annual
Meeting of Shareholders of the Company (the "Proxy Statement"), filed with
the Securities and Exchange Commission (the "Commission") on March 16, 1999,
under the captions "Election of Directors" and "Executive Officers," is
incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors - Certain Transactions" is
incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
3(a) Articles of Incorporation
3(b) Certificate of Amendment to Articles of Incorporation
3(c) Code of Regulations
11 Statement Regarding Computation of Per Share Earnings
13 Annual Report to Shareholders
21 Subsidiaries of Registrant
27 Financial Data Schedule
99 Proxy Statement for 1999 Annual Meeting of Shareholders
(b) Financial Statement Schedules. All schedules are omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto.
(c) Reports on Form 8-K. There were no reports filed during 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL BANCORP, INC.
By: /s/ David M. Windau
------------------------------
David M. Windau, Chief Executive
Officer (Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
/s/ David M. Windau /s/ Lawrence R. Rhoades
- ----------------------------- -----------------------------------
David M. Windau, President, Lawrence R. Rhoades, Chairman of the
Chief Executive Officer and Director Board, Chief Financial Officer and
Director
Date: March 16, 1999 Date: March 16, 1999
/s/ Graydon H. Hayward /s/ Leon W. Maginnis
- ----------------------------- -----------------------------------
Graydon H. Hayward, Director Leon W. Maginnis, Director
Date: March 16, 1999 Date: March 16, 1999
- ----------------------------- -----------------------------------
Bob Moore, Director Fredric C. Spurck, Director
Date: March 16, 1999 Date: March 16, 1999
/s/ Roger O. Wilkinson
- -----------------------------
Roger O. Wilkinson, Director
Date: March 16, 1999
INDEX TO EXHIBITS
Exhibit Number
3(a) Articles of Incorporation
Incorporated by reference to the Registration Statement on
Form S-1 filed by the Holding Company on March 23, 1995
(the "S-1") with the Securities and Exchange Commission,
Exhibit 3.1
3(b) Certificate of Amendment to Articles of Incorporation
3(c) Code of Regulations
Incorporated by reference to the S-1, Exhibit 3.2
Incorporated by reference to the S-1, Exhibit 3.3
11 Statement Regarding Computation of Per Share Earnings
Incorporated by reference to Note 1 to the Financial
Statements included in the Annual Report
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for 1999 Annual Meeting of Shareholders
Incorporated by reference to the Proxy Statement, filed
with the Securities and Exchange Commission on March 16, 1999