1
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended March 31, 1999
[ ] 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 0-25971
-------
INDIAN VILLAGE BANCORP, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 34-1891199
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 South Walnut Street, Gnadenhutten, Ohio 44629
-------------------------------------------------
(Address of principal executive offices)
(740) 254-4313
--------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]*
* The small business issuer's Registration Statement on Form SB-2 was
declared effective on May 14, 1999. The small business issuer has conducted
no business except the offering of its shares in connection with the
conversion of Indian Village Community Bank from the mutual to stock form
of organization. The financial information contained in the Form 10-QSB is
provided, therefore, for Indian Village Community Bank.
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1.
2
INDIAN VILLAGE COMMUNITY BANK
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets ......................................................................... 3
Statements of Income ................................................................... 4
Statements of Comprehensive Income ..................................................... 5
Statements of Changes in Members' Equity................................................ 6
Statements of Cash Flows ............................................................... 7
Notes to Financial Statements .......................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 14
Part II - Other Information
Item 1. Legal Proceedings.................................................................. 20
Item 2. Changes in Securities and Use of Proceeds.......................................... 20
Item 3. Defaults Upon Senior Securities.................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................................ 20
Item 5. Other Information.................................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................... 20
SIGNATURES ........................................................................................... 21
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2.
3
INDIAN VILLAGE COMMUNITY BANK
BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
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March 31, December 31,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 281 $ 409
Interest-bearing deposits in other banks 20 388
-------- --------
Total cash and cash equivalents 301 797
Time deposits 499 499
Securities available for sale at fair value 6,034 6,195
Loans, net of allowance for loan losses 33,564 31,274
Premises and equipment, net 477 447
Real estate owned 122 122
Federal Home Loan Bank stock 414 407
Accrued interest receivable 190 183
Other assets 230 100
-------- --------
Total assets $ 41,831 $ 40,024
======== ========
LIABILITIES
Deposits $ 30,824 $ 30,866
Federal Home Loan Bank advances 5,750 4,000
Accrued interest payable 50 37
Other liabilities 58 19
-------- --------
Total liabilities 36,682 34,922
MEMBERS' EQUITY
Retained earnings - substantially restricted 5,169 5,105
Accumulated other comprehensive income
Unrealized gains on securities available for sale 33 50
Additional minimum pension liability (53) (53)
-------- --------
Total accumulated other comprehensive income (21) (3)
-------- --------
Total members' equity 5,149 5,102
-------- --------
Total liabilities and members' equity $ 41,831 $ 40,024
======== ========
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See accompanying notes to financial statements.
3.
4
INDIAN VILLAGE COMMUNITY BANK
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1999 1998
---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $663 $599
Securities 104 140
Interest-bearing deposits and Federal funds sold 10 11
---- ----
Total interest income 777 750
INTEREST EXPENSE
Deposits 368 382
Federal Home Loan Bank advances 64 15
---- ----
Total interest expense 432 397
---- ----
NET INTEREST INCOME 345 353
Provision for loan losses 3 --
---- ----
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 342 353
NONINTEREST INCOME
Service charges and other fees 4 2
Gain on sale of securities available for sale, net 2 --
Other income 5 10
---- ----
Total noninterest income 11 12
NONINTEREST EXPENSE
Salaries and employee benefits 106 100
Occupancy and equipment 19 19
Professional and consulting fees 15 19
FDIC deposit insurance 5 7
Franchise taxes 18 18
Date processing 22 14
Director and committee fees 19 15
Other expense 51 29
---- ----
Total noninterest expense 255 221
---- ----
INCOME BEFORE INCOME TAXES 98 144
Income tax expense 34 48
---- ----
NET INCOME $ 64 $ 96
==== ====
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See accompanying notes to financial statements.
4.
5
INDIAN VILLAGE COMMUNITY BANK
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
---------
1999 1998
---- ----
NET INCOME $ 64 $ 96
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for sale arising (16) (12)
during period
Reclassification adjustment for accumulated gains included in
net income (1) --
---- ----
Net unrealized gains (losses) on securities (17) (12)
Additional minimum pension liability adjustment -- --
---- ----
Other comprehensive income (17) (12)
---- ----
COMPREHENSIVE INCOME $ 47 $ 84
==== ====
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See accompanying notes to financial statements.
5.
6
INDIAN VILLAGE COMMUNITY BANK
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
---------
1999 1998
---- ----
BALANCE, BEGINNING OF PERIOD $ 5,102 $ 4,852
Net income 64 96
Net change in unrealized gain on securities available for sale (17) (12)
------- -------
BALANCE, END OF PERIOD $ 5,149 $ 4,936
======= =======
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See accompanying notes to financial statements.
6.
7
INDIAN VILLAGE COMMUNITY BANK
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
---------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 64 $ 96
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 7 8
Premium amortization, net of accretion 7 (2)
Provision for loan losses 3 --
Federal Home Loan Bank stock dividends (7) (7)
Gain on sale of securities available for sale (2) --
Net change in accrued interest receivable and other assets (137) (45)
Net change in accrued expenses and other liabilities 62 (43)
------- -------
Net cash from operating activities (3) 7
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (1,040) (1,257)
Proceeds from sales of securities available for sale 652 --
Proceeds from maturities of securities available for sale 517 902
Net change in loans (2,293) 156
Premises and equipment expenditures, net (37) (9)
------- -------
Net cash from investing activities (2,201) (208)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (42) 200
Net change in short-term Federal Home Loan Bank advances 1,750 --
------- -------
Net cash from financing activities 1,708 200
------- -------
Net change in cash and cash equivalents (496) (1)
Cash and cash equivalents at beginning of period 797 923
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 301 $ 922
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 418 $ 393
Income taxes -- --
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See accompanying notes to financial statements.
7.
8
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Indian Village Community Bank ("Bank") at March 31,
1999, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
financial statements have been prepared in accordance with the instructions for
Form 10-QSB and, therefore, do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances, and should be read in
conjunction with the financial statements and notes thereto of the Bank for the
year ended December 31, 1998. The accounting policies of the Bank described in
the notes to financial statements contained in the Bank's December 31, 1998,
financial statements, have been consistently followed in preparing this Form
10-QSB.
The Bank is engaged in the business of residential mortgage lending and consumer
banking with operations conducted through its main office located in
Gnadenhutten, Ohio. This community and the contiguous areas are the source of
substantially all the Bank's loan and deposit activities. The majority of the
Bank's income is derived from residential and consumer lending activities and
investments.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and disclosures provided, and future results could differ.
The allowance for loan losses, fair values of financial instruments and pension
liabilities are particularly subject to change.
The provision for income taxes is based on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the total of the current
year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 simplifies the calculation of earnings per share ("EPS") by
replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data must be restated to conform with the new presentation.
SFAS No. 128 will apply to the Bank beginning with the interim period ending
September 30, 1999.
SFAS No. 129, "Disclosures of Information about Capital Structure," became
effective for the Bank as of December 31, 1997. SFAS No. 129 consolidated
existing accounting guidance relating to disclosure about a company's capital
structure. SFAS No. 129 did not affect the Bank's disclosures.
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(Continued)
8.
9
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A new accounting standard adopted January 1, 1998, Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
requires comprehensive income to be reported for all periods. Comprehensive
income includes both net income and other comprehensive income. Other
comprehensive income includes the change in unrealized gains and losses on
securities available for sale and the change in additional minimum pension
liability.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" changes the way that public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 uses a "management approach" to disclose financial and
descriptive information about an enterprise's reportable operating segments
which is based on reporting information the way that management organizes the
segments within the enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will likely result in
more segments being reported. In addition, SFAS No. 131 requires significantly
more information to be disclosed for each reportable segment than is presently
being reported in annual financial statements. SFAS No. 131 also requires
selected information to be reported in interim financial statements. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. SFAS No. 131 did not have a significant impact on the Bank.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" amends the disclosure requirements of previous pension and other
postretirement benefit accounting standards by requiring additional disclosures
about such plans as well as eliminating some disclosures no longer considered
useful. SFAS No. 132 also allows greater aggregation of disclosures for
employers with multiple defined benefit plans. SFAS No. 132 is effective for
financial statements for periods beginning after December 15, 1997 and did not
have a significant impact on the Bank's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. SFAS No. 133 does
not allow hedging of a security which is classified as held to maturity. Upon
adoption of SFAS No. 133, companies may reclassify any security from held to
maturity to available for sale if they wish to be able to hedge the security in
the future. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 with early adoption encouraged for any fiscal quarter beginning July 1,
1998 or later, with no retroactive application. Management does not expect the
adoption of SFAS No. 133 to have a significant impact on the Bank's financial
statements.
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(Continued)
9.
10
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 134, "Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," changes the way companies involved in mortgage banking account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. SFAS No. 134 allows any retained mortgage-backed
securities after a securitization of mortgage loans held for sale to be
classified based on holding intent in accordance with SFAS No. 115 except in
cases where the retained mortgage-backed security is committed to be sold before
or during the securitization process in which case it must be classified as
trading. Previously, all retained mortgage-backed securities were required to be
classified as trading. SFAS No. 134 was effective on January 1, 1999 and did not
have a significant impact on the Bank's financial statements.
NOTE 2 - ADOPTION OF PLAN OF CONVERSION
On January 20, 1999, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, unanimously adopted a Plan of
Conversion from a federally chartered mutual bank to a federally chartered stock
bank with the concurrent formation of a holding company. The Holding Company
will acquire 100 percent of the Bank's common stock. The conversion is expected
to be accomplished through amendment of the Bank's charter and the sale of the
Holding Company's common stock in an amount equal to the pro forma market value
of the Bank after giving effect to the conversion. A subscription offering of
the shares of the Holding Company's common stock will be offered to the Bank's
depositors, then to an employee stock benefit plan and then to other members.
Any shares of the Holding Company's common stock not sold in the subscription
offering may be offered for sale to the general public.
At the time of the conversion, the Bank will establish a liquidation account in
an amount equal to its regulatory capital as of the latest practicable date
before the conversion at which such regulatory capital can be determined. The
liquidation account will be maintained for the benefit of eligible depositors
who continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. The Bank may
not pay dividends that would reduce shareholders' equity below the required
liquidation account balance.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts that are both well capitalized
and given favorable qualitative examination ratings by the OTS.
Conversion costs are deferred and will be deducted from the proceeds of the
shares sold in the conversion. As of March 31, 1999, $106,000 in costs had been
deferred.
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(Continued)
10.
11
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 3 - SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
-----------------March 31, 1999-----------------
U.S. Treasury securities $ 249 $ 5 $ -- $ 254
U.S. Government agencies 1,448 5 (1) 1,452
Mortgage-backed securities 4,289 69 (30) 4,328
------- ------- ------- -------
$ 5,986 $ 79 $ (31) $ 6,034
======= ======= ======= =======
-----------------December 31, 1999--------------
U.S. Treasury securities $ 747 $ 13 $ -- $ 760
U.S. Government agencies 1,050 6 -- 1,056
Obligations of states and
political subdivisions 147 5 -- 152
Mortgage-backed securities 4,175 70 (18) 4,227
------- ------- ------- -------
$ 6,119 $ 94 $ (18) $ 6,195
======= ======= ======= =======
The amortized cost and estimated fair values of securities available for sale,
by contractual maturity, are shown below. Actual maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a single maturity date, primarily mortgage-backed securities, are shown
separately.
Estimated
Amortized Fair
Cost Value
---- -----
Due after one year through five years $ 549 $ 556
Due after five years through ten years 750 752
Due after ten years 398 398
Mortgage-backed securities 4,289 4,328
------ ------
$5,986 $6,034
====== ======
Proceeds from sales of securities available for sale during the three months
ended March 31, 1999 were $652,000. Gross gains of $2,000 were realized on those
sales. There were no sales of securities available for sale during the three
months ended March 31, 1998.
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(Continued)
11.
12
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 4 - LOANS
Loans are summarized as follows:
March 31, December 31,
1999 1998
---- ----
Real estate loans:
One- to four-family residential $ 27,284 $ 26,080
Multi-family residential 1,710 1,736
Nonresidential 1,082 647
Construction 894 677
Land 147 135
-------- --------
31,117 29,275
Consumer loans:
Home equity loans and lines of credit 938 887
Home improvement 352 301
Automobile 559 516
Loans on deposit accounts 288 294
Unsecured 22 12
Other 538 274
-------- --------
2,697 2,284
Commercial business loans 55 27
-------- --------
33,869 31,586
Less:
Net deferred loan fees and costs (59) (54)
Loans in process (25) (40)
Allowance for loan losses (221) (218)
-------- --------
$ 33,564 $ 31,274
======== ========
Activity in the allowance for loan losses is summarized as follows:
Three Months Ended
March 31,
---------
1999 1998
---- ----
Balance at beginning of period $218 $176
Provision for losses 3 --
Charge-offs -- --
Recoveries -- --
---- ----
Balance at end of period $221 $176
==== ====
As of and for the three months ended March 31, 1999 and 1998, no loans were
considered impaired within the scope of SFAS No. 114.
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(Continued)
12.
13
INDIAN VILLAGE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands)
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NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of customers. These
financial instruments include commitments to make loans. The Bank's exposure to
credit loss in case of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of those instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of March 31, 1999, variable rate and fixed rate commitments to make loans or
fund outstanding lines of credit amounted to approximately $441,000 and
$2,035,000. As of December 31, 1998, variable rate and fixed rate commitments to
make loans or fund outstanding lines of credit amounted to approximately
$494,000 and $1,891,000. Since loan commitments may expire without being used,
the amounts do not necessarily represent future cash commitments.
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13.
14
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
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INTRODUCTION
In the following pages, management presents an analysis of the financial
condition of Indian Village Community Bank as of March 31, 1999 compared to
December 31, 1998, and results of operations for the three months ended March
31, 1999 compared with the same periods in 1998. This discussion is designed to
provide a more comprehensive review of the operating results and financial
position than could be obtained from an examination of the financial statements
alone. This analysis should be read in conjunction with the interim financial
statements and related footnotes included herein.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Bank's operations and the Bank's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Bank's general market area.
FINANCIAL CONDITION
Total assets increased 4.5% from $40.0 million at December 31, 1998 to $41.8
million at March 31, 1999 primarily as a result of an increase in loans. Loans,
net, increased 7.3% from $31.3 million to $33.6 million primarily as a result of
growth in the residential mortgage loan and consumer loan portfolios. The
residential mortgage loan portfolio increased from $26.1 million to $27.3
million. The consumer loan portfolio increased from $2.3 million to $2.7
million. Cash and cash equivalents decreased from $797,000 to $301,000 to fund
loan growth. Mortgaged-backed securities, net, remained relatively unchanged
while investment securities, net, decreased from $2.0 million to $1.7 million as
a result of maturities.
Deposits decreased from $30.9 million at December 31, 1998 to $30.8 million at
March 31, 1999. Management attributes this decline to increased competition and
the overall lack of growth in the Gnadenhutten market. To offset the lack of
deposit growth, Indian Village increased its Federal Home Loan Bank advances
from $4.0 million to $5.8 million in order to fund loans. Total equity increased
as a result of retained net income.
RESULTS OF OPERATIONS
Net income was $64,000 in the 1999 quarter compared to $96,000 in the 1998
quarter. Higher interest expense and higher noninterest expense were the primary
reasons for the decline in net income.
Net interest income decreased from $353,000 in the 1998 quarter to $345,000 in
the current quarter. Total interest income increased from $750,000 to $777,000
primarily as a result of higher average loan balances. Total interest expense
increased from $397,000 to $432,000 primarily because of increased interest
expense on Federal Home Loan Bank advances due to higher average outstanding
balances.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate to
provide for probable losses based on management's evaluation of the
collectibility of the loan portfolio, including past loan loss experience, known
and inherent risks in the nature and volume of the portfolio, information about
specific borrower situations
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14.
15
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
and estimated collateral values, economic conditions, and other factors. The
provision for loan losses was $3,000 in the current quarter compared to no
provision in the 1998 quarter. The provision was increased primarily because of
the increased risk of loss associated with the overall growth and changes in
composition of the loan portfolio, including the consumer loan portfolio which
carries a higher inherent risk of loss than the residential mortgage loan
portfolio. The allowance for loan losses was $221,000 at March 31, 1999 compared
to $218,000 at December 31, 1998. Management deemed the allowance adequate at
both dates. Although management uses the best information available, future
adjustments to the allowance may be necessary due to changes in economic,
operating, regulatory and other conditions that may be beyond Indian Village's
control. While Indian Village maintains its allowance for loan losses at a level
which it considers to be adequate to provide for probable losses, there can be
no assurance that further additions will not be made to the allowance for loan
losses and that actual losses will not exceed the estimated amounts.
Noninterest income remained relatively stable, decreasing only $1,000 from
$12,000 in the 1998 quarter to $11,000 in the current quarter.
Noninterest expense increased from $221,000 in the 1998 quarter to $255,000 in
the current quarter primarily as a result of an increase in stationary and
printing expense and advertising expense. The increase in stationary and
printing expense, from $4,000 in the 1998 quarter to $12,000 in the current
quarter, was the result of Indian Village's name change in January 1999.
Advertising expense increased from $5,000 in the 1998 quarter to $12,000 in the
current quarter primarily as a result of consumer loan advertising and
advertising of debit cards. Noninterest expense is expected to increase in
future periods because of the expenses associated with the proposed stock
benefit plans, the costs associated with operating as a public company, and the
costs of staffing and equipping the proposed new branch office in New
Philadelphia, Ohio.
Income tax expense decreased from $48,000 to $34,000 as a result of lower income
before taxes.
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15.
16
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity, primarily represented by cash and cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the three months ended March 31, 1999 and 1998.
Three Months Ended
March 31,
---------
1999 1998
---- ----
Net income $ 64 $ 96
Adjustments to reconcile net income to
net cash from operating activities (67) (89)
------- -------
Net cash from operating activities (3) 7
Net cash from investing activities (2,201) (208)
Net cash from financing activities 1,708 200
------- -------
Net change in cash and cash equivalents (496) (1)
Cash and cash equivalents at beginning of period 797 923
------- -------
Cash and cash equivalents at end of period $ 301 $ 922
======= =======
The Bank's principal sources of funds are deposits, loan repayments, maturities
of securities, Federal Home Loan Bank advances and other funds provided by
operations. While scheduled loan repayments and maturing securities are
relatively predictable, deposit flows and early loan prepayments are influenced
by interest rates, general economic conditions, and competition. The Bank
maintains investments in liquid assets based on management's assessment of (1)
need for funds, (2) expected deposit flows, (3) yields available on short-term
liquid assets and (4) objectives of the asset/liability management program.
OTS regulations presently require the Bank to maintain an average daily balance
of investments in United States Treasury, federal agency obligations and other
investments having maturities of five years or less in an amount equal to 4% of
the sum of the Bank's average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less. The liquidity requirement, which may
be changed from time to time by the OTS to reflect changing economic conditions,
is intended to provide a source of relatively liquid funds on which the Bank may
rely, if necessary, to fund deposit withdrawals or other short-term funding
needs. At March 31, 1999, the Bank's regulatory liquidity was 5.53%. At such
date, the Bank had no commitments to originate variable rate residential real
estate mortgage loans. Loan commitments are generally for 30 days. The Bank
considers its liquidity and capital reserves sufficient to meet its outstanding
short- and long-term needs. See Note 5 of the Notes to Financial Statements.
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material affect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators about
the Bank's components, risk weightings and other factors. At March 31, 1999, and
December 31, 1998, the Bank complies with all
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16.
17
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
regulatory capital requirements. Based on the Bank's computed regulatory capital
ratios, the Bank is considered well capitalized under the Federal Deposit Act at
March 31, 1999 and December 31, 1998.
At March 31, 1999, and December 31, 1998 the Bank's actual capital levels and
minimum required levels were:
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
MARCH 31, 1999
Total capital (to risk-
weighted assets) $5,294 24.0% $1,766 8.0% $2,206 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 5,073 23.0 882 4.0 1,323 6.0
Tier 1 (core) capital (to
adjusted total assets) 5,073 12.1 1,254 3.0 2,096 5.0
Tangible capital (to
adjusted total assets) 5,073 12.1 627 1.5 N/A
DECEMBER 31, 1998
Total capital (to risk-
weighted assets) $5,226 25.8% $1,621 8.0% $2,026 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 5,008 24.7 810 4.0 1,215 6.0
Tier 1 (core) capital (to
adjusted total 5,008 12.5 1,202 3.0 1,997 5.0
Tangible capital (to
adjusted total assets) 5,008 12.5 599 1.5 N/A
In February 1999, the Bank received Office of Thrift Supervision approval to
establish a branch office in New Philadelphia, Ohio. The Bank purchased the land
in December 1998 for $213,000. Based on preliminary architectural estimates, the
Bank expects the total cost of the construction and furniture, fixtures and
equipment to be $1.0 million. At March 31, 1999, the Bank had not paid any costs
related to this office other than the purchase of the land.
YEAR 2000 ISSUE
The Bank uses computers, computer software and equipment utilizing embedded
microprocessors that will be effected by the year 2000 issue. The year 2000
issue exists because many computer systems and applications use two-digit date
fields to designate a year. As the century date change occurs, date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may cause erroneous results, ranging
from system malfunctions to incorrect or incomplete processing.
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17.
18
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
The Bank's year 2000 committee consists of Cindy S. Knisely, Michael A. Cochran,
Marty R. Lindon and Lori S. Frantz. The committee reports monthly to the Board
of Directors. The committee has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Bank's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. The Bank has analyzed the
operation of all date-sensitive computer systems and identified in
writing all third-party vendors and service providers associated with
these systems. This phase was completed as of June 30, 1998.
3. Renovation - Review of vendor and service providers responses to the
Bank's year 2000 inquiries and development of a follow-up plan and
timeline. This phase was completed as of December 31, 1998.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. The Bank is currently in this phase of its plan. The Bank
has replaced all in-house equipment, such as teller station equipment,
with year 2000 compliant equipment. A third-party service bureau
processes all customer transactions and has completed upgrades to its
systems to be year 2000 compliant. The Bank conducted in-house proxy
testing in August 1998 and on-line testing in February 1999. The
results of both forms of testing were satisfactory and without
material exceptions. Other parties whose year 2000 compliance may
effect the Bank include the Federal Home Loan Bank of Cincinnati,
brokerage firms, the operator of the Bank's automated teller machines
network and the Bank's pension plan administrator. These third parties
have indicated their compliance or intended compliance. Where it is
possible to do so, the Bank has scheduled testing with these third
parties. Where testing is not possible, the Bank will rely on
certifications from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant technology. As
the Bank progresses through the validation phase, it expects to
determine necessary remedial actions and provide for their
implementation. The Bank has already implemented a new year 2000
compliant computerized teller system and has verified the year 2000
compliance of its computer hardware and other equipment containing
embedded microprocessors. The Bank's plan provides for year 2000
readiness to be completed by June 30, 1999.
Management of the Bank has had discussions with a majority of its commercial
borrowers, including all of its large borrowers, regarding their year 2000
readiness. These discussions have revealed that these borrowers are not heavily
dependent on computers. Accordingly, the Bank does not believe that its
commercial borrowers will be adversely affected by the year 2000.
The Bank estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be approximately $35,000, none of which had been incurred
as of March 31, 1999. System maintenance or modification costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Bank does
not separately track the
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18.
19
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
internal costs and time that its own employees spend on year 2000 issues, which
are principally payroll costs.
Because the Bank depends substantially on its computer systems and those of
third parties, the failure of these systems to be year 2000 compliant could
cause substantial disruption of the Bank's business and could have a material
adverse financial impact on the Bank. Failure to resolve year 2000 issues
presents the following risks to the Bank, which it believes reflects its most
reasonably likely worst-case scenario:
1. The Bank could lose customers to other financial institutions,
resulting in a loss of revenue, if the Bank's third-party service
bureau is unable to properly process customer transactions;
2. Governmental agencies, such as the Federal Home Loan Bank of
Cincinnati, and correspondent institutions could fail to provide funds
to the Bank, which could materially impair the Bank's liquidity and
affect the Bank's ability to fund loans and deposit withdrawals;
3. Concern on the part of depositors that year 2000 issues could impair
access to their deposit account balances could result in the Bank
experiencing deposit outflows before December 31, 1999; and
4. The Bank could incur increased personnel costs if additional staff is
required to perform functions that inoperative systems would have
otherwise performed.
Management believes that it is impossible to estimate the potential lost revenue
due to the year 2000 issue, as the extent and longevity of any potential problem
cannot be predicted. Because substantially all of the Bank's loan portfolio
consists of loans to individuals rather than commercial enterprises, management
believes that year 2000 issues will not impair materially the ability of the
Bank's borrowers to repay their debt.
There can be no assurances that the Bank's year 2000 plan will effectively
address the year 2000 issue, that the Bank's estimates of the timing and costs
of completing the plan will ultimately be accurate or that the impact of any
failure of the Bank or its third-party vendors and service providers to be year
2000 compliant will not have a material adverse effect on the Bank's business,
financial condition or results of operations.
The Bank has a business resumption contingency plan for year 2000 compliance
that calls for the Bank to resort to manual processing of transactions until the
computer systems resume operation.
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19.
20
INDIAN VILLAGE COMMUNITY BANK
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults On Senior Securities
-----------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 3(a): Articles of Incorporation (incorporated by
reference to Registration Statement on Form SB-2, as amended
(File No. 333-74621))
Exhibit No. 3(b): Bylaws (incorporated by reference to
Registration Statement on Form SB-2, as amended (File No.
333-74621))
Exhibit No. 27: Financial Data Schedule
(b) No current reports on Form 8-K were filed by the small business
issuer during the quarter ended March 31, 1999.
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20.
21
INDIAN VILLAGE COMMUNITY BANK
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirement of the Securities Exchange Act of 1934, the small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 29, 1999 /s/ Marty R. Lindon
------------------------ ------------------------------------
Marty R. Lindon
President and Chief Executive Officer
Date: June 29, 1999 /s/ Lori S. Frantz
------------------------ ------------------------------------
Lori S. Frantz
Vice President, Treasurer and Chief
Financial Officer
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21.
22
INDIAN VILLAGE COMMUNITY BANK
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 23
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22.