1
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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 June 30, 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
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INDIAN VILLAGE BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 34-1891199
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 South Walnut Street, Gnadenhutten, Ohio 44629
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(Address of principal executive offices)
(740) 254-4313
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(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]*
As of August 14, 1999, the latest practical date, 445,583 of the issuer's common
shares, $.01 par value, were issued and outstanding.
* The small business issuer's Registration Statement on Form S-1 was declared
effective on May 14, 1999. As of June 30, 1999, the small business issuer
has conducted no business except the offering of its shares and preparation
to acquire Indian Village Community Bank. 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
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Page
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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............................................ 23
Item 2. Changes in Securities and Use of Proceeds.................... 23
Item 3. Defaults Upon Senior Securities.............................. 23
Item 4. Submission of Matters to a Vote of Security Holders.......... 23
Item 5. Other Information............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
SIGNATURES ..................................................................... 24
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2.
3
INDIAN VILLAGE COMMUNITY BANK
BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
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June 30, December 31,
1999 1998
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ASSETS
Cash and due from banks $ 532 $ 409
Interest-bearing deposits in other banks 1,966 388
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Total cash and cash equivalents 2,498 797
Time deposits 499 499
Securities available for sale at fair value 6,242 6,195
Loans, net of allowance for loan losses 35,755 31,274
Premises and equipment, net 708 447
Real estate owned 122 122
Federal Home Loan Bank stock 421 407
Accrued interest receivable 224 183
Other assets 349 100
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Total assets $46,818 $40,024
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LIABILITIES
Deposits $30,951 $30,866
Federal Home Loan Bank advances 7,500 4,000
Accrued interest payable 51 37
Other liabilities 3,165 19
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Total liabilities 41,667 34,922
MEMBERS' EQUITY
Retained earnings - substantially restricted 5,266 5,105
Accumulated other comprehensive income
Unrealized gains/(losses) on securities available for sale (62) 50
Additional minimum pension liability (53) (53)
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Total accumulated other comprehensive income (115) (3)
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Total members' equity 5,151 5,102
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Total liabilities and members' equity $46,818 $40,024
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See accompanying notes to financial statements.
3.
4
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands)
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Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $708 $602 $1,371 $1,201
Securities 99 135 203 275
Interest-bearing deposits and
Federal funds sold 17 14 27 25
---- ---- ------ ------
Total interest income 824 751 1,601 1,501
INTEREST EXPENSE
Deposits 368 379 736 761
Federal Home Loan Bank advances 89 35 153 50
---- ---- ------ ------
Total interest expense 457 414 889 811
---- ---- ------ ------
NET INTEREST INCOME 367 337 712 690
Provision for loan losses 3 1 6 1
---- ---- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 364 336 706 689
NONINTEREST INCOME
Service charges and other fees 4 4 8 6
Gain on sale of securities
available for sale, net 8 (11) 10 (11)
Other income 4 3 9 13
---- ---- ------ ------
Total noninterest income 16 (4) 27 8
NONINTEREST EXPENSE
Salaries and employee benefits 106 102 212 202
Occupancy and equipment 16 16 35 35
Professional and consulting fees 12 9 27 28
FDIC deposit insurance 4 7 9 14
Franchise taxes 17 18 35 36
Date processing 19 14 41 28
Director and committee fees 19 18 38 33
Other expense 41 36 92 65
---- ---- ------ ------
Total noninterest expense 234 220 489 441
---- ---- ------ ------
INCOME BEFORE INCOME TAXES 146 112 244 256
Income tax expense 49 37 83 85
---- ---- ------ ------
NET INCOME $ 97 $ 75 $ 161 $ 171
==== ==== ====== ======
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See accompanying notes to financial statements.
4.
5
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
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Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
NET INCOME $ 97 $ 75 $ 161 $171
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale arising during period (90) (11) (105) (23)
Reclassification adjustment for
accumulated (gains) losses included in
net income (5) 7 (7) 7
---- ---- ----- ----
Net unrealized gains (losses)
on securities (95) (4) (112) (16)
Additional minimum pension
liability adjustment -- -- -- --
---- ---- ----- ----
Other comprehensive income (95) (4) (112) (16)
COMPREHENSIVE INCOME $ 2 $ 71 $ 49 $155
==== ==== ===== ====
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See accompanying notes to financial statements.
5.
6
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Unaudited)
(Dollars in thousands)
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Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
BALANCE, BEGINNING OF PERIOD $5,149 $4,936 $5,102 $4,852
Net income 97 75 161 171
Net change in unrealized gain on
securities available for sale (95) (4) (112) (16)
------ ------ ------ ------
BALANCE, END OF PERIOD $5,151 $5,007 $5,151 $5,007
====== ====== ====== ======
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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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Six Months Ended
June 30,
--------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 161 $ 171
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 16 17
Premium amortization, net of accretion 8 (5)
Provision for loan losses 6 1
Federal Home Loan Bank stock dividends (14) (14)
Gain/Loss on sale of securities available for sale (10) 11
Net change in accrued interest receivable and other assets (290) 1
Net change in accrued expenses and other liabilities 3,109 (102)
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Net cash from operating activities 2,986 80
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (2,541) (2,138)
Proceeds from sales of securities available for sale 1,128 541
Proceeds from maturities of securities available for sale 1,307 775
Net change in loans (4,487) (1,534)
Premises and equipment expenditures, net (277) (18)
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Net cash from investing activities (4,870) (2,374)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 85 176
Net change in short-term Federal Home Loan Bank advances 2,500 1,800
Proceeds from long-term Federal Home Loan Bank advances 1,000 --
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Net cash from financing activities 3,585 1,976
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Net change in cash and cash equivalents 1,701 (318)
Cash and cash equivalents at beginning of period 797 923
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,498 $ 605
======= =======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 875 802
Income taxes 5 83
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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 June 30,
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 to the new presentation. SFAS
No. 128 will apply to Indian Village Bancorp, Inc. ("Company") 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)
Under a new accounting standard adopted January 1, 1998, Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
comprehensive income is 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 Company'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 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN
ASSOCIATION WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
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 conversion was
consummated on July 1, 1999, by amending the Bank's Articles of Incorporation
and the sale of the common stock of the Company in an amount equal to the pro
forma market value of the Bank after giving effect to the conversion. Common
shares of the Company were offered in accordance with the Plan of Conversion. A
total of 445,583 common shares of the Company were sold at $10.00 per share. Net
proceeds of $4,093,682 were recorded, after deducting conversion costs of
$362,147.
The Company retained 50% of the net proceeds from the sale of common shares. The
remainder of the net proceeds was invested in the capital stock issued by the
Bank to the Company as a result of the conversion.
At the time of the conversion, the Bank established a liquidation account in an
amount equal to its regulatory capital as of December 31, 1998. 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, like the Bank, that are both
well capitalized and well managed.
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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
-------------------June 30, 1999-------------------
U.S. Treasury securities $ 249 $ 3 $ -- $ 252
U.S. Government agencies 2,286 1 (50) 2,237
Mortgage-backed securities 3,800 31 (78) 3,753
------ --- ----- ------
$6,335 $35 $(128) $6,242
====== === ===== ======
------------------December 31, 1998----------------
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 within one year $ 249 $ 252
Due after one year through five years 547 548
Due after five years through ten years 991 976
Due after ten years 748 713
Mortgage-backed securities 3,800 3,753
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$6,335 $6,242
====== ======
Proceeds from sales of securities available for sale during the three and six
months ended June 30, 1999 were $476,000 and $1,128,000. Gross gains of $8,000
and $10,000 were realized on those sales. Proceeds from sales of securities
available for sale during the three and six months ended June 30, 1998 were
$541,000. Gross losses of $11,000 were realized on those sales.
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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:
June 30, December 31,
1999 1998
---- ----
Real estate loans:
One- to four-family residential $28,337 $26,080
Multi-family residential 2,291 1,736
Nonresidential 932 647
Construction 1,537 677
Land 148 135
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33,245 29,275
Consumer loans:
Home equity loans and lines of credit 1,050 887
Home improvement 224 301
Automobile 578 516
Loans on deposit accounts 258 294
Unsecured 96 12
Other 95 274
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2,801 2,284
Commercial business loans 73 27
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36,119 31,586
Less:
Net deferred loan fees and costs (63) (54)
Loans in process (77) (40)
Allowance for loan losses (224) (218)
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$35,755 $31,274
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Activity in the allowance for loan losses is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $221 $176 $218 $176
Provision for losses 3 1 6 1
Charge-offs 0 0 0 0
Recoveries 0 0 0 0
---- ---- ---- ----
Balance at end of period $224 $177 $224 $177
==== ==== ==== ====
As of and for the three and six months ended June 30, 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 June 30, 1999, variable rate and fixed rate commitments to make loans or
fund outstanding lines of credit amounted to approximately $367,000 and
$802,000. 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 June 30, 1999 compared to
December 31, 1998, and results of operations for the three and six months ended
June 30, 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 at June 30, 1999 were $46.8 million compared to $40.0 million at
December 31, 1998, an increase of $6.8 million, or 17.0%. The increase in total
assets was primarily due to an increase in loans of $4.5 million, and an
increase in cash and cash equivalents of $1.7 million. The increase in loans was
largely in one- to four-family residential real estate loans, increasing $2.3
million, and construction loans, multi-family residential real estate loans and
consumer loans, increasing $860,000, $555,000 and $517,000, respectively. These
increases are reflective of a stable local economy coupled with a more
aggressive promotion of consumer loans. The increase in cash and cash
equivalents was the result of the influx of investors' stock subscriptions in
connection with the Bank's then pending conversion to stock form.
The $517,000, or 22.6%, increase in the Bank's consumer loan portfolio between
December 31, 1998 and June 30, 1999 consisted primarily of increases in other
consumer loans of $321,000 and home equity loans and lines of credit of
$163,000. Consumer loans represented 7.8% and 7.2% of gross loans at June 30,
1999 and December 31, 1998.
Total deposits remained relatively unchanged at $31.0 million on June 30, 1999
compared to $30.9 million at December 31, 1998. The Bank experienced modest
increases in negotiable order of withdrawal ("NOW") accounts, and savings
accounts aggregating $229,000. Decreases in certificates of deposit, money
market accounts and noninterest-bearing demand deposit accounts partially offset
the aforementioned increase by $144,000. Management attributes the lack of
substantial deposit growth to increased competition and the overall lack of
growth its local market area. The certificate of deposit portfolio as a percent
of total deposits decreased slightly from 73.8% at December 31, 1998 to 73.6% at
June 30, 1999. Almost all certificates of deposit held by the Bank mature in
less than three years with the majority maturing in the next year.
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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)
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As a secondary source of liquidity, the Bank obtains borrowings from the Federal
Home Loan Bank of Cincinnati ("FHLB"), from which it held advances totaling $7.5
million at June 30, 1999 and $4.0 million at December 31, 1999. Due to continued
loan demand, the Bank used these funds to originate mortgage loans as well as
provide for short-term liquidity needs. FHLB advances at June 30, 1999 consisted
of $1.5 million in short-term advances, a $1.0 million advance due April 2000
with a fixed rate of interest of 4.67%, a $1.0 million advance due December 2003
with a fixed rate of interest of 4.20%, a $1.0 million advance due April 2004
with a fixed rate of interest of 5.44%, a $2.0 million advance due April 2008
with a fixed rate of interest of 5.60%, and a $1.0 million advance due July 2008
with a fixed rate of interest of 5.15%. Additional advances may be obtained from
the Federal Home Loan Bank to fund future loan growth and liquidity as needed.
Other liabilities at June 30, 1999 increased by $3,146,000 and represent
subscriptions received for the sale of common stock of the Company, which was
consummated on July 1, 1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 1998
The general economic conditions, the monetary and fiscal policies of federal
agencies and the regulatory policies of agencies that regulate financial
institutions affect the operating results of the Bank. Interest rates on
competing investments and general market rates of interest influence the Bank's
cost of funds. Lending activities are influenced by the demand for real estate
loans and other types of loans, which in turn is affected by the interest rates
at which such loans are made, general economic conditions and the availability
of funds for lending activities.
The Bank's net income primarily depends on its net interest income, which is the
difference between the interest income earned on interest-earning assets, such
as loans and securities, and interest expense incurred on interest-bearing
liabilities, such as deposits and borrowings. The level of net interest income
is dependent on the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Provisions for loan
losses, service charges, gains on the sale of assets, other income, noninterest
expense and income taxes also affect net income.
Net income was $161,000 for the six months ended June 30, 1999, compared to
$171,000 for the six months ended June 30, 1998. The decrease in net income for
the six months ended June 30, 1999 was primarily the result of an increase in
noninterest expense, partially offset by an increase in net interest income and
noninterest income.
Net interest income totaled $712,000 for the six months ended June 30, 1999, as
compared to $690,000 for the six months ended June 30, 1998, representing an
increase of $22,000, or 3.2%. The change in net interest income is attributable
to an increase in the ratio of average interest-earning assets to average
interest-bearing liabilities offset by a decrease in the interest rate spread.
Interest and fees on loans increased approximately $170,000, or 14.2%, from $1.2
million for the six months ended June 30, 1998 to $1.4 million for the six
months ended June 30, 1999. The increase in interest income was due to higher
average loans, partially offset by a decrease in the yield earned.
- --------------------------------------------------------------------------------
15.
16
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
Interest earned on securities totaled $203,000 for the six months ended June 30,
1999, as compared to $275,000 for the six months ended June 30, 1998. The
decrease was a result of lower average balances of securities combined with a
decreased yield earned.
Interest on interest-bearing deposits and overnight deposits increasing slightly
to $27,000. This stability was the result of the average balance and yield
earned on interest-bearing deposits and overnight funds remaining relatively
unchanged.
Interest paid on deposits decreased $25,000 for the six months ended June 30,
1999, compared to the six months ended June 30, 1998. The decrease in interest
expense was due to a decrease in the cost of funds partially offset by an
increase in the average balances of deposits.
Interest on Federal Home Loan Bank advances totaled $153,000 for the six months
ended June 30, 1999, compared to $50,000 for the six months ended June 30, 1998.
The increase was the result of a higher average balance partially offset by a
lower cost of funds. The additional borrowings were used to provide funding for
loan demand.
The Bank maintains an allowance for loan losses in an amount that, in
management's judgment, is adequate to absorb reasonably foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent on a
variety of factors, including the performance of the Bank's loan portfolio, the
economy, changes in real estate values and interest rates and the view of the
regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level which is considered adequate to absorb losses inherent in the loan
portfolio. The amount of the provision is based on management's monthly review
of the loan portfolio and consideration of such factors as historical loss
experience, general prevailing economic conditions, changes in the size and
composition of the loan portfolio and specific borrower considerations,
including the ability of the borrower to repay the loan and the estimated value
of the underlying collateral.
The provision for loan losses for the six months ended June 30, 1999 totaled
$6,000 compared to $1,000 for the six months ended June 30, 1998. The Bank has
not experienced significant net charge-offs in any of the periods presented. The
Bank's low historical charge-off history is the product of a variety of factors,
including the Bank's underwriting guidelines, which generally require a
loan-to-value or projected completed value ratio of 80% for the purchase or
construction of one- to four-family residential properties and 75% for
commercial real estate and land loans, established income information and
defined ratios of debt to income. In spite of the low historical charge-off
history, management increased the allowance for loan losses due to growth of the
total loan portfolio and an increase in nonresidential real estate and consumer
loans as a percentage of the total portfolio. The allowance for loan losses
totaled $224,000 or .62% of gross loans at June 30, 1999, compared with
$218,000., or .69% of gross loans at December 31, 1998.
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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)
- --------------------------------------------------------------------------------
Noninterest income includes service charges and other fees, net gains on sales
of securities available for sale and other income. For the six months ended June
30, 1999, noninterest income totaled $27,000 compared to $8,000 for the six
months ended June 30, 1998. During the 1999 period, the Bank experienced an
increase in service charges and other fees and a gain on the sale of a security
available for sale that was partially offset by a slight decrease in other
miscellaneous income.
Noninterest expense totaled $489,000 for the six months ended June 30, 1999
compared to $441,000 for same period in 1998. The increase in noninterest
expense was primarily the result of a $27,000 increase in other expense due to
increases in stationary and printing expense and advertising expense. The
increase in stationary and printing expense was attributable to the Bank's name
change in January 1999 and the increase in advertising expense was due to
consumer loan and debit card advertising. Additionally, data processing expenses
increased by $13,000 from period to period.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. The provision for income taxes totaled $83,000
for the six months ended June 30, 1999 compared to $85,000 for the six months
ended June 30, 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 1998
Net income was $97,000 for the three months ended June 30, 1999, compared to
$75,000 for the three months ended June 30, 1998. The increase in net income for
the three months ended June 30, 1999 was primarily the result of an increase in
interest income, partially offset by an increase in interest expense and
noninterest expense.
Net interest income totaled $367,000 for the three months ended June 30, 1999,
as compared to $337,000 for the three months ended June 30, 1998, representing
an increase of $30,000, or 8.9%. The change in net interest income is
attributable to an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities offset by a decrease in the interest rate
spread.
Interest and fees on loans increased approximately $106,000, or 17.6%, from
$602,000 for the three months ended June 30, 1998 to $708,000 for the three
months ended June 30, 1999. The increase in interest income was due to higher
average loans, partially offset by a decrease in the yield earned.
Interest earned on securities totaled $99,000 for the three months ended June
30, 1999, as compared to $135,000 for the three months ended June 30, 1998. The
decrease was a result of lower average balances of securities combined with a
decreased yield earned.
Interest on interest-bearing deposits and overnight deposits remained relatively
stable at $17,000, compared to $14,000 in the same quarter in 1998. This
stability was the result of the average balance and yield earned on
interest-bearing deposits and overnight funds remaining relatively unchanged.
Interest paid on deposits decreased $11,000 for the three months ended June 30,
1999, compared to the three months ended June 30, 1998. The decrease in interest
expense was due to a decrease in the cost of funds partially offset by an
increase in the average balances of deposits.
- --------------------------------------------------------------------------------
17.
18
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
Interest on Federal Home Loan Bank advances totaled $89,000 for the three months
ended June 30, 1999, compared to $35,000 for the three months ended June 30,
1998. The increase was the result of a higher average balance partially offset
by a lower cost of funds. The additional borrowings were used to provide funding
for loan demand.
The provision for loan losses for the three months ended June 30, 1999 totaled
$3,000 compared to $1,000 for the three months ended June 30, 1998. The Bank has
not experienced significant net charge-offs in any of the periods presented. In
spite of the low historical charge-off history, management increased the
allowance for loan losses due to growth of the total loan portfolio and an
increase in nonresidential real estate and consumer loans as a percentage of the
total portfolio.
For the three months ended June 30, 1999, noninterest income totaled $16,000,
compared to $(4,000) for the three months ended June 30, 1998. During the 1999
period, the Bank experienced a gain on the sale of a security available for sale
that was partially offset by a slight decrease in other miscellaneous income.
Noninterest expense totaled $234,000 for the three months ended June 30, 1999
compared to $220,000 for same period in 1998. The increase in noninterest
expense was primarily the result of a $5,000 increase in other expense due to
advertising expense. The increase in advertising expense was due to consumer
loan and debit card advertising.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. The provision for income taxes totaled $49,000
for the three months ended June 30, 1999 compared to $37,000 for the three
months ended March 31, 1998.
- --------------------------------------------------------------------------------
18.
19
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 six months ended June 30, 1999 and 1998.
Six Months Ended
June 30,
--------
1999 1998
---- ----
Net income $ 161 $ 171
Adjustments to reconcile net income to
net cash from operating activities 2,825 (91)
------- -------
Net cash from operating activities 2,986 80
Net cash from investing activities (4,870) (2,374)
Net cash from financing activities 3,585 1,976
------- -------
Net change in cash and cash equivalents 1,701 (318)
Cash and cash equivalents at beginning of period 797 923
------- -------
Cash and cash equivalents at end of period $ 2,498 $ 605
======= =======
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 June 30, 1999, the Bank's regulatory liquidity was 6.80%. 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 June 30, 1999, and
December 31, 1998, the Bank complies with all regulatory capital requirements.
Based on the Bank's computed regulatory capital ratios, the Bank is considered
well capitalized under the prompt corrective-action provisions of the Federal
Deposit Insurance Corporation Improvement Act at June 30, 1999 and December 31,
1998.
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19.
20
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
At June 30, 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
------ ----- ------ ----- ------ -----
JUNE 30, 1999
Total capital (to risk-
weighted assets) $5,393 22.2% $1,940 8.0% $2,425 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 5,169 21.3 970 4.0 1,455 6.0
Tier 1 (core) capital (to
adjusted total assets) 5,169 11.0 1,406 3.0 1,212 5.0
Tangible capital (to
adjusted total assets) 5,169 11.0 703 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 June 30, 1999, the Bank had paid costs related
to this office totaling $450,000 including the purchase of the land. The new
branch is expected to open for business during the fourth quarter of 1999.
YEAR 2000 ISSUE
Indian Village uses computers, computer software and equipment using embedded
microprocessors that will be affected 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.
- --------------------------------------------------------------------------------
20.
21
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
Indian Village'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 noninformation 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 Indian Village's Year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. Indian Village 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 Indian
Village'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. Indian Village 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 compliance. Indian
Village 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 affect Indian Village include the Federal Home Loan
Bank of Cincinnati, brokerage firms, the operator of Indian Village's
automated teller machines network and Indian Village's pension plan
administrator. These third parties have indicated their compliance or
intended compliance. Where it is possible to do so, Indian Village has
scheduled testing with these third parties. Where testing is not
possible, Indian Village will rely on certifications from vendors and
service providers.
5. Implementation - Replacement or repair of noncompliant technology. As
Indian Village progresses through the validation phase, Indian Village
expects to determine necessary remedial actions and provide for their
implementation. Indian Village 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. Management believes Indian Village's plan for
Year 2000 readiness has been completed as of June 30, 1999.
Management of Indian Village 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, Indian Village does not believe
that its commercial borrowers will be adversely affected by the year 2000.
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21.
22
INDIAN VILLAGE COMMUNITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Table amounts in thousands)
- --------------------------------------------------------------------------------
Indian Village 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, all of which had been incurred
as of June 30, 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. Indian Village
does not separately track the internal costs and time that its own employees
spend on Year 2000 issues, which are principally payroll costs.
Because Indian Village 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 Indian Village's business and could have a
material adverse financial impact on Indian Village. Failure to resolve Year
2000 issues presents the following risks to Indian Village, which it believes
reflects its most reasonably likely worst-case scenario:
1. Indian Village could lose customers to other financial institutions,
resulting in a loss of revenue, if Indian Village'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 Indian Village, which could materially impair Indian Village's
liquidity and affect Indian Village'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 Indian Village
experiencing deposit outflows before December 31, 1999; and,
4. Indian Village 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 Indian Village's portfolio
consists of loans to individual rather than commercial enterprises, management
believes that Year 2000 issues will not impair materially the ability of Indian
Village's borrowers to repay their debt.
There can be no assurances that Indian Village's Year 2000 plan will effectively
address the Year 2000 issue, that Indian Village's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of Indian Village or its third-party vendors and service providers
to be Year 2000 compliant will not have a material adverse effect on Indian
Village's business, financial condition or results of operations.
Indian Village has a business-resumption contingency plan for Year 2000
compliance that calls for Indian Village to resort to manual processing of
transactions until the computer systems resume operations.
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22.
23
INDIAN VILLAGE COMMUNITY BANK
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults On Senior Securities
-----------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
On June 23, 1999, at a special meeting, the members of the Bank
approved the Plan of Conversion providing for the Bank's conversion
from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). On July 1, 1999,
Indian Village Bancorp, Inc. (the "Company") issued 445,583 common
shares to persons who subscribed for shares in connection with the
Conversion and the Company acquired all of the shares issued by the
Bank in the Conversion in consideration and exchange for 50% of the
net proceeds from the sale of the 445,583 common shares of the
Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1999.
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23.
24
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: 8/13/99 /s/ Marty R. Lindon
------------------------------ -------------------------------------
Marty R. Lindon
President and Chief Executive Officer
Date: 8/13/99 /s/ Lori S. Frantz
------------------------------ -------------------------------------
Lori S. Frantz
Vice President, Treasurer and
Chief Financial Officer
- --------------------------------------------------------------------------------
24.
25
INDIAN VILLAGE COMMUNITY BANK
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 26
- --------------------------------------------------------------------------------
25.