-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AfoGAkfkvmNxt2CHnq0yROznMJK0uZZKWw2K79DZpUkNai9ZecucoKLi9JvogD11 S/Z0bxifHX5TGxpUwEN9hA== 0000908834-01-000093.txt : 20010409 0000908834-01-000093.hdr.sgml : 20010409 ACCESSION NUMBER: 0000908834-01-000093 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER VALLEY BANCORP CENTRAL INDEX KEY: 0001015593 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351984567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21765 FILM NUMBER: 1590363 BUSINESS ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 BUSINESS PHONE: 8122734949 MAIL ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 10KSB 1 0001.txt FORM 10-KSB OF RIVER VALLEY BANCORP SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission File Number 0-21765 RIVER VALLEY BANCORP (Exact Name of Small Business Issuer in its Charter) Indiana 35-1984567 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 430 Clifty Drive P.O. Box 1590 Madison, Indiana 47250-0590 (Address of Principal Executive Offices) Zip Code Issuer's telephone number, including area code: (812) 273-4949 Securities Registered under Section 12(b) of the Exchange Act: None Securities Registered under Section 12(g) of the Exchange Act: Common Stock, without par value (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [ X ] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer had $12,171,072 in revenues for the fiscal year ended December 31, 2000. As of March 7, 2001, there were issued and outstanding 868,874 shares of the issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the issuer, computed by reference to the last known sale price of such stock as of March 23, 2001, was $11,560,825. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2000, are incorporated into Part II. Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 32 Pages RIVER VALLEY BANCORP Form 10-KSB INDEX Page Forward Looking Statement.................................................. 3 PART I Item 1. Business................................................... 3 Item 2. Properties.................................................26 Item 3. Legal Proceedings..........................................27 Item 4. Submission of Matters to a Vote of Security Holders........27 Item 4.5. Executive Officers of the Registrant.......................27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................28 Item 5.5. Selected Consolidated Financial Data.......................28 Item 6. Management's Discussion and Analysis or Plan of Operations...........................................28 Item 6A. Quantitative and Qualitative Analysis of Financial Condition and Results of Operation...................28 Item 7. Financial Statements.......................................29 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................29 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons..............................................30 Item 10. Executive Compensation.....................................30 Item 11. Security Ownership of Certain Beneficial Owners and Management.......................................30 Item 12. Certain Relationships and Related Transactions.............30 PART IV Item 13. Exhibits and Reports on Form 8-K...........................30 SIGNATURES .......................................................31 FORWARD LOOKING STATEMENT This Annual Report on Form 10-KSB ("Form 10-KSB") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-KSB and include statements regarding the intent, belief, outlook, estimates or expectations of the Holding Company (as defined below), its directors, or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-KSB are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-KSB identifies important factors that could cause such differences. These factors include but are not limited to changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Business General River Valley Bancorp, an Indiana corporation (the "Holding Company" and together with the "Bank," the "Company"), was organized in May, 1996. On December 20, 1996, it acquired the common stock of Madison First Federal Savings and Loan Association ("First Federal") upon the conversion of First Federal from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), and acquired 120,434 shares of common stock, $8.00 par value per share (the "Citizens Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6% of the issued and outstanding shares of Citizens' common stock (the "Acquisition"). On November 22, 1997, Citizens merged with and into First Federal (the "Merger") pursuant to an Agreement and Plan of Reorganization entered into among the Holding Company, First Federal and Citizens dated September 26, 1997 (the "Agreement"). Pursuant to the Agreement, each outstanding share of Citizens common stock held by shareholders other than the Holding Company was converted into the right to receive $30 cash, payable by the Holding Company, and shares of Citizens held by the Holding Company and its subsidiaries were cancelled. Also, pursuant to the Agreement, First Federal changed its corporate title to River Valley Financial Bank (the "Bank"). Following the effective time of the Merger, the Holding Company remained as the sole shareholder of the Bank, and Citizens' status as a national banking association terminated. For ease of reference, First Federal will be referred to as the "Bank" hereinafter both with respect to historical information concerning events and results of operations prior to the Merger and with respect to information relating to events occurring after the Merger. The Conversion of the Bank was accounted for in a manner similar to a pooling of interests, and the Acquisition of Citizens was accounted for as a purchase transaction. Under purchase accounting, the acquired assets and liabilities of Citizens were recorded at fair value as of December 20, 1996. Because the assets and liabilities of the Bank were recorded at fair value as of the date of the Acquisition, the financial data prior to December 20, 1996 provided herein does not include information derived from the financial statements of Citizens. Rather, such financial data provided herein includes only information derived from the financial statements of the Bank. From and after December 20, 1996, the operating results of Citizens and the Bank are consolidated with those of the Holding Company. The Merger was accounted for in a manner similar to a pooling of interests. The Bank was organized as a federally chartered savings and loan association in 1875. The Bank is the oldest independent financial institution headquartered in Jefferson County, Indiana. Citizens was organized as a national bank in 1981 and, until the Merger, conducted its business from four full-service offices, all located in Jefferson County, Indiana. Following the Merger, these offices became branch offices of the Bank. Prior to the Conversion, the Bank conducted its business from three full-service offices and one stand-alone drive-through branch, all located in Jefferson County, Indiana. As a result of the Acquisition, the Holding Company became subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System (the "FRB"). As a condition to the Holding Company obtaining the requisite approval from the FRB for the Acquisition, the Holding Company committed to cause the Bank to (i) enter into a definitive agreement to sell the Bank's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and deposits originated at that branch, within 180 days of consummation of the Acquisition. On February 28, 1997, the Bank sold its Hanover, Indiana branch to People's Trust Company based in Brookville, Indiana ("People's Trust"), pursuant to that commitment. Deposits totaling $6.8 million were assumed by People's Trust, and the Bank recorded an after tax gain of $125,000 on the transaction. As a result of the Merger and the resulting termination of Citizens' status as a national banking association, the Holding Company is no longer subject to regulation by the FRB as a bank holding company and is instead regulated by the Office of Thrift Supervision (the "OTS") as a savings and loan holding company. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction, or refinancing of one- to four- family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 52.0% of the Bank's total loan portfolio at December 31, 2000. The Bank had not identified any loans as held for sale at December 31, 2000. The Bank also offers multi-family mortgage loans, non-residential real estate loans, land loans, construction loans, nonmortgage commercial loans and consumer loans. Its principal market area is Jefferson County, Indiana and adjoining counties. Loan Portfolio Data. The following table sets forth the composition of the Bank's loan portfolio, including loans held for sale, as of December 31, 2000, 1999 and 1998 by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process.
At December 31, -------------------------------------------------------------- 2000 1999 1998 ------------------ ----------------- ----------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- TYPE OF LOAN (Dollars in thousands) Residential real estate: One-to four-family......................................... $ 77,304 52.0% $ 69,588 58.6% $ 65,907 57.4% Multi-family............................................... 3,319 2.2 2,918 2.5 1,775 1.6 Construction............................................... 6,827 4.6 4,163 3.5 8,126 7.1 Nonresidential real estate.................................... 25,944 17.4 12,758 10.7 7,604 6.6 Land loans.................................................... 4,269 2.9 10,079 8.5 6,300 5.5 Consumer loans: Automobile loans........................................... 11,118 7.5 6,922 5.8 6,828 5.9 Loans secured by deposits.................................. 574 .4 548 .5 723 .6 Home improvement loans..................................... 6 --- 34 --- --- --- Other...................................................... 2,988 2.0 2,040 1.7 5,089 4.4 Commercial loans.............................................. 16,361 11.0 9,780 8.2 12,461 10.9 ------- ----- ------- ----- ------- ----- Gross loans receivable........................................ 148,710 100.0 118,830 100.0 114,813 100.0 Add/(Deduct): Deferred loan origination costs............................ 324 .2 245 .2 200 .2 Undisbursed portions of loans in process...................................... (6,362) (4.3) (2,422) (2.0) (1,151) (1.0) Allowance for loan losses.................................. (1,702) (1.1) (1,522) (1.3) (1,477) (1.3) ------- ----- ------- ----- ------- ----- Net loans receivable.......................................... $140,970 94.8% $115,131 96.9% $112,385 97.9% ======== ==== ======== ==== ======== ====
The following table sets forth certain information at December 31, 2000, regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Due During Years Ended December 31, Balance ------------------------------------------------------------------------ Outstanding at 2004 2006 2011 2016 December 31, to to to and 2000 2001 2002 2003 2005 2010 2015 following ------------- ------ ------ ------ ------ ------ ------ --------- (In thousands) Residential real estate loans: One-to four-family................. $ 77,304 $ 909 $ 291 $ 467 $ 1,463 $ 8,066 $19,337 $46,771 Multi-family....................... 3,319 --- --- 5 158 601 129 2,426 Construction....................... 6,827 6,827 --- --- --- --- --- --- Nonresidential Real estate loans.................. 25,944 4,737 46 28 681 1,757 6,102 12,593 Land loans............................ 4,269 2,378 3 560 40 269 433 586 Consumer loans: Loans secured by deposits.......... 574 298 50 25 160 24 --- 17 Other loans........................ 14,112 1,124 1,384 2,415 8,037 991 161 --- Commercial loans...................... 16,361 8,572 683 901 1,356 1,537 1,392 1,920 -------- ------- ------ ------ ------- ------- ------- ------- Total............................ $148,710 $24,845 $2,457 $4,401 $11,895 $13,245 $27,554 $64,313 ======== ======= ====== ====== ======= ======= ======= =======
The following table sets forth, as of December 31, 2000, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates. Due After December 31, 2001 ------------------------------------------------ Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Residential real estate loans: One-to four-family.......... $14,356 $62,039 $ 76,395 Multi-family................ 269 3,050 3,319 Construction................ --- --- --- Non-residential Real estate loans........... 3,835 17,372 21,207 Land loans .................. 892 999 1,891 Consumer loans: Loans secured by deposits... 254 22 276 Other loans................. 12,773 215 12,988 Commercial loans............... 3,591 4,198 7,789 ------- ------- -------- Total..................... $35,970 $87,895 $123,865 ======= ======= ======== Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $77.3 million, or 52.0% of the Bank's portfolio of loans, at December 31, 2000, consisted of one- to four-family residential loans, of which approximately 81.2% had adjustable rates. The Bank currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, although until late 1995, the Bank's ARMs were indexed to the 11th District Cost of Funds. Some of the Bank's residential ARMs are originated at a discount or "teaser" rate which is generally 150 to 175 basis points below the "fully indexed" rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. The Bank's ARMs have a current margin above such index of 2.5% for owner-occupied properties and 3.0% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank's portfolio at December 31, 2000 provide for maximum rate adjustments per year and over the life of the loan of 1% and 4%, respectively, although the Bank also originates residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1.5% and 6%, respectively. The Bank's ARMs generally provide for interest rate minimums of 1% below the origination rate. The Bank's residential ARMs are amortized for terms up to 30 years. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank currently offers fixed-rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 30 years. Prior to the Merger, the Bank retained all of its fixed-rate residential mortgage loans in its portfolio; however, after the effective date of the Merger, the Bank began underwriting its fixed-rate residential mortgage loans for potential sale to the Federal Home Loan Mortgage Corporation (the "FHLMC") on a servicing-retained basis. At December 31, 2000, approximately 18.8% of the Bank's one- to four-family residential mortgage loans had fixed rates. Before the Merger, Citizens offered fixed-rate one- to four-family residential mortgage loans in accordance with the guidelines established by the FHLMC to facilitate the sale of such loans to the FHLMC in the secondary market. These loans amortized on a monthly basis with principal and interest due each month and were written with terms of 15, 20 and 30 years. Citizens retained the servicing on all loans sold to the FHLMC. At December 31, 2000, the Bank had approximately $37.6 million of fixed-rate residential mortgage loans which were sold to the FHLMC and for which the Bank provides servicing. The Bank generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (i.e. the "Loan-to-Value Ratio") exceeds 95% and generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 80%. The Bank generally requires private mortgage insurance on all conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of such insurance is factored into the APY on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. Substantially all of the one- to four-family residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, the Bank does permit assumptions of existing residential mortgage loans on a case-by-case basis. At December 31, 2000, the Bank had outstanding approximately $4.9 million of home equity loans, with unused lines of credit totalling approximately $3.4 million. No home equity loans were included in non-performing assets on that date. The Bank's home equity lines of credit are adjustable-rate lines of credit tied to the prime rate and are amortized based on a 10- to 20-year maturity. The Bank generally allows a maximum 90% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans equal 1.5% of the outstanding principal balance per month. The Bank also offers indemnification mortgage loans ("ID Mortgage Loans"), which are typically written as fixed-rate second mortgage loans. The Bank's ID Mortgage Loans are written for terms of 5 years and generally have maximum Loan-to-Value Ratios of 80%. The Bank also offers standard second mortgage loans, which are adjustable-rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity with a current margin above such index of 3%. The Bank's second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 1% and 4%, respectively. The Bank's second mortgage loans have terms of 10 to 30 years. At December 31, 2000, one- to four-family residential mortgage loans amounting to $171,000, or .11% of total loans, were included in the Bank's non-performing assets. Construction Loans. The Bank offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Generally, construction loans are written as 12-month fixed-rate loans with interest calculated on the amount disbursed under the loan and payable on a semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value Ratio for its construction loans, although the Bank may permit an 85% Loan-to-Value Ratio for one- to four-family residential construction loans. Inspections are generally made prior to any disbursement under a construction loan, and the Bank does not charge commitment fees for its construction loans. At December 31, 2000, $6.8 million, or 4.6% of the Bank's total loan portfolio, consisted of construction loans. The largest construction loan at December 31, 2000, totalled $601,000. Construction loans totalling $115,000 were included in non-performing assets on that date. While providing the Bank with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and the Bank taking title to the project. Nonresidential Real Estate Loans. At December 31, 2000, $25.9 million, or 17.4% of the Bank's portfolio, consisted of nonresidential real estate loans. Nonresidential real estate loans are primarily secured by real estate such as churches, farms and small business properties. The Bank originates nonresidential real estate loans as one-year adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, written for maximum terms of 30 years. The Bank's adjustable-rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 1% and 4%, respectively, and interest rate minimums of 1% below the origination rate. The Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate collateral. The Bank underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, evaluates the borrower's ability to service the debt from the net operating income of the property. The Bank's largest nonresidential real estate loan as of December 31, 2000 was $2.8 million and was secured by three commercial buildings in (or close in proximity to) Madison, Indiana. No nonresidential real estate loans were included in non-performing assets at December 31, 2000. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-family Loans. At December 31, 2000, approximately $3.3 million, or 2.2% of the Bank's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). The Bank writes multi-family loans on terms and conditions similar to its nonresidential real estate loans. The largest multi-family loan in the Bank's portfolio as of December 31, 2000 was $1.5 million and was secured by a 46 unit apartment complex in Hanover, Indiana. No multi-family loans were included in non-performing assets on that date. Multi-family loans, like nonresidential real estate loans, involve a greater risk than do residential loans. See "Nonresidential Real Estate Loans" above. Also, the loans-to-one borrower limitations restrict the ability of the Bank to make loans to developers of apartment complexes and other multi-family units. Land Loans. At December 31, 2000, approximately $4.3 million, or 2.9% of the Bank's total loan portfolio, consisted of mortgage loans secured by undeveloped real estate. The Bank's land loans are generally written on terms and conditions similar to its nonresidential real estate loans. Some of the Bank's land loans are land development loans; i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At December 31, 2000, the Bank's largest land loan totalled $597,000. Land loans totalling $214,000, or .14% of the Bank's total loan portfolio, were included in non-performing assets as of December 31, 2000. Such loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost-overruns rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause the Bank to take title to partially improved land that is unmarketable without further capital investment. Commercial Loans. At December 31, 2000, $16.4 million, or 11.0% of the Bank's total loan portfolio, consisted of nonmortgage commercial loans. The Bank's commercial loans are written on either a fixed-rate or an adjustable-rate basis with terms that vary depending on the type of security, if any. At December 31, 2000, approximately 92.6% of the Bank's commercial loans were secured by collateral, such as equipment, inventory and crops. The Bank's adjustable-rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At December 31, 2000, the largest commercial loan was $646,000. As of the same date, commercial loans totalling $49,000 were included in non-performing assets. Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than the Bank's average residential mortgage loans. Consumer Loans. The Bank's consumer loans, consisting primarily of auto loans, home improvement loans, unsecured installment loans, loans secured by deposits and mobile home loans aggregated approximately $14.7 million at December 31, 2000, or 9.9% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans, except loans secured by deposits, are fixed-rate loans with terms that vary from six months (for unsecured installment loans) to 60 months (for home improvement loans and loans secured by new automobiles). At December 31, 2000, 90.4% of the Bank's consumer loans were secured by collateral. The Bank's loans secured by deposits are made up to 90% of the current account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate. The Bank offers both direct and indirect automobile loans. Under the Bank's indirect automobile program, participating automobile dealers receive loan applications from prospective purchasers of automobiles at the point of sale and deliver them to the Bank for processing. The dealer receives a portion of the interest payable on approved loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections depend upon the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2000, consumer loans amounting to $72,000 were included in non-performing assets. Origination, Purchase and Sale of Loans. The Bank historically has originated its ARMs pursuant to its own underwriting standards which did not conform with the standard criteria of the FHLMC or Federal National Mortgage Association ("FNMA"). The Bank's ARMs varied from secondary market criteria because, among other things, the Bank did not require current property surveys in most cases and did not permit the conversion of those loans to fixed rate loans in the first three years of its term. If the Bank desired to sell its non-conforming ARMs, it may experience difficulty in selling such loans quickly in the secondary market. The Bank began underwriting fixed-rate residential mortgage loans for potential sale to the FHLMC on a servicing-retained basis after the Merger. Prior to the Merger, Citizens also originated loans for sale to the FHLMC and retained servicing rights for a fee of one-fourth of 1% of the principal balance of all loans serviced. Loans originated for sale to the FHLMC in the secondary market are originated in accordance with the guidelines established by the FHLMC and are sold promptly after they are originated. The Bank receives a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. At December 31, 2000, the Bank serviced $37.6 million in loans sold to the FHLMC. The Bank confines its loan origination activities primarily to Jefferson County and surrounding counties. At December 31, 2000, the Bank held loans totalling approximately $13.1 million that were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from existing customers, real estate brokers and newspaper and periodical advertising. Loan applications are taken at any of the Bank's five full-service offices. The Bank's loan approval processes are intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. Under the Bank's lending policy, a loan officer may approve mortgage loans up to $75,000, a Senior Loan Officer may approve mortgage loans up to $150,000 and the President may approve mortgage loans up to $240,000. All other mortgage loans must be approved by at least four members of the Bank's Board of Directors. The lending policy further provides that loans secured by readily marketable collateral, such as stock, bonds and certificates of deposit may be approved by a Loan Officer for up to $75,000, by a Senior Loan Officer for up to $150,000 and by the President up to $300,000. Loans secured by other non-real estate collateral may be approved by a Loan Officer for up to $25,000, by a Senior Loan Officer up to $75,000 and by the President up to $150,000. Finally, the lending policy provides that unsecured loans may be approved by a Loan Officer or Senior Loan Officer up to $10,000 or by the President up to $25,000. All other unsecured loans or loans secured by non-real estate collateral must be approved by at least four members of the Bank's Board of Directors. The Bank generally requires appraisals on all real property securing its loans and requires an attorney's opinion or title insurance and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. The Bank also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not require escrow accounts for insurance premiums or taxes. The Bank's underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations. The Bank occasionally purchases participations in commercial loans, nonresidential real estate and multi-family loans from other financial institutions. At December 31, 2000, the Bank held in its loan portfolio participations in these types of loans aggregating approximately $166,000 that it had purchased, all of which were serviced by others. The Bank generally does not sell participations in any loans that it originates. The following table shows loan origination and repayment activity for the Bank during the periods indicated:
Year Ended December 31, -------------------------------------------------- 2000 1999 1998 ------ ------ ------ (In thousands) Loans Originated: Residential real estate loans (1).................... $24,630 $28,816 $37,537 Multi-family loans................................... 133 2,092 326 Construction loans................................... 13,120 4,838 5,108 Non-residential real estate loans.................... 17,308 3,995 447 Land loans........................................... 2,499 4,554 2,909 Consumer loans....................................... 12,708 5,945 6,423 Commercial loans..................................... 14,768 6,625 16,771 ------- ------- ------- Total loans originated........................... 85,166 56,865 69,521 Reductions: Sales................................................ 2,614 14,253 17,025 Principal loan repayments and other (2).............. 56,713 39,866 51,998 ------- ------- ------- Total reductions................................. 59,327 54,119 69,023 ------- ------- ------- Net increase ............................................ $25,839 $ 2,746 $ 498 ======= ======= =======
(1) Includes loans originated for sale in the secondary market. (2) Other items consist of amortization of deferred loan origination costs, the provision for losses on loans and net charges to the allowance for loan losses. Origination and Other Fees. The Bank realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when management determines that the collectibility of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. The Bank delivers delinquency notices with respect to all mortgage loans contractually past due 5 to 10 days. When loans are 30 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Commercial and consumer loans are treated similarly. Interest income on consumer, commercial and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued and the loan is written-off, or written down to the fair value of the collateral securing the loan. It is the Bank's policy to recognize losses on these loans as soon as they become apparent. Non-performing Assets. At December 31, 2000, $621,000, or .38% of consolidated total assets, were non-performing loans compared to $857,000, or .62% of consolidated total assets, at December 31, 1999. The Bank had no REO at December 31, 2000. The table below sets forth the amounts and categories of the Bank's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At December 31, --------------------------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in thousands) Non-performing assets: Non-performing loans.............................. $ 621 $ 857 $1,947 Troubled debt restructurings ..................... 1,314 835 937 ------ ------ ------ Total non-performing loans and troubled debt restructurings........................... 1,935 1,692 2,884 Foreclosed real estate............................ --- --- 82 ------ ------ ------ Total non-performing assets..................... $1,935 $1,692 $2,966 ====== ====== ====== Total non-performing loans and troubled debt restructurings to total loans..................... 1.30% 1.42% 2.51% ==== ==== ==== Total non-performing assets to total assets.......... 1.19% 1.22% 2.14% ==== ==== ====
At December 31, 2000, the Bank held loans delinquent from 30 to 89 days totalling $240,000. Other than in connection with these loans and other delinquent loans disclosed in this section, management was not aware of any other borrowers who were experiencing financial difficulties. In addition, there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at December 31, 2000, 1999 and 1998, relating to delinquencies in the Bank's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 2000 At December 31, 1999 At December 31, 1998 ---------------------------------------- ------------------------------------ ----------------------------------- 30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More --------------------- ------------------ ------------------ ----------------- ----------------- ----------------- Principal Principal Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance of of of of of of of of of of of of Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Residential real estate loans... 4 $ 98 2 $171 5 $186 15 $726 69 $2,194 26 $931 Multi-family loans.. --- --- --- --- --- --- --- --- --- --- --- --- Construction loans.. --- --- 1 115 --- --- --- --- --- --- 1 23 Land loans.......... --- --- 1 214 --- --- 1 36 1 11 3 203 Non-residential real estate loans. --- --- --- --- --- --- --- --- --- --- 4 325 Consumer loans....... 17 82 13 72 32 133 13 72 86 560 56 465 Commercial loans..... 4 60 2 49 2 15 2 23 10 477 --- --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ ----- ------ Total............. 25 $240 19 $621 39 $334 31 $857 166 $3,242 90 $1,947 ==== ==== ==== ==== ==== ==== ==== ==== ==== ====== ===== ====== Delinquent loans to total loans.......... .58% 1.00% 4.52% === ==== ====
Classified assets. Federal regulations and the Bank's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. At December 31, 2000, the aggregate amount of the Bank's classified assets and general and specific loss allowances were as follows: At December 31, 2000 (In thousands) Substandard assets............................... $1,935 Doubtful assets.................................. --- Loss assets...................................... --- ------ Total classified assets...................... $1,935 ====== General loss allowances.......................... $1,597 Specific loss allowances......................... 105 ------ Total allowances............................. $1,702 ====== The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Bank's classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb probable losses from loans at December 31, 2000. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the five years ended December 31, 2000.
Year Ended December 31, --------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period................... $1,522 $1,477 $1,276 $1,190 $ 407 Charge-offs: Single-family residential................... (4) (17) --- --- --- Consumer.................................... (71) (86) (140) (254) (3) Commercial.................................. (9) (20) (83) (15) --- ------ ------ ------ ------ ------ Total charge-offs......................... (84) (123) (223) (269) (3) Recoveries....................................... 37 28 149 51 --- ------ ------ ------ ------ ------ Net charge-offs............................... (47) (95) (74) (218) (3) Provision for losses on loans.................... 227 140 275 304 22 Increase due to Acquisition...................... --- --- --- --- 764 ------ ------ ------ ------ ------ Balance at end of period...................... $1,702 $1,522 $1,477 $1,276 $1,190 ====== ====== ====== ====== ====== Allowance for loan losses as a percent of total loans outstanding before net items...... 1.15% 1.28% 1.29% 1.13% 1.07% ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding before net items............ 0.03% 0.08% 0.06% 0.20% 0.01% ====== ====== ====== ====== ======
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank's allowance for loan losses at the dates indicated.
At December 31, ---------------------------------------------------------------------------------- 2000 1999 1998 --------------------- -------------------- -------------------- Percent Percent Percent of loans of loans of loans in each in each in each category category category to total to total to total Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Residential real estate............ $ 346 58.8% $ 4 64.6% $ 11 66.1% Nonresidential real estate......... --- 20.3 --- 19.2 --- 12.1 Consumer loans..................... 403 9.9 109 8.0 111 10.9 Commercial loans................... 106 11.0 --- 8.2 --- 10.9 Unallocated........................ 847 --- 1,409 --- 1,355 --- ------ ----- ------ ----- ------ ----- Total............................ $1,702 100.0% $1,522 100.0% $1,477 100.0% ====== ===== ====== ===== ====== =====
Investments and Mortgage-Backed Securities Investments. The Bank's investment portfolio (excluding mortgage-backed securities) consists of U.S. government and agency obligations, commercial paper, corporate bonds, municipal securities and Federal Home Loan Bank ("FHLB") stock. At December 31, 2000, the investments in the portfolio had a carrying value of approximately $6.3 million, or 3.9%, of the consolidated total assets. The following table sets forth the amortized cost and the market value of the Bank's investment portfolio at the dates indicated.
At December 31, ----------------------------------------------------------------------------------- 2000 1999 1998 ---------------------- --------------------- --------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Held to Maturity: U.S. Government and agency obligations............... $ --- $ --- $1,000 $995 $1,000 $980 Available for Sale: U.S. Government and agency obligations............... 4,921 4,989 --- --- --- --- Commercial paper................... --- --- 2,972 2,957 --- --- Corporate bonds.................... --- --- 1,000 1,000 --- --- Muncipal securities................ 336 340 276 273 276 283 ------ ------ ------ ------ ------ ------ Total available for sale........... 5,257 5,329 4,248 4,230 276 283 FHLB stock............................ 943 943 943 943 943 943 ------ ------ ------ ------ ------ ------ Total investments................ $6,200 $6,272 $6,191 $6,168 $2,219 $2,206 ====== ====== ====== ====== ====== ======
The following table sets forth the amount of investment securities (excluding FHLB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2000.
Amount at December 31, 2000 which matures in ----------------------------------------------------------------------------------- One Year One Year Five Years After or Less to Five Years to Ten Years Ten Years -------------------- ------------------- ------------------- ------------------- Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- ---- ----- (Dollars in thousands) U.S. Government and agency obligations......... $1,001 6.53% $3,920 6.84% $--- ---% $--- ---% Municipal Securities........................... --- --- 276 6.65 60 8.27 --- ---
Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed pass-through securities in the form of FHLMC, FNMA and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed pass-through securities generally entitle the Bank to receive a portion of the cash flows from an identified pool of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by its respective agencies as to principal and interest. Except for a $12,000 investment in interest-only certificates, the Bank does not invest in any derivative products. Although mortgage-backed securities generally yield less than individual loans originated by the Bank, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect the Bank's earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because they are guaranteed as to principal repayment by the issuing agency. In addition, the Bank has purchased adjustable-rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, the Bank is subject to prepayment risk on such adjustable rate mortgage-backed securities. The Bank attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, the Bank is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans. At December 31, 2000, the Bank had mortgage-backed securities with a carrying value of approximately $1.9 million all of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. The following table sets forth the amortized cost and market value of the Bank's mortgage-backed securities at the dates indicated.
At December 31, ----------------------------------------------------------------------------------- 2000 1999 1998 --------------------- -------------------- -------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Held to Maturity: Mortgage-backed securities....................... $ --- $ --- $2,138 $2,147 $3,190 $3,220 Available for Sale: Government agency securities................ 1,314 1,289 1,511 1,466 2,196 2,177 Collateralized mortgage obligations...................... 627 629 627 605 627 619 ------ ------ ------ ------ ------ ------ Total mortgage-backed securities................... $1,941 $1,918 $4,276 $4,218 $6,013 $6,016 ====== ====== ====== ====== ====== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2000.
Amount at December 31, 2000 which matures in ------------------------------------------------------------------------------ One Year One Year to After or Less Five Years Five Years ------------------------ ------------------------ ---------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- (Dollars in thousands) Mortgage-backed securities available for sale........................... $67 6.47% $1,002 6.83% $872 7.03% ==== ====== ====
The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the years ended December 31, 2000, 1999 and 1998.
Year Ended December 31, ----------------------------------------------------------- 2000 1999 1998 ---- ---- ---- (In thousands) Beginning balance.................................... $4,209 $5,986 $8,978 Purchases............................................ 1,000 --- --- Sales proceeds....................................... (1,006) --- --- Repayments........................................... (2,297) (1,709) (2,970) Losses on sales...................................... (12) --- --- Premium and discount amortization, net............... (20) (30) (40) Unrealized gains (losses) on securities available for sale................................ 44 (38) 18 ------ ------ ------ Ending balance....................................... $1,918 $4,209 $5,986 ====== ====== ======
Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its NOW and MMDAs are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. An analysis of the Bank's deposit accounts by type, maturity and rate at December 31, 2000, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 2000 Deposits Rate - --------------- ------- ---- -------- ---- (Dollars in thousands) Withdrawable: Non-interest bearing accounts.............................. $ 100 $ 9,170 7.0% ---% Savings accounts........................................... 50 21,208 16.3 3.45 MMDA...................................................... 100 7,310 5.6 4.89 NOW accounts............................................... 100 15,079 11.6 2.55 ------- ----- ---- Total withdrawable....................................... 52,767 40.5 2.79 Certificates (original terms): I.R.A...................................................... 250 6,496 5.0 4.91 3 months................................................... 2,500 42 --- 3.70 6 months................................................... 2,500 2,521 1.9 5.40 9 months................................................... 2,500 6,876 5.3 6.68 12 months.................................................. 500 16,572 12.7 5.85 15 months.................................................. 500 3,792 2.9 5.24 18 months.................................................. 500 5,864 4.5 6.70 24 months.................................................. 500 4,016 3.1 6.24 30 months ................................................. 500 1,779 1.4 5.00 36 months.................................................. 500 341 .3 5.81 48 months.................................................. 500 368 .3 5.13 60 months.................................................. 500 1,083 .8 5.87 Jumbo certificates............................................ 100,000 27,708 21.3 5.65 -------- ----- ---- Total certificates......................................... 77,458 59.5 5.79 -------- ----- ---- Total deposits................................................ $130,225 100.0% 4.58 ======== ===== ====
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated: At December 31, --------------------------------------------- 2000 1999 1998 ---- ---- ---- (In thousands) 3.01 to 5.00%..................$26,782 $36,591 $23,200 5.01 to 6.00%.................. 5,997 14,250 31,364 6.01 to 7.00%.................. 42,370 7,445 11,229 7.01 to 8.00%.................. 2,309 207 214 ------- ------- ------- Total.......................$77,458 $58,493 $66,007 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2000. Matured certificates, which have not been renewed as of December 31, 2000, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 2000 ---------------------------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 3.01 to 5.00%............................... $23,202 $ 2,385 $ 284 $ 911 5.01 to 6.00%............................... 2,672 2,160 488 677 6.01 to 7.00%............................... 35,458 6,276 612 24 7.01 to 8.00%............................... 541 1,429 239 100 ------- ------- ------ ------ Total.................................... $61,873 $12,250 $1,623 $1,712 ======= ======= ======
The following table indicates the amount of the Bank's jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2000. At December 31, 2000 Maturity Period (In thousands) Three months or less............................... $14,507 Greater than three months through six months....... 6,776 Greater than six months through twelve months...... 3,481 Over twelve months................................. 2,944 ------- Total......................................... $27,708 ======= The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 2000 Deposits 1999 1999 Deposits 1998 1998 Deposits -------- ----- ------- -------- ----- ------ -------- ----- (Dollars in thousands) Withdrawable: Non-interest bearing accounts...... $ 9,170 7.0% $ 1,267 $ 7,903 6.9% $ (462) $ 8,365 7.0% Savings accounts................... 21,208 16.3 (5,432) 26,640 23.3 4,262 2,378 19.0 MMDA........................ 7,310 5.6 424 6,886 6.0 (98) 6,984 5.9 NOW accounts....................... 15,079 11.6 750 14,329 12.6 (88) 14,417 12.2 -------- ----- ------- -------- ----- ------- -------- ----- Total withdrawable............... 52,767 40.5 (2,991) 55,758 48.8 3,614 52,144 44.1 Certificates (original terms): I.R.A.............................. 6,496 5.0 (395) 6,891 6.0 (359) 7,250 6.1 3 months........................... 42 --- (287) 329 .3 66 263 .2 6 months........................... 2,521 1.9 (4,419) 6,940 6.1 (298) 7,238 6.1 9 months........................... 6,876 5.3 5,851 1,025 .9 (2,027) 3,052 2.6 12 months.......................... 16,572 12.7 2,692 13,880 12.1 7,298 6,582 5.6 15 months.......................... 3,792 2.9 (2,803) 6,595 5.8 (12,179) 18,774 15.9 18 months.......................... 5,864 4.5 5,044 820 .7 (222) 1,042 .9 24 months.......................... 4,016 3.1 3,677 339 .3 (115) 454 .4 30 months ......................... 1,779 1.4 (2,941) 4,720 4.1 2,172 2,548 2.2 36 months.......................... 341 .3 (176) 517 .5 (85) 602 .5 48 months.......................... 368 .3 (121) 489 .4 (136) 625 .5 60 months.......................... 1,083 .8 (980) 2,063 1.8 (172) 2,235 1.9 96 months.......................... --- --- --- --- --- (219) 219 .2 Jumbo certificates.................... 27,708 21.3 13,823 13,885 12.2 (1,238) 15,123 12.8 -------- ----- ------- -------- ----- ------- -------- ----- Total certificates................. 77,458 59.5 18,965 58,493 51.2 (7,514) 66,007 55.9 -------- ----- ------- -------- ----- ------- -------- ----- Total deposits........................ $130,225 100.0% $15,974 $114,251 100.0% $(3,900) $118,151 100.0% ======== ===== ======= ======== ===== ======= ======== =====
Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments, or borrowings. At December 31, 2000, the Bank had $13.0 million in FHLB advances and the Holding Company had $450,000 in other borrowed money consisting of a variable-rate one-year line of credit advance. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Holding Company's and the Bank's borrowings at or for the years ended December 31, 2000, 1999 and 1998. At or for the Year Ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in thousands) FHLB Advances and Other Borrowed Money: Outstanding at end of period.............. $13,450 $6,500 $ 270 Average balance outstanding for period.... 8,813 2,228 2,549 Maximum amount outstanding at any month-end during the period............. 13,450 6,500 5,000 Weighted average interest rate during the period....................... 5.67% 6.42% 6.28% Weighted average interest rate at end of period........................ 6.42% 6.07% 6.63% Service Corporation Subsidiaries Prior to the Acquisition and Conversion, the Bank had two subsidiaries: Madison First Service Corporation ("First Service") and McCauley Insurance Agency, Inc. ("McCauley"). First Service was incorporated under the laws of the State of Indiana on July 3, 1973 and owned all of the outstanding capital stock of McCauley. First Service had no other operations. McCauley was organized under the laws of the State of Indiana under the name Builders Insurance Agency, Inc. on August 2, 1957 and changed its name to McCauley Insurance Agency, Inc. on August 29, 1957. McCauley engaged in the sale of general fire and accident, car, home and life insurance to the general public. During the period ended December 31, 1996, McCauley received approximately $200,000 in commissions. Upon consummation of the Acquisition, the Bank became a bank holding company, subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). At that time, the insurance operations of McCauley were not permitted under the BHCA, and the Bank was required to divest its ownership of McCauley. On December 17, 1996, the Bank sold McCauley to the Madison Insurance Agency, Inc. for a gain of $141,000. The Bank continues to hold First Service which currently holds rental property but does not otherwise engage in significant business activities. The historic consolidated statements of earnings of the Bank and its subsidiaries included elsewhere herein include the operations of First Service and McCauley for the periods prior to the Holding Company's divestment of its ownership of McCauley. All intercompany balances and transactions have been eliminated in the consolidation. Employees As of December 31, 2000, the Bank employed 56 persons on a full-time basis and 6 persons on a part-time basis. None of the employees is represented by a collective bargaining group. Management considers its employee relations to be good. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Jefferson County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions and certain nonbanking consumer lenders that provide similar services in Jefferson County and which have significantly larger resources available to them than does the Bank. In total, there are 11 financial institutions located in Jefferson County, Indiana, including the Bank. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services they provide borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. REGULATION General As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. A savings association must pay a semi-annual assessment to the OTS based upon a marginal assessment rate that decreases as the asset size of the savings association increases, and which includes a fixed-cost component that is assessed on all savings associations. The assessment rate that applies to a savings association depends upon the institution's size, condition and the complexity of its operations. The Bank's semi-annual assessment is approximately $27,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuances or retirements of its securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. Savings and Loan Holding Company Regulation As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and is thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without obtaining the prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company currently operates as a unitary savings and loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") on November 12, 1999, there were no restrictions on the permissible business activities of a unitary savings and loan holding company. The GLB Act included a provision that prohibits any new unitary savings and loan holding company, defined as a company that acquires a thrift after May 4, 1999, from engaging in commercial activities. This provision also includes a grandfather clause, however, that permits a company that was a savings and loan holding company as of May 4, 1999, or had an application to become a savings and loan holding company on file with the OTS as of that date, to acquire and continue to control a thrift and to continue to engage in commercial activities. Because the Holding Company qualifies under this grandfather provision, the GLB Act did not affect the Holding Company's authority to engage in diversified business activities. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies, to the same extent as if the Holding Company were a bank holding company and the Bank were a bank. See "-Qualified Thrift Lender." At December 31, 2000, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple savings and loan holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend or make a capital distribution on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System The Bank is a member of the FHLB system, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member financial institutions. At December 31, 2000, the Bank's investment in stock of the FHLB of Indianapolis was $943,000. For the fiscal year ended December 31, 2000, the FHLB of Indianapolis paid approximately $78,000 in dividends to the Bank, for an annual rate of 8.25%. All 12 FHLB's are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in the Bank's capital. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as the Bank, and for banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. During 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF had been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law. In 1996, however, legislation was enacted to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF. See "--Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. In 1996, legislation was enacted that included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The Bank recognized this one-time assessment as a non-recurring operating expense during the three-month period ending September 30, 1996, and paid this assessment during the fourth quarter of 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. In addition to the assessment for deposit insurance, savings institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation ("FICO"), which is a federally-chartered corporation that was organized to provide some of the financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments for SAIF members approximated 6.10 basis points, while BIF members paid 1.22 basis points. By law, payments on Financing Corporation obligations have been shared equally between BIF members and SAIF members since January 1, 2000. Although Congress has considered merging the SAIF and the BIF, until then, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. The OTS requires a core capital level of 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and no less than 4% for all other savings associations. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 2000, the Bank was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with either "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless measures its interest rate risk in conformity with the OTS regulation and, as of December 31, 2000 would not have been required to deduct any amounts from its total capital available to calculate its risk-based capital requirement. The OTS recently proposed an amendment to its interest rate risk rule that would delete the requirement that a savings association with excess exposure to interest rate risk make a capital deduction. If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2000, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations The OTS also restricts the amount of "capital distributions" that may be made by savings associations. The regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The regulation exempts certain savings associations from filing either a notice or an application with the OTS before making any capital distribution, and requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision requires, at a minimum, that the Bank file a notice with the OTS 30 days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew, or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on the Bank's current operations. Liquidity The Financial Regulatory Relief and Economic Efficiency Act of 2000, which was signed into law on December 27, 2000, repealed the former statutory requirement that all savings associations maintain an average daily balance of liquid assets in a minimum amount of not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. The OTS adopted an interim final rule in March 2001 that implemented this revised statutory requirement, although savings associations remain subject to the OTS regulation that requires them to maintain sufficient liquidity to ensure their safe and sound operation. Safety and Soundness Standards In 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. During 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and be appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 2000, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on the Bank's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test that requires the association to maintain an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise to qualify as a QTL. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 2000, the Bank was in compliance with its QTL requirement, with approximately 79.6% of its portfolio assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must dispose of any investment or activity not permissible for a national bank and a savings association. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law, which became effective in 1996, authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. Transactions with Affiliates The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between financial institutions and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions deemed to be consistent with safe and sound banking practices for transactions between a financial institution and its affiliates, and restricts the types of collateral security permitted in connection with a financial institution's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following the Bank's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating - outstanding, satisfactory, needs to improve, and substantial noncompliance - and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank can no longer use the percentage of taxable income method of computing its allowable tax bad debt deduction and instead must compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code or (ii) excess dividends or distributions are paid out by the Bank or the Bank redeems its own stock. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. The Holding Company and the Bank elected to file a consolidated federal income tax return for 2000. The Bank was taxed separately on its earnings in years previous to 2000. The Holding Company has been taxed as an ordinary corporation in years previous to 2000. State Taxation The Bank and the Holding Company are subject to Indiana's Financial Bank Tax ("IFBT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of IFBT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Bank's state income tax returns have not been audited in recent years. Item 2. Properties. The following table provides certain information with respect to the Bank's offices as of December 31, 2000. Net Book Value of Property, Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ----------------------- -------- --------- ------- (Dollars in thousands) Locations in Madison, Indiana Downtown Offices: 233 E. Main Street................. 1952 $242 9,110 Drive-Through Branch: 401 E. Main Street................. 1984 111 375 Hilltop Locations: 303 Clifty Drive................... 1973 705 3,250 430 Clifty Drive................... 1983 1,596 6,084 Wal-mart Banking Center 567 Ivy Tech Drive................. 1995 3 517 Locations in Hanover, Indiana 10 Medical Plaza Drive............. 1995 160 656 The following table provides certain information with respect to real estate owned by the Bank as of December 31, 2000. These properties were acquired by the Bank for future expansion of its banking operations. Address ------- 225 E. Main Street Madison, Indiana 47250 227 E. Main Street Madison, Indiana 47250 The Bank owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by the Bank was approximately $374,000 at December 31, 2000. The Bank operates 6 automated teller machines ("ATMs"), one at each office location and one at Hanover College. The Bank's ATMs participate in the MAC(R) and MagicLine(R) networks. Prior to the effective date of the Merger, the Bank had contracted for the data processing and reporting services of BISYS, Inc. in Houston, Texas. Following the Merger, the Bank performs these services in-house. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the Holding Company's or the Bank's business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 2000. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Bank are elected annually by the Holding Company's Board of Directors. Position with the Position with Name Holding Company the Bank - ---- --------------- -------- Matthew P. Forrester President and Chief President and Chief Executive Officer Executive Officer Lonnie D. Collins Secretary Secretary Larry C. Fouse Vice President of Finance Vice President of Finance Deanna Liter Vice President of Data Vice President of Data Services Services Barbara Eades Assistant Vice President Assistant Vice President Loy Skirvin Director of Human Resources Director of Human Resources Mark A. Goley Vice President - Lending Vice President - Lending Matthew P. Forrester (age 44) has served as the Bank and Holding Company President and Chief Executive Officer since October, 1999. Prior to that Mr. Forrester served as the Chief Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice President and Treasurer for its holding company, Home Bancorp. Prior to joining Home Loan Bank Mr. Forrester was an examiner for the Indiana Department of Financial Institutions. Lonnie D. Collins (age 52) has served as Secretary of the Bank since September, 1994, and as Secretary of the Holding Company since 1996. Mr. Collins has also practiced law since October, 1975 and has served as the Bank's outside counsel since 1980. Larry C. Fouse (age 55) has served as the Holding Company's Controller since 1997. From 1993 to 1997, he served as the Chief Financial Officer and Controller of Citizens, and from 1989 to 1993, served as Citizens' Vice President and Operations Officer. Deanna Liter (age 37) has served as Vice President of Data Services since 1999. From 1986 to 1997, she was manager of the Citizens' Data Processing Department. Barbara Eades (age 51) has served as Vice President of Retail Banking since 2000. From 1997 to 1999, she was Branch Manager of the downtown branch. She served as Assistant Vice President for Madison First Federal from 1990 to 1996. Loy Skirvin (age 52) has served as Director of Human Resources since 1998. From 1991 to 1997, she was Human Resources Manager for a manufacturing firm. Mark A. Goley (age 45) has served as Vice President of Loan Services since 1997. From 1989 to 1997, he served as Senior Loan Officer for Citizens. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "RIVR." Since the Holding Company has no independent operation or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders directly depends upon the ability of the Bank to pay dividends to the Holding Company and upon the earnings on its investment securities. Any dividend distributions by the Bank to the Holding Company in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Bank. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of the Bank. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the Bank's financial condition. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Other information required by this item is incorporated by reference to the material under the heading "Market Price of the Corporation's Common Shares and Related Shareholder Matters" on pages 2 and 3 of the Holding Company's 2000 Shareholder Annual Report (the "Shareholder Annual Report"). Item 5.5. Selected Consolidated Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data" on pages 4 and 5 of the Shareholder Annual Report. Item 6. Management's Discussion and Analysis or Plan of Operation. The information required by this item is incorporated by reference to pages 6 through 18 of the Shareholder Annual Report. Item 6A. Quantitative and Qualitative Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 13 through 15 of the Shareholder Annual Report. Item 7. Financial Statements. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 19 through 42 in the Shareholder Annual Report are incorporated herein by reference. Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors River Valley Bancorp We have audited the accompanying consolidated statement of financial condition of River Valley Bancorp as of December 31, 1999, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for the years ended December 31, 1999 and 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp as of December 31, 1999, and the consolidated results of its operations and its cash flows for the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Cincinnati, Ohio February 16, 2000 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On May 18, 2000, the Holding Company engaged the accounting firm of Olive LLP to examine the consolidated financial statements of the Holding Company for the fiscal year ending December 31, 2000. This action was taken following a recommendation of the Holding Company's Audit Committee to the Board of Directors to take such action and the approval of the change in auditors by the Board of Directors. Grant Thornton LLP, which had acted as the independent public accountant for the Holding Company since 1996 and audited its consolidated financial statements for 1998 and 1999, was notified of the Holding Company's decision. The audit reports issued by Grant Thornton LLP with respect to the Holding Company's consolidated financial statements for 1998 and 1999 did not contain an adverse opinion or disclaimer of opinion, and were not qualified as to uncertainty, audit scope or accounting principles. During 1998 and 1999 (and any subsequent interim period), there had been no disagreements between the Holding Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report. Moreover, none of the events listed in Item 304(a)(1)(iv)(B) of Regulation S-B occurred during 1998 or 1999 or any subsequent interim period. Prior to its engagement, Olive LLP had not been consulted by the Holding Company as to the application of accounting principles to a specific completed or contemplated transaction or the type of audit opinion that might be rendered on the Holding Company's financial statements. Pursuant to Item 304 of Regulation S-B, the Company provided a copy of its Current Report on Form 8-K announcing the change in the Company's Certifying Accountant, which was filed with the Commission on May 18, 2000, to Olive LLP for review. A letter from Grant Thornton LLP indicating that it agrees with the statements made by the Company therein is incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K/A, filed with the Commission on May 31, 2000. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons. The information required by this item with respect to directors is incorporated by reference to pages 2 through 5 and page 9 of the Holding Company's Proxy Statement for its Annual Shareholder Meeting to be held April 18, 2001 (the "2001 Proxy Statement"). Information concerning the Registrant's executive officers is included in Item 4.5 in Part I of this report. Item 10. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 5 through 6 of the 2001 Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 1 and 2 of the 2001 Proxy Statement. Item 12. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 8 of the 2001 Proxy Statement. Item 13. Exhibits and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Financial Statements Page No. Independent Auditor's Report.....................................19 Consolidated Balance Sheets at December 31, 2000 and 1999....................................20 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998.....................21 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998...........................22 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998......23 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998...........................24 Notes to Consolidated Financial Statements.......................25 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 2000. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVER VALLEY BANCORP Date: March 30, 2001 By: /s/ Matthew P. Forrester ------------------------------------ Matthew P. Forrester, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- (1) Principal Executive Officer: /s/ Matthew P. Forrester ) ------------------------------ ) Matthew P. Forrester President and ) Chief Executive ) Officer ) ) ) (2) Principal Financial and ) Accounting Officer: ) ) ) /s/ Larry C. Fouse Treasurer ) ------------------------------ ) Larry C. Fouse ) ) ) March 30, 2001 ) (3) The Board of Directors: ) ) ) /s/ Robert W. Anger Director ) ------------------------------ ) Robert W. Anger ) ) ) /s/ Jonnie L. Davis Director ) ------------------------------ ) Jonnie L. Davis ) ) ) /s/ Matthew P. Forrester Director ) ------------------------------ ) Matthew P. Forrester ) ) ) /s/ Michael J. Hensley Director ) ------------------------------ ) Michael J. Hensley ) ) ) /s/ Earl W. Johann Director ) March 30, 2001 ------------------------------ ) Earl W. Johann ) ) ) /s/ Fred W. Koehler Director ) ------------------------------ ) Fred W. Koehler ) ) EXHIBIT INDEX Exhibit No. Description Page - ----------- ----------- ---- 3 (1) Registrant's Articles of Incorporation are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 333-05121) (the "Registration Statement") (2) Registrant's Amended Code of By-Laws are incorporated by reference to Exhibit 3(2) to the Registrant's Form 10-K for the fiscal year ending December 31, 1997 10 (1) Employment Agreement between River Valley Financial Bank and Matthew P. Forrester is incorporated by reference to Exhibit 10(1) of Registrant's Form 10-K for 1999 (2) Director Deferred Compensation Master Agreement is incorporated by reference to Exhibit 10(8) to the Registration Statement (3) Director Deferred Compensation Joinder Agreement -- Robert W. Anger is incorporated by reference to Exhibit 10(10) to the Registration Statement (4) Director Deferred Compensation Joinder Agreement -- Earl W. Johann is incorporated by reference to Exhibit 10(12) to the Registration Statement (5) Director Deferred Compensation Joinder Agreement -- Frederick W. Koehler is incorporated by reference to Exhibit 10(13) to the Registration Statement (6) Director Deferred Compensation Joinder Agreement -- Michael Hensley is incorporated by reference to Exhibit 10(15) to the Registration Statement (7) Special Termination Agreement between River Valley Financial Bank, as successor to Madison First Federal Savings and Loan Association and Robert W. Anger is incorporated by reference to Exhibit 10(18) to the Registration Statement (8) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Larry Fouse is incorporated by reference to Exhibit 10(20) to the Registration Statement (9) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Mark Goley is incorporated by reference to Exhibit 10(21) to the Registration Statement (10) Exempt Loan and Share Purchase Agreement between Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp is incorporated by reference to Exhibit 10(22) to the Registration Statement 13 Shareholder Annual Report 16 Letter regarding change in certifying accountant is incorporated by reference to Exhibit 16 to the Registrant's Form 8-K/A filed May 31, 2000 21 Subsidiaries of the Registrant 23 (1) Consent of Olive LLP (2) Consent of Grant Thornton LLP EX-13 2 0002.txt SHAREHOLDER ANNUAL REPORT River Valley Bancorp P.O. Box 1590 Madison, Indiana 47250-0590 (812)273-4949 Fax - (812)273-4944 To Our Shareholders, Customers, and Friends: It is my pleasure to present to you River Valley Bancorp's fifth Annual Report to Shareholders covering the year ending December 31, 2000. While the passing of a century marked a defining moment in time, year 2000 truly was a momentous event in the annals of River Valley Bancorp. I previously characterized the year 1999 as a year of transitions for the organization and it was hoped that 2000 would be the foundation on which River Valley Bancorp would be reinvigorated. I am proud to say that the employees, and communities we serve, have responded. Year 2000 was a record year! A year that was not defined by one or two new records or record improvements, but a year where there was meaningful improvement in nearly every area of financial measurement. Year 2000 was a year that also saw the organization position itself for the future. The Corporation made a commitment to expand and renovate what will be its main bank office. This expansion will afford the Bank to close a duplicate full service office just blocks away while expanding its physical plant to accommodate growth in lending and deposit services. The Bank also made necessary commitments in technological improvements that are providing new efficiencies and controlling operating expenses. The Corporation has positioned itself to respond to opportunities without disregarding conservative principles that have served the organization so well. Operationally for the year ended December 31, 2000, net income was $1,610,000, or basic earnings per share of $1.88, compared to $1,039,000, or $1.03 basic earnings per share, reported in 1999. The return on average assets for fiscal 2000 was 1.05%; the return on average equity was 9.45%. For fiscal 1999 those numbers were 0.76% and 5.87% respectively. The earnings per share reflect continued prudent repurchase of shares to be held as treasury shares. The book value per share was $19.78 as of December 31, 2000 compared to $17.38 at December 31, 1999. The Organization experienced good asset growth in fiscal 2000 led by superior net loan growth. Assets totaled $162.1 million as of December 31, 2000, an increase of 16.9%. Net loans were $141.0 million, an increase of $25.9 million from that recorded as of December 31, 1999, or a 22.5% increase. Deposits also increased by $15.9 million, or 13.9%, to $130.2 million as of December 31, 2000. Additionally, during 2000 the Company continued to reduce non-performing loans, lowered its net loan charge-offs, as well as, increased dollar funding of its allowance for loan losses. As of December 31, 2000, non-performing loans totaled $621,000, or 0.38% of total assets, compared to 0.62% of total assets at year-end 1999. Net loan charge-offs for fiscal 2000 totaled just $47,000, or a 50.5% dollar improvement over the year earlier period. Furthermore, the Corporation made provision for loan losses of $227,000 in year 2000, up from $140,000 provided for in fiscal year 1999. Our Bank's service promise is "Expect a Difference!" We have worked very diligently to demonstrate that to our customer base each and every day. We trust that commitment is illustrated here in these pages. We thank you for your continued support and patronage. Respectfully, /s/ Matthew P. Forrester Matthew P. Forrester President, CEO River Valley Bancorp BUSINESS OF RIVER VALLEY River Valley Bancorp ("River Valley" or the "Corporation"), an Indiana corporation, was formed in 1996 for the primary purpose of purchasing all of the issued and outstanding common stock of River Valley Financial Bank (formerly Madison First Federal Savings and Loan Association; hereinafter "River Valley Financial" or the "Bank") in its conversion from mutual to stock form. The conversion offering was completed on December 20, 1996, with the sale of 1,190,250 common shares at an initial offering price of $10.00 per share. On December 23, 1996, the Corporation utilized approximately $3.0 million of the net conversion proceeds to purchase 95.6% of the outstanding common shares of Citizens National Bank of Madison ("Citizens") in a transaction that was accounted for using the purchase method of accounting. River Valley Financial and Citizens merged on November 20, 1997. Future references to River Valley, River Valley Financial and Citizens are utilized herein, as the context requires. The activities of River Valley have been limited primarily to holding the stock of the Bank. River Valley Financial was organized in 1875 under the laws of the United States of America. River Valley Financial conducts operations from its five full-service office locations in Jefferson County, Indiana and offers a variety of deposit and lending services to consumer and commercial customers in Jefferson and surrounding counties. The Corporation is subject to regulation, supervision and examination by the Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS"). River Valley Financial is subject to regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation (the "FDIC"). Deposits in River Valley Financial are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the FDIC. MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS There were 868,874 common shares of River Valley Bancorp outstanding at February 19, 2001, held of record by 379 shareholders. The number of shareholders does not reflect the number of persons or entities who may hold stock in nominee or "street name." Since December of 1996, the Corporation's common shares have been listed on The Nasdaq SmallCap Market ("Nasdaq"), under the symbol "RIVR". Presented on the following page are the high and low sale prices for the Corporation's common shares, as well as cash distributions paid thereon since December 1998. Such sales prices do not include retail financial markups, markdowns or commissions. Information relating to sales prices has been obtained from Nasdaq.
MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS (CONTINUED) Quarter Ended High Low Cash Distributions (1) 2000 December 31, 2000 $16.00 $13.63 $0.100 September 30, 2000 14.25 12.88 0.085 June 30, 2000 13.00 10.44 0.085 March 31, 2000 12.63 10.25 0.075 1999 December 31, 1999 $12.63 $11.50 $0.075 September 30, 1999 14.38 13.00 0.065 June 30, 1999 14.75 12.25 0.065 March 31, 1999 15.75 13.13 0.060 1998 December 31, 1998 $16.00 $13.25 $0.060 September 30, 1998 19.00 13.75 0.055 June 30, 1998 20.75 18.38 0.055 March 31, 1998 19.75 18.50 0.050
(1) River Valley Financial had filed a request with the Internal Revenue Service ("IRS") in 1995 to deconsolidate the Bank's subsidiaries in future federal income tax return filings. In August 1998, the Corporation finalized a closing agreement with the IRS that enabled the Corporation and each of its subsidiaries to file separate returns. By definition, the 1998 cash distributions have been deemed a tax-free return of capital. The high and low sales prices for River Valley's common shares between December 31, 2000 and February 19, 2001 were $16.88 and $15.19, respectively. Under OTS regulations applicable to converted savings associations, River Valley Financial is not permitted to pay a cash dividend on its common shares if the regulatory capital of River Valley Financial would, as a result of the payment of such dividend, be reduced below the amount required for the liquidation account (which was established for the purpose of granting a limited priority claim on the assets of River Valley Financial, in the event of a complete liquidation, to those members of River Valley Financial before the Conversion who maintain a savings account at River Valley Financial after the Conversion) or applicable regulatory capital requirements prescribed by the OTS. Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. The OTS recently amended its capital distribution regulation in a final rule which took effect on April 1, 1999. Because the Bank is a subsidiary of a savings and loan holding company, it is required to file a notice with the OTS 30 days before making any capital distributions to the Holding Company. It may also have to file an application for approval of a proposed capital distribution with the OTS if the Bank is not eligible for expedited treatment under the OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the Bank's net earnings for that year to date plus the Bank's retained net earnings for the preceding two years. The Bank must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the Bank would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the OTS or the FDIC. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the consolidated financial condition, earnings, and other data regarding River Valley at the dates and for the periods indicated.
Selected consolidated financial condition data: (1) At December 31, 2000 1999 1998 1997 1996 Total amount of: (In thousands) Assets $162,130 $138,695 $138,369 $136,933 $145,541 Loans receivable - net (2) 140,970 115,131 112,385 111,887 108,994 Cash and cash equivalents (3) 6,382 8,052 12,307 5,765 8,785 Mortgage-backed and related securities (4) 1,918 4,209 5,986 8,978 12,846 Investment securities (4) 5,329 5,230 1,283 4,272 8,948 Deposits 130,225 114,251 118,151 114,955 125,656 FHLB advances and other borrowings 13,450 6,500 270 2,000 1,100 Shareholders' equity- net 17,184 16,866 18,613 17,989 16,805 Summary of consolidated earnings data: (1) Year Ended December 31, 2000 1999 1998 1997 1996 (In thousands, except share data) Total interest income $ 11,118 $ 9,734 $10,108 $10,362 $ 5,875 Total interest expense 5,637 4,617 4,842 5,049 3,412 -------- --------- ------- ------- ---------- Net interest income 5,481 5,117 5,266 5,313 2,463 Provision for losses on loans 227 140 275 304 22 -------- --------- ------- ------- ---------- Net interest income after provision for losses on loans 5,254 4,977 4,991 5,009 2,441 Other income 1,053 844 1,188 1,134 578 General, administrative and other expense 3,764 4,080 4,093 4,003 2,870 -------- --------- ------- ------- ---------- Earnings before income tax expense 2,543 1,741 2,086 2,140 149 Income tax expense 933 702 833 830 76 -------- --------- ------- ------- ---------- Net earnings $ 1,610 $1,039 $ 1,253 $ 1,310 $ 73 ======== ========= ======= ======= ========== Basic earnings per share (5) $1.88 $1.03 $1.13 $1.20 N/A ======== ========= ======= ======= ========== Diluted earnings per share (5) $1.87 $1.03 $1.12 $1.18 N/A ======== ========= ======= ======= ==========
---------------------------- (1) River Valley acquired Citizens as of December 20, 1996. The acquisition was accounted for using the purchase method of accounting. The 1998 and 1997 consolidated financial statements reflect the results of operations for a full year while the 1996 financial statements reflect only eleven days of activity with respect to Citizens. (2) Includes loans held for sale. (3) Includes interest earning assets, federal funds sold and certificates of deposit in other financial institutions. (4) Includes securities designated as available for sale. (5) Earnings per share is not applicable for the year ended December 31, 1996, as River Valley converted to stock form in 1996.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA (CONTINUED) Selected financial ratios and other data: Year ended December 31, 2000 1999 1998 1997 1996 Interest rate spread during period 3.47% 3.63% 3.66% 3.64% 2.79% Net yield on interest-earning assets (1) 3.79 3.94 4.08 4.00 2.98 Return on assets (2) 1.05 0.76 0.92 0.99 0.08 Return on equity (3) 9.45 5.87 6.85 7.53 1.05 Equity to assets (4) 10.60 12.16 13.45 13.12 11.55 Average interest-earning assets to average interest-bearing liabilities 108.02 108.81 111.07 109.56 104.64 Non-performing assets to total assets (4) 0.38 0.62 1.47 0.58 0.56 Allowance for loan losses to total loans outstanding (4) 1.21 1.28 1.33 1.13 1.06 Allowance for loan losses to non-performing loans (4) 274.07 164.41 75.78 177.72 145.30 Net charge-offs to average total loans outstanding 0.04 0.08 0.06 0.20 0.01 General, administrative and other expense to average assets (5) (6) 2.47 2.97 3.01 2.83 3.33 Dividend payment ratio (7) 18.45 25.73 19.64 11.02 -- Number of full service offices (4) 5 5 5 6 6
- ------------------------------------- (1) Net interest income divided by average interest-earning assets. (2) Net earnings divided by average total assets. (3) Net earnings divided by average total equity. (4) At end of period. (5) General, administrative and other expense divided by average total assets. (6) Includes a $503,000 charge (or .94% of weighted-average assets) in 1996 related to the SAIF recapitalization assessment. (7) Dividends per share divided by diluted earnings per share. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General As discussed previously, River Valley was incorporated for the primary purpose of owning all of the outstanding shares of River Valley Financial. As a result, the discussion that follows focuses on River Valley Financial's financial condition and results of operations for the periods presented. The following discussion and analysis of the financial condition as of December 31, 2000 and River Valley's results of operations for periods prior to that date should be read in conjunction with the consolidated financial statements and the notes thereto, included elsewhere in this Annual Report. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. River Valley's operations and River Valley'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, but are not limited to, changes in the economy and interest rates in the nation and River Valley's general market area. The forward-looking statements contained herein include those with respect to the following matters: 1. Management's determination as to the amount and adequacy of the loan loss allowance; 2. The effect of changes in interest rates on financial condition and results of operations; 3. The effects of proposed legislation that would eliminate the federal thrift charter and the separate federal regulation of thrifts; 4. Management's opinion as to the effect of recent accounting pronouncements on River Valley's consolidated financial position and results of operations. Discussion of Changes in Financial Condition from December 31, 1999 to December 31, 2000 At December 31, 2000, River Valley's consolidated assets totaled $162.1 million, representing an increase of $23.4 million over the December 31, 1999 total. This increase in assets was funded in part by a $15.9 million increase in deposits and a $7.0 million increase in borrowings. Deposits increased to $130.2 million as of December 31, 2000 from $114.3 million while borrowings increased from $6.5 million as of December 31, 1999 to $13.5 million as of December 31, 2000. Shareholders' equity was $17.2 million as December 31, 2000, a net increase of $0.3 million from $16.9 million as of December 31, 1999. The modest increase in equity was attributed primarily to net income of $1.6 million offset by the repurchase of approximately $1,367,000, or 101,623 shares of common stock held as treasury shares. Liquid assets (i.e.), cash, federal funds sold, interest-earning deposits and certificates of deposit) decreased by $1.7 million from December 31, 1999 levels to a total of $6.4 million at December 31, 2000. Investment securities totaled $5.3 million at December 31, 2000, consistent with the $5.2 million reported at December 31, 1999. Mortgage-backed securities decreased by $2.3 million, or 54.8%, to a total of $1.9 million at December 31, 2000, primarily due to principal repayments. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Changes in Financial Condition from December 31, 1999 to December 31, 2000 (continued) Loans receivable, including loans held for sale, totaled $141.0 million at December 31, 2000, an increase of $25.9 million, or 22.5%, over the $115.1 million total at December 31, 1999. The increase resulted primarily from loan originations during 2000 of $85.3 million, which were partially offset by principal repayments of $58.2 million and sales of $2.6 million. Loan origination volume for 2000 exceeded that of 1999 by $28.3 million, or 49.7%. There were significant increases in all types of lending with the exception of land and multi-family loans. The volume of loan sales into the secondary mortgage market decreased during 2000 from 1999 volume by $11.6 million, or 81.6%, due in large part to the maturation of the market and to interest rate pressures. River Valley's consolidated allowance for loan losses totaled approximately $1.7 million for the year ended December 31, 2000, which represented 1.21% of total loans at that date. The allowance for loan losses totaled $1.5 million, or 1.28% of total loans for the period ended December 31, 1999. Nonperforming loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) totaled $0.6 million and $0.9 million at December 31, 2000 and 1999, respectively. The consolidated allowance for loan losses represented 274% and 178% of nonperforming loans at December 31, 2000 and 1999, respectively. Although management believes that its allowance for loan losses at December 31, 2000, was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation's results of operations. Deposits increased by $15.9 million, or 13.9%, to a total of $130.2 million at December 31, 2000, compared to $114.3 million total at December 31, 1999. Savings and demand deposits decreased by $3.0 million, or 5.4%, during 2000, while certificates of deposit increased by $19.0 million, or 32.4%. These fluctuations in balances were attributed to customers' preference for fixed rate savings products that typically provide higher yields than transactional accounts. Advances from the Federal Home Loan Bank and other borrowed money increased by $7.0 million from the total at December 31, 1999, as current period borrowings of $13.5 million were used in part to fund loan growth. Shareholders' equity totaled $17.2 million at December 31, 2000, an increase of $0.3 million from the $16.9 million total at December 31, 1999. The increase resulted primarily from net income of $1.6 million, which was partially offset by repurchases of shares totaling $1.4 million and cash dividends of $279,000. This net increase also includes a net increase of $268,000 related to stock benefit plans and unrealized gain on securities available for sale of $86,000. Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 General River Valley's net earnings for the year ended December 31, 2000, totaled $1.61 million, an increase of $571,000, or 55.0%, from net earnings reported in 1999. The increase in net earnings in the 2000 period was primarily attributable to an increase in net interest income of $364,000 and an increase of $209,000 in other income, while general, administrative and other expense were $316,000 lower in the current period. The provision for federal income taxes was $231,000 more in fiscal year 2000 as compared to the same period in 1999. The provision for loan losses in 2000 was $227,000 as compared to $140,000 in 1999. Net Interest Income Total interest income for the year ended December 31, 2000, amounted to $11.1 million, an increase of $1.4 million, or 14.2%, from the 1999 total, reflecting the effects of higher average balances on average assets. The average balance of interest-earning assets outstanding year-to-year increased by $14.7 million and the yield on those assets increased from an average yield of 7.49% in 1999 to 7.68% in 2000. Interest income on loans and mortgage-backed securities totaled $10.6 million for 2000, an increase of approximately $1.5 million, or 16.8%, from 1999. Interest income on investments and interest-earning deposits decreased by $132,000, or 19.0%, due to significantly smaller average balances despite higher average yields on those investments. Interest expense on deposits increased by $663,000, or 14.8%, to a total of $5.1 million for the year ended December 31, 2000, due primarily to higher average balances and a 28 basis point increase in the weighted average cost of those deposits. The cost of deposits increased from 3.82% in 1999 to 4.10% in fiscal 2000. Interest expense on borrowings totaled $500,000 for the year ended December 31, 2000, an increase of $357,000 from 1999. The increase resulted primarily from higher average borrowings year-to-year, partially offset by a 76 basis point decrease in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income increased during 2000 by $364,000, or 7.1%, compared to 1999. The interest rate spread decreased by 16 basis points for 2000, to 3.47% from 3.63% in the 1999 period, while the net interest margin amounted to 3.79% in 2000 and 3.94% in 1999. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectability of the loan portfolio. As a result of such analysis, management recorded a $227,000 provision for losses on loans in 2000, an increase of $87,000, or 62.1%, compared to the $140,000 provision recorded in 1999. The current period provision generally reflects growth in the loan portfolio, coupled with a decrease in the level of nonperforming loans year-to-year. Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 (continued) Nonperforming loans for the period ended December 31, 2000, were $621,000, a reduction of approximately $236,000 from the $857,000 recorded as of fiscal year ended 1999. Net charge-offs amounted to $47,000 in 2000, compared to $95,000 in 1999. While management believes that the allowance for losses on loans is adequate at December 31, 2000, based upon available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future. Other Income Other income amounted to $1.1 million for the year ended December 31, 2000, an increase of $209,000, or 24.8%, compared to 1999, due primarily to increases in service fees, charges and other operating income. General, Administrative and Other Expense General, administrative and other expense totaled $3.8 million for the year ended December 31, 2000, a decrease of $316,000 over the 1999 total. Employee compensation and benefits decreased by $137,000 in fiscal 2000 as compared to 1999 primarily from $150,000 in non-recurring expense associated with a severance agreement in a managerial restructuring completed in the third quarter of fiscal 1999. Occupancy and equipment expense increased only $4,000 in fiscal 2000 primarily from cost containment efforts, lower depreciation costs, and from higher charges in 1999 associated with equipment upgrades and expenses associated with Year 2000. All other operating expenses decreased by $183,000 from decreases in legal and professional services, office supplies, and educational expenses of staff. Income Taxes The provision for income taxes increased by $231,000, or 32.9 %, for the year ended December 31, 2000, as compared to 1999. The effective tax rates were 36.7% and 40.3% for the years ended December 31, 2000 and 1999, respectively. Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 General River Valley's net earnings for the year ended December 31, 1999, totaled $1.04 million, a decrease of $214,000, or 17.1%, from net earnings reported in 1998. The decrease in net earnings in the 1999 period was primarily attributable to a decrease in net interest income of $149,000 and a decrease of $344,000 in other income, including a decrease of $265,000 in the sale of loans from the prior year period. General, administrative and other expense for the year was marginally lower, but included $150,000 in non-recurring expenses associated with severance agreements. The provision for federal income taxes decreased by $131,000 in fiscal year 1999 as compared to the same period in 1998. The provision for loan losses in 1999 was $140,000 as compared to $275,000 in 1998. Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 (continued) Net Interest Income Total interest income for the year ended December 31, 1999, amounted to $9.7 million, a decrease of $374,000, or 3.7%, from the 1998 total, reflecting the effects of a lower yield on average assets. While the average balance of average interest-earning assets outstanding year-to-year increased by $823,000, the yield on those assets decreased from an average yield of 7.82% in 1998 to 7.49% in 1999. Interest income on loans and mortgage-backed securities totaled $9.0 million for 1999, a decrease of approximately $684,000, or 7.0%, from 1998. Interest income on investments and interest-earning deposits increased by $310,000, or 80.9%, due to an increase in the average balance outstanding of $6.0 million associated with a modest decrease in the average yield of approximately 5 basis points in yield from the comparable 1998 period. Interest expense on deposits decreased by $208,000, or 4.4%, to a total of $4.5 million for the year ended December 31, 1999, due primarily to a 30 basis point decrease in the weighted average cost of deposits. The cost of deposits fell from 4.12% in 1998 to 3.82% in 1999. Interest expense on borrowings totaled $143,000 for the year ended December 31, 1999, a decrease of $17,000, or 10.6%, from 1998. The decrease resulted primarily from lower average borrowings year-to-year, partially offset by a 14 basis point increase in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income decreased during 1999 by $149,000, or 2.8%, compared to 1998. The interest rate spread decreased by 3 basis points for 1999, to 3.63% from 3.66% in the 1998 period, while the net interest margin amounted to 3.94% in 1999 and 4.08% in 1998. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectibility of the loan portfolio. As a result of such analysis, management recorded a $140,000 provision for losses on loans in 1999, a decrease of $135,000, or 49.1%, compared to the $275,000 provision recorded in 1998. The current period provision generally reflects growth in the loan portfolio, coupled with a decrease in the level of nonperforming loans year-to-year. Nonperforming loans for the period ended December 31, 1999, were $857,000, a reduction of approximately $1.0 million from the $1.9 million recorded as of fiscal year ended 1998. Net charge-offs amounted to $95,000 in 1999, compared to $74,000 in 1998. While management believes that the allowance for losses on loans was adequate at December 31, 1999, based upon available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future. Other Income Other income amounted to $844,000 for the year ended December 31, 1999, a decrease of $344,000, or 29.0%, compared to 1998, due primarily to a $265,000, or 78.2%, decrease in gain on sale of loans and a $79,000 decrease in service fees, charges and other operating income. General, Administrative and Other Expense General, administrative and other expense totaled $4.1 million for the year ended December 31, 1999, a decrease of $13,000 from the 1998 total. Employee compensation and benefits decreased by $147,000 or 6.4% in fiscal 1999 as compared to 1998 primarily from the decrease in the Corporation's stock price used to record expense for various compensation programs, and by decreases in staffing levels. Included in the 1999 compensation expense is $150,000 in non-recurring expense associated with a severance agreement in a managerial restructuring completed in the third quarter of fiscal 1999. Occupancy and equipment expense increased by $80,000 or 16.5% in fiscal 1999 primarily from charges associated with equipment upgrades and expenses associated with Year 2000. All other operating expenses increased by $76,000 or 6.9% due primarily to increases in advertising, legal and professional fees, office supplies, and educational expenses of staff. Income Taxes The provision for income taxes decreased by $131,000, or 15.7 %, for the year ended December 31, 1999, as compared to 1998. The effective tax rates were 40.3% and 39.9% for the years ended December 31, 1999 and 1998, respectively.
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA The following table presents certain information relating to River Valley's average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing annual income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are derived from month-end balances, which include nonaccruing loans in the loan portfolio. Year ended December 31, 2000 1999 Average Interest Average Interest Average outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding balance paid rate balance paid rate balance (Dollars in thousands) Interest-earning assets: Interest-earning deposits and other $ 4,948 $ 318 6.43% $ 7,821 $ 417 5.33% $ 4,337 Investment securities (1) 3,580 243 6.79 5,347 276 5.16 2,871 Mortgage-backed and related securities (1)2,976 192 6.45 5,051 301 5.96 7,542 Loans receivable, net (2) 133,255 10,365 7.78 111,794 8,740 7.82 114,440 -------- ------- -------- -------- Total interest-earning assets $144,759 11,118 7.68 $130,013 9,734 7.49 $129,190 ======== ------- ---- ======== ------- ---- ======== Interest-bearing liabilities: Deposits $125,197 5,137 4.10 $117,258 4,474 3.82 $113,770 FHLB advances and other borrowings 8,813 500 5.67 2,228 143 6.42 2,549 -------- -------- -------- Total interest-bearing liabilities $134,010 5,637 4.21 $119,486 4,617 3.86 $116,319 ======== ------- ---- ======== ------- ---- ======== Net interest income $ 5,481 $ 5,117 ======= ======= Interest rate spread (3) 3.47% 3.63% ===== ===== Net yield on weighted average interest-earning assets (4) 3.79% 3.94% ===== ===== Average interest-earning assets to average interest-bearing liabilities 108.02% 108.81% ======= ======= 1998 Interest earned/ Yield/ paid rate Interest-earning assets: Interest-earning deposits and other $ 233 5.37% Investment securities (1) 150 5.22 Mortgage-backed and related securities 462 6.13 Loans receivable, net (2) 9,263 8.09 -------- ---- Total interest-earning assets 10,108 7.82 -------- ---- Interest-bearing liabilities: Deposits 4,682 4.12 FHLB advances and other borrowings 160 6.28 -------- ---- Total interest-bearing liabilities 4,842 4.16 -------- ---- Net interest income $ 5,266 ======== Interest rate spread (3) 3.66% ===== Net yield on weighted average interest-earning assets (4) 4.08% ===== Average interest-earning assets to average interest-bearing liabilities 111.07% =======
- ------------------------- (1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process plus loans held for sale. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Rate/Volume Table The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected River Valley's interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate:
Year ended December 31, 2000 vs. 1999 1999 vs. 1998 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Interest-earning deposits and other $ (173) $ 74 $ (99) $186 $ (2) $184 Investment securities (132) 23 (109) 128 (2) 126 Mortgage-backed and related securities (106) 73 (33) (149) (12) (161) Loans receivable, net 1,670 (45) 1,625 (211) (312) (523) ----- ------ ----- ----- ----- ----- Total 1,259 125 1,384 (46) (328) (374) Interest-bearing liabilities: Deposits 314 349 663 151 (359) (208) FHLB advances and other borrowing 375 (18) 357 (21) 4 (17) ----- ------ ----- ----- ----- ----- Total 689 331 1,020 130 (355) (225) ----- ------ ----- ----- ----- ----- Net change in interest income $ 570 $(206) $ 364 $(176) $ 27 $(149) ===== ====== ===== ====== ===== ======
Asset and Liability Management Like other financial institutions, River Valley Financial is subject to interest rate risk to the extent that interest-earning assets re-price differently than interest-bearing liabilities. As part of its effort to monitor and manage interest rate risk, River Valley Financial is using the Net Portfolio Value ("NPV") methodology adopted by the OTS as part of its capital regulations. Although River Valley Financial is not subject to the NPV regulation because such regulation does not apply to institutions with less than $300 million in assets and risk-based capital in excess of 12%, the application of the NPV methodology can illustrate River Valley Financial's degree of interest rate risk. Presented on the following table is an analysis of River Valley Financial's interest rate risk, as of December 31, 2000 and December 31, 1999, as measured by changes in NPV for an instantaneous and sustained parallel shift of 100 through 300 basis points in market interest rates. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) As illustrated below, River Valley Financial's NPV is currently more sensitive to rising rates than declining rates. Such difference in sensitivity occurs principally because, as rates rise, the Bank's assets reprice slower than the deposits that fund them. As a result, in a rising interest rate environment, the amount of interest River Valley Financial would receive on loans would increase as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest River Valley Financial would pay on deposits would increase, but generally quicker than the Bank's ability to reprice its interest-earning assets.
As of December 31, 2000 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $17,112 $(1,285) (7)% +200 17,898 (499) (3) +100 18,309 (88) 0 - 18,397 - - - -100 18,296 (101) (1) - -200 19,025 628 3 - -300 20,294 1,897 10 As of December 31, 1999 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $19,427 $ 801 4% +200 19,463 836 4 +100 19,198 571 3 - 18,627 - - - -100 17,759 (867) (5) - -200 17,402 (1,225) (7) - -300 17,349 (1,278) (7)
Asset and Liability Management (continued) As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. Liquidity and Capital Resources The Corporation's principal sources of funds are deposits, loan and mortgage-backed securities repayments, maturities of securities, borrowings and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan and mortgage-backed securities prepayments are more influenced by interest rates, general economic conditions and competition. The Corporation maintains investments in liquid assets based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) the yield available on short-term liquid assets and (4) the objectives of the asset/liability management program. OTS regulations presently require River Valley Financial to maintain an average daily balance of cash, investments in United States Treasury and agency securities and other investments in an amount equal to 4% of the sum of River Valley Financial's average daily balance of net withdrawable deposit accounts. The liquidity requirement, which may be changed from time to time by the OTS to reflect changing economic conditions, is intended to provide a source of relatively liquid funds upon which River Valley Financial may rely if necessary to fund deposit withdrawals or other short-term funding needs. At December 31, 2000, River Valley Financial's regulatory liquidity ratio was 11.4%. At such date, River Valley Financial had commitments to originate loans totaling $2.4 million and, in addition, had undisbursed loans in process, unused lines of credit and standby letters of credit totaling $11.8 million. At December 31, 2000, River Valley Financial had no commitments to sell loans and no outstanding commitments to purchase loans. The Corporation considers River Valley Financial's liquidity and capital resources sufficient to meet outstanding short- and long-term needs. At December 31, 2000, the Corporation had a commitment of $2.9 million to renovate and expand its office at 430 Clifty Drive to be its main office. Subsequent to the completion of the project, the Corporation intends to sell its office at 303 Clifty Drive. Liquidity and Capital Resources (continued) The Corporation's liquidity, primarily represented by cash and cash equivalents, is a result of the funds provided by or used in the Corporation's operating, investing and financing activities. These activities are summarized below for the years ended December 31, 2000, 1999, and 1998:
Year ended December 31, 2000 1999 1998 (In thousands) Cash flows from operating activities $2,028 $5,346 $(1,955) Cash flows from investing activities: Purchase of securities (7,949) (21,537) - Proceeds from maturities of securities 8,297 19,399 5,970 Proceeds from sales of securities 2,002 - - Net loan (originations) repayments (26,165) (6,673) 2,145 Other (1,087) (121) 773 Cash flows from financing activities: Net increase (decrease) in deposits 15,974 (3,900) 3,196 Net increase (decrease) in borrowings 6,950 6,230 (1,730) Purchase of stock (1,367) (2,724) (270) Other (353) (275) (690) -------- -------- -------- Net increase (decrease) in cash and cash equivalents $(1,670) $(4,255) $ 7,439 ======== ======== =======
River Valley Financial is required by applicable law and regulation to meet certain minimum capital standards. Such capital standards include a tangible capital requirement, a core capital requirement, or leverage ratio, and a risk-based capital requirement. The tangible capital requirement requires savings associations to maintain "tangible capital" of not less than 1.5% of the association's adjusted total assets. Tangible capital is defined in OTS regulations as core capital minus intangible assets. "Core capital" is comprised of common shareholders' equity (including retained earnings), noncumulative preferred stock and related surplus, minority interests in consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual associations. OTS regulations require savings associations to maintain core capital generally equal to 4% of the association's total assets except those associations with the highest examination rating and acceptable levels of risk. Liquidity and Capital Resources (continued) OTS regulations require that savings associations maintain "risk-based capital" in an amount not less than 8% of "risk-weighted assets." Risk-based capital is defined as core capital plus certain additional items of capital, which in the case of River Valley Financial includes a general loan loss allowance of $1.7 million at December 31, 2000. River Valley Financial exceeded all of its regulatory capital requirements at December 31, 2000. The following table summarizes River Valley Financial's regulatory capital requirements and regulatory capital at December 31, 2000:
OTS Requirement Actual Amount Percent of Percent of Amount Assets Amount Assets(1) Amount of Excess (Dollars in thousands) Tangible capital 1.50% $2,422 10.45% $16,867 $14,445 Core capital (2) 4.00% 6,458 10.45% 16,867 10,409 Risk-based capital 8.00% 9,293 15.52% 18,031 8,738
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has proposed and is expected to adopt a core capital requirement for savings associations comparable to that adopted by the OCC for national banks. The regulation requires core capital of at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. River Valley Financial is in compliance with this requirement. Effect of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. The definition of a derivative financial instrument is complex, but in general, it is an instrument with one or more underlyings, such as an interest rate or foreign exchange rate, that is applied to a notional amount, such as an amount of currency, to determine the settlement amount(s). It generally requires no significant initial investment and can be settled net or by delivery of an asset that is readily convertible to cash. SFAS No. 133 applies to derivatives embedded in other contracts, unless the underlying of the embedded derivative is clearly and closely related to the host contract. SFAS No. 133, as amended by SFAS No. 137, was effective for fiscal years beginning after June 15, 2000. On adoption, entities were permitted to transfer held-to-maturity debt securities to the available-for-sale or trading category without calling into question their intent to hold other debt securities to maturity in the future. Adoption of SFAS No. 133 did not have a material impact on the Corporation's consolidated financial statements. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto included herein have been prepared in accordance with generally accepted accounting principles, which require River Valley to measure financial position and results of operations in terms of historical dollars with the exception of investment and mortgage-backed securities available-for-sale, which are carried at fair value. Changes in the relative value of money due to inflation or recession are generally not considered. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. While interest rates are greatly influenced by changes in the rate of inflation, they do not change at the same rate or in the same magnitude as the rate of inflation. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as changes in monetary and fiscal policies. Change in Accountants On May 18, 2000, the Holding Company engaged the accounting firm of Olive LLP to examine the consolidated financial statements of the Holding Company for the fiscal year ending December 31, 2000. This action was taken following the recommendation of the Holding Company's Audit Committee to the Board of Directors. Grant Thornton LLP, which had acted as the independent public accountant for the Holding Company since 1996 and audited its consolidated financial statements for 1998 and 1999, was notified of the Holding Company's decision. The audit reports issued by Grant Thornton LLP with respect to the Holding Company's consolidated financial statements for 1998 and 1999 did not contain an adverse opinion or disclaimer of opinion, and were not qualified as to uncertainty, audit scope or accounting principles. During 1998 and 1999 (and any subsequent interim period), there had been no disagreements between the Holding Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report. Moreover, none of the events listed in Item 304(a)(1)(iv)(B) of Regulation S-B occurred during 1998 or 1999 or any subsequent interim period. Prior to its engagement, Olive LLP had not been consulted by the Holding Company as to the application of accounting principles to a specific completed or contemplated transaction or the type of audit opinion that might be rendered on the Holding Company's financial statements. Independent Auditor's Report To the Stockholders and Board of Directors River Valley Bancorp Madison, Indiana We have audited the accompanying consolidated balance sheet of River Valley Bancorp and subsidiary as of December 31, 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements as of December 31, 1999, and for the years ended December 31, 1999 and 1998, were audited by other auditors whose report dated February 16, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp and subsidiary as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2000. Olive LLP /s/ Olive LLP Indianapolis, Indiana February 23, 2001
River Valley Bancorp and Subsidiary Consolidated Balance Sheet December 31 2000 1999 - ---------------------------------------------------------------------------------------------------------------- (In Thousands, Except Share Amounts) Assets Cash and due from banks $ 3,361 $ 3,648 Federal funds sold 1,550 Interest-bearing demand deposits 3,021 2,854 ----------------------------------------- Cash and cash equivalents 6,382 8,052 Investment securities Available for sale 7,247 6,301 Held to maturity (fair value of $3,142) 3,138 ----------------------------------------- Total investment securities 7,247 9,439 Loans, net of allowance for loan losses of $1,702 and $1,522 140,970 115,131 Premises and equipment 2,817 1,928 Federal Home Loan Bank stock 943 943 Interest receivable 1,468 1,043 Other assets 2,303 2,159 ----------------------------------------- Total assets $162,130 $138,695 ========================================= Liabilities Deposits Noninterest-bearing $ 9,170 $ 7,903 Interest-bearing 121,055 106,348 ----------------------------------------- Total deposits 130,225 114,251 Borrowings 13,450 6,500 Interest payable 598 330 Other liabilities 673 748 ----------------------------------------- Total liabilities 144,946 121,829 ----------------------------------------- Commitments and Contingencies Stockholders' Equity Preferred stock, no par value Authorized and unissued--2,000,000 shares Common stock, no par value Authorized--5,000,000 shares Issued--1,190,250 shares Additional paid-in capital 11,349 11,314 Retained earnings 10,882 9,551 Shares acquired by stock benefit plans (734) (967) Less 321,376 and 219,753 treasury shares, at cost (4,343) (2,976) Accumulated other comprehensive income (loss) 30 (56) ----------------------------------------- Total stockholders' equity 17,184 16,866 ----------------------------------------- Total liabilities and stockholders' equity $162,130 $138,695 =========================================
See notes to consolidated financial statements.
River Valley Bancorp and Subsidiary Consolidated Statement of Income Year Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Interest Income Loans receivable $10,365 $8,740 $9,263 Investment securities 435 577 612 Interest-earning deposits and other 318 417 233 ------------------------------------------------------ Total interest income 11,118 9,734 10,108 ------------------------------------------------------ Interest Expense Deposits 5,137 4,474 4,682 Borrowings 500 143 160 ------------------------------------------------------ Total interest expense 5,637 4,617 4,842 ------------------------------------------------------ Net Interest Income 5,481 5,117 5,266 Provision for loan losses 227 140 275 ------------------------------------------------------ Net Interest Income After Provision for Loan Losses 5,254 4,977 4,991 ------------------------------------------------------ Other Income Service fees and charges 931 723 739 Net realized losses on sales of available-for-sale securities (2) Net gains on loan sales 44 74 339 Other income 80 47 110 ------------------------------------------------------ Total other income 1,053 844 1,188 ------------------------------------------------------ Other Expenses Salaries and employee benefits 2,025 2,162 2,309 Net occupancy and equipment expenses 568 564 484 Data processing fees 151 126 127 Advertising 190 182 178 Legal and professional fees 144 155 106 Other expenses 686 891 889 ------------------------------------------------------ Total other expenses 3,764 4,080 4,093 ------------------------------------------------------ Income Before Income Tax 2,543 1,741 2,086 Income tax expense 933 702 833 ------------------------------------------------------ Net Income $ 1,610 $1,039 $1,253 ====================================================== Basic Earnings per Share $1.88 $1.03 $1.13 ====================================================== Diluted Earnings per Share $1.87 $1.03 $1.12 ======================================================
See notes to consolidated financial statements.
River Valley Bancorp and Subsidiary Consolidated Statement of Comprehensive Income Year Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Net Income $1,610 $1,039 $1,253 Other comprehensive income, net of tax Unrealized gains (losses) on securities available for sale Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $55, $(22), and $10 85 (43) 19 Less: Reclassification adjustment for losses included in net income, net of tax benefit of $1 (1) --------------------------------------------------- 86 (43) 19 --------------------------------------------------- Comprehensive Income $1,696 $ 996 $1,272 ===================================================
See notes to consolidated financial statements.
River Valley Bancorp and Subsidiary Consolidated Statement of Stockholders' Equity Shares Accumulated Acquired Other Common Stock Additional by Stock Comprehensive Treasury Stock --------------------- Paid-in Retained Benefit Income ---------------------- Shares Amount Capital Earnings Plans (Loss) Shares Amount Total - --------------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except for Share Amounts) Balances, January 1, 1998 1,190,250 $11,229 $ 7,797 $(1,005) $(32) $17,989 Net income 1,253 1,253 Unrealized gains on 19 19 securities Cash dividends ($.22 per (261) (261) share) Purchase of shares for stock benefit plans ( 428) (428) Amortization of expense related to stock benefit 59 234 293 plans Purchase of treasury stock (18,000) $ (270) (270) Issuance of shares for stock benefit plans 1,190 18 18 --------------------------------------------------------------------------------------------------- Balances, December 31, 1998 1,190,250 11,288 8,789 (1,199) (13) (16,810) (252) 18,613 Net income 1,039 1,039 Unrealized losses on (43) (43) securities Cash dividends ($.265 per (277) (277) share) Amortization of expense related to stock benefit 26 232 258 plans Purchase of treasury stock (202,943) (2,724) (2,724) --------------------------------------------------------------------------------------------------- Balances, December 31, 1999 1,190,250 11,314 9,551 (967) (56) (219,753) (2,976) 16,866 Net income 1,610 1,610 Unrealized gains on securities, net of reclassification adjustment 86 86 Cash dividends ($.345 per (279) (279) share) Contribution to stock (8) (8) benefit plans Amortization of expense related to stock benefit plans 35 241 276 Purchase of treasury stock (101,623) (1,367) (1,367) --------------------------------------------------------------------------------------------------- Balances, December 31, 2000 1,190,250 $11,349 $10,882 $ (734) $30 (321,376) $(4,343) $17,184 ===================================================================================================
See notes to consolidated financial statements.
River Valley Bancorp and Subsidiary Consolidated Statement of Cash Flows Year Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Operating Activities Net income $1,610 $1,039 $ 1,253 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses 227 140 275 Depreciation and amortization 240 250 223 Amortization of goodwill 6 6 27 Deferred income tax (77) 38 14 Investment securities amortization (accretion), net (26) (95) 39 Investment securities losses 2 Loans originated for sale in the secondary market (2,614) (10,552) (20,042) Proceeds from sale of loans in the secondary market 2,632 14,226 17,194 (Gain) loss on sale of loans (18) 27 (169) Amortization of deferred loan origination cost 99 93 99 Amortization of expense related to stock benefit plans 276 258 293 Gain on sale of premises and equipment (42) (11) (57) Net change in Interest receivable (425) 13 42 Interest payable 268 (138) 5 Other adjustments (130) 52 (1,151) ------------------------------------------------ Net cash provided (used) by operating activities 2,028 5,346 (1,955) ------------------------------------------------ Investing Activities Net change in interest-bearing deposits 897 Purchases of securities available for sale (7,949) (21,537) Proceeds from maturities of securities available for sale 7,093 18,347 1,286 Proceeds from sales of securities available for sale 2,002 Proceeds from maturities of securities held to maturity 1,204 1,052 4,684 Net change in loans (26,165) (6,673) 2,145 Purchases of premises and equipment (1,143) (245) (191) Proceeds from sale of premises and equipment 56 49 67 Proceeds from sale of real estate acquired through foreclosure 75 ------------------------------------------------ Net cash provided (used) by investing activities (24,902) (8,932) 8,888 ------------------------------------------------ Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (2,991) 3,614 1,424 Certificates of deposit 18,965 (7,514) 1,772 Proceeds from borrowings 23,450 9,131 6,270 Repayment of borrowings (16,500) (2,901) (8,000) Cash dividends (350) (277) (261) Purchase of stock (1,367) (2,724) (270) Proceeds from exercise of stock options 18 Advances by borrowers for taxes and insurance 5 2 (19) Acquisition of stock for stock benefit plans (8) (428) ------------------------------------------------ Net cash provided (used) by financing activities 21,204 (669) 506 ------------------------------------------------ Net Change in Cash and Cash Equivalents (1,670) (4,255) 7,439 Cash and Cash Equivalents, Beginning of Year 8,052 12,307 4,868 ------------------------------------------------ Cash and Cash Equivalents, End of Year $6,382 $8,052 $12,307 ================================================ Additional Cash Flows Information Interest paid $5,369 $4,755 $4,837 Income tax paid 876 657 1,159 Investment securities held to maturity transferred to available for sale 1,934
See notes to consolidated financial statements. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 1-- Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of River Valley Bancorp (Company) and its wholly owned subsidiary, River Valley Financial Bank (Bank), and the Bank's wholly owned subsidiary, Madison First Service Corporation (First Service), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Bank. The Bank operates under a federal thrift charter and provides full banking services, in a single significant business segment. As a federally-chartered thrift, the Bank is subject to regulation by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in southeastern Indiana. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Consolidation--The consolidated financial statements include the accounts of the Company, the Bank and First Service after elimination of all material intercompany transactions. Investment Securities--Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in accumulated other comprehensive income, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Loans held for sale are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Company considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccural loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 2000, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the areas within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Goodwill, resulting from the acquisition of Citizens National Bank of Madison, is being amortized on the straight-line basis over a period of ten years. During 1998, goodwill was reduced by approximately $168,000 for the favorable resolution of certain preacquisition contingencies, and for the purchase of minority interest shares at a price below the assigned value at acquisition. It is periodically evaluated as to the recoverability of its carrying value. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Mortgage servicing rights on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Treasury stock is stated at cost. Cost is determined by the first-in, first-out method. Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. Earnings per share have been computed based upon the weighted-average common shares outstanding during each year. Unearned ESOP shares have been excluded from the computation of average shares outstanding. Reclassifications of certain amounts in the 1999 and 1998 consolidated financial statements have been made to conform to the 2000 presentation. Note 2 -- Restriction on Cash and Due From Banks The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2000, was $862,000. Note 3 -- Investment Securities
2000 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Available for sale Federal agencies $4,921 $68 $4,989 State and municipal 336 4 340 Mortgage-backed securities 1,941 5 $28 1,918 --------------------------------------------------------------------- Total investment securities $7,198 $77 $28 $7,247 =====================================================================
River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) 1999 ------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------- Available for sale State and municipal $ 276 $ 3 $ 273 Mortgage-backed securities 2,138 67 2,071 Corporate obligations 1,000 1,000 Other securities 2,972 15 2,957 ------------------------------------------------------------------ Total available for sale 6,386 85 6,301 ------------------------------------------------------------------ Held to maturity Federal agencies 1,000 5 995 Mortgage-backed securities 2,138 $15 6 2,147 ------------------------------------------------------------------ Total held to maturity 3,138 15 11 3,142 ------------------------------------------------------------------ Total investment securities $9,524 $15 $96 $9,443 ==================================================================
The amortized cost and fair value of securities available for sale at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale ----------------------------------- Amortized Fair Cost Value - -------------------------------------------------------------------------------- Within one year $1,001 $1,003 One to five years 4,196 4,263 Five to ten years 60 63 ----------------------------------- 5,257 5,329 Mortgage-backed securities 1,303 1,279 Other asset-backed securities 638 639 ----------------------------------- Totals $7,198 $7,247 =================================== Securities with a carrying value of $6,851,000 and $5,209,000 were pledged at December 31, 2000 and 1999 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during 2000 were $2,002,000. Gross gains of $10,000 and gross losses of $12,000 were realized on those sales. There were no sales of securities available for sale during 1999 and 1998. On April 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting of Derivative Instruments and Hedging Activities. As permitted by SFAS No. 133, all securities classified as held to maturity were transferred to available for sale. The adoption of this statement did not have a significant impact on the Company's financial statement. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 4 -- Loans and Allowance December 31 2000 1999 - ------------------------------------------------------------------------------- Residential real estate One-to-four family residential $ 77,304 $ 69,588 Multi-family residential 3,319 2,918 Construction 6,827 4,163 Nonresidential real estate and land 30,213 22,837 Commercial 16,361 9,780 Consumer and other 14,686 9,544 ------------------------------- 148,710 118,830 Unamortized deferred loan costs 324 245 Undisbursed loans in process (6,362) (2,422) Allowance for loan losses (1,702) (1,522) ------------------------------- Total loans $140,970 $115,131 =============================== 2000 1999 1998 - ------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $1,522 $1,477 $1,276 Provision for losses 227 140 275 Recoveries on loans 37 28 149 Loans charged off (84) (123) (223) --------------------------------------- Balances, December 31 $1,702 $1,522 $1,477 ======================================= Information on impaired loans is summarized below. December 31 2000 - -------------------------------------------------------------------------------- Impaired loans with an allowance $ 250 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 885 ------------- Total impaired loans $1,135 ============= Allowance for impaired loans (included in the Company's allowance for loan losses) $57 River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Year Ended December 31 2000 - -------------------------------------------------------------------------------- Average balance of impaired loans $1,128 Interest income recognized on impaired loans 89 Cash-basis interest included above 85 At December 31, 1999, the Company had approximately $600,000 of impaired loans. At December 31, 2000, 1999 and 1998, the Company had nonperforming loans totaling $621,000, $857,000, and $1,947,000, respectively. Note 5 -- Premises and Equipment December 31 2000 1999 - -------------------------------------------------------------------------------- Land $ 805 $ 792 Buildings 1,629 1,637 Leasehold improvements 117 117 Equipment 2,472 2,201 Construction in progress 853 ---------------------------- Total cost 5,876 4,747 Accumulated depreciation and amortization (3,059) (2,819) ---------------------------- Net $2,817 $1,928 ============================ At December 31, 2000, the Company had committed $2,900,000 for office building renovation and expansion. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 6 -- Deposits
December 31 2000 1999 - ----------------------------------------------------------------------------------------------- Demand deposits $ 31,559 $ 29,118 Savings deposits 21,208 26,640 Certificates and other time deposits of $100,000 or more 30,606 13,884 Other certificates and time deposits 46,852 44,609 ------------------------------------ Total deposits $130,225 $114,251 ====================================
Certificates and other time deposits maturing in years ending December 31 2001 $61,873 2002 12,250 2003 1,623 2004 553 2005 664 Thereafter 495 ------------------ $77,458 ================== Note 7 -- Borrowings
December 31 2000 1999 - --------------------------------------------------------------------------------------------- Federal Home Loan Bank advances $13,000 $6,000 Line of credit 450 500 -------------------------------- Total borrowings $13,450 $6,500 ================================
Maturities by year for advances at December 31, 2000 are $9,000,000 in 2001 and $4,000,000 in 2002. The weighted-average interest rate at December 31, 2000 and 1999 was 6.35% and 5.91%. The Federal Home Loan Bank advances are secured by first-mortgage loans and investment securities totaling $61,701,000 at December 31, 2000. Advances are subject to restrictions or penalties in the event of prepayment. The Company has a $1,000,000 line of credit with another financial institution which matures in November 2001 with a variable interest rate of .5% under prime. The line of credit is collateralized by a pledge of 1,000 shares of the Bank's stock. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 8 -- Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of loans serviced for others totaled $37,562,000, $40,212,000 and $34,300,000 at December 31, 2000, 1999 and 1998, respectively. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2000 and 1999 totaled $290,000 and $286,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights. 2000 1999 1998 - -------------------------------------------------------------------------------- Mortgage Servicing Rights Balances, January 1 $225 $222 $113 Servicing rights capitalized 26 102 170 Amortization of servicing rights (24) (99) (34) -------------------------------------- 227 225 249 Valuation allowance (27) -------------------------------------- Balances, December 31 $227 $225 $222 ====================================== Note 9 -- Income Tax Year Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------- Income tax expense (benefit) Currently payable Federal $805 $505 $631 State 205 159 188 Deferred Federal (61) 38 16 State (16) (2) ---------------------------------------- Total income tax expense $933 $702 $833 ======================================== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $865 $592 $709 Effect of state income taxes 125 105 122 Other (57) 5 2 ---------------------------------------- Actual tax expense $933 $702 $833 ======================================== Effective tax rate 36.7% 40.3% 39.9% River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) A cumulative net deferred tax asset is included in other assets. The components of the liability are as follows: December 31 2000 1999 - -------------------------------------------------------------------------------- Assets Allowance for loan losses $564 $469 Deferred compensation 147 106 Pensions and employee benefits 60 66 Securities available for sale 83 119 Purchase accounting adjustments 131 142 Other 6 ---------------------------- Total assets 991 902 ---------------------------- Liabilities Depreciation and amortization (103) (93) Loan fees (127) (83) Mortgage servicing rights (93) (86) ---------------------------- Total liabilities (323) (262) ---------------------------- $668 $640 ============================ Retained earnings include approximately $2,100,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $714,000. Note 10 -- Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Financial instruments whose contract amount represents credit risk as of December 31 were as follows: 2000 1999 - -------------------------------------------------------------------------------- Commitments to extend credit $14,070 $9,310 Standby letters of credit 196 97 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and subsidiary are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. Note 11 -- Dividend and Capital Restrictions Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined) for the current year plus those for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 2000, the stockholder's equity of the Bank was $17,161,000, of which none was available for the payment of dividends without prior regulatory approval. Note 12 -- Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 2000 and 1999, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2000 that management believes have changed the Bank's classification.
River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Required for Adequate To Be Well Actual Capital 1 Capitalized 1 ----------------------------------------------------------------------- December 31 Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------- As of December 31, 2000 Total risk-based capital 1 (to risk-weighted assets) $18,031 15.5% $9,293 8.0% $11,617 10.0% Tier 1 capital 1 (to risk-weighted assets) 16,867 14.5% 4,647 4.0% 6,970 6.0% Core capital 1 (to adjusted total assets) 16,867 10.5% 6,458 4.0% 8,072 5.0% Core capital 1 (to adjusted tangible assets) 16,867 10.5% 3,229 2.0% N/A Tangible capital 1 (to adjusted total assets) 16,867 10.5% 2,422 1.5% N/A As of December 31, 1999 Total risk-based capital 1 (to risk-weighted assets) $18,040 19.0% $7,615 8.0% $9,518 10.0% Tier 1 capital 1 (to risk-weighted assets) 16,850 17.7% 3,808 4.0% 5,711 6.0% Core capital 1 (to adjusted total assets) 16,850 12.1% 5,563 4.0% 6,954 5.0% Core capital 1 (to adjusted tangible assets) 16,850 12.1% 2,781 2.0% N/A Tangible capital 1 (to adjusted total assets) 16,850 12.1% 2,086 1.5% N/A
1 As defined by regulatory agencies Note 13 -- Employee Benefits The Bank provides pension benefits for substantially all of the Bank's employees and is a participant in a pension fund known as the Pentegra Group. This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. There was no pension expense or benefit for the years ended December 31, 2000, 1999 and 1998. The Bank has a retirement savings 401(k) plan in which substantially all employees may participate. The Bank matches employees' contributions at the rate of 50 percent for the first 6 percent of W-2 earnings contributed by participants. The Bank's expense for the plan was $20,000, $24,000 and $28,000 for the years ended December 31, 2000, 1999 and 1998. The Bank has a supplemental retirement plan which provides retirement benefits to all directors. The Bank's obligations under the plan have been funded via the purchase of key man life insurance policies, of which the Bank is the beneficiary. Expense recognized under the supplemental retirement plan totaled approximately $24,000, $32,000 and $22,000 for the years ended December 31, 2000, 1999 and 1998, respectively. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) As part of the conversion in 1996, the Company established an ESOP covering substantially all employees of the Company and Bank. The ESOP acquired 95,220 shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $952,000 of common stock acquired by the ESOP is shown as a reduction of stockholders' equity. Unearned ESOP shares totaled 48,695 and 60,876 at December 31, 2000 and 1999 and had a fair value of $779,000 and $777,000 at December 31, 2000 and 1999. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which may be distributed to participants or used to repay the loan, are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company and Bank, are made to the ESOP. ESOP expense for the years ended December 31, 2000, 1999 and 1998 was $156,000, $147,000 and $200,000. At December 31, 2000, the ESOP had 46,525 allocated shares, 48,695 suspense shares and no committed-to-be released shares. At December 31, 1999, the ESOP had 34,344 allocated shares, 60,876 suspense shares and no committed-to-be released shares. The Company also has a Recognition and Retention Plan (RRP) which provides for the award and issuance of up to 47,610 shares of the Company's stock to members of the Board of Directors and management. During 2000, 1998 and 1997, the RRP purchased 32,920 shares of the Company's common stock in the open market. At December 31, 2000, 32,920 shares had been awarded. Common stock awarded under the RRP vests ratably over a five-year period, commencing with the date of the award. Expense recognized under the RRP plan totaled approximately $105,000, $113,000 and $113,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Note 14 -- Related Party Transactions The Bank has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balances, January 1, 2000 $893 Changes in composition of related parties (407) New loans, including renewals 197 Payments, etc., including renewals (26) ------------------- Balances, December 31, 2000 $657 =================== Deposits from related parties held by the Banks at December 31, 2000 totaled $915,000. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 15 -- Stock Option Plan Under the Company's incentive stock option plan, which is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, the Company grants selected executives and other key employees stock option awards which vest at a rate of 20 percent a year. During 1997, the Company authorized the grant of options for up to 119,025 shares of the Company's common stock. The exercise price of each option, which has a ten-year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: 2000 1999 - ------------------------------------------------------------------------------- Risk-free interest rates 6.5 and 5.9% 5.5% Dividend yields 2.7% 2.2% Volatility factors of expected market price of common stock 11.7% 10.0% Weighted-average expected life of the options 10 years 10 years Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Net income As reported $1,610 $1,039 $1,253 Pro forma 1,575 999 1,165 Basic earnings per share As reported 1.88 1.03 1.13 Pro forma 1.83 .99 1.05 Diluted earnings per share As reported 1.87 1.03 1.12 Pro forma 1.83 .99 1.04 River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the years ended December 31, 2000, 1999 and 1998.
Year Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Weighted- Weighted- Weighted- Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------------ Outstanding, beginning of year 93,959 $14.58 103,959 $14.81 105,149 $14.81 Granted 24,000 13.17 10,000 12.63 Exercised (1,190) 14.78 Forfeited/expired (18,614) 14.78 (20,000) 14.78 --------------- -------------- -------------- Outstanding, end of year 99,345 $14.17 93,959 $14.58 103,959 $14.81 =============== ============== ============== Options exercisable at year end 51,725 39,787 19,834 Weighted-average fair value of options granted during the year $3.18 $2.79
As of December 31, 2000, the 99,345 options outstanding have exercise prices ranging from $10.75 to $14.78 and a weighted-average remaining contractual life of 6.6 years. Note 16 -- Earnings Per Share
2000 1999 1998 -------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Per Share Average Per Share Average Per Share Year Ended December 31 Income Shares Amount Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share Income available to common stockholders $1,610 858,059 $1.88 $1,039 1,007,087 $1.03 $1,253 1,105,930 $1.13 =========== ============ =========== Effect Of Dilutive Stock Options 1,486 16,056 ------------------------ ----------------------- ---------------------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $1,610 859,545 $1.87 $1,039 1,007,087 $1.03 $1,253 1,121,986 $1.12 ==================================================================================================
Options to purchase 65,345 shares of common stock with a weighted-average exercise price of $14.78 per share and 93,959 shares with a weighted-average exercise price of $14.58 per share were outstanding at December 31, 2000 and 1999, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 17 -- Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Securities and Mortgage-backed Securities--Fair values are based on quoted market prices. Loans--The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable--The fair values of interest receivable/payable approximate carrying values. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits--The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Federal Home Loan Bank Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Line of Credit--The approximate market value for this variable borrowing approximates carrying value. Advance Payment by Borrowers for Taxes and Insurance--The fair value approximates carrying value. Off-Balance Sheet Commitments--For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The difference between the fair value and notional amount of outstanding loan commitments at December 31, 2000 and 1999, was not material. River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The estimated fair values of the Company's financial instruments are as follows:
2000 1999 ------------------------------------------------------------------ Carrying Fair Carrying Fair December 31 Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $6,382 $6,382 $8,052 $8,052 Investment securities available for sale 7,247 7,247 6,301 6,301 Investment securities held to maturity 3,138 3,142 Loans including loans held for sale, net 140,970 139,660 115,131 112,633 Interest receivable 1,468 1,468 1,043 1,043 Stock in FHLB 943 943 943 943 Liabilities Deposits 130,225 130,168 114,251 114,527 FHLB advances 13,000 13,034 6,000 6,000 Line of credit 450 450 500 500 Interest payable 598 598 330 330 Advance payments by borrowers for taxes and insurance 41 41 36 36
Note 18 -- Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheet December 31 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 202 $ 371 Investment in common stock of subsidiary 17,161 16,861 Other assets 271 134 ------------------------------------ Total assets $17,634 $17,366 ==================================== Liabilities--borrowings $ 450 $ 500 Stockholders' Equity 17,184 16,866 ------------------------------------ Total liabilities and stockholders' equity $17,634 $17,366 ====================================
River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
Condensed Statement of Income Year Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Income Dividends from subsidiary $1,621 $3,158 Other income 65 62 $ 71 ----------------------------------------------- Total income 1,686 3,220 71 ----------------------------------------------- Expenses Interest expense 63 101 3 Other expenses 120 105 102 ----------------------------------------------- Total expenses 183 206 105 ----------------------------------------------- Income (loss) before income tax and equity in undistributed (distribution in excess of) income of subsidiary 1,503 3,014 (34) Income tax benefit 47 58 13 ----------------------------------------------- Income (loss) before equity in undistributed (distribution in excess of) income of subsidiary 1,550 3,072 (21) Equity in undistributed (distribution in excess of) income of subsidiary 60 (2,033) 1,274 ----------------------------------------------- Net Income $1,610 $1,039 $1,253 ===============================================
River Valley Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows Year Ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $1,610 $1,039 $1,253 Adjustments to reconcile net income to net cash provided by operating activities (4) 1,905 (1,186) ------------------------------------------------- Net cash provided by operating activities 1,606 2,944 67 ------------------------------------------------- Financing Activities Purchase of stock (1,367) (2,724) (270) Proceeds from exercise of stock options 18 Acquisition of stock for stock benefit plans (8) Proceeds from borrowings 450 3,131 270 Repayment of borrowings (500) (2,901) Cash dividends (350) (277) (261) ------------------------------------------------- Net cash used by financing activities (1,775) (2,771) (243) ------------------------------------------------- Net Change in Cash and Cash Equivalents (169) 173 (176) Cash and Cash Equivalents at Beginning of Year 371 198 374 ------------------------------------------------- Cash and Cash Equivalents at End of Year $ 202 $ 371 $ 198 =================================================
GENERAL INFORMATION FOR SHAREHOLDERS Transfer Agent and Registrar: Shareholder and General Inquiries: Corporate Trust Services River Valley Bancorp Fifth Third Center Attn: Matthew P. Forrester 38 Fountain Square Plaza 303 Clifty Drive, P.O. Box 1590 Mail Drop #10AT66 Madison, Indiana 47250 Cincinnati, Ohio 45263 Tel: (812) 273-4949 Tel: (800) 837-2755 or Fax: (812) 273-4944 (513) 579-5320 Corporate Counsel: Special Counsel: Lonnie D. Collins, Attorney Barnes & Thornburg 426 E. Main Street 11 S. Meridian Street Madison, Indiana 47250 Indianapolis, Indiana 46204 Tel: (812) 265-3616 Tel: (317) 236-1313 Fax: (812) 273-3143 Fax: (317) 231-7433 Annual and Other Reports: Additional copies of this Annual Report to Shareholders and copies of the most recent Form 10-KSB may be obtained without charge by contacting the Corporation. Offices of River Valley Financial Bank: Hilltop: 303 Clifty Drive 430 Clifty Drive Downtown: 233 East Main Street Drive thru: 401 East Main Street Wal-Mart: 567 Ivy Tech Drive Hanover: 10 Medical Plaza E-MAIL Address: rvfbank.com Annual Meeting: The Annual Meeting of Shareholders of River Valley Bancorp will be held on Wednesday, April 18, 2001, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250. BOARD OF DIRECTORS Fred W. Koehler, Chairman Auditor Jefferson County, Indiana Robert W. Anger Retired, Former CEO Madison First Federal Jonnie L. Davis Retired, Administrative Assistant, Various Firms Matthew P. Forrester President, CEO River Valley Financial Bank Michael J. Hensley Partner, Law Firm- Hensley, Walro, Collins, & Hensley Earl W. Johann Retired, Former Owner Madison Distributing Co. Charles J. McKay Partner - Scott, Callicotte, & McKay LLC CPAs ***************** Lonnie D. Collins Board Secretary Partner, Law Firm- Hensley, Walro, Collins & Hensley EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK Matthew P. Forrester President, CEO Mark A. Goley Vice President of Lending Barbara J. Eades Vice President of Retail Banking Larry C. Fouse Vice President of Finance Deanna J. Liter Vice President of Data Services Loy M. Skirvin Director of Human Resources OFFICERS OF RIVER VALLEY FINANCIAL BANK Dawn M. Moore Internal Audit/Compliance Officer Robert J. Schoenstein Jr. Assistant Vice President Loan Officer Theresa A. Dryden Loan Officer Angela D. Adams Branch Manager James B. Allen Loan Officer Kenneth L. Cull Loan Officer Debbie R. Finnegan Branch Manager Rachael A. Goble Branch Manager Rick T. Nelson Loan Officer Linda L. Ralston Branch Manager Rhonda E. Wingham Branch Manager EX-21 3 0003.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF RIVER VALLEY BANCORP Subsidiaries of River Valley Bancorp: Name Jurisdiction of Incorporation River Valley Financial Bank Federal Madison First Service Corporation Indiana EX-23.1 4 0004.txt CONSENT OF OLIVE LLP Exhibit 23.1 Consent of Independent Public Accountants We hereby consent to the incorporation by reference to the Registration Statement on Form S-8 of River Valley Bancorp (the "Company"), File Number 0-21765, of our report dated February 23, 2001 on the consolidated financial statements of the Company which report is incorporated by reference in the Company's 2000 Annual Report on Form 10-KSB filed pursuant to the Securities and Exchange Act of 1934. /s/ Olive LLP OLIVE LLP Indianapolis, IN March 29, 2001 EX-23.2 5 0005.txt CONSENT OF GRANT THORNTON LLP Exhibit 23.2 ACCOUNTANT'S CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 000-21765, of our report dated February 16, 2000 contained in the 2000 Annual Report to Shareholders of River Valley Bancorp, which is incorporated by reference in this Form 10-KSB. /s/ Grant Thornton LLP GRANT THORNTON LLP Cincinnati, Ohio March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----