UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 000-32643
Indian River Banking Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2931518
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
958 20th Place, Vero Beach, Florida 32960
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
772.569.9200
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
As of July 31, 2002, the registrant had 1,951,700 shares of Common
Stock outstanding.
Item 1 - Financial Statements
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS June 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Cash and due from banks $ 16,916 $ 13,334
Federal funds sold 5,655 10,033
Securities available for sale 153,341 128,758
Securities held to maturity 13,652 13,562
Other securities 1,899 1,899
Loans held for sale 1,516 5,795
Loans, net 219,224 208,043
Bank premises and equipment, net 4,095 4,052
Accrued interest receivable 2,332 2,783
Other assets 734 886
------------------------------
Total assets $419,364 $389,145
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 51,702 $ 49,062
Interest-bearing deposits:
NOW and money market 48,900 40,390
Savings 114,359 108,628
Time deposits 123,319 120,726
------------------------------
Total deposits 338,280 318,806
Other borrowings 49,121 41,583
Other liabilities 1,135 1,052
------------------------------
Total liabilities 388,536 361,441
------------------------------
Stockholders' Equity
Preferred stock -- --
Common stock 1,951 1,949
Capital surplus 20,924 20,878
Retained earnings 6,716 3,879
Accumulated other comprehensive income 1,237 998
------------------------------
TOTAL STOCKHOLDERS' EQUITY 30,828 27,704
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $419,364 $389,145
==============================
See Notes to Condensed Consolidated Financial Statements.
2
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
- ------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $4,215 $4,487
Investment securities and due from banks 2,263 1,888
Federal funds sold 28 61
---------------
6,506 6,436
---------------
Interest expense:
Deposits 1,948 2,723
Other 385 516
---------------
2,333 3,239
---------------
NET INTEREST INCOME 4,173 3,197
Provision for loan losses 130 120
---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,043 3,077
---------------
Other income:
Service charges and fees 427 426
Gain on sale of securities 61 36
Gain on sale of loans 390 441
Other 232 184
---------------
1,110 1,087
---------------
Other expense:
Salaries and benefits 1,466 1,703
Occupancy and equipment 385 381
Data processing 324 327
Office expenses and insurance 752 777
---------------
2,927 3,188
---------------
INCOME BEFORE INCOME TAXES 2,226 976
Provision for income taxes 835 349
---------------
NET INCOME $1,391 $ 627
===============
Basic earnings per share $ 0.71 $ 0.32
===============
Diluted earnings per share $ 0.70 $ 0.32
===============
See Notes to Condensed Consolidated Financial Statements.
3
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
- --------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $ 8,386 $ 8,836
Investment securities and due from banks 4,317 3,920
Federal funds sold 105 70
-----------------
12,808 12,826
-----------------
Interest expense:
Deposits 4,156 5,581
Other 767 975
-----------------
4,923 6,556
-----------------
NET INTEREST INCOME 7,885 6,270
Provision for loan losses 260 240
-----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,625 6,030
-----------------
Other income:
Service charges and fees 825 777
Gain on sale of securities 751 57
Gain on sale of loans 687 688
Other 395 357
-----------------
2,658 1,879
-----------------
Other expense:
Salaries and benefits 2,843 2,898
Occupancy and equipment 766 748
Data processing 676 634
Office expenses and insurance 1,439 1,454
-----------------
5,724 5,734
-----------------
INCOME BEFORE INCOME TAXES 4,559 2,175
Provision for income taxes 1,714 803
-----------------
NET INCOME $ 2,845 $ 1,372
=================
Basic earnings per share $ 1.46 $ 0.71
=================
Diluted earnings per share $ 1.42 $ 0.69
=================
See Notes to Condensed Consolidated Financial Statements.
4
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
---------------
Net income $1,391 $ 627
Other comprehensive income, net of tax:
Unrealized gain on investments available-for-sale arising during the
period, net of taxes of $1,170 and $77 in 2002 and 2001, respectively 1,993 132
---------------
Comprehensive income $3,384 $ 759
===============
See Notes to Condensed Consolidated Financial Statements.
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
---------------
Net income $2,845 $1,372
Other comprehensive income, net of tax:
Unrealized gain on investments available-for-sale arising during the period,
net of taxes of $140 and $493 in 2002 and 2001, respectively 239 840
---------------
Comprehensive income $3,084 $2,212
===============
See Notes to Condensed Consolidated Financial Statements.
5
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
Accumulated
Common Stock Other Total
--------------------- Capital Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 1,604 $ 1,604 $ 14,195 $ 7,137 $ 265 $ 23,201
10% stock dividend 160 160 2,177 (2,337) -- --
Fractional shares -- -- -- (4) -- (4)
Shares issued 2 2 19 -- -- 21
Net income 1,372 -- 1,372
Other comprehensive income,
unrealized gain on
securities, net of tax 840 840
------------------------------------------------------------------------------
Balance, June 30, 2001 1,766 $ 1,766 $ 16,391 $ 6,168 $ 1,105 $ 25,430
==============================================================================
Balance, January 1, 2002 1,772 $ 1,772 $ 16,456 $ 8,478 $ 998 $ 27,704
10% stock dividend 177 177 4,422 (4,599) -- --
Fractional shares -- -- -- (8) -- (8)
Shares issued 2 2 46 -- -- 48
Net income -- -- -- 2,845 -- 2,845
Other comprehensive income,
unrealized gain on
securities, net of tax -- -- -- -- 239 239
------------------------------------------------------------------------------
Balance, June 30, 2002 1,951 $ 1,951 $ 20,924 $ 6,716 $ 1,237 $ 30,828
==============================================================================
See Notes to Condensed Consolidated Financial Statements
6
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
- ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 2,845 $ 1,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities (751) (57)
Depreciation and amortization 332 397
Provision for loan losses 260 240
Decrease in loans held for sale 4,279 389
Decrease (increase) in other assets 463 (7)
Increase in other liabilities 83 741
------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,511 3,075
------------------------
Cash Flows From Investing Activities
Cash flows from securities, net (23,585) (12,544)
Loan originations and principal collections on loans, net (11,441) (10,197)
Purchases of premises and equipment (333) (708)
------------------------
NET CASH USED BY INVESTING ACTIVITIES (35,359) (23,449)
------------------------
Cash Flows From Financing Activities
Net increase in deposits 19,474 16,142
Increase in other borrowings, net 7,538 20,907
Cash paid for fractional shares (8) (4)
Proceeds from issuance of common stock 48 21
------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,052 37,066
------------------------
NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (796) 16,692
Cash and cash equivalents:
Beginning 23,367 10,830
------------------------
Ending $ 22,571 $ 27,522
========================
See Notes to Condensed Consolidated Financial Statements.
7
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Indian River
Banking Company (the "Company"), which are unaudited, except for the condensed
consolidated balance sheet at December 31, 2001, which is derived from the
audited consolidated balance sheet at that date, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended June 30, 2002, are not necessarily indicative of the results that
may be expected for the full year. For further information, refer to the
Company's consolidated financial statements and the notes thereto for the year
ended December 31, 2001.
The accompanying condensed consolidated financial statements include the
accounts of Indian River Banking Company and its wholly-owned subsidiaries,
Indian River National Bank, a federally-chartered independent community bank,
Indian River Title Company, LLC, and IRNB Insurance Services, LLC, collectively
referred to as the "Bank". All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents per the condensed consolidated statements of cash
flows includes cash on hand, amounts due from banks (including cash items in
process of clearing), and federal funds sold.
NOTE 2. INVESTMENT SECURITIES
Securities held to maturity: The amortized cost and fair values of securities
held to maturity as of June 30, 2002 and December 31, 2001 are summarized as
follows.
(In Thousands) June 30, 2002
--------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
U.S. Government corporations and agencies $ 3,329 $ -- $ (135) $ 3,194
Mortgage-backed securities 5,030 7 -- 5,037
State, county and municipal securities 5,293 156 (7) 5,442
--------------------------------------------------------------
$ 13,652 $ 163 $ (142) $ 13,673
==============================================================
December 31, 2001
--------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
U.S. Government corporations and agencies $ 3,232 $ -- $ (12) $ 3,220
Mortgage-backed securities 5,037 38 -- 5,075
State, county and municipal securities 5,293 38 (121) 5,210
--------------------------------------------------------------
$ 13,562 $ 76 $ (133) $ 13,505
==============================================================
8
Securities available for sale: The amortized cost and fair values of securities
available for sale as of June 30, 2002 and December 31, 2001 are summarized as
follows:
(In Thousands) June 30, 2002
--------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
U. S. Government corporations and agencies $ 42,013 $ 646 $ (9) $ 42,650
Corporate securities 11,920 394 -- 12,314
Mortgage-backed securities 97,445 951 (19) 98,377
--------------------------------------------------------------
$ 151,378 $ 1,991 $ (28) $ 153,341
==============================================================
December 31, 2001
--------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
U. S. Government corporations and agencies $ 58,972 $ 1,145 $ (397) $ 59,720
Corporate securities 56,768 904 (193) 57,479
Mortgage-backed securities 11,434 166 (41) 11,559
--------------------------------------------------------------
$ 127,174 $ 2,215 $ (631) $ 128,758
==============================================================
NOTE 3. LOANS
The composition of net loans is as follows at June 30, 2002 and December 31,
2001:
(In Thousands) June 30, December 31,
2002 2001
---------------------------
Real estate:
Construction and land development and other land loans $ 38,852 $ 32,778
Farmland 2,936 2,943
One to four family residential 81,939 74,917
Multifamily residential 2,434 3,521
Nonfarm, nonresidential 65,460 62,660
Agriculture 1,356 2,454
Commercial and industrial 12,935 14,948
Consumer 14,163 14,421
Other 2,169 2,225
---------------------------
222,244 210,867
Less: Allowance for loan losses (3,015) (2,819)
Unearned discount (5) (5)
---------------------------
Loans, net $ 219,224 $ 208,043
===========================
9
NOTE 4. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained to provide for estimated losses in
the loan portfolio that have been incurred as of the balance sheet date. In
establishing the allowance management (1) makes specific allocations for certain
non-performing loans based on management's estimates of collateral shortfall,
(2) applies loss factor percentages to the balances of identified loans in each
category of problem and past due loans and (3) applies loss factor percentages
to balances of performing loans in each category of loans. Loss factor
percentages are determined taking into consideration the risk characteristics of
the loan portfolio, past charge-off experience of the Bank and its peer group,
general economic conditions and other factors that warrant current recognition.
While management uses the best information available to make its evaluation, the
allowance could change materially within the next year if there are significant
changes in economic conditions.
Activity in the allowance for loan losses for the six months ended June 30, 2002
and 2001 is as follows:
(In Thousands)
2002 2001
---- ----
Balance, beginning $ 2,819 $ 2,453
Charge-offs:
Commercial (2) (62)
Loans to individuals (51) (52)
Credit Cards (26) (18)
Other loans (13) --
------- -------
Total (92) (132)
------- -------
Recoveries:
1-4 Family Real Estate 7 --
Loans to individuals 18 11
Credit Cards 1 4
Other loans 2 --
------- -------
Total 28 15
------- -------
Net charge-offs (64) (117)
Provision for loan losses 260 240
------- -------
Balance, ending $ 3,015 $ 2,576
======= =======
10
NOTE 5. EARNINGS PER SHARE
Basic earnings per-share amounts are computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding, adjusted
for stock dividends and splits occurring subsequent to period-end (the
denominator). Diluted earnings per-share amounts assume the conversion, exercise
or issuance of all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from continuing
operations.
Following is information about the computation of the earnings per share data
for the three months and six months ended June 30, 2002 and 2001 respectively
(after adjusting for 10% stock dividends in 2002 and 2001):
(In Thousands, Except Per Share Data) Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------------
Three Months Ended June 30, 2002:
Basic earnings per share, income available to
common stockholders $ 1,391 1,951 $ 0.71
===================
Effect of dilutive securities, options -- 46
-------------------------------------
Diluted earnings per share $ 1,391 1,997 $ 0.70
========================================================
Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------------
Three Months Ended June 30, 2001:
Basic earnings per share, income available to
common stockholders $ 627 1,943 $ 0.32
===================
Effect of dilutive securities, options -- 38
-------------------------------------
Diluted earnings per share $ 627 1,981 $ 0.32
========================================================
Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------------
Six Months Ended June 30, 2002:
Basic earnings per share, income available to
common stockholders $ 2,845 1,951 $ 1.46
===================
Effect of dilutive securities, options -- 48
-------------------------------------
Diluted earnings per share $ 2,845 1,999 $ 1.42
========================================================
Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------------
Six Months Ended June 30, 2001:
Basic earnings per share, income available to
common stockholders $ 1,372 1,942 $ 0.71
===================
Effect of dilutive securities, options -- 38
-------------------------------------
Diluted earnings per share $ 1,372 1,980 $ 0.69
========================================================
11
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following at June 30, 2002 and December 31,
2001.
(In Thousands) June 30, December 31,
2002 2001
------------------------
Advance under term loan with Colonial Bank, principal and interest payable
quarterly at an adjustable rate, 3.25% at June 30, 2002 $ 510 $ 570
Advances under line of credit with Federal Home Loan Bank:
Advance, interest payable monthly at a fixed rate of 6.44%,
with equal semiannual principal payments of $142
through September 2004 714 857
Convertible advance due March 2008, interest payable quarterly at a fixed
rate of 5.51% 2,000 2,000
Convertible advance due January 2011, interest payable quarterly
at a fixed rate of 4.41% 10,000 10,000
Convertible advance due May 2011, interest payable quarterly
at a fixed rate of 3.95% 15,000 15,000
Overnight repurchase agreements payable 20,897 13,156
-----------------------
$49,121 $41,583
=======================
NOTE 7. STOCK DIVIDEND
Stockholders' equity accounts have been retroactively adjusted in the
accompanying balance sheet as of December 31, 2001 to reflect a 10% stock
dividend declared January 24, 2002.
Item 2 - Management's Discussion and Analysis
Forward-Looking Statements
- --------------------------
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"Indian River expects," "Indian River believes," "Indian River anticipates,"
may, should or words of similar import. Such forward-looking statements involve
known and unknown risks including, but not limited to, changes in general
economic and business conditions, interest rate fluctuations, competition within
and from outside the banking industry, new products and services in the banking
industry, risk inherent in making loans such as repayment risks and fluctuating
collateral values, problems with technology utilized by the Indian River,
changing trends in customer profiles and changes in laws and regulations
applicable to Indian River. Although Indian River believes that its expectations
with respect to the forward-looking statements are based upon reliable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results, performance or achievements of
Indian River will not differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Indian River is a one-bank holding company for Indian River Bank and is
headquartered in Vero Beach, Florida. Indian River Bank is a growing community
bank serving individuals and small to medium sized businesses with special focus
on real estate related lending and the professional community. The Bank operates
four branches in Indian River County and three branches in Brevard County. The
Bank offers deposit accounts and associated services to businesses and
individuals and makes loans and invests in qualified securities. In addition,
the Bank's income includes fees on deposit accounts and loans.
12
FINANCIAL CONDITION
- -------------------
Total Assets
- ------------
Indian River's total assets were $419.4 million at June 30, 2002, a
7.77% increase from $389.1 million at December 31, 2001. The increase in the
Company's asset base was due to continued deposit growth. During the second
quarter, Indian River experienced steady levels of deposit growth and Indian
River anticipates that deposit growth for the remainder of 2002 will continue at
more modest levels.
Investments
- -----------
As noted, Indian River experienced continued deposit growth during the
first six months of 2002 while loan growth was much more moderate. This
situation resulted in a $24.7 million or 19.8% increase in the investment
portfolio. The increase in the investment portfolio occurred during the first
quarter of 2002 as total investments fell $973 thousand in the second quarter,
due mostly to principal repayments on mortgage backed securities. In investing
the Bank's excess liquidity, Indian River also undertook to restructure
portfolio composition to reduce both credit and interest rate risk. Accordingly,
the Company's exposure to corporate securities was reduced to $12.3 million at
June 30, 2002 from $59.7 million at December 31, 2001. Additionally, the
Company's holdings of U.S. Government agency securities were reduced by $17
million to $42.7 million during the six months ended June 30, 2002. The Bank's
portfolio of mortgage-backed securities increased to $98.4 million at June 30,
2002 from $11.6 million at December 31, 2001.
This restructuring was done to shorten the duration of the portfolio in
a declining rate environment to reduce interest rate risk and portfolio price
volatility as well as to reduce the Company's credit exposure. The Bank reduced
credit risk by significantly reducing the corporate bond portfolio. The
reduction in U.S Government agency securities was primarily in eliminating
structured notes and similar more price volatile holdings. Proceeds from these
sales along with additional liquidity were reinvested in mortgage-backed
instruments, both PAC CMO's ("Planned Amortization Class - Collateralized
Mortgage Obligations) and in adjustable rate mortgage securities. The PAC CMO
investments were selected to provide anticipated consistent cash flows over
shorter periods of time than the securities that were sold. As a result of the
restructuring process, the weighted average life of the Bank's investment
portfolio declined from 8.08 years at December 31, 2001 to 4.93 years at June
30, 2002. The shorter duration should provide greater portfolio market value
stability and significantly reduced interest rate risk in a rising rate
environment while providing a superior yield over alternative short-term money
market investments in a flat rate or declining rate environment.
The Bank does not anticipate continued significant portfolio turnover
in the latter part of 2002, but does expect that future investment security
purchases during this period will continue to be of shorter maturities to
further reduce overall portfolio duration.
Loans Receivable
- ----------------
Loans were $219.2 million at June 30, 2002, an increase of $11.2
million, or 5.4%, from December 31, 2001. The most significant increase was in
the category of construction and land development ($6.1 million or 18.53%). This
increase is largely due the increased demand for new home construction loans
brought about by the low interest rate environment. These loans have been made
to individuals for the construction of 1-4 family residences, as well as to
businesses for the construction of commercial property. The rate environment
also helped fuel a $7.0 million, or 9.37%, increase in one-to-four family
residential loans during the first six months of 2002. The bank expects
construction and one to four family loan growth to continue through the end of
2002, due to strong housing markets locally. The other loan category in which
Indian River experienced increases includes commercial and industrial real
estate ($2.8 million, or 4.47%). There were also several loan categories that
experienced small decreases, those being in farmland ($7 thousand, or 0.23%),
multi family residential ($1.1 million, or 30.87%), agriculture ($1.1 million,
or 44.75%), commercial loans ($2.0 million, or 13.47%), consumer loans ($257
thousand, or 1.78%), and other loans ($57 thousand, or 2.55%).
13
Deposits
- --------
Indian River's deposits increased $19.5 million, or 6.11%, from $318.8
million at December 31, 2001 to $338.3 million at June 30, 2002, including an
increase of $1.5 million in the quarter ended June 30, 2002. Increases occurred
in demand deposits ($2.6 million, or 5.38%), NOW and money market accounts ($8.5
million, or 21.07%) and savings deposits ($5.7 million, or 5.28%). The increase
in NOW and money market account balances can be primarily attributed to a new
lock box service, which has brought in over $7 million in NOW account in the
last six months. Also, by gradually lowering the premium rate paid on the new
savings account special from the opening of the Rockledge Branch in 2001, and
the offering of time deposit specials in the second quarter of 2002, Indian
River has been able to maintain some of the deposits.
The Company's time deposits outstanding increased $2.6 million or 2.15%
during the first six months of 2002. The increase can be attributed to time
deposit specials at competitive rates that have been offered during the second
quarter of 2002. These specials have resulted in the movement of some funds from
savings accounts to time deposits. In the second quarter of 2002, savings
accounts decreased by $9.2 million, or 7.48%, and time deposits increased by
$7.0 million, or 6.03%.
Stockholders' Equity
- --------------------
Total stockholders' equity increased by $3.1 million, or 11.28%, during
the first six months of 2002. Net income of $2.8 million was complemented by a
$239 thousand increase in accumulated other comprehensive income. Accumulated
other comprehensive income for Indian River consists of the net unrealized gain
or loss on investments available for sale.
Results of Operations
- ---------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net Income
- ----------
For the first six months of 2002, Indian River recorded net income of
$2.8 million. This was $1.4 million, or 107.32%, more than the $1.4 million in
net income recorded for the first six months of 2001. Basic earnings per share
increased $0.75 during the six months ended June 30, 2002, to $1.46, as compared
to $0.71 per share during the comparable period of 2001 (as adjusted to reflect
the 10% stock dividend in 2002 and 2001). Diluted earnings per share increased
from $0.69 to $1.42 during the first six months of 2002, as compared to the same
period in 2001. The aggregate change in net income for the six months ended June
30 2002 was affected by the presence of non-recurring income from the sale of
securities during 2002 and one-time noninterest expenses during 2001, as
discussed further below.
Net interest income increased $1.6 million, or 25.75%, for the first
six months of 2002 compared to the same period in 2001. This increase in net
interest income was complemented by an increase in other income of $779
thousand, or 41.50%, and a decrease in other expenses of $10 thousand, or 0.16%.
This was offset by an increase in the provision for loan losses of $20 thousand,
or 8.33%, and an increase in taxes on income of $911 thousand, or 113.44%.
Net Interest Income
- -------------------
Net interest income increased to $7.9 million for the first six months
of 2002 from $6.3 million for the same period in 2001. The $1.6 million, or
25.75%, increase in net interest income was mainly the result of a $1.6 million,
or 24.91% decrease in deposit expense. Yields on Indian River's interest-earning
assets decreased by 127 basis points, and the rates paid on Indian River's
interest-bearing liabilities decreased by 172 basis points. This resulted in an
increase in the interest rate spread to 3.57% for the first six months of 2002
from 3.12% for the first six months of 2001. Net interest margin also increased
to 4.06% from 3.84%. The ratio of average interest-earning assets to average
interest-bearing liabilities for the first six months of 2002 was 1.19% as
compared to 1.18% for the same period in 2001.
14
Total interest income for the first six months of 2002 was $12.8
million, consistent with the interest income for the same period in 2001.
Although the average yields on assets decreased 127 basis points, the interest
income remained consistent due to a $62.8 million increase in average
interest-earning assets. The decline in yields on earning assets for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001 is
primarily the result of the action of the Federal Reserve in decreasing market
interest rates in 2001, resulting in the adjustment of interest rates on the
Bank's variable rate loans, which comprise over half of the loan portfolio, as
well as new loans being offered at these lower market rates.
Indian River's average loans increased $14.9 million, or 7.23%, and the
related yield decreased to 7.63% for the first six months of 2002 from 8.63% in
2001. During the same period, average investment securities increased $38.5
million, or 32.32%, and the related yield decreased to 5.52% from 6.63%. Yields
on investment securities were impacted more dramatically due to the increase in
the total portfolio from the second quarter of 2001. Additionally, the sale and
call of investment securities during the first six months of 2002 resulted in
the reinvestment of the proceeds in lower yielding securities. Indian River's
average federal funds sold increased by $9.4 million, and the related yield
decreased to 1.66% for the first six months of 2002 from 4.18% in 2001. The
decrease in yields on earning assets was offset by the decrease in average rates
on deposits and other borrowings.
Total interest expense for the first six months of 2002 was $4.9
million, a decrease of 24.91% from $6.6 million for the same period in 2001. The
decrease in total expense can be attributed to the decrease in the related rates
on deposits and other borrowings, which offset the $50.1 million, or 17.96%,
increases in the average balances outstanding of interest-bearing liabilities
for the first six months of 2002 compared to the same period in 2001. The
related rate decreased to 3.02% for the first six months of 2002 from 4.74% in
2001. The average time deposit rate paid decreased from 6.03% for the first six
months of 2001 to 3.90% for the first six months of 2002. This is the result of
prior time deposit specials at a higher rate that did not mature until 2002;
those that renewed did so at the current lower market rate.
15
The following table provides certain information relating to
Indian River's average consolidated statements of financial condition and
reflects the interest income on interest-earning assets and interest expense of
interest-bearing liabilities for the periods indicated and the average yields
earned and rates paid for the periods indicated. These yields and costs are
derived by dividing income or expense by the average daily balance of the
related assets or liabilities for the periods presented.
Six Months Ended June 30,
2002 2001
--------------------------------------------------------------------------------
(In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
------------ ---------- ---------- ----------- ---------- ----------
Investments (1) $ 157,770 $ 4,317 5.52% $ 119,235 $ 3,920 6.63%
Federal funds sold 12,718 105 1.66% 3,364 70 4.18%
Loans receivable (2) less loans in
process 221,517 8,386 7.63% 206,584 8,836 8.63%
--------- ------- ------ --------- ------- ------
Total interest earning assets 392,005 12,808 6.59% 329,183 12,826 7.86%
------- ------ ------- ------
Noninterest-earning assets 17,593 16,867
--------- ---------
Total $ 409,598 $ 346,050
========= =========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $ 46,474 $ 232 1.01% $ 29,824 $ 170 1.15%
Savings accounts 117,628 1,605 2.75% 67,879 1,142 3.39%
Certificates of deposit 119,811 2,319 3.90% 142,760 4,269 6.03%
Other 44,867 767 3.45% 38,249 975 5.14%
--------- ------- ------ --------- ------- ------
Total interest-bearing
liabilities 328,780 4,923 3.02% 278,712 6,556 4.74%
------- ------ ------- ------
Noninterest-bearing
liabilities 51,797 42,848
Stockholders' equity 29,021 24,490
--------- ---------
Total $ 409,598 $ 346,050
========= =========
Net interest income and net yield
on interest-earning assets $ 7,885 4.06% $ 6,270 3.84%
======= ====== ======== ======
(1) Includes investment securities and Federal Reserve Bank, Federal Home Loan
Bank, and IBB stock. Yields on securities available for sale have been
calculated on the basis of historical cost and do not give effect to changes in
fair value of such securities, which are reflected as a component of
stockholder's equity.
(2) Includes loans for which the accrual of interest has been suspended.
16
Other Income
- ------------
Other income increased by $779 thousand, or 41.50%, for the first six
months of 2002 compared to the same period of 2001. This was a result of an
increase in service charges and fees of $48 thousand and the increase in gains
on security sales of $694 thousand. The large increase in gain on sale of
securities is due primarily to the sale of $45.2 million of corporate investment
securities, mainly during the first quarter of 2002. During the first six months
of 2002, the Bank has elected to decrease the percentage of corporate bonds
outstanding to less than 10% of the total investment portfolio, electing to
purchase mortgage backed securities and CMO's.
Other Expenses
- --------------
Indian River's other expenses decreased $10 thousand for the first six
months of 2002 compared to the same period in 2001. The decrease was primarily
the result of a $55 thousand decrease in salaries and benefits, and a $15
thousand decrease in office expenses and insurance. Salaries and benefits
decreased in 2002 as compared to 2001 for a few reasons. The resignation of
William A. High as President, Chief Executive Officer, and Director in 2001,
resulted in a one time pre-tax charge of $567,000 or $357,000 after taxes, in
respect of payments in satisfaction of all amounts which may have been owing
under Mr. High's employment agreement and the termination of options held my Mr.
High. This one time expense offset the $500 thousand increase in salaries and
benefits in 2002 due to the addition of employees for the new Rockledge Branch,
which opened in April 2001, and the hiring of additional staff to support the
growth of Indian River. Data processing expense increased by $42 thousand for
the six months ended June 30, 2002 as compared to the same period 2001. This was
primarily due to increases in ATM transaction processing fees and increases in
software service contracts and service bureau expenses. There was also an $18
thousand increase in occupancy and equipment expense for the first six months of
2002 compared to the same period in 2001.
The Company expects to recognize $250 thousand in compensation expense
during the remainder of 2002 to reflect the expense related to the potential
cashless exercise of outstanding options under certain of its option plans.
Provision for Loan Losses
- -------------------------
Indian River makes provisions for loan losses in amounts deemed
necessary to maintain the allowance for loan losses at an appropriate level as
determined by management. At June 30, 2002, total nonperforming loans were $177
thousand, or 0.08% of total loans, compared to $290 thousand, or 0.13% of total
loans at December 31, 2001.
The allowance for loan losses is a valuation reserve established by
management in an amount it deems adequate to provide for losses in the
portfolio. Management assesses the adequacy of the allowance for loan losses
based upon a number of factors including, among others: analytical reviews of
loan loss experience in relationship to outstanding loans and commitments;
unfunded loan commitments; problem and nonperforming loans and other loans
presenting credit concerns; trends in loan growth, portfolio composition and
quality; appraisals of the value of collateral; and management's judgment with
respect to current and expected economic conditions and their impact on the
existing loan portfolio.
The allowance for loan losses is increased by provisions for loan
losses charged to expense. Charge-offs of loan amounts determined by management
to be uncollectable decrease the allowance, and recoveries of previous
charge-offs are added to the allowance.
17
Calculating the allowance for loan losses is divided into three primary
allocation groups: (1) specific allocation loans, (2) past due/problem loans and
(3) all other passing grade loans. For specific allocation loans, the Bank has
determined a reserve amount to set aside which it believes is sufficient to
cover a collateral shortfall. As of June 30, 2002, Indian River had three loans
with specific allocations in the aggregate amount of $309 thousand. Problem
loans are identified by the Asset Liability Committee and are assigned a risk
grade. Loans graded special mention are multiplied by an inherent loss factor of
5% to determine the amount to be reserved. Loans graded substandard are
multiplied by a loss factor of 10%, loans graded doubtful are multiplied by a
loss factor of 50% and loans graded loss are multiplied by a loss factor of
100%. Past due loans are graded based on the number of days which the loan is
past due, and are multiplied by the same loss factors as problem loans. Loans
past due 30-59 days are graded special mention, loans past due 60-89 days are
graded substandard and loans past due 90 days or more are graded doubtful. As of
June 30, 2002, 10.25% of the allowance for loan losses reflected specific loan
allocations and past due/problem loans. All other loans are graded pass and are
categorized into six loan groups and multiplied by an historical experience
factor to determine the appropriate level of the allowance for loan losses. Due
to Indian River's low loss history, the historical experience factors have been
adjusted to reflect peer group historical loss factors and current economic
conditions. The factors currently are: 0.30 percent for 1 to 4 family real
estate loans, 0.77% for commercial real estate loans, 1.00% for commercial,
non-real estate loans, 1.00% for farmland and farmer loans, 0.85% for consumer,
non-revolving loans, and 3.00% for other revolving loans.
As a result of Indian River's low charge-offs and low change in
non-performing loans, these two elements have caused little change in the
allowance as a percentage of loans. The increase in the allowance for loan
losses in dollar terms is attributable to increases in the level of total loans.
The following table allocates the allowance for loan losses by loan
category, along with the percent of average loans per category to total average
loans. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
(In Thousands) June 30, 2002 December 31, 2001
----------------------------------------------------
Amount % Amount %
----------------------------------------------------
Commercial, Agricultural $ 402 7.3% $ 524 18.6%
Real estate construction 375 16.7 154 5.4
Real estate mortgage 1,870 68.6 1,775 63.0
Consumer, other 368 7.4 366 13.0
------- -------
Total Allowance for loan losses $ 3,015 100.0% $ 2,819 100.0%
======= =======
See Note 4, Allowance for Loan Losses, in the Notes to Unaudited
Condensed Consolidated Financial Statements for additional information.
Non-Performing Assets. Indian River Bank's non-performing assets, which
are comprised of loans delinquent 90 days or more, non-accrual loans, and other
real estate owned ("OREO"), totaled $177 thousand at June 30, 2002 compared to
$290 thousand at December 31, 2001. The percentage of non-performing assets to
total assets decreased to 0.04% at June 30, 2002 from 0.08% at December 31,
2001.
Non-performing assets at June 30, 2002 consisted of non-accrual loans
in the amount of $144 thousand and loans past due over 90 days of $33 thousand.
Indian River did not have any other real estate owned as of June 30,
2002 or December 31, 2001. Generally, Indian River would evaluate the fair value
of each OREO property annually. These evaluations may be appraisals or other
market studies.
18
Indian River places credit card loans on non-accrual status when they
are 180 days delinquent. All other consumer and commercial loans are placed on
nonaccrual at 90 days delinquent or when determined uncollectable by management.
The following table allocates the non-performing loans by loan type.
(In Thousands)
June 30, 2002 December 31, 2001
---------------------------------------------------
Nonaccrual Loans Amount % Amount %
- -------------------------------------------------------------------------------------------------
Real estate $ 120 83.3% $ 120 90.2%
Installment 24 16.7 13 9.8
Accrual Loans - past due 90 days or more
June 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------
Amount % Amount %
------------------------------------------------------
Real estate $ 33 100% $ 125 79.6%
Installment -- -- 32 20.4
For the six months ended June 30, 2002, $7 thousand in gross interest
income would have been recorded if the $144 thousand of nonaccrual loans had
been accruing interest throughout this period.
At June 30, 2002, there were no performing loans considered potential
problem loans, defined as loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems causes management to have serious doubt as to the
ability of the borrowers to comply with the present loan repayment terms.
Taxes on Income
- ---------------
Indian River's tax expense was $1.7 million, or 37.6% of income before
taxes, for the first six months of 2002 and $803 thousand, or 36.9% of income
before taxes, for the same period in 2001.
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Net Income
- ----------
For the second quarter of 2002, Indian River recorded net income of
$1.4 million. This was $764 thousand, or 121.65%, more than the $627 thousand in
net income recorded for the second quarter of 2001. Basic earnings per share
increased $0.39 during the three months ended June 30, 2002, to $0.71, as
compared to the $0.32 per share during the comparable period of 2001 (as
adjusted to reflect the 10% stock dividend in 2002 and 2001). Diluted earnings
per share increased from $0.32 to $0.70 during the second quarter of 2002, as
compared to the same period in 2001.
Net interest income increased $976 thousand, or 30.52%, for the second
quarter of 2002 compared to the same period in 2001. This increase in net
interest income was complemented or offset by an increase in other income of $23
thousand, or 2.07%, an increase in the provision for loan losses of $10
thousand, or 8.33%, a decrease in other expenses of $261 thousand, or 8.19%, and
an increase in taxes on income of $486 thousand, or 139.15%.
19
Net Interest Income
- -------------------
Net interest income increased to $4.2 million for the second quarter of
2002 from $3.2 million for the same period in 2001. The $70 thousand, or 1.08%,
increase in interest income was complemented by a $906 thousand, or 27.98%
decrease in interest expense. Yields on Indian River's interest-earning assets
decreased by 117 basis points, and the rates paid on Indian River's
interest-bearing liabilities decreased by 176 basis points. This resulted in an
increase in the interest rate spread to 3.70% for the second quarter of 2002
from 3.11% for the second quarter of 2001. Net interest margin increased to
4.17% from 3.81%. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 1.20% for the second quarter of 2002
compared to 1.18% for the second quarter of 2001.
Total interest income for the second quarter of 2002 was $6.5 million,
a 1.08% increase from $6.4 million during the same period in 2001. The principal
factor in the increase of interest income was the $65.3 million increase in
average interest-earning assets. Indian River's average loans increased $16.6
million, or 7.90%, and the related yield decreased to 7.45% for the second
quarter of 2002 from 8.55% in 2001. During the same period, average investment
securities increased $48.1 million, or 40.05%, and the related yield decreased
to 5.40% from 6.31%.
Total interest expense for the second quarter of 2002 was $2.3 million,
a decrease of 27.98% from $3.2 million for the same period in 2001. The decrease
in total expense can be attributed to a decrease in the rate paid to 2.80% for
the second quarter of 2002 from 4.56% in the second quarter of 2001. This was
offset by an increase in the average interest-bearing liabilities of $48.8
million, or 17.11% during this period. The decrease in interest rates on savings
accounts in the second quarter of 2002 was due primarily to the lowering of
premium rates on new accounts that were originally offered with the opening of
the Rockledge Branch beginning in the second quarter of 2001. The bank has
elected to gradually reduce the premium rate paid on the new savings account
special, thus has been able to maintain most of these deposits. The rate paid on
time deposits has also decreased by 224 basis points, to 3.58% in the second
quarter of 2002, compared to the second quarter of 2001. This is the result of
over $49.5 million in time deposits maturing and repricing in the second quarter
of 2002. Many of these time deposits were prior specials at a higher rate; those
that renewed did so at the current lower market rate.
20
The following table provides certain information relating to Indian
River's average consolidated statements of financial condition and reflects the
interest income on interest-earning assets and interest expense of
interest-bearing liabilities for the periods indicated and the average yields
earned and rates paid for the periods indicated. These yields and costs are
derived by dividing income or expense by the average daily balance of the
related assets or liabilities for the periods presented.
Three Months Ended June 30,
2002 2001
-------------------------------------------------------------------------------------
(In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
---------- ---------- ----------- ------------ ---------- -----------
Investments (1) $ 168,043 $ 2,263 5.40% $ 119,988 $ 1,888 6.31%
Federal funds sold 6,653 28 1.67% 6,053 61 4.04%
Loans receivable(2) less loans in
process 227,059 4,215 7.45% 210,432 4,487 8.55%
--------- --------- ----- --------- --------- -----
Total interest earning assets 401,755 6,506 6.50% 336,473 6,436 7.67%
--------- ----- --------- -----
Noninterest-earning assets 15,662 17,418
--------- ---------
Total $ 417,417 $ 353,891
========= =========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $ 48,903 $ 114 0.94% $ 30,346 $ 91 1.20%
Savings accounts 118,629 748 2.53% 69,538 565 3.26%
Certificates of deposit 121,692 1,086 3.58% 142,439 2,067 5.82%
Other 44,745 385 3.45% 42,841 516 4.83%
--------- --------- ----- --------- --------- -----
Total interest-bearing
Liabilities 333,969 2,333 2.80% 285,164 3,239 4.56%
--------- ----- --------- -----
Noninterest-bearing
Liabilities 53,406 43,782
Stockholders' equity 30,042 24,945
--------- ---------
Total $ 417,417 $ 353,891
========= =========
Net interest income and net yield
on interest-earning assets $ 4,173 4.17% $ 3,197 3.81%
========= ===== ========== =====
- --------------------
(1) Includes investment securities and Federal Reserve Bank, Federal Home Loan
Bank, and IBB stock. Yields on securities available for sale have been
calculated on the basis of historical cost and do not give effect to changes in
fair value of such securities, which are reflected as a component of
stockholder's equity.
(2) Includes loans for which the accrual of interest has been suspended.
Other Income
- ------------
Other income increased by $23 thousand, or 2.07%, for the second
quarter of 2002 compared to the same period of 2001. This increase was due to
increases in gains on sale of securities of $25 thousand and other income of $48
thousand. These increases were offset by a decrease in gain on sale of loans of
$51 thousand.
21
Other Expenses
- --------------
Indian River's other expenses decreased $261 thousand for the second
quarter of 2002 compared to the same period in 2001. This decrease was primarily
the result of a $237 thousand decrease in salaries and benefits, and a $25
thousand decrease in office and insurance expense. Salaries and benefits
decreased in the second quarter of 2002 as compared to the same period in 2001
primarily due to the resignation of William A. High as President, Chief
Executive Officer, and Director in 2001. In the second quarter of 2001 the
Company took a one time pre-tax charge of $567,000 or $357,000 after taxes, in
respect of payments in satisfaction of all amounts which may have been owing
under Mr. High's employment agreement and the termination of options held by Mr.
High. This decrease was partially offset by the addition of staff to support the
growth of the Bank.
Taxes on Income
- ---------------
Indian River's tax expense was $835 thousand for the second quarter of
2002 and $349 thousand for the same period in 2001. This increase was entirely
due to the increase in income before taxes.
22
Liquidity
- ---------
Liquidity management enables us to maintain sufficient cash flow to
fund operations and to meet financial obligations to depositors and borrowers.
Indian River Bank's liquidity is enhanced by its ability to attract and retain
deposits and by principal and interest payments on loans and maturing securities
in the investment portfolio. Indian River Bank's core deposit base, consisting
of demand deposits, money market, and savings accounts supplemented by other
deposits of varying maturities and rates, contributes to liquidity. Our
liquidity position, those assets invested in federal funds and securities
available for sale of $159.0 million at June 30, 2002, reflected an increase of
$20.2 million from December 31, 2001, or 14.67%. Funds available through
short-term borrowing and asset maturities are considered adequate to meet all
current needs. At June 30, 2002, Indian River Bank had available credit of $15.0
million under lines of credit at correspondent banks. Although management
believes that the liquidity position is adequate, increased loan demand could
have an adverse impact on liquidity. Indian River Bank also has a $54.5 million
borrowing line with the Federal Home Loan Bank of Atlanta. The outstanding
balance on this line decreased to $27.7 million as of June 30, 2002, from $27.9
at December 31, 2001 and decreased from $33.0 million at June 30, 2001. This
line has been utilized by the Bank as a funding source at a lower cost, by
locking in borrowings at lower rates. In addition, the Asset/Liability
Management Committee has established minimum standards and key ratios of asset
quality and performance. These standards and ratios provide the framework for
guidance and measurement. Management evaluates these standards and ratios on an
ongoing basis.
CAPITAL RESOURCES
- -----------------
In the first six months of 2002, total stockholders' equity increased
$3.1 million, or 11.28%, as a result of earnings and an increase in accumulated
other comprehensive income. Earnings contributed $2.8 million to stockholders'
equity this six month period. Accumulated other comprehensive gains increased
stockholders' equity by $239 thousand during this six month period.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On June 30,
2002, Indian River exceeded all capital requirements, having a total risk-based
capital ratio of 12.69%, a Tier 1 risk-based capital ratio of 11.51%, and a
leverage ratio of 7.09%. As of June 30, 2002, Indian River Bank also met the
criteria for categorization as a "well-capitalized" institution under the prompt
corrective action rules promulgated under the Federal Deposit Insurance Act,
having total and tier 1 risk based capital ratios of 12.64% and 11.46%, and a
leverage ratio of 7.06%. Designation of the Bank as a "well-capitalized"
institution under these regulations does not constitute a recommendation or
endorsement of Indian River Bank by Federal bank regulators.
EFFECTS OF INFLATION
- --------------------
The unaudited consolidated financial statements and related unaudited
financial data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America and practices
within the banking industry which require the measurement of financial position
and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation.
23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk is that portion of the variation in the Company's
performance attributable to changes in interest rates. Management closely
monitors the Company's exposure to how changes in market conditions can impact
the Indian River's future performance and considers strategies to reduce any
negative results.
Interest rate risk takes place because of unbalanced changes in
interest income and expense, and asset and liability market value when rates
change. The imbalances flow through to create variability in net interest
income, net income, and the market value of equity. The ultimate cause of
interest rate risk is a repricing mismatch between the assets and liabilities on
the Company's balance sheet and, if relevant, off-balance sheet positions.
Indian River's exposure to interest rate risk is managed primarily
through the Company's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting potential negative effects of changes in
market interest rates. Since Indian River's primary source of interest-bearing
liabilities is customer deposits, the ability to manage the types and terms of
such deposits may be somewhat limited by customer preferences in the market
areas served by the Company. Borrowings, which include FHLB advances, short-term
borrowings and long-term borrowings, are generally structured with specific
terms which in management's judgment, when aggregated with the terms for
outstanding deposits and matched with interest-earning assets, mitigate Indian
River's exposure to interest rate risk. The rates, terms and interest rate
indices of Indian River's interest-earning assets result primarily from the
Company's strategies of investing in loans and securities which permit the
Company to limit its exposure to interest rate risk, together with credit risk,
while achieving a positive interest rate spread from the difference between the
income earned on interest-earning assets and the cost of interest-bearing
liabilities.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management uses a quarterly model which measures Indian River's exposure
to interest rate risk. The model calculates the present value of assets,
liabilities, off-balance sheet financial instruments and equity at current
interest rates, and at hypothetical higher and lower interest rates at various
intervals. The present value of each major category of financial instrument is
calculated by the model using estimated cash flows based upon weighted average
contractual rates and terms at discount rates representing the estimated current
market interest rate for similar financial instruments. The resulting present
value of longer term fixed-rate financial instruments are more sensitive to
change in a higher or lower market interest rate scenario, while adjustable-rate
financial instruments largely reflect only a change in present value
representing the difference between the contractual and discounted rates until
the next interest rate repricing opportunity.
The following table presents Indian River's exposure over the
subsequent twelve month periods to immediate, hypothetical changes in interest
rates at the dates indicated:
June 30, 2002 June 30, 2001
--------------------------------------------- ---------------------------------------------
Change in Percentage Percentage
Interest Percentage Change in Percentage Change in
Rates Change in Percentage Market Value Change in Percentage Market Value
(Basis Net Interest Change in of Portfolio Net Interest Change in of Portfolio
Points) income Net Income Equity income Net Income Equity
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
+200 -4.82% -6.43% -13.34% -5.73% -7.56% -15.79%
+100 -1.62% -2.54% -6.41% -2.84% -3.79% -7.79%
0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
-100 -2.97% -1.54% -1.04% -0.31% +1.42% +0.67%
-200 -5.98% -3.40% -5.99% -0.43% +2.70% -2.54%
24
As the table indicates, the Bank is susceptible to lower earnings in
both a declining and a rising rate environment. The reason for this situation is
because of the concept of negative convexity. This exists because the Bank has
heavy exposure to residential mortgage loans in the loan portfolio and
mortgage-backed securities in the investment portfolio combined with a negative
GAP position. If rates decline, mortgage prepayments (both from portfolio loans
and those associated with mortgage-backed securities) will increase. The Bank
will have higher rate loans and investments paying off and will have to reinvest
these funds at lower prevailing market rates. The negative GAP will help in this
scenario somewhat since interest expenses will decline, but not enough to
totally mitigate the reinvestment issues. If rates increase, the opposite will
happen. Prepayments will slow down and interest expenses will increase.
Indian River has been in a liability sensitive position during 2001 and
2002, which is reflected in the above tables. The Company has developed
strategies to bring the balance sheet into a more neutral position and will be
implementing these actions in 2002 and 2003. The Company is sensitive to the
economic environment and will restructure the repricing characteristics in a
gradual manner to minimize major asset purchases at the bottom of the rate
cycle.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, 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. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
In addition, the previous table does not necessarily indicate the
impact of general interest rate movements on Indian River's net interest income
because the repricing of certain categories of assets and liabilities are
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicating as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
Management uses the model to ascertain general levels of risk and to
consider specific strategies to mitigate that risk.
25
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time the Company is a participant in various
legal proceedings incidental to its business. In the opinion of management, the
liabilities (if any) resulting from such legal proceedings will not have a
material effect on the financial position of the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2002, the annual meeting of shareholders of the
Company was held for the purposes of (1) electing four (4) directors to serve
until the annual meeting of shareholders to be held in 2005, and until their
successors are duly elected and qualified and (2) ratifying the appointment of
McGladrey & Pullen, LLP as the Company's independent auditors. The name of each
director elected at the meeting and the votes cast are set forth below.
- ------------------------------------------------------------------------------------------------------------------------
Name For Against Abstentions Broker Non-Votes
- ------------------------------------------------------------------------------------------------------------------------
Paul A. Beindorf 1,405,317 8,292 -- --
- ------------------------------------------------------------------------------------------------------------------------
Robert A. Grice 1,413,125 484 -- --
- ------------------------------------------------------------------------------------------------------------------------
John L. Minton 1,400,298 1,311 -- --
- ------------------------------------------------------------------------------------------------------------------------
John David Smith 1,413,367 242 -- --
- ------------------------------------------------------------------------------------------------------------------------
Following the meeting, the persons elected at the meeting, together
with the following persons, constituted the entire Board of Directors: Griffin
A. Greene, William C. Graves, IV, William B. Marine, William B. Marine, Keith H.
Morgan, Jr., Daniel R. Richey, Mary M. Rogers.
The vote on the ratification of McGladrey & Pullen, LLP as the
Company's independent auditors was as follows:
For: 1,405,018
Against 7,470
Abstain 1,121
Broker NonVotes -
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Articles of Incorporation of Indian River, as amended (1)
3(b) Bylaws of Indian River (1)
10(b) Indian River 1995 Stock Option Plan (3)
10(c) Indian River 1999 Stock Option Plan (4)
11 Statement of Computation of Per Share Earnings
Please refer to Note 5 to the Condensed
Consolidated Financial Statements
21 Subsidiaries of the Registrant
99(a) Certification of Paul A. Beindorf
99(b) Certification of Phillip L. Tasker
- --------------------------
(1) Incorporated by reference to exhibit of same number to Indian River's
registration statement on Form SB-2 (No. 333-36688)
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(2) Incorporated by reference to exhibit 10(b) to Indian River's registration
statement on Form SB-2 (No. 333-36688)
(3) Incorporated by reference to exhibit 10(c) to Indian River's registration
statement on Form SB-2 (No. 333-36688)
(4) Incorporated by reference to exhibit 10(d) to Indian River's registration
statement on Form SB-2 (No. 333-36688)
(b) Reports on Form 8-K
On April 8, 2002, Indian River filed a report on Form 8-K, under Item 5
thereof, reporting earnings for the quarter ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIAN RIVER BANKING COMPANY
(Registrant)
August 12, 2002 By: /s/ Paul A. Beindorf
----------------------------------------
Paul A. Beindorf, President and Chief Executive
Officer
August 12, 2002 By: /s/ Phillip Tasker
----------------------------------------
Phillip Tasker, Chief Financial Officer
28