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 September 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 November 4, 2002, the registrant had 1,958,560 shares of Common
Stock outstanding.
Item 1 - Financial Statements
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------
(Unaudited)
Cash and due from banks $ 15,528 $ 13,334
Federal funds sold 7,381 10,033
Securities available for sale 154,121 128,758
Securities held to maturity 13,687 13,562
Other securities 1,899 1,899
Loans held for sale 3,469 5,795
Loans, net 224,033 208,043
Bank premises and equipment, net 4,072 4,052
Accrued interest receivable 2,214 2,783
Other assets 709 886
--------------------------------
TOTAL ASSETS $427,113 $389,145
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 51,337 $ 49,062
Interest-bearing deposits:
NOW and money market 47,376 40,390
Savings 108,767 108,628
Time deposits 126,590 120,726
--------------------------------
TOTAL DEPOSITS 334,070 318,806
Guaranteed preferred beneficial interests in Company's
subordinated debentures 7,000 --
Other borrowings 51,407 41,583
Other liabilities 1,514 1,052
--------------------------------
TOTAL LIABILITIES 393,991 361,441
--------------------------------
Stockholders' Equity
Preferred stock -- --
Common stock 1,954 1,949
Capital surplus 20,978 20,878
Retained earnings 8,113 3,879
Accumulated other comprehensive income 2,077 998
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 33,122 27,704
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $427,113 $389,145
================================
See Notes to Condensed Consolidated Financial Statements.
2
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
- ----------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $4,253 $4,437
Investment securities and due from banks 2,167 2,078
Federal funds sold 14 104
----------------
6,434 6,619
----------------
Interest expense:
Deposits 1,738 2,729
Other 424 552
----------------
2,162 3,281
----------------
NET INTEREST INCOME 4,272 3,338
Provision for loan losses 180 180
----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,092 3,158
----------------
Other income:
Service charges and fees 448 418
Gain on sale of securities 62 165
Gain on sale of loans 347 174
Other 243 186
----------------
1,100 943
----------------
Other expense:
Salaries and benefits 1,561 1,251
Occupancy and equipment 408 386
Data processing 294 320
Office expenses and insurance 694 574
----------------
2,957 2,531
----------------
INCOME BEFORE INCOME TAXES 2,235 1,570
Provision for income taxes 838 560
----------------
NET INCOME $1,397 $1,010
================
Basic earnings per share $ 0.72 $ 0.52
================
Diluted earnings per share $ 0.70 $ 0.51
================
See Notes to Condensed Consolidated Financial Statements.
3
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
- -------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $12,639 $13,274
Investment securities and due from banks 6,484 5,998
Federal funds sold 119 173
-----------------
19,242 19,445
-----------------
Interest expense:
Deposits 5,894 8,310
Other 1,191 1,527
-----------------
7,085 9,837
-----------------
NET INTEREST INCOME 12,157 9,608
Provision for loan losses 440 420
-----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,717 9,188
-----------------
Other income:
Service charges and fees 1,273 1,195
Gain on sale of securities 813 222
Gain on sale of loans 1,034 863
Other 638 542
-----------------
3,758 2,822
-----------------
Other expense:
Salaries and benefits 4,404 4,149
Occupancy and equipment 1,174 1,134
Data processing 970 954
Office expenses and insurance 2,133 2,028
-----------------
8,681 8,265
-----------------
INCOME BEFORE INCOME TAXES 6,794 3,745
Provision for income taxes 2,552 1,363
-----------------
NET INCOME $ 4,242 $ 2,382
=================
Basic earnings per share $ 2.18 $ 1.22
=================
Diluted earnings per share $ 2.13 $ 1.20
=================
See Notes to Condensed Consolidated Financial Statements.
4
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
--------------------------
Net income $ 1,397 $ 1,010
Other comprehensive income, net of tax:
Unrealized gain on investments available-for-sale arising during the period,
net of taxes of $516 and $550 in 2002 and 2001, respectively 879 932
Less reclassification adjustment for net gains included in net income,
net of taxes of $23 and $61 in 2002 and 2001, respectively (39) (104)
=========================
Comprehensive income $ 2,237 $ 1,838
=========================
See Notes to Condensed Consolidated Financial Statements.
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
-------------------------
Net income $ 4,242 $ 2,382
Other comprehensive income, net of tax:
Unrealized gain on investments available-for-sale arising during the period,
net of taxes of $935 and $1,062 in 2002 and 2001, respectively
1,591 1,808
Less reclassification adjustment for net gains included in net income,
net of taxes of $301 and $82 in 2002 and 2001, respectively (512) (140)
=========================
Comprehensive income $ 5,321 $ 4,050
=========================
See Notes to Condensed Consolidated Financial Statements.
5
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS
ENDED SEPTEMBER 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 $ 7,136 $ 265 $ 23,200
10% stock dividend, applied
retroactively 160 160 2,177 (2,337) -- --
------------------------------------------------------------------------------------------
Balance, January 1, 2001, as adjusted 1,764 1,764 16,372 4,799 265 23,200
Fractional shares -- -- -- (3) -- (3)
Shares issued 3 3 33 -- -- 36
Net income -- -- -- 2,382 -- 2,382
Other comprehensive income,
unrealized gain on
securities, net of tax -- -- -- -- 1,668 1,668
------------------------------------------------------------------------------------------
Balance, September 30, 2001 1,767 $ 1,767 $ 16,405 $ 7,178 $ 1,933 $ 27,283
==========================================================================================
Balance, January 1, 2002 1,772 $ 1,772 $ 16,456 $ 8,478 $ 998 $ 27,704
10% stock dividend, applied
retroactively 177 177 4,422 (4,599) -- --
------------------------------------------------------------------------------------------
Balance, January 1, 2002, as adjusted 1,949 1.949 20,878 3,879 998 27,704
Fractional shares -- -- -- (8) -- (8)
Shares issued 5 5 100 -- -- 105
Net income -- -- -- 4,242 -- 4,242
Other comprehensive income,
unrealized gain on
securities, net of tax -- -- -- -- 1,079 1,079
------------------------------------------------------------------------------------------
Balance, September 30, 2002 1,954 $ 1,954 $ 20,978 $ 8,113 $ 2,077 $ 33,122
==========================================================================================
See Notes to Condensed Consolidated Financial Statements
6
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(In Thousands)
2002 2001
- --------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 4,242 $ 2,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities (813) (222)
Depreciation and amortization 637 538
Provision for loan losses 440 420
Decrease (increase) in loans held for sale 2,326 (789)
Decrease (increase) in other assets 323 (416)
Increase in other liabilities 462 1,047
-------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,617 2,960
-------------------
Cash Flows From Investing Activities
Cash flows from securities, net (23,151) (4,233)
Loan originations and principal collections on loans, net (16,430) (16,241)
Purchases of premises and equipment (469) (817)
-------------------
NET CASH USED BY INVESTING ACTIVITIES (40,050) (21,291)
-------------------
Cash Flows From Financing Activities
Net increase in deposits 15,264 20,417
Increase in other borrowings, net 9,824 16,305
Cash paid for fractional shares (8) (3)
Proceeds from issuance of common stock 105 36
Proceeds from issuance of trust preferred securities 6,790 --
-------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,975 36,755
-------------------
NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (458) 18,424
Cash and cash equivalents:
Beginning 23,367 10,830
--------------------
Ending $ 22,909 $ 29,254
====================
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 accounting principles generally accepted in the United States of
America for interim financial information and Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America 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 nine-month period
ended September 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, IRNB Insurance Services, LLC, and Indian River
Capital Trust I, 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 September 30, 2002 and December 31, 2001 are summarized
as follows.
(In Thousands) September 30, 2002
------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
U.S. Government corporations and agencies $ 3,366 $ -- $ (19) $ 3,347
Mortgage-backed securities 5,028 -- (16) 5,012
State, county and municipal securities 5,293 304 -- 5,597
---------------------------------------------
$ 13,687 $ 304 $ (35) $ 13,956
=============================================
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 September 30, 2002 and December 31, 2001 are summarized
as follows:
(In Thousands) September 30, 2002
---------------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------
U. S. Government corporations and agencies $ 29,010 $ 1,241 $ - $ 30,251
Corporate securities 10,484 460 (8) 10,936
Mortgage-backed securities 111,330 1,685 (81) 112,934
---------------------------------------------------------------------
$150,824 $ 3,386 $ (89) $ 154,121
=====================================================================
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 September 30, 2002 and December
31, 2001:
(In Thousands) September 30, December 31,
2002 2001
---------------------------------------
Real estate:
Construction, land development and other land loans $ 40,226 $ 32,778
Farmland 2,992 2,943
One to four family residential 84,652 74,917
Multifamily residential 2,414 3,521
Nonfarm, nonresidential 66,465 62,660
Agriculture 1,875 2,454
Commercial and industrial 13,161 14,948
Consumer 13,298 14,421
Other 2,105 2,225
---------------------------------------
227,188 210,867
Less: Allowance for loan losses (3,151) (2,819)
Unearned discount (4) (5)
---------------------------------------
Loans, net $ 224,033 $208,043
=======================================
9
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended September
30, 2002 and 2001 is as follows:
(In Thousands)
2002 2001
Balance, beginning $ 2,819 $ 2,453
---------------- ---------------
Charge-offs:
Construction, land development - (4)
Commercial and industrial (2) (62)
Loans to individuals (71) (86)
Credit Cards (36) (30)
Other loans (32) -
---------------- ---------------
Total (141) (182)
---------------- ---------------
Recoveries:
1-4 Family Real Estate 6 -
Commercial and industrial 1 -
Loans to individuals 20 -
Credit Cards 2 5
Other loans 4 14
---------------- ---------------
Total 33 19
---------------- ---------------
Net charge-offs (110) (163)
Provision for loan losses 440 420
---------------- ---------------
Balance, ending $ 3,151 $ 2,710
================ ===============
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 nine months ended September 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 September 30, 2002:
Basic earnings per share, income available to
common stockholders $ 1,397 1,952 $ 0.72
===================
Effect of dilutive securities, options 47
-----------------------------
Diluted earnings per share $ 1,397 1,999 $ 0.70
================================================
Common Per-Share
Net Earnings Shares Amounts
------------------------------------------------
Three Months Ended September 30, 2001:
Basic earnings per share, income available to
common stockholders $ 1,010 1,944 $ 0.52
===================
Effect of dilutive securities, options 35
-----------------------------
Diluted earnings per share $ 1,010 1,979 $ 0.51
================================================
Common Per-Share
Net Earnings Shares Amounts
------------------------------------------------
Nine months Ended September 30, 2002:
Basic earnings per share, income available to
common stockholders $ 4,242 1,951 $ 2.18
===================
Effect of dilutive securities, options 47
-----------------------------
Diluted earnings per share $ 4,242 1,998 $ 2.13
================================================
Common Per-Share
Net Earnings Shares Amounts
------------------------------------------------
Nine months Ended September 30, 2001:
Basic earnings per share, income available to
common stockholders $ 2,382 1,943 $ 1.22
===================
Effect of dilutive securities, options 44
-----------------------------
Diluted earnings per share $ 2,382 1,987 $ 1.20
================================================
11
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following at September 30, 2002 and December 31,
2001:
(In Thousands) September 30, December 31,
2002 2001
-------------------------------
Advance under line of credit with Colonial Bank, interest
payable quarterly at an adjustable rate, 4.75% at September 30, 2002. $ 635 $ 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 572 857
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 18,400 13,156
Overnight advance, interest payable monthly at a rate that adjusts daily 4,800 -
-------------------------------
$ 51,407 $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.
NOTE 8. TRUST PREFERRED SECURITIES
On September 30, 2002, a wholly-owned statutory business trust established by
the Company issued $7 million in guaranteed preferred beneficial interests in
the trust ("trust-preferred securities"). The sole assets of the statutory
business trust are a series of subordinated debentures of the Company in the
amount of $7 million and related payments. The Company has fully and
unconditionally guaranteed the statutory business trust's obligations under the
trust-preferred securities, to the extent set forth in the guarantee agreement.
The subordinated debentures are unsecured and subordinate to all senior debt (as
defined) of the Company. The subordinated debentures bear interest at a variable
rate of 3 month LIBOR plus 3.45%, 5.34% for the quarterly period ended September
30, 2002, and mature on November 7, 2032. They are redeemable in whole or in
part on or after November 7, 2007. The trust preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their maturity or earlier redemption.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
FINANCIAL CONDITION
- -------------------
Total Assets
- ------------
Indian River's total assets were $427.1 million at September 30, 2002,
a 9.76% increase from $389.1 million at December 31, 2001. The increase in the
Company's asset base was due to deposit growth and an increase in other
borrowings. During the third quarter, Indian River experienced a slight decline
in deposits levels offset by an increase in other borrowings. Indian River
anticipates that deposits for the remainder of 2002 will remain stable.
Investments
- -----------
Indian River experienced deposit and other borrowing growth during the
first nine months of 2002 while loan growth was much more moderate. This
situation resulted in a $25.5 million or 17.67% increase in the investment
portfolio. In investing the Bank's excess liquidity, Indian River also undertook
to restructure portfolio composition to reduce both credit and interest rate
risk. The portfolio restructuring was accomplished primarily in the first
quarter of 2002. Accordingly, the Company's exposure to corporate securities was
reduced to $10.9 million at September 30, 2002 from $57.5 million at December
31, 2001. Additionally, the Company's holdings of U.S. Government agency
securities were reduced by $29.4 million to $33.6 million during the nine months
ended September 30, 2002. The Bank's portfolio of mortgage-backed securities
increased to $117.9 million at September 30, 2002 from $16.6 million at December
31, 2001.
13
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 3.33 years at
September 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
during the remainder 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 $224.0 million at September 30, 2002, an increase of $16.0
million, or 7.69%, from December 31, 2001, including an increase of $4.8 million
from June 30, 2002. The most significant increase since December 31, 2001 was in
the category of construction, land development, and other land loans ($7.4
million or 22.72%). This increase is largely due to 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 $9.7 million, or 12.99%,
increase in one-to-four family residential loans during the first nine 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 categories in which Indian River experienced increases include
commercial and industrial real estate ($3.8 million, or 6.07%) and farmland
loans ($49 thousand, or 1.65%). There were also several loan categories that
experienced decreases, those being in multi family residential ($1.1 million, or
31.45%), agriculture ($579 thousand, or 23.59%), commercial loans ($1.8 million,
or 11.95%), consumer loans ($1.1 million, or 7.78%), and other loans ($120
thousand, or 5.42%).
Deposits
- --------
Indian River's deposits increased $15.3 million, or 4.79%, from $318.8
million at December 31, 2001 to $334.1 million at September 30, 2002, including
a decrease of $4.2 million in the quarter ended September 30, 2002. Increases
occurred in demand deposits ($2.3 million, or 4.64%), NOW and money market
accounts ($7.0 million, or 17.30%) and savings deposits ($139 thousand, or
0.13%). 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 deposits in the last nine months. Also, by gradually lowering the
premium rate paid on the new savings account special from the opening of the
Rockledge Branch in 2001, Indian River has been able to maintain most of those
deposits.
The Company's time deposits outstanding increased $5.9 million or 4.86%
during the first nine months of 2002. The increase can be attributed to time
deposit specials at competitive rates that have been offered during the second
and third quarters of 2002. These specials have resulted in the movement of some
funds from savings accounts to time deposits. In the third quarter of 2002,
savings accounts decreased by $5.6 million, or 4.89%, and time deposits
increased by $3.3 million, or 2.65%.
Stockholders' Equity
- --------------------
Total stockholders' equity increased by $5.4 million, or 19.56%, during
the first nine months of 2002. Net income of $4.2 million was complemented by a
$1.1 million 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.
14
Results of Operations
- ---------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Income
- ----------
For the first nine months of 2002, Indian River recorded net income of
$4.2 million. This was $1.9 million, or 78.07%, more than the $2.4 million in
net income recorded for the first nine months of 2001. Basic earnings per share
increased $0.96 during the nine months ended September 30, 2002, to $2.18, as
compared to $1.22 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 $1.20 to $2.13 during the first nine months of 2002, as compared
to the same period in 2001. The aggregate change in net income for the nine
months ended September 30, 2002 was affected by the presence of non-recurring
income from the sale of securities during 2002, the increase in net interest
income in 2002, and one-time noninterest expenses during 2001, as discussed
further below.
Net interest income increased $2.5 million, or 26.52%, for the first
nine 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 $936
thousand, or 33.19%. This was offset by an increase in the provision for loan
losses of $20 thousand, or 4.76%, an increase in other expenses of $416
thousand, or 5.03%, and an increase in taxes on income of $1.2 million, or
87.24%.
Net Interest Income
- -------------------
Net interest income increased to $12.2 million for the first nine
months of 2002 from $9.6 million for the same period in 2001. The $2.5 million,
or 26.52%, increase in net interest income was mainly the result of a $2.8
million, or 27.97% decrease in deposit expense. Yields on Indian River's
interest-earning assets decreased by 110 basis points, and the rates paid on
Indian River's interest-bearing liabilities decreased by 170 basis points. This
resulted in an increase in the interest rate spread to 3.70% for the first nine
months of 2002 from 3.10% for the first nine months of 2001. Net interest margin
also increased to 4.14% from 3.78%. The ratio of average interest-earning assets
to average interest-bearing liabilities for the first nine months of 2002 was
1.18%, consistent with the 1.18% for the first nine months of 2001.
Total interest income for the first nine months of 2002 was $19.2
million compared to $19.4 million for the same period in 2001. The main factor
in the $203 thousand, or 1.04%, decrease in interest income is due to the 110
basis point decrease in the average yields on interest-earning assets. This
decrease more than offset the $52.5 million, or 15.47%, increase in average
interest-earning assets. The decline in yields on earning assets for the nine
months ended September 30, 2002 as compared to the nine months ended September
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 $11.7 million, or 5.58%, and the
related yield decreased to 7.65% for the first nine months of 2002 from 8.48% in
2001. During the same period, average investment securities increased $37.7
million, or 30.36%, and the related yield decreased to 5.36% from 6.46%. Yields
on investment securities were impacted more dramatically due to the increase in
the total portfolio from the third quarter of 2001. Additionally, the sale and
call of investment securities during the first nine months of 2002 resulted in
the reinvestment of the proceeds in lower yielding securities. Indian River's
average federal funds sold increased by $3.2 million, and the related yield
decreased to 1.66% for the first nine months of 2002 from 3.66% in 2001. The
decrease in yields on earning assets was offset by the decrease in average rates
on deposits and other borrowings.
15
Total interest expense for the first nine months of 2002 was $7.1
million, a decrease of 27.97% from $9.8 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 $42.9 million, or 14.88%,
increase in the average balances outstanding of interest-bearing liabilities for
the first nine months of 2002 compared to the same period in 2001. The related
rate decreased to 2.86% for the first nine months of 2002 from 4.56% in 2001.
The average time deposit rate paid decreased from 5.81% for the first nine
months of 2001 to 3.69% for the first nine 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.
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.
Nine months Ended September 30,
2002 2001
----------------------------------- -----------------------------------
(In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
--------- --------------------- ---------- ---------------------
Investments (1) $ 161,754 $ 6,484 5.36% $ 124,078 $ 5,998 6.46%
Federal funds sold 9,543 119 1.66% 6,339 173 3.66%
Loans receivable (2) less loans in
process 220,840 12,639 7.65% 209,173 13,274 8.48%
--------- ---------------- --------- ----------------
Total interest-earning assets 392,137 19,242 6.56% 339,590 19,445 7.66%
--------------------- -----------------
Noninterest-earning assets 21,154 16,568
--------- ----------
Total $ 413,291 $ 356,158
========= ==========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $ 47,331 $ 343 0.97% 30,542 $ 269 1.18%
Savings accounts 115,530 2,179 2.52% 75,052 1,928 3.43%
Certificates of deposit 122,259 3,372 3.69% 140,661 6,113 5.81%
Other 46,295 1,191 3.44% 42,229 1,527 4.84%
--------- --------------------- ---------- -------------------
Total interest-bearing
liabilities 331,415 7,085 2.86% 288,484 9,837 4.56%
--------------------- -------------------
Noninterest-bearing
Liabilities 51,675 43,031
Stockholders' equity 30,201 24,643
--------- ----------
Total $ 413,291 $ 356,158
========= =========
Net interest income and net yield
on interest-earning assets $ 12,157 4.14% $ 9,608 3.78%
===================== ===================
(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 $936 thousand, or 33.19%, for the first nine
months of 2002 compared to the same period of 2001. This was partly a result of
an increase in service charges and fees of $78 thousand, or 6.54%, and the
increase in gains on security sales of $591 thousand, or 266.62%. The large
increase in gain on sale of securities is due primarily to the sale of $48.8
million of corporate investment securities, mainly during the first quarter of
2002. During the first nine 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.
There was also a $172 thousand, or 19.90%, increase in gain on sale of loans,
which is a result of the increase in 1-4 family real estate loans originated and
then sold in the secondary market. There was a $95 thousand, or 17.62%, increase
in other income. This includes investment services income increase of $68
thousand and title fee income increase of $27 thousand.
Other Expenses
- --------------
Indian River's other expenses increased $416 thousand, or 5.03%, for
the first nine months of 2002 compared to the same period in 2001. The increase
was primarily the result of a $255 thousand, or 6.15%, increase in salaries and
benefits. 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 in 2001 offset
the $822 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. There was a
$106 thousand, or 5.21%, increase in office expenses and insurance, primarily
due to the increase in advertising and public relation expenses. There was a $16
thousand, or 1.68%, increase in data processing expense for the nine months
ended September 30, 2002 as compared to the same period 2001. There was also a
$39 thousand increase in occupancy and equipment expense for the first nine
months of 2002 compared to the same period in 2001.
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 September 30, 2002, total nonperforming loans were
$815 thousand, or 0.36% 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.
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 September 30, 2002, Indian River had two
loans with specific allocations in the aggregate amount of $308 thousand, a
decline of $1 thousand since June 30, 2002. 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
17
substandard and loans past due 90 days or more are graded doubtful. As of
September 30, 2002, 14.35% 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 (real estate loans are further
sub-categorized) 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 are based on FDIC quarterly
banking profile report as of June 30, 2002 for all institutions. Indian River
feels that these factors are a better indication of overall loan performance in
the nation. The third quarter 2002 factors are: 0.14% for real estate loans,
1.60% for all non real estate commercial loans, 7.05% for credit card loans,
3.49% for consumer loans, 0.52% for non-real estate agricultural loans, and
0.25% for other revolving loans. In addition to historical experience factors,
Indian River also provides for losses due to economic factors, concentration of
credit and portfolio composition changes.
As a result of Indian River's low charge-offs and low non-performing
loans to total loans outstanding, 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 actual loans per category as of September
30, 2002, verses prior quarters where the average loans per category to total
average loans was used. 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) September 30, 2002 December 31, 2001
-----------------------------------------------------
Amount % Amount %
-----------------------------------------------------
Commercial, Agricultural $ 503 6.6 % $ 524 8.3 %
Real estate construction 410 17.7 154 15.5
Real estate mortgage 1,472 68.9 1,775 68.3
Consumer, other 669 6.8 366 7.9
Unallocated 97 - - -
------ -------
Total Allowance for loan losses $3,151 100.0 % $ 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 $815 thousand at September 30, 2002
compared to $290 thousand at December 31, 2001. The percentage of non-performing
assets to total assets increased to 0.19% at September 30, 2002 from 0.08% at
December 31, 2001.
Non-performing assets at September 30, 2002 consisted of non-accrual
loans in the amount of $705 thousand and loans past due over 90 days of $110
thousand.
Indian River did not have any other real estate owned as of September
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)
September 30, 2002 December 31, 2001
--------------------------------------------------------------------------
Nonaccrual Loans Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
Real estate mortgage $ 705 100 % $ 120 90.2 %
Installment - - 13 9.8
Accrual Loans - past due 90 days or more
September 30, 2002 December 31, 2001
- ---------------------------------------------------------------------------------------------------------------------
Amount % Amount %
--------------------------------------------------------------------------
Real estate mortgage $ 85 76.6 % $ 125 79.6 %
Installment 25 23.4 32 20.4
For the nine months ended September 30, 2002, $25 thousand in gross
interest income would have been recorded if the $705 thousand of nonaccrual
loans had been accruing interest throughout this period.
At September 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 $2.6 million, or 37.56% of income before
taxes, for the first nine months of 2002 and $1.4 million, or 36.4% of income
before taxes, for the same period in 2001.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Income
- ----------
For the third quarter of 2002, Indian River recorded net income of $1.4
million. This was $387 thousand, or 38.32%, more than the $1.0 million in net
income recorded for the third quarter of 2001. Basic earnings per share
increased $0.20 during the three months ended September 30, 2002, to $0.72, as
compared to the $0.52 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 $0.51 to $0.70 during the third quarter of 2002, as
compared to the same period in 2001.
Net interest income increased $934 thousand, or 27.98%, for the third
quarter of 2002 compared to the same period in 2001. This increase in net
interest income was complemented by an increase in other income of $157
thousand, or 16.65%. This increase was offset by a $426 thousand, or 16.83%,
increase in other expenses, and an increase in taxes on income of $278 thousand,
or 49.64%.
19
Net Interest Income
- -------------------
Net interest income increased to $4.2 million for the third quarter of
2002 from $3.3 million for the same period in 2001. The $185 thousand, or 2.79%,
decrease in interest income was offset by a $1.1 million, or 34.11% decrease in
interest expense. Yields on Indian River's interest-earning assets decreased by
91 basis points, and the rates paid on Indian River's interest-bearing
liabilities decreased by 168 basis points. This resulted in an increase in the
interest rate spread to 3.85% for the third quarter of 2002 from 3.08% for the
third quarter of 2001. Net interest margin increased to 4.25% from 3.69%. The
ratio of average interest-earning assets to average interest-bearing liabilities
for the third quarter of 2002 was 1.18%, compared to 1.17% for the third quarter
of 2001.
Total interest income for the third quarter of 2002 was $6.4 million, a
2.79% decrease from $6.6 million during the same period in 2001. The principal
factor in the decrease of interest income was the decrease in average yields on
interest-earning assets, which more than offset the $39.5 million increase in
average earning assets. Indian River's average loans increased $12.4 million, or
5.79%, and the related yield decreased to 7.47% for the third quarter of 2002
from 8.25% in 2001. During the same period, average investment securities
increased $36.0 million, or 26.93%, and the related yield decreased to 5.07%
from 6.17%. Average federal funds sold decreased $8.9 million, or 72.95%, and
the related yield decreased to 1.66% from 3.37% during the same period.
Total interest expense for the third quarter of 2002 was $2.2 million,
a decrease of 34.11% from $3.3 million for the same period in 2001. The decrease
in total expense can be attributed to a decrease in the rate paid on total
interest-bearing liabilities to 2.55% for the third quarter of 2002 from 4.23%
in the third quarter of 2001. This was offset by an increase in the average
interest-bearing liabilities of $28.9 million, or 9.39% during this period. The
decrease in interest rates on savings accounts in the third 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 207
basis points, to 3.29% in the third quarter of 2002, compared to the third
quarter of 2001. This is the result time deposits maturing and repricing since
the third quarter of 2001.
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 September 30,
2002 2001
-------------------------------------------------------------------------------------
(In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
------------- ---------- ----------- ------------ ---------- -----------
Investments (1) $ 169,592 $ 2,167 5.07% $ 133,609 $ 2,078 6.17%
Federal funds sold 3,297 14 1.66% 12,189 104 3.37%
Loans receivable(2) less loans in
process 225,867 4,253 7.47% 213,506 4,437 8.25%
------------- ---------- ----------- ------------ ---------- -----------
Total interest-earning assets 398,756 6,434 6.40% 359,304 6,619 7.31%
---------- ----------- ---------- -----------
Noninterest-earning assets 21,800 18,277
------------- ------------
Total $ 420,556 $ 377,581
============= ============
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $ 49,015 $ 111 0.90% $ 31,955 $ 99 1.22%
Savings accounts 111,403 574 2.04% 89,163 786 3.50%
Certificates of deposit 127,076 1,053 3.29% 136,533 1,844 5.36%
Other 49,104 424 3.43% 50,060 552 4.40%
------------- ---------- ----------- ------------ ---------- -----------
Total interest-bearing
Liabilities
336,598 2,162 2.55% 307,711 3,281 4.23%
---------- ----------- ---------- -----------
Noninterest-bearing
Liabilities 51,436 43,543
Stockholders' equity 32,522 26,327
------------- ------------
Total $ 420,556 $ 377,581
============= ============
Net interest income and net yield
on interest-earning assets $ 4,272 4.25% $ 3,338 3.69%
========== =========== ========== ===========
(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 $157 thousand, or 16.65%, for the third
quarter of 2002 compared to the same period of 2001. This increase was due to
increases in gains on sale of loans of $173 thousand, or 99.43%, and other
income of $57 thousand, or 30.65%. Included in other income is a $41 thousand
increase in investment services income. There was also an increase in service
charges and fees of $30 thousand, or 7.18%. These increases were offset by a
decrease in gain on sale of securities of $103 thousand, or 62.42%.
21
Other Expenses
- --------------
Indian River's other expenses increased $426 thousand for the third
quarter of 2002 compared to the same period in 2001. Salary and benefit expenses
increased $310 thousand, or 24.78% for the third quarter of 2002 compared to the
same quarter in 2001. The full-time equivalent number of employees was 140 as of
September 30, 2002 compared to 126 as of September 30, 2001. The increase was
necessary to support the growth of Indian River. There was a $120 thousand, or
20.9%, increase in office expenses and insurance. This is due primarily to the
increase in advertising and public relation expenses. There was a $22 thousand,
or 5.70%, increase in occupancy and equipment expense. This is due to increases
in depreciation expenses for hardware and software, as software upgrades and
equipment for additional staff is necessary. These increases were offset by a
decrease in data processing expense of $26 thousand, or 8.13%.
Taxes on Income
- ---------------
Indian River's tax expense was $838 thousand for the third quarter of
2002 and $560 thousand for the same period in 2001. This increase was entirely
due to the increase in income before taxes.
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 $161.5 million at September 30, 2002, reflected an
increase of $22.7 million from December 31, 2001, or 16.37%. Funds available
through short-term borrowing and asset maturities are considered adequate to
meet all current needs. At September 30, 2002, Indian River Bank had available
credit of $11.0 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
$55.5 million borrowing line with the Federal Home Loan Bank of Atlanta. The
outstanding balance on this line decreased to $27.6 million as of September 30,
2002, from $27.9 at December 31, 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 nine months of 2002, total stockholders' equity increased
$5.4 million, or 19.56%, as a result of earnings and an increase in accumulated
other comprehensive income. Earnings contributed $4.2 million to stockholders'
equity this nine month period. Accumulated other comprehensive gains increased
stockholders' equity by $1.1 million during this nine 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 September 30,
2002, Indian River exceeded all capital requirements, having a total risk-based
capital ratio of 16.07%, a Tier 1 risk-based capital ratio of 14.84%, and a
leverage ratio of 9.12%. These ratios have increased in part due to the issuance
of $7 million aggregate liquidation amount of trust preferred securities, which
are included in Tier 1 capital. See Note 8 to the Unaudited Consolidated
Financial Statements for additional information. As of September 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 13.26% and 12.03%, and a leverage ratio of 7.41%.
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.
22
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.
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.
23
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:
September 30, 2002 September 30, 2001
--------------------------------------------- ---------------------------------------------
Percentage Percentage
Percentage Change in Percentage Change in
Change in Change in Percentage Market Value Change in Percentage Market Value
Interest Rates Net Interest Change in of Portfolio Net Interest Change in of Portfolio
(Basis Points) income Net Income Equity income Net Income Equity
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
+200 -4.83% -10.13% -18.60% -4.59% -3.93% -11.15%
+100 -2.42% -5.06% -7.68% -1.92% -1.82% -4.36%
0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
-100 2.42% 5.10% 3.06% 0.97% 2.00% -0.46%
-200 4.23% 8.86% 5.04% 1.72% 3.39% -3.08%
As the table indicates, the Bank is susceptible to lower earnings in a
rising rate environment and will experience slightly higher earnings in a
declining rate situation. The Bank has a negative GAP position which is
reflected in the table. The Bank's position has improved, somewhat since the
quarter ended June 30, 2002 when the Bank was susceptible to lower earnings in
either a rising or a declining rate scenario (a condition known as negative
convexity). The improvement is a result of two factors: (1) the Bank's cost of
funds has declined to the point that in the hypothetical downward shifts
contemplated in the table, much of the bank's deposits would not earn any
interest which would further reduce the cost of funds and (2) the Bank's
projected loan growth has increased to the point that increased interest income
would exceed the effects of accelerated repayments of loans and investments that
are inherent in significant downward shifts in market rates.
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.
24
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-14 under the Securities Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
adequate. There were no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors subsequent to the date of the evaluation
that could significantly affect those controls.
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
At September 30, 2002, the Company's new wholly owned
statutory business trust, Indian River Capital Trust I (the "Trust"), issued
$7.0 million of floating rate preferred capital securities to a third party. The
Trust invested the proceeds in an equivalent amount of junior subordinated debt
securities of the Company bearing an interest rate equal to the coupon rate on
the securities issued by the Trust. After the payment of placement fees, the
Company received an aggregate of $6,790,000 from these transactions. The net
proceeds received by the Company will be used for the general corporate purposes
of the Company and the Bank, including supporting continued expansion activities
through the establishment and/or acquisition of additional branch offices and
possible corporate acquisitions. The subordinated debt securities, which are the
sole assets of the Trust, are subordinate and junior in right of payment to all
present and future senior debt (as defined in the indenture) and certain other
financial obligations of the Company. The Company and the Trust issued these
securities in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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)
4(a) Indenture, dated as of September 30,
2002 between Indian River Banking Company and Wells
Fargo Bank, National Association, as trustee (2)
4(b) Amended and Restated Declaration of Trust, dated as of
September 30, 2002 among Indian River Banking Company, Wells
Fargo Bank, National Association as Property Trustee, and
Paul A. Beindorf, Diana L. Walker and Phillip L. Tasker as
Administrative Trustees (2)
4(c) Guarantee Agreement dated as of September 30, 2002, between
Indian River Banking Company and Wells Fargo Bank, National
Association, as trustee (2)
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)
(2) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. Indian River agrees to provide a copy of these documents to the
Commission upon request.
26
(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 October 18, 2002, Indian River filed a report on Form 8-K, under
Item 5 thereof, reporting earnings for the quarter ended September 30, 2002.
27
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)
November 12, 2002 By: /s/ Paul A. Beindorf
----------------------------------------
Paul A. Beindorf, President and
Chief Executive Officer
November 12, 2002 By: /s/ Phillip Tasker
----------------------------------------
Phillip Tasker, Chief Financial Officer
28
CERTIFICATION
I, Paul A. Beindorf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Indian River Banking
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Paul A. Beindorf
--------------------
President and Chief Executive Officer
CERTIFICATION
I, Phillip L. Tasker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Indian River Banking
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Phillip L. Tasker
-----------------------------------
Chief Financial Officer