-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CDLNUVt8bzb/EA2qOK2p1jYm8jmXhyzsGCqCbqUI4IiiATREaqATRpzPqoNa6vxz HZvphdwKVFKeqekWw0Ub0A== 0000908834-02-000104.txt : 20020415 0000908834-02-000104.hdr.sgml : 20020415 ACCESSION NUMBER: 0000908834-02-000104 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER VALLEY BANCORP CENTRAL INDEX KEY: 0001015593 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351984567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21765 FILM NUMBER: 02595857 BUSINESS ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 BUSINESS PHONE: 8122734949 MAIL ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 10KSB 1 rv2001_10k.txt FORM 10-KSB FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 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 000-21765 RIVER VALLEY BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1984567 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 430 Clifty Drive P.O. box 1590 Madison, Indiana 47250-0590 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (812) 273-4949 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [ X ] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer had $15,006,000 in revenues for the fiscal year ended December 31, 2001. As of February 19, 2002, there were issued and outstanding 809,951 shares of the issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the issuer, computed by reference to the last known sale price of such stock as of March 21, 2002, was $14,993,797. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2001 are incorporated into Part II. Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 37 pages RIVER VALLEY BANCORP Form 10-KSB INDEX Page ---- FORWARD LOOKING STATEMENT ................................................ 3 PART I Item 1. Description of Business...................................... 3 Item 2. Description of Properties.................................... 30 Item 3. Legal Proceedings............................................ 31 Item 4. Submission of Matters to a Vote of Security Holders.......... 31 Item 4.5. Executive Officers of the Registrant......................... 31 PART II Item 5. Market for Common Equity and Related Stockholder Matters..... 32 Item 5.5. Selected Consolidated Financial Data......................... 33 Item 6. Management's Discussion and Analysis or Plan of Operation.... 33 Item 6A. Quantitative and Qualitative Disclosures About Market Risk... 33 Item 7. Financial Statements......................................... 33 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 34 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.......... 34 Item 10. Executive Compensation....................................... 34 Item 11. Security Ownership of Certain Beneficial Owners and Management................................................. 34 Item 12. Certain Relationships and Related Transactions............... 34 PART IV Item 13. Exhibits and Reports on Form 8-K............................. 35 SIGNATURES................................................................. 36 FORWARD LOOKING STATEMENT This Annual Report on Form 10-KSB ("Form 10-KSB") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-KSB and include statements regarding the intent, belief, outlook, estimates or expectations of the Holding Company (as defined below), its directors, or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-KSB are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-KSB identifies important factors that could cause such differences. These factors include but are not limited to changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Description of Business. General River Valley Bancorp, an Indiana corporation (the "Holding Company" and together with the "Bank", the "Company"), was organized in May 1996. On December 20, 1996, it acquired the common stock of Madison First Federal Savings and Loan Association ("First Federal") upon the conversion of First Federal from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), and acquired 120,434 shares of common stock, $8.00 par value per share (the "Citizens Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6% of the issued and outstanding shares of Citizens' common stock (the "Acquisition"). On November 22, 1997, Citizens merged with and into First Federal (the "Merger") pursuant to an Agreement and Plan of Reorganization entered into among the Holding Company, First Federal and Citizens dated September 26, 1997 (the "Agreement"). Pursuant to the Agreement, each outstanding share of Citizens common stock held by shareholders other than the Holding Company was converted into the right to receive $30 cash, payable by the Holding Company, and shares of Citizens held by the Holding Company and its subsidiaries were canceled. Also, pursuant to the Agreement, First Federal changed its corporate title to River Valley Financial Bank (the "Bank"). Following the effective time of the Merger, the Holding Company remained as the sole shareholder of the Bank, and Citizens' status as a national banking association terminated. For ease of reference, First Federal will be referred to as the "Bank" hereinafter both with respect to historical information concerning events and results of operations prior to the Merger and with respect to information relating to events occurring after the Merger. The Conversion of the Bank was accounted for in a manner similar to a pooling of interests, and the Acquisition of Citizens was accounted for as a purchase transaction. Under purchase accounting, the acquired assets and liabilities of Citizens were recorded at fair value as of December 20, 1996. Because the assets and liabilities of the Bank were recorded at fair value as of the date of the Acquisition, the financial data prior to December 20, 1996 provided herein does not include information derived from the financial statements of Citizens. Rather, such financial data provided herein includes only information derived from the financial statements of the Bank. From and after December 20, 1996, the operating results of Citizens and the Bank are consolidated with those of the Holding Company. The Merger was accounted for in a manner similar to a pooling of interests. The Bank was organized as a federally chartered savings and loan association in 1875. The Bank is the oldest independent financial institution headquartered in Jefferson County, Indiana. Citizens was organized as a national bank in 1981 and, until the Merger, conducted its business from four full-service offices, all located in Jefferson County, Indiana. Following the Merger, these offices became branch offices of the Bank. Prior to the Conversion, the Bank conducted its business from three full-service offices and one stand-alone drive-through branch, all located in Jefferson County, Indiana. As a result of the Acquisition, the Holding Company became subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System (the "FRB"). As a condition to the Holding Company obtaining the requisite approval from the FRB for the Acquisition, the Holding Company committed to cause the Bank to (i) enter into a definitive agreement to sell the Bank's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and deposits originated at that branch, within 180 days of consummation of the Acquisition. On February 28, 1997, the Bank sold its Hanover, Indiana branch to People's Trust Company based in Brookville, Indiana ("People's Trust"), pursuant to that commitment. Deposits totaling $6.8 million were assumed by People's Trust, and the Bank recorded an after tax gain of $125,000 on the transaction. As a result of the Merger and the resulting termination of Citizens' status as a national banking association, the Holding Company is no longer subject to regulation by the FRB as a bank holding company and is instead regulated by the Office of Thrift Supervision (the "OTS") as a savings and loan holding company. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction, or refinancing of one- to four- family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 45.1% of the Bank's total loan portfolio at December 31, 2001. The Bank had not identified any loans as held for sale at December 31, 2001. The Bank also offers multi-family mortgage loans, non-residential real estate loans, land loans, construction loans, nonmortgage commercial loans and consumer loans. Its principal market area is Jefferson County, Indiana and adjoining counties. Loan Portfolio Data. The following table sets forth the composition of the Bank's loan portfolio, including loans held for sale, as of December 31, 2001, 2000 and 1999 by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process.
At December 31, ----------------------------------------------------------- 2001 2000 1999 ----------------- ------------------- ----------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- TYPE OF LOAN (Dollars in thousands) Residential real estate: One-to four-family...................... $73,431 45.1% $ 77,304 52.0% $ 69,588 58.6% Multi-family............................ 3,932 2.4 3,319 2.2 2,918 2.5 Construction............................ 6,874 4.2 6,827 4.6 4,163 3.5 Nonresidential real estate................ 36,898 22.7 25,944 17.4 12,758 10.7 Land loans................................ 4,994 3.1 4,269 2.9 10,079 8.5 Consumer loans: Automobile loans........................ 12,320 7.6 11,118 7.5 6,922 5.8 Loans secured by deposits............... 537 .3 574 .4 548 .5 Home improvement loans.................. -- -- 6 -- 34 -- Other................................... 4,549 2.8 2,988 2.0 2,040 1.7 Commercial loans.......................... 19,216 11.8 16,361 11.0 9,780 8.2 -------- ---- -------- ---- -------- ---- Gross loans receivable.................... 162,751 100.0 148,710 100.0 118,830 100.0 Add/(Deduct): Deferred loan origination costs......... 356 .2 324 .2 245 .2 Undisbursed portions of loans in process............................... (3,163) (2.0) (6,362) (4.3) (2,422) (2.0) Allowance for loan losses............... (1,972) (1.3) (1,702) (1.1) (1,522) (1.3) -------- ---- -------- ---- -------- ---- Net loans receivable...................... $157,972 96.9% $140,970 94.8% $115,131 96.9% ======== ==== ======== ==== ======== ====
The following table sets forth certain information at December 31, 2001 regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Due During Years Ended December 31, ------------------------------------------------------------------------ Balance Outstanding at 2005 2007 2012 2017 December 31, to to to and 2001 2002 2003 2004 2006 2011 2016 following -------------- -------- ------- ------- -------- -------- -------- --------- (In thousands) Residential real estate loans: One-to four-family............ $ 73,431 $ 1,054 $ 252 $ 347 $ 1,364 $ 6,571 $14,703 $49,140 Multi-family.................. 3,932 -- 3 -- 16 480 883 2,550 Construction.................. 6,874 6,874 -- -- -- -- -- -- Nonresidential Real estate loans............. 36,898 4,906 17 99 554 2,186 7,033 22,103 Land loans...................... 4,994 2,476 276 28 47 432 560 1,175 Consumer loans: Loans secured by deposits..... 537 298 11 98 98 24 -- 8 Other loans................... 16,869 1,078 1,349 2,974 9,396 1,568 504 -- Commercial loans................ 19,216 9,443 1,042 495 2,380 1,478 2,070 2,308 -------- ------- ------ ------ ------- ------- ------- ------- Total........................ $162,751 $26,129 $2,950 $4,041 $13,855 $12,739 $25,753 $77,284 ======== ======= ====== ====== ======= ======= ======= =======
The following table sets forth, as of December 31, 2001, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates. Due After December 31, 2002 --------------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- --------- (In thousands) Residential real estate loans: One-to four-family ............ $ 14,446 $ 57,931 $ 72,377 Multi-family .................. 846 3,086 3,932 Construction .................. -- -- -- Non-residential real estate loans 5,092 26,900 31,992 Land loans ...................... 816 1,702 2,518 Consumer loans: Loans secured by deposits ..... 239 -- 239 Other loans ................... 15,628 163 15,791 Commercial loans ................ 5,386 4,387 9,773 -------- -------- -------- Total ....................... $ 42,453 $ 94,169 $136,622 ======== ======== ======== Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $73.4 million, or 45.1% of the Bank's portfolio of loans, at December 31, 2001, consisted of one- to four-family residential loans, of which approximately 80.0% had adjustable rates. The Bank currently offers adjustable rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, although until late 1995, the Bank's ARMs were indexed to the 11th District Cost of Funds. Some of the Bank's residential ARMs are originated at a discount or "teaser" rate which is generally 150 to 175 basis points below the "fully indexed" rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. The Bank's ARMs have a current margin above such index of 2.5% for owner-occupied properties and 3.0% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank's portfolio at December 31, 2001 provide for maximum rate adjustments per year and over the life of the loan of 1% and 4%, respectively, although the Bank also originates residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1.5% and 6%, respectively. The Bank's ARMs generally provide for interest rate minimums of 1% below the origination rate. The Bank's residential ARMs are amortized for terms up to 30 years. Adjustable rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank currently offers fixed rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 30 years. Prior to the Merger, the Bank retained all of its fixed rate residential mortgage loans in its portfolio; however, after the effective date of the Merger, the Bank began underwriting its fixed rate residential mortgage loans for potential sale to the Federal Home Loan Mortgage Corporation (the "FHLMC") on a servicing-retained basis. At December 31, 2001, approximately 20.0% of the Bank's one- to four-family residential mortgage loans had fixed rates. Before the Merger, Citizens offered fixed rate one- to four-family residential mortgage loans in accordance with the guidelines established by the FHLMC to facilitate the sale of such loans to the FHLMC in the secondary market. These loans amortized on a monthly basis with principal and interest due each month and were written with terms of 15, 20 and 30 years. Citizens retained the servicing on all loans sold to the FHLMC. At December 31, 2001, the Bank had approximately $56.1 million of fixed rate residential mortgage loans which were sold to the FHLMC and for which the Bank provides servicing. The Bank generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the "Loan-to-Value Ratio") exceeds 95% and generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 80%. The Bank generally requires private mortgage insurance on all conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of such insurance is factored into the annual percentage yield on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. Substantially all of the one- to four-family residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, the Bank does permit assumptions of existing residential mortgage loans on a case-by-case basis. At December 31, 2001, the Bank had outstanding approximately $4.8 million of home equity loans, with unused lines of credit totaling approximately $4.6 million. No home equity loans were included in non-performing assets on that date. The Bank's home equity lines of credit are adjustable rate lines of credit tied to the prime rate and are amortized based on a 10- to 20-year maturity. The Bank generally allows a maximum 90% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans equal 1.5% of the outstanding principal balance per month. The Bank also offers indemnification mortgage loans ("ID Mortgage Loans"), which are typically written as fixed rate second mortgage loans. The Bank's ID Mortgage Loans are written for terms of five years and generally have maximum Loan-to-Value Ratios of 80%. The Bank also offers standard second mortgage loans, which are adjustable rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity with a current margin above such index of 3%. The Bank's second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 1% and 4%, respectively. The Bank's second mortgage loans have terms of 10 to 30 years. At December 31, 2001, $37,000 of one- to four-family residential mortgage loan, or 0.02% of total loans, were included in the Bank's non-performing assets. Construction Loans. The Bank offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Generally, construction loans are written as 12-month fixed rate loans with interest calculated on the amount disbursed under the loan and payable on a semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value Ratio for its construction loans, although the Bank may permit an 85% Loan-to-Value Ratio for one- to four-family residential construction loans. Inspections are generally made prior to any disbursement under a construction loan, and the Bank does not charge commitment fees for its construction loans. At December 31, 2001, $6.9 million, or 4.2% of the Bank's total loan portfolio, consisted of construction loans. The largest construction loan at December 31, 2001 totaled $720,000. No construction loans were included in non-performing assets on that date. While providing the Bank with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and the Bank taking title to the project. Nonresidential Real Estate Loans. At December 31, 2001, $36.9 million, or 22.7% of the Bank's portfolio, consisted of nonresidential real estate loans. Nonresidential real estate loans are primarily secured by real estate such as churches, farms and small business properties. The Bank originates nonresidential real estate loans as one-year adjustable rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, written for maximum terms of 30 years. The Bank's adjustable rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 1% and 4%, respectively, and interest rate minimums of 1% below the origination rate. The Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate collateral. The Bank underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, evaluates the borrower's ability to service the debt from the net operating income of the property. The Bank's largest nonresidential real estate loan as of December 31, 2001 was $2.8 million and was secured by three commercial buildings in (or close in proximity to) Madison, Indiana. Nonresidential real estate loans totaling $164,000 were included in non-performing assets at December 31, 2001. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-family Loans. At December 31, 2001, approximately $3.9 million, or 2.4% of the Bank's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). The Bank writes multi-family loans on terms and conditions similar to its nonresidential real estate loans. The largest multi-family loan in the Bank's portfolio as of December 31, 2001 was $1.5 million and was secured by a 46-unit apartment complex in Hanover, Indiana. No multi-family loans were included in non-performing assets on that date. Multi-family loans, like nonresidential real estate loans, involve a greater risk than residential loans. See "Nonresidential Real Estate Loans" above. Also, the loan-to-one borrower limitations restrict the ability of the Bank to make loans to developers of apartment complexes and other multi-family units. Land Loans. At December 31, 2001, approximately $5.0 million, or 3.1% of the Bank's total loan portfolio, consisted of mortgage loans secured by undeveloped real estate. The Bank's land loans are generally written on terms and conditions similar to its nonresidential real estate loans. Some of the Bank's land loans are land development loans; i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At December 31, 2001, the Bank's largest land loan totaled $980,000. Land loans totaling $18,000, or 0.01% of the Bank's total loan portfolio, were included in non-performing assets as of December 31, 2001. Such loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost-overruns rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause the Bank to take title to partially improved land that is unmarketable without further capital investment. Commercial Loans. At December 31, 2001, $19.2 million, or 11.8% of the Bank's total loan portfolio, consisted of nonmortgage commercial loans. The Bank's commercial loans are written on either a fixed rate or an adjustable rate basis with terms that vary depending on the type of security, if any. At December 31, 2001, approximately 16.9% of the Bank's commercial loans were secured by collateral, such as equipment, inventory and crops. The Bank's adjustable rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At December 31, 2001, the largest commercial loan was $1.1 million. As of the same date, commercial loans totaling $346,000 were included in non-performing assets. Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than the Bank's average residential mortgage loans. Consumer Loans. The Bank's consumer loans, consisting primarily of auto loans, home improvement loans, unsecured installment loans, loans secured by deposits and mobile home loans aggregated approximately $17.4 million at December 31, 2001, or 10.7% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans, except loans secured by deposits, are fixed rate loans with terms that vary from six months (for unsecured installment loans) to 60 months (for home improvement loans and loans secured by new automobiles). At December 31, 2001, 89.0% of the Bank's consumer loans were secured by collateral. The Bank's loans secured by deposits are made in amounts up to 90% of the current account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate. The Bank offers both direct and indirect automobile loans. Under the Bank's indirect automobile program, participating automobile dealers receive loan applications from prospective purchasers of automobiles at the point of sale and deliver them to the Bank for processing. The dealer receives a portion of the interest payable on approved loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections depend upon the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2001, consumer loans amounting to $164,000 were included in non-performing assets. Origination, Purchase and Sale of Loans. The Bank historically has originated its ARMs pursuant to its own underwriting standards which did not conform with the standard criteria of the FHLMC or Federal National Mortgage Association ("FNMA"). The Bank's ARMs varied from secondary market criteria because, among other things, the Bank did not require current property surveys in most cases and did not permit the conversion of those loans to fixed rate loans in the first three years of its term. If the Bank desired to sell its non-conforming ARMs, it may experience difficulty in selling such loans quickly in the secondary market. The Bank began underwriting fixed rate residential mortgage loans for potential sale to the FHLMC on a servicing-retained basis after the Merger. Prior to the Merger, Citizens also originated loans for sale to the FHLMC and retained servicing rights for a fee of one-fourth of 1% of the principal balance of all loans serviced. Loans originated for sale to the FHLMC in the secondary market are originated in accordance with the guidelines established by the FHLMC and are sold promptly after they are originated. The Bank receives a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. At December 31, 2001, the Bank serviced $56.1 million in loans sold to the FHLMC. The Bank confines its loan origination activities primarily to Jefferson County and surrounding counties. At December 31, 2001, the Bank held loans totaling approximately $16.0 million that were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from existing customers, real estate brokers and newspaper and periodical advertising. Loan applications are taken at any of the Bank's four full-service offices. The Bank's loan approval processes are intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank evaluates the employment and credit history and information on the historical and projected income and expenses of its borrowers. Under the Bank's lending policy, a loan officer may approve mortgage loans up to $75,000, a Senior Loan Officer may approve mortgage loans up to $150,000 and the President may approve mortgage loans up to $240,000. All other mortgage loans must be approved by at least four members of the Bank's Board of Directors. The lending policy further provides that loans secured by readily marketable collateral, such as stock, bonds and certificates of deposit may be approved by a Loan Officer for up to $75,000, by a Senior Loan Officer for up to $150,000 and by the President up to $300,000. Loans secured by other non-real estate collateral may be approved by a Loan Officer for up to $25,000, by a Senior Loan Officer up to $75,000 and by the President up to $150,000. Finally, the lending policy provides that unsecured loans may be approved by a Loan Officer or Senior Loan Officer up to $10,000 or by the President up to $25,000. All other unsecured loans or loans secured by non-real estate collateral must be approved by at least four members of the Bank's Board of Directors. The Bank generally requires appraisals on all real property securing its loans and requires an attorney's opinion or title insurance and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing the loan if the property is in a flood plain. The Bank also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not require escrow accounts for insurance premiums or taxes. The Bank's underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations. The Bank occasionally purchases participations in commercial loans, nonresidential real estate and multi-family loans from other financial institutions. At December 31, 2001, the Bank held in its loan portfolio participations in these types of loans aggregating approximately $151,000 that it had purchased, all of which were serviced by others. The Bank generally does not sell participations in any loans that it originates. The following table shows loan origination and repayment activity for the Bank during the periods indicated: Year Ended December 31, ------------------------------- 2001 2000 1999 ------------------------------- (In thousands) Loans Originated: Residential real estate loans(1) ..... $ 76,409 $ 24,630 $ 28,816 Multi-family loans ................... 730 133 2,092 Construction loans ................... 12,638 13,120 4,838 Non-residential real estate loans .... 21,486 17,308 3,995 Land loans ........................... 2,363 2,499 4,554 Consumer and other loans ............. 14,610 12,708 5,945 Commercial loans ..................... 19,626 14,768 6,625 Total loans originated ............ 147,862 85,166 56,865 Reductions: Sales ................................ 45,790 2,614 14,253 Principal loan repayments and other(2) 85,070 56,713 39,866 Total reductions .................. 130,860 59,327 54,119 Net increase ......................... $ 17,002 $ 25,839 $ 2,746 ======== ======== ======== - ------------------------------- (1) Includes loans originated for sale in the secondary market. (2) Other items consist of amortization of deferred loan origination costs, the provision for losses on loans and net charges to the allowance for loan losses. Origination and Other Fees. The Bank realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when management determines that the collectibility of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. The Bank delivers delinquency notices with respect to all mortgage loans contractually past due 5 to 10 days. When loans are 30 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Commercial and consumer loans are treated similarly. Interest income on consumer, commercial and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued and the loan is written-off, or written down to the fair value of the collateral securing the loan. It is the Bank's policy to recognize losses on these loans as soon as they become apparent. Non-performing Assets. At December 31, 2001, $690,000, or 0.36% of consolidated total assets, were non-performing loans compared to $621,000, or 0.38% of consolidated total assets, at December 31, 2000. The Bank had no REO at December 31, 2001. The table below sets forth the amounts and categories of the Bank's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days. At December 31, ---------------------------- 2001 2000 1999 -------- --------- --------- (In thousands) Non-performing assets: Non-performing loans ..................... $ 690 $ 621 $ 857 Troubled debt restructurings ............. 1,486 1,314 835 ------ ------ ------ Total non-performing loans and troubled debt restructurings .................. 2,176 1,935 1,692 Foreclosed real estate ................... -- -- -- ------ ------ ------ Total non-performing assets ............ $2,176 $1,935 $1,692 ====== ====== ====== Total non-performing loans and troubled debt restructurings to total loans ............ 1.34% 1.30% 1.42% ==== ==== ==== Total non-performing assets to total assets. 1.14% 1.19% 1.22% ==== ==== ==== At December 31, 2001, the Bank held loans delinquent from 30 to 89 days totaling $847,000. Other than in connection with these loans and other delinquent loans disclosed in this section, management was not aware of any other borrowers who were experiencing financial difficulties. In addition, there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at December 31, 2001, 2000 and 1999 relating to delinquencies in the Bank's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 2001 At December 31, 2000 At December 31, 1999 ------------------------------------ ----------------------------------- ----------------------------------- 30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More ------------------ ----------------- ----------------- ----------------- ----------------- ----------------- Principal Principal Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------- (Dollars in thousands) Residential real estate loans ..... 5 $110 1 $ 37 4 $ 98 2 $171 5 $186 15 $726 Multi-family loans.. -- -- -- -- -- -- -- -- -- -- -- -- Construction loans.. -- -- -- -- -- -- 1 115 -- -- -- -- Land loans ......... 1 52 1 18 -- -- 1 214 -- -- 1 36 Non-residential real estate loans. -- -- 1 164 -- -- -- -- -- -- -- -- Consumer loans ..... 44 333 19 125 17 82 13 72 32 133 13 72 Commercial loans ... 8 352 15 346 4 60 2 49 2 15 2 23 -- ---- -- ---- -- ---- -- ---- -- ---- -- ---- Total ............ 58 $847 37 $690 25 $240 19 $621 39 $334 31 $857 == ==== == ==== == ==== == ==== == ==== == ==== Delinquent loans to total loans....... 0.94% 0.58% 1.00% ==== ==== ====
Classified Assets. Federal regulations and the Bank's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. At December 31, 2001, the aggregate amount of the Bank's classified assets and general and specific loss allowances were as follows: At December 31, 2001 -------------------- (In thousands) Substandard assets ................................ $1,078 Doubtful assets ................................... 297 Loss assets ....................................... 0 ------ Total classified assets .................. $1,375 ====== General loss allowances ........................... 1,765 Specific loss allowances .......................... 207 ------ Total allowances ......................... $1,972 ====== The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Bank's classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb probable losses from loans at December 31, 2001. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the five years ended December 31, 2001.
Year Ended December 31, ------------------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period.................. $1,702 $1,522 $1,477 $1,276 $1,190 Charge-offs: Single-family residential..................... (31) (4) (17) -- -- Consumer...................................... (107) (71) (86) (140) (254) Commercial.................................... (73) (9) (20) (83) (15) ------ ------ ------ ------ ------ Total charge-offs........................... (211) (84) (123) (223) (269) Recoveries...................................... 31 37 28 149 51 ------ ------ ------ ------ ------ Net charge-offs............................... (180) (47) (95) (74) (218) Provision for losses on loans................... 450 227 140 275 304 Increase due to Acquisition..................... -- -- -- -- -- ------ ------ ------ ------ ------ Balance at end of period...................... $1,972 $1,702 $1,522 $1,477 $1,276 ====== ====== ====== ====== ====== Allowance for loan losses as a percent of total loans outstanding before net items...... 1.21% 1.15% 1.28% 1.29% 1.13% ==== ==== ==== ==== ==== Ratio of net charge-offs to average loans outstanding before net items.................. 0.12% 0.03% 0.08% 0.06% 0.20% ==== ==== ==== ==== ====
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank's allowance for loan losses at the dates indicated.
At December 31, ------------------------------------------------------------ 2001 2000 1999 ------------------ -------------------- ------------------ Percent Percent Percent of loans of loans of loans in each in each in each category category category to total to total to total Amount loans Amount loans Amount loans ------ -------- ------ -------- ------ -------- (Dollars in thousands) Balance at end of period applicable to: Residential real estate .... $ 610 51.7% $ 346 58.8% $ 4 64.6% Nonresidential real estate.. 156 25.8 -- 20.3 -- 19.2 Consumer loans ............. 626 10.7 403 9.9 109 8.0 Commercial loans ........... 365 11.8 106 11.0 -- 8.2 Unallocated ................ 215 -- 847 -- 1,409 -- ------ ----- ------ ----- ------ ----- Total .................... $1,972 100.0% $1,702 100.0% $1,522 100.0% ====== ===== ====== ===== ====== =====
Investments and Mortgage-Backed Securities Investments. The Bank's investment portfolio (excluding mortgage-backed securities) consists of U.S. government and agency obligations, corporate bonds, municipal securities and Federal Home Loan Bank ("FHLB") stock. At December 31, 2001, the investments in the portfolio had a carrying value of approximately $18.1 million, or 9.4%, of the consolidated total assets. The following table sets forth the amortized cost and the market value of the Bank's investment portfolio at the dates indicated.
At December 31, --------------------------------------------------------- 2001 2000 1999 ----------------- ------------------ ----------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Held to Maturity: U.S. Government and agency obligations ............ $ -- $ -- $ -- $ -- $ 1,000 $ 995 Available for Sale: U.S. Government and agency obligations ............ 14,756 14,835 4,921 4,989 -- -- Commercial paper ......... -- -- -- -- 2,972 2,957 Corporate bonds .......... 1,645 1,640 -- -- 1,000 1,000 Municipal securities ..... 335 347 336 340 276 273 ------- ------- ------- ------- ------- ------- Total available for sale . 16,736 16,822 5,257 5,329 4,248 4,230 FHLB stock ................. 1,250 1,250 943 943 943 943 ------- ------- ------- ------- ------- ------- Total investments ....... $17,986 $18,072 $ 6,200 $ 6,272 $ 6,191 $ 6,168 ======= ======= ======= ======= ======= =======
The following table sets forth the amount of investment securities (excluding FHLB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2001.
Amount at December 31, 2001 which matures in --------------------------------------------------------------------------- One Year One Year Five to After or Less to Five Years Ten Years Ten Years ----------------- ------------------ ------------------ ----------------- Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) U.S. Government and agency obligations...................... $-- --% $14,756 4.39% $-- --% $-- --% Municipal Securities................ -- -- 275 6.65 60 8.27 -- -- Corporate Bonds..................... -- -- 1,645 5.72 -- -- -- --
Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed pass-through securities in the form of FHLMC, FNMA and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed pass-through securities generally entitle the Bank to receive a portion of the cash flows from an identified pool of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by its respective agencies as to principal and interest. Except for an $8,000 investment in interest-only certificates, the Bank does not invest in any derivative products. Although mortgage-backed securities generally yield less than individual loans originated by the Bank, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect the Bank's earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because they are guaranteed as to principal repayment by the issuing agency. In addition, the Bank has purchased adjustable rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, the Bank is subject to prepayment risk on such adjustable rate mortgage-backed securities. The Bank attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, the Bank is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans. At December 31, 2001, the Bank had mortgage-backed securities with a carrying value of approximately $838,000 all of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. The following table sets forth the amortized cost and market value of the Bank's mortgage-backed securities at the dates indicated.
At December 31, ------------------------------------------------------- 2001 2000 1999 ------------------ ----------------- ----------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Held to Maturity: Mortgage-backed securities .......... $ -- $ -- $ -- $ -- $2,138 $2,147 Available for Sale: Government agency securities ........ 204 207 1,314 1,289 1,511 1,466 Collateralized mortgage obligations.. 634 624 627 629 627 605 ------ ------ ------ ------ ------ ------ Total mortgage-backed securities... $ 838 $ 831 $1,941 $1,918 $4,276 $4,218 ====== ====== ====== ====== ====== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2001.
Amount at December 31, 2001 which matures in ---------------------------------------------------------------- One Year One Year After or Less to Five Years Five Years ----------------- ------------------ -------------------- Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- (Dollars in thousands) Mortgage-backed securities available for sale.................................. $ -- --% $212 5.97% $626 4.69%
The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the years ended December 31, 2001, 2000 and 1999.
Year Ended December 31, ----------------------------------------- 2001 2000 1999 ------ ------ ------ (In thousands) Beginning balance............................................... $1,918 $4,209 $5,986 Purchases....................................................... -- 1,000 -- Sales proceeds.................................................. (874) (1,006) -- Repayments...................................................... (207) (2,297) (1,709) Losses on sales................................................. (16) (12) -- Premium and discount amortization, net.......................... (6) (20) (30) Unrealized gains (losses) on securities available for sale...... 16 44 (38) ------- ------ ------ Ending balance.................................................. $ 831 $1,918 $4,209 ======= ====== ======
Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its NOW and MMDAs are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. An analysis of the Bank's deposit accounts by type, maturity and rate at December 31, 2001 is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 2001 Deposits Rate - --------------- ------- ------------ -------- -------- (Dollars in thousands) Withdrawable: Non-interest bearing accounts $ 100 $ 11,406 7.9% --% Savings accounts ............ 50 20,089 13.8 2.00 MMDA ........................ 100 13,424 9.2 2.64 NOW accounts ................ 100 17,491 12.0 1.39 -------- ----- ---- Total withdrawable ........ 62,410 42.9 1.60 Certificates (original terms): I.R.A ....................... 250 5,945 4.1 4.40 3 months .................... 2,500 64 -- 2.43 6 months .................... 2,500 2,859 2.0 3.44 9 months .................... 2,500 870 6 4.43 12 months ................... 500 17,182 11.8 4.42 15 months ................... 500 8,950 6.1 4.71 18 months ................... 500 3,134 2.2 5.39 24 months ................... 500 8,929 6.1 5.56 30 months ................... 500 1,689 1.2 4.48 36 months ................... 500 1,276 .9 5.04 48 months ................... 500 563 .4 5.07 60 months ................... 500 1,357 .9 5.56 Jumbo certificates ............. 100,000 30,343 20.8 4.17 -------- ----- ---- Total certificates ........ 83,161 57.1 4.72 -------- ----- ---- Total deposits ................. $145,571 100.0% 3.27% ======== ===== ====
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated: At December 31, -------------------------------- 2001 2000 1999 ------- -------- -------- (In thousands) 2.01 to 3.00%.............$10,647 $ -- $ -- 3.01 to 5.00%............. 43,307 26,782 36,591 5.01 to 6.00%............. 11,417 5,997 14,250 6.01 to 7.00%............. 15,972 42,370 7,445 7.01 to 8.00%............. 1,818 2,309 207 ------- ------- ------- Total...................$83,161 $77,458 $58,493 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2001. Matured certificates, which have not been renewed as of December 31, 2001, have been allocated based upon certain rollover assumptions. Amounts at December 31, 2001 -------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years -------- ------- -------- ------------ (In thousands) 2.01 to 3.00%... $ 8,750 $ 1,430 $ -- $ 467 3.01 to 5.00%... 34,191 5,573 3,203 340 5.01 to 6.00%... 6,452 2,483 1,030 1,452 6.01 to 7.00%... 13,692 2,256 11 13 7.01 to 8.00%... 1,479 239 -- 100 ------- ------- ------- ------- Total......... $64,564 $11,981 $ 4,244 $ 2,372 ======= ======= ======= ======= The following table indicates the amount of the Bank's jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2001. At December 31, 2001 -------------------- Maturity Period (In thousands) Three months or less............................. $19,037 Greater than three months through six months..... 4,367 Greater than six months through twelve months.... 4,180 Over twelve months............................... 2,759 ------- Total......................................... $30,343 ======= The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 2001 Deposits 2000 2000 Deposits 1999 1999 Deposits ------------ ------- -------- ------------ -------- -------- ------------ -------- (Dollars in thousands) Withdrawable: Non-interest bearing accounts ................ $ 11,406 7.9% $ 2,236 $ 9,170 7.0% $ 1,267 $ 7,903 6.9% Savings accounts .......... 20,089 13.8 (1,119) 21,208 16.3 (5,432) 26,640 23.3 MMDA ...................... 13,424 9.2 6,114 7,310 5.6 424 6,886 6.0 NOW accounts .............. 17,491 12.0 2,412 15,079 11.6 750 14,329 12.6 -------- ----- -------- -------- ----- -------- -------- ----- Total withdrawable ...... 62,410 42.9 9,643 52,767 40.5 (2,991) 55,758 48.8 Certificates (original terms): I.R.A ..................... 5,945 4.1 (551) 6,496 5.0 (395) 6,891 6.0 3 months .................. 64 -- 22 42 -- (287) 329 .3 6 months .................. 2,859 2.0 338 2,521 1.9 (4,419) 6,940 6.1 9 months .................. 870 6 (6,006) 6,876 5.3 5,851 1,025 .9 12 months ................. 17,182 11.8 610 16,572 12.7 2,692 13,880 12.1 15 months ................. 8,950 6.1 5,158 3,792 2.9 (2,803) 6,595 5.8 18 months ................. 3,134 2.2 (2,730) 5,864 4.5 5,044 820 .7 24 months ................. 8,929 6.1 4,913 4,016 3.1 3,677 339 .3 30 months ................. 1,689 1.2 (90) 1,779 1.4 (2,941) 4,720 4.1 36 months ................. 1,276 .9 935 341 .3 (176) 517 .5 48 months ................. 563 .4 195 368 .3 (121) 489 .4 60 months ................. 1,357 .9 274 1,083 .8 (980) 2,063 1.8 Jumbo certificates ........... 30,343 20.8 2,635 27,708 21.3 13,823 13,885 12.2 -------- ----- -------- -------- ----- -------- -------- ----- Total certificates ........ 83,161 57.1 5,703 77,458 59.5 18,965 58,493 51.2 -------- ----- -------- -------- ----- -------- -------- ----- Total deposits ............... $145,571 100.0% $ 15,346 $130,225 100.0% $ 15,974 $114,251 100.0% ======== ===== ======== ======== ===== ======== ======== =====
Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments, or borrowings. At December 31, 2001, the Bank had $25.0 million in FHLB advances and the Holding Company had $1.5 million in other borrowed money consisting of a variable-rate one-year line of credit advance. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Holding Company's and the Bank's borrowings at or for the years ended December 31, 2001, 2000 and 1999.
At or for the Year Ended December 31, ----------------------------- 2001 2000 1999 ------- -------- ------- (In thousands) FHLB Advances and Other Borrowed Money: Outstanding at end of period....................... $26,500 $13,450 $6,500 Average balance outstanding for period............. 17,385 8,813 2,228 Maximum amount outstanding at any month-end during the period...................... 26,500 13,450 6,500 Weighted average interest rate during the period... 5.50% 5.67% 6.42% Weighted average interest rate at end of period.... 4.53% 6.42% 6.07%
Service Corporation Subsidiaries Prior to the Acquisition and Conversion, the Bank had two subsidiaries: Madison First Service Corporation ("First Service") and McCauley Insurance Agency, Inc. ("McCauley"). First Service was incorporated under the laws of the State of Indiana on July 3, 1973 and owned all of the outstanding capital stock of McCauley. First Service had no other operations. McCauley was organized under the laws of the State of Indiana under the name Builders Insurance Agency, Inc. on August 2, 1957 and changed its name to McCauley Insurance Agency, Inc. on August 29, 1957. McCauley engaged in the sale of general fire and accident, car, home and life insurance to the general public. During the period ended December 31, 1996, McCauley received approximately $200,000 in commissions. Upon consummation of the Acquisition, the Bank became a bank holding company, subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). At that time, the insurance operations of McCauley were not permitted under the BHCA, and the Bank was required to divest its ownership of McCauley. On December 17, 1996, the Bank sold McCauley to the Madison Insurance Agency, Inc. for a gain of $141,000. The Bank continues to hold First Service which currently holds land but does not otherwise engage in significant business activities. Employees As of December 31, 2001, the Bank employed 59 persons on a full-time basis and six persons on a part-time basis. None of the employees is represented by a collective bargaining group. Management considers its employee relations to be good. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Jefferson County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions and certain nonbanking consumer lenders that provide similar services in Jefferson County and which have significantly larger resources available to them than does the Bank. In total, there are 11 financial institutions located in Jefferson County, Indiana, including the Bank. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services they provide borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. REGULATION General As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. A savings association must pay a semi-annual assessment to the OTS based upon a marginal assessment rate that decreases as the asset size of the savings association increases, and which includes a fixed-cost component that is assessed on all savings associations. The assessment rate that applies to a savings association depends upon the institution's size, condition and the complexity of its operations. The Bank's semi-annual assessment is approximately $39,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuances or retirements of its securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. Savings and Loan Holding Company Regulation As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and is thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without obtaining the prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company currently operates as a unitary savings and loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") on November 12, 1999, there were no restrictions on the permissible business activities of a unitary savings and loan holding company. The GLB Act included a provision that prohibits any new unitary savings and loan holding company, defined as a company that acquires a thrift after May 4, 1999, from engaging in commercial activities. This provision also includes a grandfather clause, however, that permits a company that was a savings and loan holding company as of May 4, 1999, or had an application to become a savings and loan holding company on file with the OTS as of that date, to acquire and continue to control a thrift and to continue to engage in commercial activities. Because the Holding Company qualifies under this grandfather provision, the GLB Act did not affect the Holding Company's authority to engage in diversified business activities. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies, to the same extent as if the Holding Company were a bank holding company and the Bank were a bank. See "-Qualified Thrift Lender." At December 31, 2001, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple savings and loan holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend or make a capital distribution on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System The Bank is a member of the FHLB system, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member financial institutions. At December 31, 2001, the Bank's investment in stock of the FHLB of Indianapolis was $1.3 million. For the fiscal year ended December 31, 2001, the FHLB of Indianapolis paid approximately $78,000 in dividends to the Bank, for an annual rate of 7.39%. All 12 FHLB's are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in the Bank's capital. The FHLB of Indianapolis serves as a reserve or central bank for its member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as the Bank, and for banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. During 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF had been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law. In 1996, however, legislation was enacted to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF. See "--Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. In 1996, legislation was enacted that included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Bank was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995, and beginning January 1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. In addition to the assessment for deposit insurance, savings institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation ("FICO"), which is a federally-chartered corporation that was organized to provide some of the financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments for SAIF members approximated 6.10 basis points, while BIF members paid 1.22 basis points. By law, payments on FICO obligations have been shared equally between BIF members and SAIF members since January 1, 2000. Legislation is pending before Congress that would increase the deposit insurance assessments paid by all financial institutions, including the Bank. Although Congress has considered merging the SAIF and the BIF, until then, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. The OTS requires a core capital level of 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and no less than 4% for all other savings associations. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 2001, the Bank was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with either "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, the Bank would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. The Bank nevertheless measures its interest rate risk in conformity with the OTS regulation and, as of December 31, 2001, would not have been required to deduct any amounts from its total capital available to calculate its risk-based capital requirement. The OTS recently proposed an amendment to its interest rate risk rule that would delete the requirement that a savings association with excess exposure to interest rate risk make a capital deduction. If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2000, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations The OTS also restricts the amount of "capital distributions" that may be made by savings associations. The regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The regulation exempts certain savings associations from filing either a notice or an application with the OTS before making any capital distribution, and requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision requires, at a minimum, that the Bank file a notice with the OTS 30 days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew, or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on the Bank's current operations. Liquidity The Financial Regulatory Relief and Economic Efficiency Act of 2000, which was signed into law on December 27, 2000, repealed the former statutory requirement that all savings associations maintain an average daily balance of liquid assets in a minimum amount of not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. The OTS adopted an interim final rule in March 2001 that implemented this revised statutory requirement, although savings associations remain subject to the OTS regulation that requires them to maintain sufficient liquidity to ensure their safe and sound operation. Safety and Soundness Standards In 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. During 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and be appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 2001, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on the Bank's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test that requires the association to maintain an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise to qualify as a QTL. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 2001, the Bank was in compliance with its QTL requirement, with approximately 80.3% of its portfolio assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must dispose of any investment or activity not permissible for a national bank and a savings association. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law, which became effective in 1996, authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. Transactions with Affiliates The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between financial institutions and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions deemed to be consistent with safe and sound banking practices for transactions between a financial institution and its affiliates, and restricts the types of collateral security permitted in connection with a financial institution's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following the Bank's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating - outstanding, satisfactory, needs to improve, and substantial noncompliance - and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank can no longer use the percentage of taxable income method of computing its allowable tax bad debt deduction and instead must compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code or (ii) excess dividends or distributions are paid out by the Bank or the Bank redeems its own stock. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. The Holding Company and the Bank elected to file a consolidated federal income tax return for 2001 and 2000. The Bank was taxed separately on its earnings in years prior to 2000. The Holding Company has been taxed as an ordinary corporation in years prior to 2000. State Taxation The Bank and the Holding Company are subject to Indiana's Financial Bank Tax ("IFBT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of IFBT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Bank's state income tax returns have not been audited in recent years. Item 2. Description of Properties. The following table provides certain information with respect to the Bank's offices as of December 31, 2001.
Net Book Value of Property, Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ----------------------- -------- --------- ------- (Dollars in thousands) Locations in Madison, Indiana: Downtown Office: 233 E. Main Street............... 1952 $ 657 9,110 Drive-Through Branch: 401 E. Main Street............... 1984 102 375 Hilltop Location: 430 Clifty Drive................. 1983 4,240 32,000 Wal-mart Banking Center: 567 Ivy Tech Drive............... 1995 2 517 Location in Hanover, Indiana: 10 Medical Plaza Drive........... 1995 146 656
During the fourth quarter of 2001, the Bank completed its renovation and expansion of its office located at 430 Clifty Drive. During that same quarter, the Bank closed its location at 303 Clifty Drive. At December 31, 2001, the location at 303 Clifty Drive was listed for sale and had a book value of $232,000. The following table provides certain information with respect to real estate owned by the Bank as of December 31, 2001. These properties were acquired by the Bank for future expansion of its banking operations. Address ------- 225 E. Main Street Madison, Indiana 47250 227 E. Main Street Madison, Indiana 47250 The Bank owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by the Bank was approximately $388,000 at December 31, 2001. The Bank operates nine automated teller machines ("ATMs"), one at each office location (the main office has two), one at Hanover College, one at a Kroger supermarket, one at a BP gas station, all in Madison, Indiana, and one in Carrolton, Kentucky. The Bank's ATMs participate in the MAC(R) network. Prior to the effective date of the Merger, the Bank had contracted for the data processing and reporting services of BISYS, Inc. in Houston, Texas. Following the Merger, the Bank performs these services in-house. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the Holding Company's or the Bank's business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 2001. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Bank are elected annually by the Holding Company's Board of Directors.
Position with the Position Name Holding Company with the Bank ----------------------- -------------------------------------- -------------------------------- Matthew P. Forrester President and Chief President and Chief Executive Officer Executive Officer Lonnie D. Collins Secretary Secretary Larry C. Fouse Vice President of Finance Vice President of Finance Deanna Liter Vice President of Data Services Vice President of Data Services Barbara Eades Vice President of Retail Banking Vice President of Retail Banking Loy Skirvin Vice President of Human Vice President of Human Resources Resources Mark A. Goley Vice President - Lending Vice President - Lending Anthony D. Brandon Vice President of Loan Vice President of Loan Administration Administration
Matthew P. Forrester (age 45) has served as the Bank and Holding Company President and Chief Executive Officer since October 1999. Prior to that, Mr. Forrester served as the Chief Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice President and Treasurer for its holding company, Home Bancorp. Prior to joining Home Loan Bank, Mr. Forrester was an examiner for the Indiana Department of Financial Institutions. Lonnie D. Collins (age 53) has served as Secretary of the Bank since September 1994 and as Secretary of the Holding Company since 1996. Mr. Collins has also practiced law since October 1975 and has served as the Bank's outside counsel since 1980. Larry C. Fouse (age 56) has served as the Holding Company's Controller since 1997. From 1993 to 1997, he served as the Chief Financial Officer and Controller of Citizens and from 1989 to 1993 served as Citizens' Vice President and Operations Officer. Deanna Liter (age 38) has served as Vice President of Data Services since 1999. From 1986 to 1997, she was manager of the Citizens' Data Processing Department. Barbara Eades (age 52) has served as Vice President of Retail Banking since 2000. From 1997 to 1999, she was Branch Manager of the downtown branch. She served as Assistant Vice President for Madison First Federal from 1990 to 1996. Loy Skirvin (age 53) has served as Vice President of Human Resources since 1998. From 1991 to 1997, she was Human Resources Manager for a manufacturing firm. Mark A. Goley (age 46) has served as Vice President of Loan Services since 1997. From 1989 to 1997, he served as Senior Loan Officer for Citizens. Anthony D. Brandon (age 30) has served as Vice President of Loan Administration since September of 2001. Prior to joining the Bank, he served as President of Republic Bank of Indiana. PART II Item 5. Market for Common Equity and Related Stockholder Matters. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "RIVR." Since the Holding Company has no independent operation or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders directly depends upon the ability of the Bank to pay dividends to the Holding Company and upon the earnings on its investment securities. Any dividend distributions by the Bank to the Holding Company in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Bank. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of the Bank. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the Bank's financial condition. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Other information required by this item is incorporated by reference to the material under the heading "Market Price of the Corporation's Common Shares and Related Shareholder Matters" on pages 2 and 3 of the Holding Company's 2001 Shareholder Annual Report (the "Shareholder Annual Report"). Item 5.5. Selected Consolidated Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data" on pages 4 and 5 of the Shareholder Annual Report. Item 6. Management's Discussion and Analysis or Plan of Operation. The information required by this item is incorporated by reference to pages 6 through 19 of the Shareholder Annual Report. Item 6A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is incorporated by reference to pages 13 through 15 of the Shareholder Annual Report. Item 7. Financial Statements. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 20 through 45 in the Shareholder Annual Report are incorporated herein by reference. Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors River Valley Bancorp We have audited the accompanying consolidated statement of financial condition of River Valley Bancorp as of December 31, 1999, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for the years ended December 31, 1999 and 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp as of December 31, 1999, and the consolidated results of its operations and its cash flows for the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Grant Thornton LLP Cincinnati, Ohio February 16, 2000 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. On May 18, 2000, the Holding Company engaged the accounting firm of BKD, LLP (formerly Olive LLP) to examine the consolidated financial statements of the Holding Company for the fiscal years ending December 31, 2000 and 2001. This action was taken following a recommendation of the Holding Company's Audit Committee to the Board of Directors to take such action and the approval of the change in auditors by the Board of Directors. Grant Thornton LLP, which had acted as the independent public accountant for the Holding Company since 1996 and audited its consolidated financial statements for 1999, was notified of the Holding Company's decision. The audit reports issued by Grant Thornton LLP with respect to the Holding Company's consolidated financial statements for 1999 did not contain an adverse opinion or disclaimer of opinion, and were not qualified as to uncertainty, audit scope or accounting principles. During 1999 (and any subsequent interim period), there had been no disagreements between the Holding Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report. Moreover, none of the events listed in Item 304(a)(1)(iv)(B) of Regulation S-B occurred during 1999 or any subsequent interim period. Prior to its engagement, BKD, LLP had not been consulted by the Holding Company as to the application of accounting principles to a specific completed or contemplated transaction or the type of audit opinion that might be rendered on the Holding Company's financial statements. Pursuant to Item 304 of Regulation S-B, the Company provided a copy of its Current Report on Form 8-K announcing the change in the Company's Certifying Accountant, which was filed with the Commission on May 18, 2000, to BKD, LLP for review. A letter from Grant Thornton LLP indicating that it agrees with the statements made by the Company therein is incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K/A, filed with the Commission on May 31, 2000. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. The information required by this item with respect to directors is incorporated by reference to pages 2 through 5 and page 10 of the Holding Company's Proxy Statement for its Annual Shareholder Meeting to be held April 17, 2002 (the "2002 Proxy Statement"). Information concerning the Registrant's executive officers is included in Item 4.5 in Part I of this report. Item 10. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 5 and 6 of the 2002 Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 1 and 2 of the 2002 Proxy Statement. Item 12. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to page 8 of the 2002 Proxy Statement. Item 13. Exhibits and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Financial Statements Page No. ----------------------------------------------- -------------- Independent Accountants' Report.............................. 21 Consolidated Balance Sheets at December 31, 2001 and 2000......................................................... 22 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999............................. 23 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999................. 24 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999................. 25 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999....................... 26 Notes to Consolidated Financial Statements................... 27 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 2001. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVER VALLEY BANCORP Date: March 29, 2002 By: /s/ Matthew P. Forrester ------------------------------------- Matthew P. Forrester, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date - -------------------------------------- ----------------------- ------------- (1) Principal Executive Officer: /s/ Matthew P. Forrester ) --------------------------------- President and ) Matthew P. Forrester Chief Executive Officer ) ) ) ) (2) Principal Financial and Accounting ) Officer: ) ) /s/ Larry C. Fouse ) --------------------------------- Treasurer ) Larry C. Fouse ) ) ) March 29, 2002 ) (3) The Board of Directors: ) ) /s/ Robert W. Anger ) --------------------------------- Director ) Robert W. Anger ) ) /s/ Jonnie L. Davis ) --------------------------------- Director ) Jonnie L. Davis ) ) /s/ Matthew P. Forrester ) --------------------------------- Director ) Matthew P. Forrester ) ) /s/ Michael J. Hensley ) --------------------------------- Director ) Michael J. Hensley ) ) /s/ Earl W. Johann ) March 29, 2002 --------------------------------- Director ) Earl W. Johann ) ) /s/ Fred W. Koehler ) --------------------------------- Director ) Fred W. Koehler ) ) /s/ Charles J. McKay ) --------------------------------- Director ) Charles J. McKay ) ) EXHIBIT INDEX Exhibit No. Description - ----------- ----------------------------------------------------------------- 3 (1) Registrant's Articles of Incorporation are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 333-05121) (the "Registration Statement") (2) Registrant's Amended Code of By-Laws are incorporated by reference to Exhibit 3(2) to the Registrant's Form 10-K for the fiscal year ending December 31, 1997 10 (1) Employment Agreement between River Valley Financial Bank and Matthew P. Forrester is incorporated by reference to Exhibit 10(1) of Registrant's Form 10-K for 1999 (2) Director Deferred Compensation Master Agreement is incorporated by reference to Exhibit 10(8) to the Registration Statement (3) Director Deferred Compensation Joinder Agreement -- Robert W. Anger is incorporated by reference to Exhibit 10(10) to the Registration Statement (4) Director Deferred Compensation Joinder Agreement -- Earl W. Johann is incorporated by reference to Exhibit 10(12) to the Registration Statement (5) Director Deferred Compensation Joinder Agreement -- Frederick W. Koehler is incorporated by reference to Exhibit 10(13) to the Registration Statement (6) Director Deferred Compensation Joinder Agreement -- Michael Hensley is incorporated by reference to Exhibit 10(15) to the Registration Statement (7) Special Termination Agreement between River Valley Financial Bank, as successor to Madison First Federal Savings and Loan Association and Robert W. Anger is incorporated by reference to Exhibit 10(18) to the Registration Statement (8) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Larry Fouse is incorporated by reference to Exhibit 10(20) to the Registration Statement (9) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Mark Goley is incorporated by reference to Exhibit 10(21) to the Registration Statement (10) Exempt Loan and Share Purchase Agreement between Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp is incorporated by reference to Exhibit 10(22) to the Registration Statement 13 Shareholder Annual Report 16 Letter regarding change in certifying accountant is incorporated by reference to Exhibit 16 to the Registrant's Form 8-K/A filed May 31, 2000 21 Subsidiaries of the Registrant 23 (1) Consent of BKD, LLP (2) Consent of Grant Thornton LLP EX-13 3 rv_ex13.txt ANNUAL REPORT EXHIBIT 13 ---------- River Valley Bancorp P.O. Box 1590 Madison, Indiana 47250-0590 (812)273-4949 Fax - (812) 273-4944 To Our Shareholders, Customers, and Friends: It is my pleasure to present to you River Valley Bancorp's sixth Annual Report to Shareholders covering the year ending December 31, 2001. The year of 2001 will always be defined by the events of September 11th. Our lives have been scarred by those tragic events, but our souls have been lifted by a new sense of patriotism and hope. America's well being was challenged, but not our spirit. History will record the tragedy and the hatred of those events, but the true newsmaker that we bore witness to was the rekindled spirit of goodness. This renewal has transformed our nation, our people, and I am pleased to say, our Company. Our Company's own renewal is a process that began in 1999. I am proud to report this commitment produced yet another record year for 2001. The Corporation has not only prospered; it has positioned itself for continued growth and profitability for the future. The Corporation has had solid balance sheet growth, made strategic commitments in facilities and technology, and positioned itself for meeting the needs of an expanded customer base. Through our subsidiary, River Valley Financial Bank, we became our county's largest financial institution, taking that century old distinction away from a bank that is recognized as Indiana's oldest financial institution. Operationally for the year ended December 31, 2001, net income was $1,976,000, or basic earnings per share of $2.50, compared to $1,610,000, or $1.88 basic earnings per share, reported in 2000. The return on average assets for fiscal 2001 was 1.09%; the return on average equity was 11.27%. For fiscal 2000 those numbers were 1.05% and 9.45% respectively. The earnings per share reflected not only stronger profitability, but prudent repurchase of outstanding shares. The book value of shares outstanding as of December 31, 2001 was $22.21 compared to $19.78 at December 31, 2000. The Organization experienced good asset growth in fiscal 2001 led by strong loan growth. Assets totaled $191.6 million as of December 31, 2001, an increase of 18.2%. Net loans, including loans held for sale, were $158.0 million, an increase of $17.0 million from that recorded as of December 31, 2000, or a 12.1% increase. Deposits also increased by $15.4 million, or 11.8% to $145.6 million as of December 31, 2001. In spite of the economic downturn reported in 2001, the Corporation diligently controlled non-performing loans while providing adequate funding for its allowance for loan losses. As of December 31, 2001, non-performing loans totaled $690,000, or 0.36% of total assets, compared to 0.38% of total assets at year-end 2000. The Corporation raised its loan loss reserve ratio to 1.25% of total loans by providing $450,000 to allowances for loan losses in 2001, up from the $227,000 provided for in 2000. Your Corporation had another record year. We are proud of our accomplishments, but most importantly, mindful of the realities of September 11th that say "what we take for granted can hurt us." We thank you for your continued support and patronage. May God continue to bless us all. Respectfully Submitted, /s/ Matthew P. Forrester Matthew P. Forrester President, CEO River Valley Bancorp BUSINESS OF RIVER VALLEY River Valley Bancorp ("River Valley" or the "Corporation"), an Indiana corporation, was formed in 1996 for the primary purpose of purchasing all of the issued and outstanding common stock of River Valley Financial Bank (formerly Madison First Federal Savings and Loan Association; hereinafter "River Valley Financial" or the "Bank") in its conversion from mutual to stock form. The conversion offering was completed on December 20, 1996, with the sale of 1,190,250 common shares at an initial offering price of $10.00 per share. On December 23, 1996, the Corporation utilized approximately $3.0 million of the net conversion proceeds to purchase 95.6% of the outstanding common shares of Citizens National Bank of Madison ("Citizens") in a transaction that was accounted for using the purchase method of accounting. River Valley Financial and Citizens merged on November 20, 1997. Future references to River Valley, River Valley Financial and Citizens are utilized herein, as the context requires. The activities of River Valley have been limited primarily to holding the stock of the Bank. River Valley Financial was organized in 1875 under the laws of the United States of America. River Valley Financial conducts operations from its four full-service office locations in Jefferson County and offers a variety of deposit and lending services to consumer and commercial customers in Jefferson and surrounding counties. The Corporation is subject to regulation, supervision and examination by the Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS"). River Valley Financial is subject to regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation (the "FDIC"). Deposits in River Valley Financial are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the FDIC. MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS There were 809,951 common shares of River Valley Bancorp outstanding at February 19, 2002, held of record by 359 shareholders. The number of shareholders does not reflect the number of persons or entities who may hold stock in nominee or "street name." Since December of 1996, the Corporation's common shares have been listed on The Nasdaq SmallCap Market ("Nasdaq"), under the symbol "RIVR". Presented on the following page are the high and low sale prices for the Corporation's common shares, as well as cash distributions paid thereon since December 1999. Such sales prices do not include retail financial markups, markdowns or commissions. Information relating to sales prices has been obtained from Nasdaq. MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS (CONTINUED) Quarter Ended High Low Cash Distributions 2001 December 31, 2001 $20.70 $19.50 $0.150 September 30, 2001 21.07 17.72 0.125 June 30, 2001 18.00 16.02 0.125 March 31, 2001 17.00 15.19 0.100 2000 December 31, 2000 $16.00 $13.63 $0.100 September 30, 2000 14.25 12.88 0.085 June 30, 2000 13.00 10.44 0.085 March 31, 2000 12.63 10.25 0.075 1999 December 31, 1999 $12.63 $11.50 $0.075 September 30, 1999 14.38 13.00 0.065 June 30, 1999 14.75 12.25 0.065 March 31, 1999 15.75 13.13 0.060 The high and low sales prices for River Valley's common shares between December 31, 2001 and February 19, 2002 were $28.35 and $20.20, respectively. Under OTS regulations applicable to converted savings associations, River Valley Financial is not permitted to pay a cash dividend on its common shares if the regulatory capital of River Valley Financial would, as a result of the payment of such dividend, be reduced below the amount required for the liquidation account (which was established for the purpose of granting a limited priority claim on the assets of River Valley Financial, in the event of a complete liquidation, to those members of River Valley Financial before the Conversion who maintain a savings account at River Valley Financial after the Conversion) or applicable regulatory capital requirements prescribed by the OTS. Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. The OTS recently amended its capital distribution regulation in a final rule, which took effect on April 1, 1999. Because the Bank is a subsidiary of a savings and loan holding company, it is required to file a notice with the OTS 30 days before making any capital distributions to the Holding Company. It may also have to file an application for approval of a proposed capital distribution with the OTS if the Bank is not eligible for expedited treatment under the OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the Bank's net earnings for that year to date plus the Bank's retained net earnings for the preceding two years. The Bank must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the Bank would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the OTS or the FDIC. SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the consolidated financial condition, earnings, and other data regarding River Valley at the dates and for the periods indicated.
Selected consolidated financial condition data: At December 31, 2001 2000 1999 1998 1997 Total amount of: (In thousands) Assets $191,618 $162,130 $138,695 $138,369 $136,933 Loans receivable - net (1) 157,972 140,970 115,131 112,385 111,887 Cash and cash equivalents (2) 5,641 6,382 8,052 12,307 5,765 Mortgage-backed and related securities 831 1,918 4,209 5,986 8,978 Investment securities 16,822 5,329 5,230 1,283 4,272 Deposits 145,571 130,225 114,251 118,151 114,955 FHLB advances and other borrowings 26,500 13,450 6,500 270 2,000 Shareholders' equity- net 17,971 17,184 16,866 18,613 17,989 Summary of consolidated earnings data: Year Ended December 31, 2001 2000 1999 1998 1997 (In thousands, except share data) Total interest income $ 13,084 $ 11,118 $ 9,734 $ 10,108 $ 10,362 Total interest expense 6,617 5,637 4,617 4,842 5,049 -------- -------- -------- -------- -------- Net interest income 6,467 5,481 5,117 5,266 5,313 Provision for losses on loans 450 227 140 275 304 -------- -------- -------- -------- -------- Net interest income after provision for losses on loans 6,017 5,254 4,977 4,991 5,009 Other income 1,922 1,053 844 1,188 1,134 General, administrative and other expense 4,706 3,764 4,080 4,093 4,003 -------- -------- -------- -------- -------- Earnings before income tax expense 3,233 2,543 1,741 2,086 2,140 Income tax expense 1,257 933 702 833 830 -------- -------- -------- -------- -------- Net earnings $ 1,976 $ 1,610 $ 1,039 $ 1,253 $ 1,310 ======== ======== ======== ======== ======== Basic earnings per share $ 2.50 $ 1.88 $ 1.03 $ 1.13 $ 1.20 ======== ======== ======== ======== ======== Diluted earnings per share $ 2.44 $ 1.87 $ 1.03 $ 1.12 $ 1.18 ======== ======== ======== ======== ========
- -------------------------------- (1) Includes loans held for sale. (2) Includes certificates of deposit in other financial institutions.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA (CONTINUED) Selected financial ratios and other data: Year ended December 31, 2001 2000 1999 1998 1997 Interest rate spread during period 3.58% 3.47% 3.63% 3.66% 3.64% Net yield on interest-earning assets (1) 3.80 3.79 3.94 4.08 4.00 Return on assets (2) 1.09 1.05 0.76 0.92 0.99 Return on equity (3) 11.27 9.45 5.87 6.85 7.53 Equity to assets (4) 9.38 10.60 12.16 13.45 13.12 Average interest-earning assets to average interest-bearing liabilities 105.94 108.02 108.81 111.07 109.56 Non-performing assets to total assets (4) 0.36 0.38 0.62 1.47 0.58 Allowance for loan losses to total loans outstanding (4) 1.25 1.21 1.28 1.33 1.13 Allowance for loan losses to non-performing loans (4) 285.80 274.07 164.41 75.78 177.72 Net charge-offs to average total loans outstanding 0.12 0.04 0.08 0.06 0.20 General, administrative and other expense to average assets (5) 2.60 2.47 2.97 3.01 2.83 Dividend payout ratio 20.49 18.45 25.73 19.64 11.02 Number of full service offices (4) 4 5 5 5 6
- --------------------------------------- (1) Net interest income divided by average interest-earning assets. (2) Net earnings divided by average total assets. (3) Net earnings divided by average total equity. (4) At end of period. (5) General, administrative and other expense divided by average total assets. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General As discussed previously, River Valley was incorporated for the primary purpose of owning all of the outstanding shares of River Valley Financial. As a result, the discussion that follows focuses on River Valley Financial's financial condition and results of operations for the periods presented. The following discussion and analysis of the financial condition as of December 31, 2001 and River Valley's results of operations for periods prior to that date should be read in conjunction with the consolidated financial statements and the notes thereto, included elsewhere in this Annual Report. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. River Valley's operations and River Valley's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include, but are not limited to, changes in the economy and interest rates in the nation and River Valley's general market area. The forward-looking statements contained herein include those with respect to the following matters: 1. Management's determination as to the amount and adequacy of the loan loss allowance; 2. The effect of changes in interest rates on financial condition and results of operations; 3. The effects of proposed legislation that would eliminate the federal thrift charter and the separate federal regulation of thrifts; and 4. Management's opinion as to the effect of recent accounting pronouncements on River Valley's consolidated financial position and results of operations. Discussion of Changes in Financial Condition from December 31, 2000 to December 31, 2001 At December 31, 2001, River Valley's consolidated assets totaled $191.6 million, representing an increase of $29.5 million over the December 31, 2000 total. This increase in assets was funded in part by a $15.4 million increase in deposits and a $13.1 million increase in borrowings. Deposits increased to $145.6 million as of December 31, 2001 from $130.2 million while borrowings increased from $13.5 million as of December 31, 2000 to $26.5 million as of December 31, 2001. Shareholders' equity was $18.0 million as December 31, 2001, a net increase of $0.8 million from $17.2 million as of December 31, 2000. The modest increase in equity was attributed primarily to net income of $2.0 million offset by the repurchase of approximately $1.2 million or 64,293 shares of common stock. Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and certificates of deposit) decreased by $0.7 million from December 31, 2000 levels to a total of $5.6 million at December 31, 2001. Investment securities totaled $17.7 million at December 31, 2001, an increase of $11.5 million over December 31, 2000. Mortgage-backed securities decreased by $1.1 million, to a total of $831,000 at December 31, 2001, primarily due to principal repayments and the sale of several issues. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Changes in Financial Condition from December 31, 2000 to December 31, 2001 (continued) Loans receivable, including loans held for sale, totaled $158.0 million at December 31, 2001, an increase of $17.0 million, or 12.1%, over the $141.0 million total at December 31, 2000. The increase resulted primarily from loan originations during 2001 of $147.9 million, which were partially offset by principal repayments of $85.3 million and sales of $46.1 million. Loan origination volume for 2001 exceeded that of 2000 by $62.7 million, or 73.6%. There were significant increases in all types of lending with the exception of land and multi-family loans. The volume of loan sales into the secondary mortgage market increased during 2001 from 2000 volume by $43.5 million, due in large part to low interest rates. River Valley's consolidated allowance for loan losses totaled approximately $2.0 million for the year ended December 31, 2001, which represented 1.25% of total loans at that date. The allowance for loan losses totaled $1.7 million, or 1.21% of total loans for the period ended December 31, 2000. Nonperforming loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) totaled $0.7 million and $0.6 million at December 31, 2001 and 2000, respectively. The consolidated allowance for loan losses represented 286% and 274% of nonperforming loans at December 31, 2001 and 2000, respectively. Although management believes that its allowance for loan losses at December 31, 2001 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could negatively affect the Corporation's results of operations. Deposits increased by $15.3 million, or 11.8%, to a total of $145.6 million at December 31, 2001, compared to $130.2 million total at December 31, 2000. Savings and demand deposits increased by $9.6 million, or 18.2%, during 2001, while certificates of deposit increased by $5.7 million, or 7.4%. These fluctuations in balances were attributed to competitive rates, marketing and good community public relations. Advances from the Federal Home Loan Bank and other borrowed money increased by $13.0 million from the total at December 31, 2000, as current period borrowings of $26.5 million were used in part to fund loan growth. Shareholders' equity totaled $18.0 million at December 31, 2001, an increase of $0.8 million from the $17.2 million total at December 31, 2000. The increase resulted primarily from net income of $2.0 million, which was partially offset by repurchases of shares totaling $1.2 million and cash dividends of $388,000. This net increase also includes a net increase of $296,000 related to stock benefit plans, proceeds of $68,000 from the exercise of stock options and unrealized gain on securities available for sale of $17,000. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000 General River Valley's net earnings for the year ended December 31, 2001, totaled $1.98 million, an increase of $366,000, or 22.7%, from net earnings reported in 2000. The increase in net earnings in the 2001 period was primarily attributable to an increase in net interest income of $986,000 and an increase of $869,000 in other income, while general, administrative and other expense were $942,000 higher in the current period. The provision for federal income taxes was $324,000 more in fiscal year 2001 as compared to the same period in 2000. The provision for loan losses in 2001 was $450,000 as compared to $227,000 in 2000. Net Interest Income Total interest income for the year ended December 31, 2001, amounted to $13.1 million, an increase of $2.0 million, or 18.0%, from the 2000 total, reflecting the effects of higher average balances on interest earning assets. The average balance of interest-earning assets outstanding year-to-year increased by $25.2 million and the yield on those assets increased from an average yield of 7.68% in 2000 to 7.70% in 2001. Interest income on loans and mortgage-backed securities totaled $12.3 million for 2001, an increase of approximately $1.8 million, or 16.9%, from 2000. Interest income on investments, FHLB stock and interest-earning deposits increased by $183,000, or 32.6%, due to higher average balances on those investments. Interest expense on deposits increased by $524,000, or 10.2%, to a total of $5.7 million for the year ended December 31, 2001, due primarily to higher average balances. The cost of deposits decreased from 4.1% in 2000 to 3.9% in fiscal 2001. Interest expense on borrowings totaled $956,000 for the year ended December 31, 2001, an increase of $456,000 from 2000. The increase resulted primarily from higher average borrowings year-to-year, partially offset by a 17 basis point decrease in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income increased during 2001 by $986,000, or 18.0%, compared to 2000. The interest rate spread increased by 11 basis points for 2001, to 3.58% from 3.47% in the 2000 period, while the net interest margin amounted to 3.80% in 2001 and 3.79% in 2000. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectibility of the loan portfolio. As a result of such analysis, management recorded a $450,000 provision for losses on loans in 2001, an increase of $223,000, or 98.2%, compared to the $227,000 provision recorded in 2000. The current period provision generally reflects growth in the loan portfolio, coupled with a change in the loan mix; less 1-4 family and more commercial/non-residential. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000 (continued) Nonperforming loans for the period ended December 31, 2001 were $690,000, an increase of approximately $69,000 from the $621,000 recorded as of fiscal year ended 2000. Net charge-offs amounted to $180,000 in 2001, compared to $47,000 in 2000. While management believes that the allowance for losses on loans is adequate at December 31, 2001, based upon available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future. Other Income Other income amounted to $1.9 million for the year ended December 31, 2001, an increase of $869,000, or 82.5%, compared to 2000, due primarily to increases in net gains on loan sales and service fees and charges. Net gains on loan sales increased from $44,000 in 2000 to $772,000 in 2001, an increase of $728,000. The volume of loan sales increased from $2.6 million in 2000 to $46.1 million in 2001. General, Administrative and Other Expense General, administrative and other expense totaled $4.7 million for the year ended December 31, 2001, an increase of $942,000 over the 2000 total. Employee compensation and benefits increased by $266,000 in fiscal 2001 as compared to 2000 primarily from cost of living, benefit expense and increase in ESOP expenses. Occupancy and equipment expense increased by $44,000 in fiscal 2001 as compared to 2000 due to higher depreciation costs. Other operating expenses increased by $632,000 primarily from increases in advertising, data processing, donations and mortgage servicing. The corporation also made a $100,000 donation to a local school system in exchange for federal tax credits in future years. Income Taxes The provision for income taxes increased by $324,000, or 34.7 %, for the year ended December 31, 2001, as compared to 2000. The effective tax rates were 38.8% and 36.7% for the years ended December 31, 2001 and 2000, respectively. Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 General River Valley's net earnings for the year ended December 31, 2000 totaled $1.61 million, an increase of $571,000 or 55.0%, from net earnings reported in 1999. The increase in net earnings in the 2000 period was primarily attributable to an increase in net interest income of $364,000 and an increase of $209,000 in other income. General, administrative and other expense for the year was marginally lower. The provision for federal income taxes increased by $231,000 in fiscal year 2000 as compared to the same period in 1999. The provision for loan losses in 2000 was $227,000 as compared to $140,000 in 1999. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 2000 and 1999 (continued) Net Interest Income Total interest income for the year ended December 31, 2000, amounted to $11.1 million, an increase of $1.4 million, or 14.20%, from the 1999 total, reflecting the effects of higher average balances on average assets. While the average balance of interest-earning assets outstanding year-to-year increased by $14.7 million, and the yield on those assets increased from an average yield of 7.49% in 1999 to 7.68% in 2000. Interest income on loans and mortgage-backed securities totaled $10.6 million for 2000, an increase of approximately $1.5 million, or 16.8%, from 1999. Interest income on investments, FHLB stock and interest-earning deposits decreased by $132,000, or 19.0%, due to a decrease in the average balance outstanding. Interest expense on deposits increased by $663,000, or 14.8%, to a total of $5.2 million for the year ended December 31, 2000, due primarily to a 28 basis point increase in the weighted average cost of deposits. The cost of deposits rose from 3.82% in 1999 to 4.10% in fiscal 2000. Interest expense on borrowings totaled $500,000 for the year ended December 31, 2000 an increase of $357,000 from 1999. The increase resulted primarily from higher average borrowings year-to-year, partially offset by a 75 basis point decrease in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income increased during 2000 by $364,000, or 7.1%, compared to 1999. The interest rate spread decreased by 16 basis points for 2000, to 3.47% from 3.63% in the 1999 period, while the net interest margin amounted to 3.79 % in 2000 and 3.94% in 1999. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectibility of the loan portfolio. As a result of such analysis, management recorded a $227,000 provision for losses on loans in 2000, an increase of $87,000 or 62.1% compared to the $140,000 provision recorded in 1999. The current period provision generally reflects growth in the loan portfolio, coupled with a decrease in the level of nonperforming loans year-to-year. Nonperforming loans for the period ended December 31, 2000 were $621,000, a reduction of approximately $236,000 from the $857,000 recorded as of fiscal year ended 1999. Net charge-offs amounted to $47,000 in 2000, compared to $95,000 in 1999. While management believes that the allowance for losses on loans was adequate at December 31, 2000, based upon available facts and circumstances, there can be no assurance that the loan allowance will be adequate to cover losses on nonperforming assets in the future. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 (continued) Other Income Other income amounted to $1.1 million for the year ended December 31, 2000, an increase of $209,000, or 24.8%, compared to 1999, due primarily to a $208,000 increase in service fees and charges. General, Administrative and Other Expense General, administrative and other expense totaled $3.8 million for the year ended December 31, 2000, a decrease of $316,000 over the 1999 total. Employee compensation and benefits decreased by $137,000 or 6.3% in fiscal 2000 as compared to 1999 primarily from the decrease in staffing levels. Included in the 1999 compensation expense was $150,000 in non-recurring expense associated with a severance agreement in a managerial restructuring completed in the third quarter of fiscal 1999. Occupancy and equipment expense increased by $4,000 or 0.1% in fiscal 2000 primarily from charges associated with equipment upgrades. All other operating expenses decreased by $183,000 or 13.5% due to decreases in a variety of expense categories and were not attributable to any one item. Income Taxes The provision for income taxes increased by $231,000, or 32.9 %, for the year ended December 31, 2000, as compared to 1999. The effective tax rates were 36.7% and 40.3% for the years ended December 31, 2000 and 1999, respectively. AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA The following table presents certain information relating to River Valley's average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing annual income or expense by the average daily balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are derived from daily balances, which include nonaccruing loans in the loan portfolio.
Year ended December 31, 2001 2000 1999 Average Interest Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/ balance paid rate balance paid rate balance paid rate (Dollars in thousands) Interest-earning assets: Interest-earning deposits $ 5,042 $ 185 3.67% $ 4,005 $ 240 5.99% $ 6,878 $ 342 4.97% Other securities (1) 8,480 481 5.67 3,580 243 6.79 5,347 276 5.16 Mortgage-backed and related securities 1,259 73 5.80 2,976 192 6.45 5,051 301 5.96 Loans receivable (2) 154,171 12,267 7.96 133,255 10,365 7.78 111,794 8740 7.82 FHLB stock 1,055 78 7.39 943 78 8.27 943 75 7.95 --------- ------ -------- ------ ---------- ------ Total interest-earning assets 170,007 13,084 7.70 144,759 11,118 7.68 130,013 9,734 7.49 Non-interest earning assets, ------ ------ net of allowance for loan losses 10,922 7,859 7,309 --------- -------- ---------- Total assets $ 180,929 $152,618 $ 137,322 ========= ======== ========== Liabilities/shareholder equity Interest-bearing liabilities: Savings deposits $ 32,108 1,006 3.13 $ 32,906 1,185 3.60 $ 34,250 1,220 3.56 Interest bearing demand (5) 26,719 330 1.24 24,265 392 1.62 23,430 372 1.59 Certificates of deposit 84,262 4,325 5.13 68,026 3,560 5.23 59,578 2,882 4.84 FHLB advances and other borrowings 17,385 956 5.50 8,813 500 5.67 2,228 143 6.42 --------- ------ ------ ------ Total interest-bearing liabilities 160,474 6,617 4.12 134,010 5,637 4.21 119,486 4,617 3.86 Other liabilities 2,915 ------ 1,561 ------ 347 ------ --------- -------- ---------- Total liabilities 163,389 135,571 119,833 Total equity 17,540 17,047 17,489 --------- -------- ---------- Total liabilities and equity $ 180,929 $152,618 $ 137,322 ========= ======== ========== Net interest earning assets $ 9,533 $ 10,749 $ 10,527 ========= ======== ========== Net interest income $6,467 $ 5,481 $5,117 ====== ======= ====== Interest rate spread (3) 3.58% 3.47% 3.63% Net yield on weighted average interest-earning assets (4) 3.80% 3.79% 3.94% Average interest-earning assets to average Interest-bearing liabilities 105.94% 108.02% 108.81%
(1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process plus loans held for sale. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. (5) Includes Non-Interest DDA of $9,985, $8,512, and $8,113. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Rate/Volume Table The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected River Valley's interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate:
Year ended December 31, 2001 vs. 2000 2000 vs. 1999 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Interest-earning deposits and other $ 64 $ (119) $ (55) $ (173) $ 74 $ (99) Investment securities 284 (46) 238 (106) 73 (33) Mortgage-backed and related securities (101) (18) (119) (132) 23 (109) Loans receivable, net 1,659 243 1,902 1,670 (45) 1,625 ------- ------ ------- ------- ------- ------- Total 1,906 60 1,966 1,259 125 1,384 ------- ------ ------- ------- ------- ------- Interest-bearing liabilities: Deposits 713 (189) 524 314 349 663 FHLB advances and other borrowings 472 (16) 456 375 (18) 357 ------- ------ ------- ------- ------- ------- Total 1,185 (205) 980 689 331 1,020 ------- ------ ------- ------- ------- ------- Net change in interest income $ 721 $ 265 $ 986 $ 570 $ (206) $ 364 ======= ======= ======= ======= ======= =======
Asset and Liability Management Like other financial institutions, River Valley Financial is subject to interest rate risk to the extent that interest-earning assets re-price differently than interest-bearing liabilities. As part of its effort to monitor and manage interest rate risk, River Valley Financial is using the Net Portfolio Value "NPV") methodology adopted by the OTS as part of its capital regulations. Although River Valley Financial is not subject to the NPV regulation because such regulation does not apply to institutions with less than $300 million in assets and risk-based capital in excess of 12%, the application of the NPV methodology can illustrate River Valley Financial's degree of interest rate risk. Presented on the following table is an analysis of River Valley Financial's interest rate risk, as of December 31, 2001, (the latest information available) and December 31, 2000, as measured by changes in NPV for an instantaneous and sustained parallel shift of 100 through 300 basis points in market interest rates. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) Generally, NPV is more sensitive to rising rates than declining rates. Such difference in sensitivity occurs principally because, as rates rise, a bank's assets re-price slower than the deposits that fund them. As a result, in a rising interest rate environment, the amount of interest a bank would receive on loans would increase as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the bank would pay on deposits would increase, but generally slower than the bank's ability to re-price its interest-earning assets. However, River Valley Financial Bank has addressed some of these issues, which has generally reduced its overall exposure to interest rate risk. As of December 31, 2001 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $ 22,166 $ (3,131) (12)% +200 23,416 (1,881) (7) +100 24,376 (921) (4) - ------- 25,297 -------- - -100 25,957 661 3 - -200 (1) ------ -------- ------ - -300 (1) ------ -------- ------ As of December 31, 2000 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent +300 $ 17,112 $ (1,285) (7)% +200 17,898 (499) (3) +100 18,309 (88) 0 - 18,397 ------- ------ - -100 18,296 (101) (1) - -200 19,025 628 3 - -300 20,294 1,897 10 (1) At December 31, 2001, the OTS did not provide information as to interest rate risk for 200 and 300 point decreases. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset and Liability Management (continued) As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. Liquidity and Capital Resources The Corporation's principal sources of funds are deposits, loan and mortgage-backed securities repayments, maturities of securities, borrowings and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan and mortgage-backed securities prepayments are more influenced by interest rates, general economic conditions and competition. The Corporation maintains investments in liquid assets based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) the yield available on short-term liquid assets and (4) the objectives of the asset/liability management program. The Financial Regulatory Relief and Economic Efficiency Act of 2000, which was signed into law on December 27, 2000, repealed the former statutory requirement that all savings associations maintain an average daily balance of liquid assets in a minimum amount of not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. The OTS adopted an interim final rule in March 2001 that implemented this revised statutory requirement, although savings associations remain subject to the OTS regulation that requires them to maintain sufficient liquidity to ensure their safe and sound operation. At December 31, 2001, River Valley Financial Bank had commitments to originate loans totaling $7.0 million and in addition, had undisbursed loans in process, unused lines of credit and standby letters of credit totaling $10.3 million. At such date, River Valley Financial Bank had $2.6 million in commitments to sell loans and no outstanding commitment to purchase loans. The Corporation considers River Valley Financial Bank's liquidity and capital resources sufficient to meet outstanding short- and long-term needs. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) The Corporation's liquidity, primarily represented by cash and cash equivalents, is a result of the funds provided by or used in the Corporation's operating, investing and financing activities. These activities are summarized below for the years ended December 31, 2001, 2000 and 1999: Year ended December 31, 2001 2000 1999 (In thousands) Cash flows from operating activities $ 756 $ 2,028 $ 5,346 Cash flows from investing activities: Purchase of securities (19,262) (7,949) (21,537) Proceeds from maturities of securities 5,204 8,297 19,399 Proceeds from sales of securities 3,689 2,002 ------- Net loan (originations) repayments (15,078) (26,165) (6,673) Other (3,079) (1,087) (121) Cash flows from financing activities: Net increase (decrease) in deposits 15,346 15,974 (3,900) Net increase (decrease) in borrowings 13,050 6,950 6,230 Purchase of stock (1,182) (1,367) (2,724) Other (185) (353) (275) --------- --------- --------- Net increase (decrease) in cash and cash Equivalents $ (741) $ (1,670) $ (4,255) ========= ========= ========= River Valley Financial is required by applicable law and regulation to meet certain minimum capital standards. Such capital standards include a tangible capital requirement, a core capital requirement, or leverage ratio, and a risk-based capital requirement. The tangible capital requirement requires savings associations to maintain "tangible capital" of not less than 1.5% of the association's adjusted total assets. Tangible capital is defined in OTS regulations as core capital minus intangible assets. "Core capital" is comprised of common shareholders' equity (including retained earnings), noncumulative preferred stock and related surplus, minority interests in consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual associations. OTS regulations require savings associations to maintain core capital generally equal to 4% of the association's total assets except those associations with the highest examination rating and acceptable levels of risk. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (continued) OTS regulations require that savings associations maintain "risk-based capital" in an amount not less than 8% of "risk-weighted assets." Risk-based capital is defined as core capital plus certain additional items of capital, which in the case of River Valley Financial includes a general loan loss allowance of $2.0 million at December 31, 2001. River Valley Financial exceeded all of its regulatory capital requirements at December 31, 2001. The following table summarizes River Valley Financial's regulatory capital requirements and regulatory capital at December 31, 2001:
OTS Requirement Actual Amount Percent of Percent of Amount Assets Amount Assets(1) Amount of Excess (Dollars in thousands) Tangible capital 1.50% $ 2,863 9.6% $ 18,398 $ 15,535 Core capital (2) 4.00% 7,635 9.6% 18,398 10,763 Risk-based capital 8.00% 11,627 13.9% 20,162 8,535
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has proposed and is expected to adopt a core capital requirement for savings associations comparable to that adopted by the Office of the Comptroller of the Currency for national banks. The regulation requires core capital of at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. River Valley Financial is in compliance with this requirement. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Effect of Recent Accounting Pronouncements Accounting for a Business Combination. Statement of Financial Accounting Standards ("SFAS") No. 141, requires that all business combinations should be accounted for using the purchase method of accounting; use of the pooling method is prohibited. This statement requires that goodwill be initially recognized as an asset in the financial statement and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. The provisions of Statement No. 141 are effective for any business combination that is initiated after June 30, 2001. Accounting for Goodwill. Under the provisions of SFAS NO. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. Impairment test of goodwill should be done on an annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process, as outlined within the statement. If the fair value of the goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. The provisions of Statement No. 142 would be effective for fiscal years beginning after December 15, 2001. Early adoption would be permitted for companies with a fiscal year beginning after March 15, 2001 provided that the first quarter financial statements have not been previously issued. In all cases, the statement must be adopted as of the beginning of a fiscal year. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001 but before this Statement is initially applied would be accounted for in accordance with the amortization and nonamortization provisions of the statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. The Company adopted these new accounting rules on January 1, 2002. As a result, the Company will not amortize the goodwill it has recorded prior to June 30, 2001, but will make an annual assessment of any impairment in goodwill and, if necessary, recognize an impairment loss at that time. The Company had goodwill of $31,000 at December 31, 2001, and amortization of $6,000 for the year ended December 31, 2001. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto included herein have been prepared in accordance with generally accepted accounting principles, which require River Valley to measure financial position and results of operations in terms of historical dollars with the exception of investment and mortgage-backed securities available-for-sale, which are carried at fair value. Changes in the relative value of money due to inflation or recession are generally not considered. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. While interest rates are greatly influenced by changes in the rate of inflation, they do not change at the same rate or in the same magnitude as the rate of inflation. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as changes in monetary and fiscal policies. River Valley Bancorp Accountants' Report and Consolidated Financial Statements December 31, 2001 and 2000 Independent Accountants' Report To the Stockholders and Board of Directors River Valley Bancorp Madison, Indiana We have audited the accompanying consolidated balance sheets of River Valley Bancorp as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements for the year ended December 31, 1999 were audited by other auditors whose report dated February 16, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2000. /s/ BKD, LLP BKD, LLP Indianapolis, Indiana February 15, 2002
River Valley Bancorp Consolidated Balance Sheets December 31, 2001 and 2000 Assets 2001 2000 ------------------------------------------- (In Thousands, Except Share Amounts) Cash and due from banks $ 4,689 $ 3,361 Interest-bearing demand deposits 952 3,021 ---------------- ---------------- Cash and cash equivalents 5,641 6,382 Investment securities - available for sale 17,653 7,247 Loans held for sale 2,638 -- Loans, net of allowance for loan losses of $1,972 and $1,702 155,334 140,970 Premises and equipment 5,379 2,817 Federal Home Loan Bank stock 1,250 943 Interest receivable 1,475 1,468 Other assets 2,248 2,303 ---------------- ---------------- Total assets $ 191,618 $ 162,130 ================ ================ Liabilities Deposits Noninterest-bearing $ 11,406 $ 9,170 Interest-bearing 134,165 121,055 ---------------- ---------------- Total deposits 145,571 130,225 Borrowings 26,500 13,450 Interest payable 613 598 Other liabilities 963 673 ---------------- ---------------- Total liabilities 173,647 144,946 ---------------- ---------------- Commitments and Contingencies Stockholders' Equity Preferred stock, no par value Authorized and unissued - 2,000,000 shares Common stock, no par value Authorized - 5,000,000 shares Issued and outstanding - 809,251 and 868,874 shares Additional paid-in capital 7,654 8,135 Retained earnings 10,802 9,753 Shares acquired by stock benefit plans (532) (734) Accumulated other comprehensive income 47 30 ---------------- ---------------- Total stockholders' equity 17,971 17,184 ---------------- ---------------- Total liabilities and stockholders' equity $ 191,618 $ 162,130 ================ ================
River Valley Bancorp Consolidated Statements of Income Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 -------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Interest Income Loans receivable $ 12,267 $ 10,365 $ 8,740 Investment securities 554 435 577 Interest-earning deposits and other 263 318 417 --------------- --------------- --------------- Total interest income 13,084 11,118 9,734 --------------- --------------- --------------- Interest Expense Deposits 5,661 5,137 4,474 Borrowings 956 500 143 --------------- --------------- --------------- Total interest expense 6,617 5,637 4,617 --------------- --------------- --------------- Net Interest Income 6,467 5,481 5,117 Provision for loan losses 450 227 140 --------------- --------------- --------------- Net Interest Income After Provision for Loan Losses 6,017 5,254 4,977 --------------- --------------- --------------- Other Income Service fees and charges 1,099 931 723 Net realized gains (losses) on sales of available-for-sale securities 17 (2) -- Net gains on loan sales 772 44 74 Other income 34 80 47 --------------- --------------- --------------- Total other income 1,922 1,053 844 --------------- --------------- --------------- Other Expenses Salaries and employee benefits 2,291 2,025 2,162 Net occupancy and equipment expenses 612 568 564 Data processing fees 190 151 126 Advertising 208 190 182 Legal and professional fees 164 144 155 Other expenses 1,241 686 891 --------------- --------------- --------------- Total other expenses 4,706 3,764 4,080 --------------- --------------- --------------- Income Before Income Tax 3,233 2,543 1,741 Income tax expense 1,257 933 702 --------------- --------------- --------------- Net Income $ 1,976 $ 1,610 $ 1,039 =============== =============== =============== Basic Earnings per Share $ 2.50 $ 1.88 $ 1.03 =============== =============== =============== Diluted Earnings per Share $ 2.44 $ 1.87 $ 1.03 =============== =============== ===============
River Valley Bancorp Consolidated Statements of Comprehensive Income Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 --------------------------------------------------------------- (In Thousands) Net Income $ 1,976 $ 1,610 $ 1,039 Other comprehensive income (loss), net of tax Unrealized gains (losses) on securities available for sale Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $18, $55, and $(22) 27 85 (43) Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $7 and $(1) 10 (1) -- --------------- --------------- --------------- 17 86 (43) --------------- --------------- --------------- Comprehensive Income $ 1,993 $ 1,696 $ 996 =============== =============== ===============
River Valley Bancorp Consolidated Statements of Stockholders' Equity Years Ended December 31, 2001, 2000 and 1999 Shares Accumulated Acquired Other Additional by Stock Comprehensive Common Stock Paid-in Retained Benefit Income Shares Amount Capital Earnings Plans (Loss) Total ------------------------------------------------------------------------------------ (In Thousands, Except for Share Amounts) Balances, January 1, 1999 1,173440 $ -- $11,119 $ 8,706 $ (1,199) $ (13) $ 18,613 Net income 1,039 1,039 Unrealized losses on securities (43) (43) Cash dividends ($.265 per share) (277) (277) Amortization of expense related to stock benefit plans 26 232 258 Purchase of stock (202,943) (2,029) (695) (2,724) ------- ------ ------- --------- -------- --------- --------- Balances, December 31, 1999 970,497 9,116 8,773 (967) (56) 16,866 Net income 1,610 1,610 Unrealized gains on securities, net of reclassification adjustment 86 86 Cash dividends ($.345 per share) (279) (279) Contribution to stock benefit plans (8) (8) Amortization of expense related to stock benefit plans 35 241 276 Purchase of stock (101,623) (1,016) (351) (1,367) ------- ------ ------- --------- -------- --------- --------- Balances, December 31, 2000 868,874 8,135 9,753 (734) 30 17,184 Net income 1,976 1,976 Unrealized gains on securities, net of reclassification adjustment 17 17 Cash dividends ($.50 per share) (388) (388) Exercise of stock options 4,670 68 68 Tax benefit of stock options exercised and RRP 4 4 Amortization of expense related to stock benefit plans 90 202 292 Purchase of stock (64,293) (643) (539) (1,182) ------- ------ ------- --------- -------- --------- --------- Balances, December 31, 2001 809,251 $ 0 $ 7,654 $ 10,802 $ (532) $ 47 $ 17,971 ======= ====== ======= ========= ======== ========= =========
River Valley Bancorp Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999 ------------------------------------------------------ (In Thousands) Operating Activities Net income $ 1,976 $ 1,610 $ 1,039 Items not requiring (providing) cash Provision for loan losses 450 227 140 Depreciation and amortization 311 240 250 Deferred income tax 3 (77) 38 Investment securities amortization (accretion), net 9 (26) (95) Investment securities (gains) losses (17) 2 -- Loans originated for sale in the secondary market (48,428) (2,614) (10,552) Proceeds from sale of loans in the secondary market 46,101 2,632 14,226 (Gain) loss on sale of loans (311) (18) 27 Amortization of deferred loan origination cost 157 99 93 Amortization of expense related to stock benefit plans 292 276 258 Gain on sale of premises and equipment -- (42) (11) Capitalized interest on construction (89) (8) -- Net change in Interest receivable (7) (425) 13 Interest payable 15 268 (138) Other adjustments 294 (116) 58 -------------- -------------- -------------- Net cash provided by operating activities 756 2,028 5,346 -------------- -------------- -------------- Investing Activities Purchase of FHLB stock (307) -- -- Purchases of securities available for sale (19,262) (7,949) (21,537) Proceeds from maturities of securities available for sale 5,204 7,093 18,347 Proceeds from sales of securities available for sale 3,689 2,002 -- Proceeds from maturities of securities held to maturity -- 1,204 1,052 Net change in loans (15,078) (26,165) (6,673) Purchases of premises and equipment (2,784) (1,143) (245) Proceeds from sale of premises and equipment -- 56 49 Proceeds from sale of real estate acquired through foreclosure 107 -- 75 Premiums paid on life insurance (95) -- -- -------------- -------------- -------------- Net cash used in investing activities (28,526) (24,902) (8,932) -------------- -------------- -------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 9,643 (2,991) 3,614 Certificates of deposit 5,703 18,965 (7,514) Proceeds from borrowings 32,050 23,450 9,131 Repayment of borrowings (19,000) (16,500) (2,901) Cash dividends (261) (350) (277) Purchase of stock (1,182) (1,367) (2,724) Proceeds from exercise of stock options 68 -- -- Advances by borrowers for taxes and insurance 8 5 2 Acquisition of stock for stock benefit plans -- (8) -- -------------- -------------- -------------- Net cash provided (used) by financing activities 27,029 21,204 (669) -------------- -------------- -------------- Net Change in Cash and Cash Equivalents (741) (1,670) (4,255) Cash and Cash Equivalents, Beginning of Year 6,382 8,052 12,307 -------------- -------------- -------------- Cash and Cash Equivalents, End of Year $ 5,641 $ 6,382 $ 8,052 ============== ============== ============== Additional Cash Flows Information Interest paid $ 6,691 $ 5,369 $ 4,755 Income tax paid 1,119 876 657 Investment securities held to maturity transferred to available for sale -- 1,934 --
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 1 - Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of River Valley Bancorp (Company) and its wholly owned subsidiary, River Valley Financial Bank (Bank), and the Bank's wholly owned subsidiary, Madison First Service Corporation (First Service), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Bank. The Bank operates under a federal thrift charter and provides full banking services, in a single significant business segment. As a federally-chartered thrift, the Bank is subject to regulation by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in southeastern Indiana. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Consolidation - The consolidated financial statements include the accounts of the Company, the Bank and First Service after elimination of all material intercompany transactions. Cash Equivalents - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Investment Securities - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in accumulated other comprehensive income, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Loans held for sale are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Company considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccural loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 2001, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the areas within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Goodwill, resulting from the acquisition of Citizens National Bank of Madison, is being amortized on the straight-line basis over a period of ten years. During 1998, goodwill was reduced by approximately $168,000 for the favorable resolution of certain preacquisition contingencies, and for the purchase of minority interest shares at a price below the assigned value at acquisition. It is periodically evaluated as to the recoverability of its carrying value. Mortgage servicing rights on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. Earnings per share have been computed based upon the weighted-average common shares outstanding during each year. Unearned ESOP shares have been excluded from the computation of average shares outstanding. Reclassifications of certain amounts in the 2000 and 1999 consolidated financial statements have been made to conform to the 2001 presentation. Note 2 - Restriction on Cash and Due From Banks The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2001, was $1,031,000. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 3 - Investment Securities
2001 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------- Available for sale Federal agencies $ 14,756 $ 179 $ 100 $ 14,835 State and municipal 335 12 -- 347 Mortgage-backed and other asset-backed securities 838 3 10 831 Corporate obligations 1,645 18 23 1,640 -------------- ------------- ------------- ------------- Total investment securities $ 17,574 $ 212 $ 133 $ 17,653 ============== ============= ============= ============= 2000 Gross Amortized Gross Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------- Available for sale Federal agencies $ 4,921 $ 68 $ -- $ 4,989 State and municipal 336 4 -- 340 Mortgage-backed and other asset-backed securities 1,941 5 28 1,918 -------------- ------------- ------------- ------------- Total investment securities $ 7,198 $ 77 $ 28 $ 7,247 ============== ============= ============= =============
The amortized cost and fair value of securities available for sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Amortized Fair Cost Value ----------------------------------- One to five years $ 16,676 $ 16,759 Five to ten years 60 63 -------------- -------------- 16,736 16,822 Mortgage-backed securities 212 214 Other asset-backed securities 626 617 -------------- -------------- Totals $ 17,574 $ 17,653 ============== ============== River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Securities with a carrying value of $622,000 and $6,851,000 were pledged at December 31, 2001 and 2000 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during 2001 and 2000 were $3,689,000 and $2,002,000. Gross gains of $33,000 and $10,000 and gross losses of $16,000 and $12,000 were realized on those sales. There were no sales of securities available for sale during 1999. On April 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting of Derivative Instruments and Hedging Activities. As permitted by SFAS No. 133, all securities classified as held to maturity were transferred to available for sale. The adoption of this statement did not have a significant impact on the Company's financial statements. Note 4 - Loans and Allowance
2001 2000 ------------------------------------------- Residential real estate One-to-four family residential $ 70,793 $ 77,304 Multi-family residential 3,932 3,319 Construction 6,874 6,827 Nonresidential real estate and land 41,892 30,213 Commercial 19,216 16,361 Consumer and other 17,406 14,686 ---------------- ---------------- 160,113 148,710 Unamortized deferred loan costs 356 324 Undisbursed loans in process (3,163) (6,362) Allowance for loan losses (1,972) (1,702) ---------------- ---------------- Total loans $ 155,334 $ 140,970 ================ ================
2001 2000 1999 ---------------------------------------------------------------- Allowance for loan losses Balances, January 1 $ 1,702 $ 1,522 $ 1,477 Provision for losses 450 227 140 Recoveries on loans 31 37 28 Loans charged off (211) (84) (123) ---------------- ---------------- ---------------- Balances, December 31 $ 1,972 $ 1,702 $ 1,522 ================ ================ ================
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Information on impaired loans is summarized below.
2001 2000 ------------------------------------------- Impaired loans with an allowance $ 339 $ 250 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 357 885 ---------------- ---------------- Total impaired loans $ 696 $ 1,135 ================ ================ Allowance for impaired loans (included in the Company's allowance for loan losses) $ 78 $ 57 2001 2000 ------------------------------------------ Average balance of impaired loans $ 1,352 $ 1,128 Interest income recognized on impaired loans 117 89 Cash-basis interest included above 110 85
At December 31, 1999, the Company had approximately $600,000 of impaired loans. At December 31, 2001, 2000 and 1999, the Company had nonperforming loans totaling $690,000, $621,000, and $857,000, respectively. Note 5 - Premises and Equipment
2001 2000 ------------------------------------------- Land $ 952 $ 805 Buildings 3,455 1,629 Leasehold improvements 2 117 Equipment 2,509 2,472 Construction in progress -- 853 ---------------- ---------------- Total cost 6,918 5,876 Accumulated depreciation and amortization (1,539) (3,059) ---------------- ---------------- Net $ 5,379 $ 2,817 ================ ================
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 6 - Deposits
2001 2000 ----------------------------------------- Demand deposits $ 42,321 $ 31,559 Savings deposits 20,089 21,208 Certificates and other time deposits of $100,000 or more 30,343 30,606 Other certificates and time deposits 52,818 46,852 ---------------- ---------------- Total deposits $ 145,571 $ 130,225 ================ ================ Certificates and other time deposits maturing in 2002 $ 64,564 2003 11,981 2004 4,244 2005 1,008 2006 883 Thereafter 481 ---------------- $ 83,161 ================ Note 7 - Borrowings 2001 2000 ----------------------------------------- Federal Home Loan Bank advances $ 25,000 $ 13,000 Line of credit 1,500 450 ---------------- ---------------- Total borrowings $ 26,500 $ 13,450 ================ ================
Maturities by year for advances at December 31, 2001 are $21,000,000 in 2002, $1,000,000 in 2003, $1,000,000 in 2006 and $2,000,000 in 2011. The weighted-average interest rate at December 31, 2001 and 2000 was 4.54% and 6.35%. The Federal Home Loan Bank advances are secured by first-mortgage loans totaling $54,440,000 at December 31, 2001. Advances are subject to restrictions or penalties in the event of prepayment. The Company has a $1,500,000 line of credit with another financial institution, which matures in February 2002 with a variable interest rate of .5% under prime. The line of credit is collateralized by a pledge of 1,000 shares of the Bank's stock. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 8 - Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled $56,057,000, $37,562,000 and $40,212,000 at December 31, 2001, 2000 and 1999, respectively. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2001, 2000 and 1999 totaled $430,000, $290,000 and $286,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights.
2001 2000 1999 --------------------------------------------------------------- Mortgage Servicing Rights Balances, January 1 $ 227 $ 225 $ 222 Servicing rights capitalized 441 26 102 Amortization of servicing rights (128) (24) (99) ---------------- ---------------- ---------------- 540 227 225 Valuation allowance (110) -- -- ---------------- ---------------- ---------------- Balances, December 31 $ 430 $ 227 $ 225 ================ ================ ================ Activity in the valuation allowance for mortgage servicing rights was as follows: 2001 ---------------------- Balance, beginning of year $ -- Additions 110 Reductions -- Direct write downs -- ---------------- Balance, end of year $ 110 ================
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 9 - Income Tax
2001 2000 1999 --------------------------------------------------------------- Income tax expense (benefit) Currently payable Federal $ 1,000 $ 805 $ 505 State 254 205 159 Deferred Federal 2 (61) 38 State 1 (16) -- ---------------- ---------------- ---------------- Total income tax expense $ 1,257 $ 933 $ 702 ================ ================ ================ Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 1,099 $ 865 $ 592 Effect of state income taxes 168 125 105 Other (10) (57) 5 ---------------- ---------------- ---------------- Actual tax expense $ 1,257 $ 933 $ 702 ================ ================ ================ Effective tax rate 38.8% 36.7% 40.3% A cumulative net deferred tax asset is included in other assets. The components of the liability are as follows: 2001 2000 ------------------------------------------- Assets Allowance for loan losses $ 759 $ 564 Deferred compensation 187 147 Pensions and employee benefits 35 60 Securities available for sale 72 83 Purchase accounting adjustments 80 131 Other 11 6 ---------------- ---------------- Total assets 1,144 991 ---------------- ---------------- Liabilities Depreciation and amortization (119) (103) Loan fees (139) (127) Mortgage servicing rights (215) (93) Other (17) -- ---------------- ---------------- Total liabilities (490) (323) ---------------- ---------------- $ 654 $ 668 ================ ================
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Retained earnings include approximately $2,100,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $714,000. Note 10 - Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets. Financial instruments whose contract amount represents credit risk as of December 31 were as follows: 2001 2000 ------------------------------------- Commitments to extend credit $ 17,083 $ 14,070 Standby letters of credit 258 196 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and Bank are also subject to claims and lawsuits, which arise, primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. Note 11 - Dividend and Capital Restrictions Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined) for the current year plus those for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 2001, the stockholder's equity of the Bank was $19,016,000, of which approximately $1,709,000 was available for the payment of dividends. Note 12 - Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 2001 and 2000, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2001 that management believes have changed the Bank's classification.
Required for Adequate To Be Well Actual Capital(1) Capitalized(1) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------- 2001 Total risk-based capital(1) (to risk-weighted assets) $ 20,162 13.9% $ 11,627 8.0% $ 14,534 10.0% Tier 1 capital(1)(to risk-weighted assets) 18,398 12.7% 5,814 4.0% 8,720 6.0% Core capital(1)(to adjusted total assets) 18,398 9.6% 7,635 4.0% 9,544 5.0% Core capital(1)(to adjusted tangible assets) 18,398 9.6% 3,818 2.0% -- N/A Tangible capital(1)(to adjusted total assets) 18,398 9.6% 2,863 1.5% -- N/A 2000 Total risk-based capital(1)(to risk-weighted assets) $ 18,031 15.5% $ 9,293 8.0% $ 11,617 10.0% Tier 1 capital(1)(to risk-weighted assets) 16,867 14.5% 4,647 4.0% 6,970 6.0% Core capital(1)(to adjusted total assets) 16,867 10.5% 6,458 4.0% 8,072 5.0% Core capital(1)(to adjusted tangible assets) 16,867 10.5% 3,229 2.0% -- N/A Tangible capital(1)(to adjusted total assets) 16,867 10.5% 2,422 1.5% -- N/A
(1) As defined by regulatory agencies Note 13 - Employee Benefits The Bank provides pension benefits for substantially all of the Bank's employees and is a participant in a pension fund known as the Pentegra Group. This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. There was no pension expense or benefit for the years ended December 31, 2001, 2000 and 1999. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) The Bank has a retirement savings 401(k) plan in which substantially all employees may participate. The Bank matches employees' contributions at the rate of 50 percent for the first 6 percent of W-2 earnings contributed by participants. The Bank's expense for the plan was $35,000, $20,000 and $24,000 for the years ended December 31, 2001, 2000 and 1999. The Bank has a supplemental retirement plan, which provides retirement benefits to all directors. The Bank's obligations under the plan have been funded via the purchase of key man life insurance policies, of which the Bank is the beneficiary. Expense recognized under the supplemental retirement plan totaled approximately $42,000, $24,000 and $32,000 for the years ended December 31, 2001, 2000 and 1999, respectively. As part of the conversion in 1996, the Company established an ESOP covering substantially all employees of the Company and Bank. The ESOP acquired 95,220 shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $952,000 of common stock acquired by the ESOP is shown as a reduction of stockholders' equity. Unearned ESOP shares totaled 38,023 and 48,695 at December 31, 2001 and 2000 and had a fair value of $787,000 and $779,000 at December 31, 2001 and 2000. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which may be distributed to participants or used to repay the loan, are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company and Bank, are made to the ESOP. ESOP expense for the years ended December 31, 2001, 2000 and 1999 was $196,000, $156,000 and $147,000. At December 31, 2001, the ESOP had 57,197 allocated shares, 38,023 suspense shares and no committed-to-be released shares. At December 31, 2000, the ESOP had 46,525 allocated shares, 48,695 suspense shares and no committed-to-be released shares. The Company also has a Recognition and Retention Plan (RRP), which provides for the award and issuance of up to 47,610 shares of the Company's stock to members of the Board of Directors and management. The RRP has purchased 32,920 shares of the Company's common stock in the open market. At December 31, 2001, 33,820 shares had been awarded. Common stock awarded under the RRP vests ratably over a five-year period, commencing with the date of the award. Expense recognized under the RRP plan totaled approximately $98,000, $105,000 and $113,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Note 14 - Related Party Transactions The Bank has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) The aggregate amount of loans, as defined, to such related parties were as follows: Balances, January 1, 2001 $ 657 Change in composition 129 New loans, including renewals 885 Payments, etc., including renewals (527) ---------------- Balances, December 31, 2001 $ 1,144 ================ Deposits from related parties held by the Banks at December 31, 2001 and 2000 totaled $732,000 and $915,000. Note 15 - Stock Option Plan Under the Company's incentive stock option plan, which is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, the Company grants selected executives and other key employees stock option awards which vest at a rate of 20 percent a year. During 1997, the Company authorized the grant of options for up to 119,025 shares of the Company's common stock. The exercise price of each option, which has a ten-year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions:
2001 2000 1999 ---------------------------------------------------------- Risk-free interest rates 5.1% 6.5 and 5.9% 5.5% Dividend yields 2.8% 2.7% 2.2% Volatility factors of expected market price of common stock 7.8% 11.7% 10.0% Weighted-average expected life of the options 10 years 10 years 10 years
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows:
2001 2000 1999 ----------------------------------------------------- Net income As reported $ 1,976 $ 1,610 $ 1,039 Pro forma 1,941 1,575 999 Basic earnings per share As reported 2.50 1.88 1.03 Pro forma 2.45 1.83 .99 Diluted earnings per share As reported 2.44 1.87 1.03 Pro forma 2.40 1.83 .99
The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999 Weighted- Weighted- Weighted- Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 99,345 $ 14.17 93,959 $ 14.58 103,959 $ 14.81 Granted 2,000 17.90 24,000 13.17 10,000 12.63 Exercised (4,670) 14.61 Forfeited/expired (10,592) 14.78 (18,614) 14.78 (20,000) 14.78 -------- -------- ------- Outstanding, end of year 86,083 $ 14.16 99,345 $ 14.17 93,959 $ 14.58 ======== ======== ======== Options exercisable at year end 53,287 51,725 39,787 Weighted-average fair value of options granted during the year $ 3.08 $ 3.18 $ 2.79
As of December 31, 2001, options totaling 16,000 have exercise prices ranging from $10.75 to $12.63 and a weighted-average remaining contractual life of 8.0 years, options totaling 68,083 have exercise prices ranging from $13.97 to $14.78 and a weighted-average remaining contractual life of 6.0 years, options totaling 2,000 have an exercise price of $17.90 and a weighted-average remaining contractual life of 9.5 years. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 16 - Earnings Per Share
2001 2000 1999 Weighted- Weighted- Per Weighted- Average Per Share Average Share Average Per Share Income Shares Amount Income Shares Amount Income Shares Amount --------------------------------------------------------------------------------------------- Basic Earnings Per Share Income available to common stockholders $ 1,976 790,933 $ 2.50 $1,610 858,059 $ 1.88 $1,039 1,007,087 $ 1.03 ======== ======== ======== Effect Of Dilutive Stock Options 17,433 1,486 ------- ------- ------- ------- ------ --------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 1,976 808,366 $ 2.44 $1,610 859,545 $ 1.87 $1,039 1,007,087 $ 1.03 ======= ======= ======== ====== ======= ======== ====== ========= ========
Options to purchase 65,345 shares of common stock with a weighted-average exercise price of $14.78 per share and 93,959 shares with a weighted-average exercise price of $14.58 per share were outstanding at December 31, 2000 and 1999, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. Note 17 - Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value. Investment Securities - Fair values are based on quoted market prices. Loans Held for Sale - Fair values are based on quoted market prices. Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values. FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Line of Credit - The approximate market value for this variable borrowing approximates carrying value. Advance Payment by Borrowers for Taxes and Insurance - The fair value approximates carrying value. Off-Balance Sheet Commitments - For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The difference between the fair value and notional amount of outstanding loan commitments at December 31, 2001 and 2000, was not material. The estimated fair values of the Company's financial instruments are as follows:
2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------------------------------------- Assets Cash and cash equivalents $ 5,641 $ 5,641 $ 6,382 $ 6,382 Investment securities available for sale 17,653 17,653 7,247 7,247 Loans including loans held for sale, net 157,972 158,931 140,970 139,660 Interest receivable 1,475 1,475 1,468 1,468 Stock in FHLB 1,250 1,250 943 943 Liabilities Deposits 145,571 145,640 130,225 130,168 FHLB advances 25,000 25,284 13,000 13,034 Line of credit 1,500 1,500 450 450 Interest payable 613 613 598 598 Advance payments by borrowers for taxes and insurance 49 49 41 41
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 18 - Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets 2001 2000 ----------------------------------------- Assets Cash and due from banks $ 400 $ 202 Investment in common stock of subsidiary 19,016 17,161 Other assets 182 271 ---------------- ---------------- Total assets $ 19,598 $ 17,634 ================ ================ Liabilities Borrowings $ 1,500 $ 450 Dividends payable 127 -- ---------------- ---------------- Total liabilities 1,627 450 Stockholders' Equity 17,971 17,184 ---------------- ---------------- Total liabilities and stockholders' equity $ 19,598 $ 17,634 ================ ================
Condensed Statements of Income 2001 2000 1999 ------------------------------------------------------------- Income Dividends from subsidiary $ 425 $ 1,621 $ 3,158 Other income 45 65 62 ---------------- ---------------- ---------------- Total income 470 1,686 3,220 ---------------- ---------------- ---------------- Expenses Interest expense 55 63 101 Other expenses 153 120 105 ---------------- ---------------- ---------------- Total expenses 208 183 206 ---------------- ---------------- ---------------- Income before income tax and equity in undistributed (distribution in excess of) income of subsidiary 262 1,503 3,014 Income tax benefit 65 47 58 ---------------- ---------------- ---------------- Income before equity in undistributed (distribution in excess of) income of subsidiary 327 1,550 3,072 Equity in undistributed (distribution in excess of) income of subsidiary 1,649 60 (2,033) ---------------- ---------------- ---------------- Net Income $ 1,976 $ 1,610 $ 1,039 ================ ================ ================
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Table Dollar Amounts in Thousands Except Per Share Amounts) Condensed Statements of Cash Flows 2001 2000 1999 ----------------------------- Operating Activities Net income $ 1,976 $ 1,610 $ 1,039 Items not requiring (providing) cash (1,453) (4) 1,905 ------- ------- ------- Net cash provided by operating activities 523 1,606 2,944 ------- ------- ------- Financing Activities Purchase of stock (1,182) (1,367) (2,724) Proceeds from exercise of stock options 68 -- -- Acquisition of stock for stock benefit plans -- (8) -- Proceeds from borrowings 1,050 450 3,131 Repayment of borrowings -- (500) (2,901) Cash dividends (261) (350) (277) ------- ------- ------- Net cash used in financing activities (325) (1,775) (2,771) ------- ------- ------- Net Change in Cash and Cash Equivalents 198 (169) 173 Cash and Cash Equivalents at Beginning of Year 202 371 198 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 400 $ 202 $ 371 ======= ======= ======= GENERAL INFORMATION FOR SHAREHOLDERS Transfer Agent and Registrar: Shareholder and General Inquiries: Corporate Trust Services River Valley Bancorp Fifth Third Center Attn: Matthew P. Forrester 38 Fountain Square Plaza 430 Clifty Drive, P.O. Box 1590 Cincinnati, Ohio 45263 Madison, Indiana 47250 Tel: (513) 579-5417 Tel: (812) 273-4949 Fax: (513) 744-6785 Fax: (812) 273-4944 Corporate Counsel: Special Counsel: Lonnie D. Collins, Attorney Barnes & Thornburg 307 Jefferson Street 11 S. Meridian Street Madison, Indiana 47250 Indianapolis, Indiana 46204 Tel: (812) 265-3616 Tel: (317) 236-1313 Fax: (812) 273-3143 Fax: (317) 231-7433 Annual and Other Reports: Additional copies of this Annual Report to Shareholders and copies of the most recent Form 10-K may be obtained without charge by contacting the Corporation. Offices of River Valley Financial Bank: Hilltop: 430 Clifty Drive Downtown: 233 East Main Street Drive thru: 401 East Main Street Wal-Mart: 567 Ivy Tech Drive Hanover: 10 Medical Plaza Internet and E-MAIL Address: rvfbank.com Annual Meeting: The Annual Meeting of Shareholders of River Valley Bancorp will be held on Wednesday, April 17, 2002, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250. DIRECTORS OF THE COMPANY AND THE BANK Fred W. Koehler Matthew P. Forrester Charles J. McKay Chairman Director & President Director Robert W. Anger Michael J. Hensley ***************** Director Director Jonnie L. Davis Earl W. Johann Lonnie D. Collins Director Director Secretary EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK Matthew P. Forrester Mark A. Goley Anthony D. Brandon President, CEO Vice President of Lending Vice President of Loan Compliance Officer Administration Barbara J. Eades Vice President of Retail Larry C. Fouse Deanna J. Liter Banking Vice President of Finance Vice President of Data Services Loy M. Skirvin Dawn M. Moore Vice President of Human Internal Audit Resources OFFICERS AND MANAGERS OF RIVER VALLEY FINANCIAL BANK Loan Officers Other Managers James B. Allen Kenneth L. Cull - Collection Officer Theresa A. Dryden Donald R. Davidson - Accounting Manager Rick T. Nelson Mary Ellen McClelland - Executive Secretary Robert J. Schoenstein--AVP Luann Nay - Loan Administrator Natasha Wells Kelly Shelton - Loan Operations Manager Teresa J. Smith - Data Processing Manager Sandy Stilwell - Customer Service Manager Mary Ellen Wehner - Commercial Loan Operations Manager Branch Managers Angela D. Adams Debbie R. Finnegan Rachael A. Goble Linda L. Ralston Rhonda E. Wingham EX-21 4 ex_21.txt SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF RIVER VALLEY BANCORP Subsidiaries of River Valley Bancorp: Name Jurisdiction of Incorporation ---------------------------------- ----------------------------- River Valley Financial Bank Federal Madison First Service Corporation Indiana EX-23.1 5 ex23_1.txt CONSENT OF BKD Exhibit 23.1 Consent of Independent Public Accountants We hereby consent to the incorporation by reference to the Registration Statement on Form S-8 of River Valley Bancorp (the "Company"), File Number 000-21765, of our report dated February 15, 2002 on the consolidated financial statements of the Company which report is incorporated by reference in the Company's 2001 Annual Report on Form 10-KSB filed pursuant to the Securities and Exchange Act of 1934. /s/ BKD, LLP - ----------------------------- BKD, LLP Indianapolis, IN March 27, 2002 EX-23.2 6 ex23_2.txt CONSENT OF GRANT THORNTON Exhibit 23.2 ACCOUNTANT'S CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 000-21765, of our report dated February 16, 2000 contained in Part II, Item 7 of this Form 10-KSB. /s/ Grant Thornton LLP - ------------------------------ GRANT THORNTON LLP Cincinnati, Ohio March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----