ANNLRPT 1 ar_02.txt RIVER VALLEY 12/31/02 AR To Our Shareholders, Customers, and Friends: It is my pleasure to present to you River Valley Bancorp's seventh Annual Report to Shareholders, covering the year ending December 31, 2002. From a national perspective, 2002 offered the promise of a renewed spirit dedicated to patriotism, idealism, and economic prosperity. It was hoped that the physiological and psychological scar incurred by our nation as a result of September 11, 2001, was to have invigorated a nation, in thinking and in action. The reality of 2002 was that the country was besieged by a year-long saga of other bad news, and of wars and rumors of war. The promise of hope got lost in a mire of uncertainties. While most corporations suffered the effects of that uncertainty, River Valley Bancorp experienced yet another outstanding year in 2002. Year 2002 was a record year in a number of financial measures, none more important than net income. For the third consecutive year, the Corporation experienced no less than double-digit gains in profitability, and even more impressive total returns to shareholders. For 2002, shareholders saw a total annual return of over 50% on their investment. Financially for the year ended December 31, 2002, net income was $2,558,000, or basic earnings per share of $3.29, compared to $1,976,000, or $2.50 basic earnings per share, reported in 2001. The return on average assets for the fiscal year 2002 was 1.22%; the return on average equity was 13.21%. For the fiscal year 2001, those numbers were 1.09% and 11.27%, respectively. The book value of shares outstanding as of December 31, 2002 was $25.45 compared to $22.21 at December 31, 2001. The organization experienced good asset growth in fiscal 2002 supported by positive portfolio loan growth. As of December 31, 2002, total assets were $224.0 million, an increase of 16.9%. Net loans, including loans held for sale, were $166.0 million, an increase of $8.0 million, or 5.1% from that recorded as of December 31, 2001. Deposits also increased by $16.2 million, or 11.1% to $161.8 million as of December 31, 2002. Shareholders' equity as of December 31, 2002 was $20.6 million, or 9.2% as expressed as a percentage of assets. For the year ended 2002, the Corporation funded its allowance for loan losses with $570,000, up from $450,000 for the previous year. The allowance for loan losses as of December 31, 2002 totaled $2.1 million, or 1.27% of loans outstanding. Total delinquency, as defined as 30 days or more, stood at 0.96% of total loans as of December 31, 2002, virtually unchanged from the 0.97% level experienced as of December 31, 2001. Fiscal 2002 was yet another record year. The Corporation is on the move, building and expanding its asset base, diversifying its market, and solidifying its core business. We are proud of our accomplishments, but always mindful that our success is defined by customer service and our ability to differentiate ourselves from other banks and "bank wannabes." We sincerely appreciate your continued support and patronage. 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 813,820 common shares of River Valley Bancorp outstanding at February 25, 2003, held of record by approximately 378 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 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 2000. Such sales prices do not include retail financial markups, markdowns or commissions. Information relating to sale 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 2002 December 31, 2002 $31.75 $26.35 $0.250 September 30, 2002 28.25 23.74 0.200 June 30, 2002 27.70 23.80 0.200 March 31, 2002 26.00 20.20 0.150 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
The high and low sale prices for River Valley's common shares between December 31, 2002 and February 25, 2003 were $31.24 and $28.98, 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 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, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total amount of: (In thousands) Assets $224,020 $191,618 $162,130 $138,695 $138,369 Loans receivable - net (1) 165,957 157,972 140,970 115,131 112,385 Cash and cash equivalents (2) 18,610 5,641 6,382 8,052 12,307 Mortgage-backed and related securities 583 831 1,918 4,209 5,986 Investment securities 27,591 16,822 5,329 5,230 1,283 Deposits 161,829 145,571 130,225 114,251 118,151 FHLB advances and other borrowings 40,000 26,500 13,450 6,500 270 Shareholders' equity- net 20,633 17,971 17,184 16,866 18,613 Summary of consolidated earnings data: Year Ended December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (In thousands, except share data) Total interest income $ 12,755 $ 13,084 $ 11,118 $ 9,734 $ 10,108 Total interest expense 5,638 6,617 5,637 4,617 4,842 -------- -------- -------- -------- -------- Net interest income 7,117 6,467 5,481 5,117 5,266 Provision for losses on loans 570 450 227 140 275 -------- -------- -------- -------- -------- Net interest income after provision for losses on loans 6,547 6,017 5,254 4,977 4,991 Other income 3,094 1,922 1,053 844 1,188 General, administrative and other expense 5,455 4,706 3,764 4,080 4,093 -------- -------- -------- -------- -------- Earnings before income tax expense 4,186 3,233 2,543 1,741 2,086 Income tax expense 1,628 1,257 933 702 833 -------- -------- -------- -------- -------- Net earnings $ 2,558 $ 1,976 $ 1,610 $ 1,039 $ 1,253 ======== ======== ======== ======== ======== Basic earnings per share $ 3.29 $ 2.50 $ 1.88 $ 1.03 $ 1.13 ======== ======== ======== ======== ======== Diluted earnings per share $ 3.15 $ 2.44 $ 1.87 $ 1.03 $ 1.12 ======== ======== ======== ======== ========
--------------------------------------- (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, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Interest rate spread during period 3.39% 3.58% 3.47% 3.63% 3.66% Net yield on interest-earning assets (1) 3.56 3.80 3.79 3.94 4.08 Return on assets (2) 1.22 1.09 1.05 0.76 0.92 Return on equity (3) 13.21 11.27 9.45 5.87 6.85 Equity to assets (4) 9.21 9.38 10.60 12.16 13.45 Average interest-earning assets to average interest-bearing liabilities 106.18 105.94 108.02 108.81 111.07 Non-performing assets to total assets (4) 0.48 0.36 0.38 0.62 1.47 Allowance for loan losses to total loans outstanding (4) 1.27 1.25 1.21 1.28 1.33 Allowance for loan losses to non-performing loans (4) 194.54 285.80 274.07 164.41 75.78 Net charge-offs to average total loans outstanding 0.27 0.12 0.04 0.08 0.06 General, administrative and other expense to average assets (5) 2.60 2.60 2.47 2.97 3.01 Dividend payout ratio 25.40 20.49 18.45 25.73 19.64 Number of full service offices (4) 4 4 5 5 5
------------------------------------- (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, 2002, 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. Critical Accounting Policies Note 1 to the consolidated financial statements thereto presented on pages 31 through 33 contains a summary of River Valley's significant accounting policies for the year ended December 31, 2002. Certain of these policies are important to the portrayal of River Valley's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. As described below, management believes that its critical accounting policies include those relating to the allowance for loan losses and the valuation of mortgage servicing rights. Allowance for loan losses The allowance for loan losses is a significant estimate that can and does change based on management's assumptions about specific borrowers and current economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses, at least on a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current economic condition, the amount of loans outstanding, certain identified problem loans, and the probability of collecting all amounts due. 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. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loan loss reserves. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Mortgage Servicing Rights River Valley recognizes the rights to service mortgage loans as separate assets in the consolidated balance sheet. The total cost of loans when sold is allocated between loans and mortgage servicing rights based on the relative fair values of each. Mortgage servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. Mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Factors included in the calculation of fair value of the mortgage servicing rights include: estimating the present value of future net cash flows, market loan prepayment speeds for similar loans, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the estimated period of net servicing revenue. It is likely that these economic factors will change over the life of the mortgage servicing rights, resulting in different valuations of the mortgage servicing rights. The differing valuations will affect the carrying value of the mortgage servicing rights on the consolidated balance sheet, as well as the amounts recorded in the consolidated statement of income. Discussion of Changes in Financial Condition from December 31, 2001 to December 31, 2002 At December 31, 2002, River Valley's consolidated assets totaled $224.0 million, representing an increase of $32.4 million over the December 31, 2001 total. This increase in assets was funded in part by a $16.3 million increase in deposits and a $13.5 million increase in borrowings. Deposits increased to $161.8 million as of December 31, 2002, from $145.6 million while borrowings increased from $26.5 million as of December 31, 2001, to $40.0 million as of December 31, 2002. Shareholders' equity was $20.6 million as December 31, 2002, a net increase of $2.6 million from $18.0 million as of December 31, 2001. Liquid assets (i.e., cash, federal funds sold, interest-earning deposits and certificates of deposit) increased by $13.0 million from December 31, 2001 levels to a total of $18.6 million at December 31, 2002. Investment securities totaled $27.6 million at December 31, 2002, an increase of $10.8 million over December 31, 2001. Mortgage-backed securities decreased by $248,000, to a total of $583,000 at December 31, 2002, 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, 2001 to December 31, 2002 Loans receivable, including loans held for sale, totaled $166.0 million at December 31, 2002, an increase of $8.0 million over the $158.0 million total at December 31, 2001. The increase resulted primarily from loan originations during 2002 of $171.4 million, which were partially offset by principal repayments of $95.5 million and sales of $67.9 million. Loan origination volume for 2002 exceeded that of 2001 by $23.5 million, or 15.9%. There were increases in all types of lending with the exception of consumer, land, and multi-family loans. The volume of loan sales into the secondary mortgage market increased during 2002 from the 2001 volume by $21.5 million, due in large part to low interest rates. River Valley's allowance for loan losses totaled approximately $2.1 for the year ended December 31, 2002, which represented 1.27% of total loans at that date. The allowance for loan losses totaled $2.0 million, or 1.25% of total loans at December 31, 2001. Non-performing loans (defined as loans delinquent greater than 90 days and loans on nonaccrual status) totaled $1.1 million and $0.7 million at December 31, 2002 and 2001, respectively. The allowance for loan losses represented 195% and 286% of non-performing loans at December 31, 2002 and 2001, respectively. Although management believes that its allowance for loan losses at December 31, 2002 was adequate based upon the available facts and circumstances, there can be no assurance that additions to such an allowance will not be necessary in future periods, which could negatively affect the Corporation's results of operations. Deposits increased by $16.2 million, or 11.1%, to a total of $161.8 million at December 31, 2002, compared to $145.6 million total at December 31, 2001. Savings and demand deposits increased by $3.9 million, or 6.2%, during 2002, while certificates of deposit increased by $12.4 million, or 14.9%. These fluctuations in balances were attributed to competitive rates and the flight of money from equity investments. Advances from the Federal Home Loan Bank and other borrowed money increased by $13.5 million from the total at December 31, 2001, as current period borrowings of $40.0 million were used in part to fund loan growth. The low interest rate environment has allowed for prudent long term funding. Shareholders' equity totaled $20.6 million at December 31, 2002, an increase of $2.6 million from the $18.0 million total at December 31, 2001. The increase resulted primarily from net income of $2.6 million, which was partially offset by a modest repurchase of shares totaling $140,000 and cash dividends of $619,000. This net increase also includes a net increase of $450,000 related to stock benefit plans, proceeds of $99,000 from the exercise of stock options and an increase in the unrealized gain on securities available for sale of $314,000. 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, 2002 and 2001 General River Valley's net earnings for the year ended December 31, 2002, totaled $2.56 million, an increase of $582,000, or 29.5%, from net earnings reported in 2001. The increase in net earnings in the 2002 period was primarily attributable to an increase of $1,172,000 in other income, while net interest income increased by $650,000, and general, administrative and other expense were $749,000 higher in the current period. The provision for federal income taxes was $371,000 more in fiscal year 2002 as compared to the same period in 2001. The provision for loan losses in 2002 was $570,000 as compared to $450,000 in 2001. Net Interest Income Total interest income for the year ended December 31, 2002, amounted to $12.8 million, a decrease of $329,000, or 2.5%, from the 2001 total, reflecting the effects of lower interest rates offset by higher average balances of interest earning assets. The average balance of interest-earning assets outstanding year-to-year increased by $30.0 million, however, the yield on those assets decreased from an average yield of 7.70% in 2001 to 6.38% in 2002. Interest income on loans and mortgage-backed securities totaled $11.6 million for 2002, a decrease of approximately $705,000, or 5.7%, from 2001. Interest income on investments, FHLB stock and interest-earning deposits increased by $376,000, or 50.5%, due to higher average balances of those investments. Interest expense on deposits decreased by $1.6 million, or 28.4%, to a total of $4.1 million for the year ended December 31, 2002, due primarily to lower costs of funding higher average balances. The cost of deposits decreased from 4.0% in 2001 to 2.6% in fiscal 2002. Interest expense on borrowings totaled $1.6 million for the year ended December 31, 2002, an increase of $628,000 from 2001. The increase resulted primarily from higher average borrowings year-to-year, offset by a 62 basis point decrease in average cost. As a result of the foregoing changes in interest income and interest expense, net interest income increased during 2002 by $650,000, or 10.1%, compared to 2001. The interest rate spread decreased by 19 basis points for 2002, to 3.39% from 3.58% in the 2001 period, while the net interest margin amounted to 3.56% in 2002 and 3.80% in 2001. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based upon historical experience, the volume and type of lending conducted by River Valley Financial, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the primary market area, and other factors related to the collectability of the loan portfolio. As a result of such analysis, management recorded a $570,000 provision for losses on loans in 2002, an increase of $120,000, or 26.7%, compared to the $450,000 provision recorded in 2001. The current period provision generally reflects growth in the loan portfolio, coupled with a change in the loan mix; that is less 1-4 family residential loans and more commercial/non-residential loans. 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 2002 and 2001 (continued) Non-performing loans for the period ended December 31, 2002 were $1.1 million, an increase of approximately $390,000 from the $690,000 recorded as of fiscal year 2001. Net charge-offs amounted to $441,000 in 2002, compared to $180,000 in 2001. While management believes that the allowance for losses on loans is adequate at December 31, 2002, based upon available facts and circumstances, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming loans in the future. Other Income Other income amounted to $3.1 million for the year ended December 31, 2002, an increase of $1.2 million, or 61.0%, compared to 2001, due primarily to the increase in net gains on loan sales, a $352,000 gain on sale of a bank property, and an increase in service fees and charges of $256,000. Net gains on loan sales increased from $772,000 in 2001 to $1.2 million in 2002, an increase of $454,000. The volume of loan sales increased from $46.1 million in 2001 to $67.6 million in 2002. General, Administrative and Other Expense General, administrative and other expense totaled $5.5 million for the year ended December 31, 2002, an increase of $749,000 over the 2001 total. Employee compensation and benefits increased by $328,000 in fiscal 2002, as compared to 2001, primarily from additional staffing, cost of living, benefit expense and an increase in ESOP expenses. Occupancy and equipment expense increased by $162,000 in fiscal 2002, as compared to 2001, due to higher depreciation costs and equipment maintenance expense. Other operating expenses increased by $259,000 primarily from increases in office supplies, data processing, charitable contributions and mortgage servicing. Income Taxes The provision for income taxes increased by $371,000, or 29.5 %, for the year ended December 31, 2002, as compared to 2001. The effective tax rates were 38.9% and 38.8% for the years ended December 31, 2002 and 2001, respectively. 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 2001 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. 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 2001 and 2000 (continued) 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 4.0% 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 2001 period provision generally reflects growth in the loan portfolio, coupled with a change in the loan mix; that is less 1-4 family residential loans and more commercial/non-residential loans. Non-performing 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 2000. Net charge-offs amounted to $180,000 in 2001, compared to $47,000 in 2000. The allowance for losses on loans was considered adequate at December 1, 2001. 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) 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. 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, 2002 2001 2000 Average Interest Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/ balance paid rate balance paid rate balance paid rate ---------- -------- ------ ----------- -------- ------ Assets (Dollars in thousands) Interest-earning assets: Interest-earning deposits $ 10,186 $ 158 1.55% $ 5,042 $ 185 3.67% $ 4,005 $ 240 5.99% Other securities (1) 23,136 867 3.75 8,480 481 5.67 3,580 243 6.79 Mortgage-backed and related securities 730 31 4.25 1,259 73 5.80 2,976 192 6.45 Loans receivable (2) 164,306 11,604 7.06 154,171 12,267 7.96 133,255 10,365 7.78 FHLB stock 1,623 95 5.85 1,055 78 7.39 943 78 8.27 -------- ------- --------- -------- ------- ------- Total interest-earning assets 199,981 12,755 6.38 170,007 13,084 7.70 144,759 11,118 7.68 -------- ------- -------- ------- Non-interest earning assets, net of allowance for loan losses 9,786 10,922 7,859 -------- ---------- ------- Total assets $209,767 $ 180,929 $152,618 ======== ========= ======== Liabilities/shareholder equity Interest-bearing liabilities: Savings deposits $ 35,878 698 1.95 $ 32,108 1,006 3.13 $ 32,906 1,185 3.60 Interest bearing demand (5) 30,475 233 0.76 26,719 330 1.24 24,265 392 1.62 Certificates of deposit 89,514 3,123 3.49 84,262 4,325 5.13 68,026 3,560 5.23 FHLB advances and other borrowings 32,475 1,584 4.88 17,385 956 5.50 8,813 500 5.67 -------- ------- --------- -------- ------- ------- ---- Total interest-bearing liabilities 188,342 5,666 2.99 160,474 6,617 4.12 134,010 5,637 4.21 -------- ------- --------- -------- ------- Other liabilities 2,052 2,915 1,561 -------- ---------- -------- Total liabilities 190,394 163,389 135,571 Total equity 19,373 17,540 17,047 -------- --------- -------- Total liabilities and equity $209,767 $ 180,929 $152,618 ======== ========= ======== Net interest earning assets $ 11,639 $ 9,533 $ 10,749 ======== ========= ======== Net interest income $ 7,117 $ 6,467 $ 5,481 ====== ======== ======= Interest rate spread (3) 3.39% 3.58% 3.47% Net yield on weighted average interest-earning assets (4) 3.56% 3.80% 3.79% Average interest-earning assets to average Interest-bearing liabilities 106.18% 105.94% 108.02%
(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 $11,854, $9,985, and $8,512. River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Rate/Volume Table The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected River Valley's interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate:
Year ended December 31, 2002 vs. 2001 2001 vs. 2000 Increase Increase (decrease) (decrease) to due due to Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) Interest-earning assets: Interest-earning deposits and other $ 155 $ (165) $ (10) $ 64 $ (119) $ (55) Investment securities 596 (210) 386 284 (46) 238 Mortgage-backed and related securities (26) (16) (42) (101) (18) (119) Loans receivable, net 773 (1,436) (663) 1,659 243 1,902 ------- --------- -------- ------- --------- ------- Total 1,498 (1,827) (329) 1,906 60 1,966 ------- --------- -------- ------- --------- ------- Interest-bearing liabilities: Deposits 406 (2,013) (1,607) 713 (189) 524 FHLB advances and other borrowings 747 (119) 628 472 (16) 456 ------- --------- -------- ------- --------- ------- Total 1,153 (2,132) (979) 1,185 (205) 980 ------- --------- -------- ------- --------- ------- Net change in interest income $ 345 $ 305 $ 650 $ 721 $ 265 $ 986 ======= ======== ======= ===== ======== =======
Asset and Liability Management Like other financial institutions, River Valley is subject to interest rate risk to the extent that interest-earning assets reprice differently than interest-bearing liabilities. As part of its effort to monitor and manage interest rate risk, River Valley is using the Net Portfolio Value ("NPV") methodology adopted by the OTS as part of its capital regulations. Although River Valley 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's interest rate risk, as of December 31, 2002, (the latest information available) and December 31, 2001, 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 reprice 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 reprice 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, 2002 (Dollars in thousands) Change in Interest Rates Estimated Amount (basis points) NPV of Change Percent -------------- --------- --------- ------- +300 $ 26,462 $ 1,814 7% +200 26,305 1,656 7 +100 25,666 1,018 4 ------- 24,648 -------- -100 23,487 (1,161) (5) -200 (1) -------- -------- ------ -300 (1) -------- -------- ------ 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) -------- -------- ------
(1) At December 31, 2002, 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 repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. Liquidity and Capital Resources The Corporation's principal sources of funds are deposits, loan and mortgage-backed securities repayments, maturities of securities, borrowings and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan and mortgage-backed securities prepayments are more influenced by interest rates, general economic conditions and competition. The Corporation maintains investments in liquid assets based upon management's assessment of (1) the need for funds, (2) expected deposit flows, (3) the yield available on short-term liquid assets and (4) the objectives of the asset/liability management program. 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, 2002, River Valley had commitments to originate loans totaling $1.4 million and in addition, had undisbursed loans in process, unused lines of credit and standby letters of credit totaling $15.9 million. At such date, River Valley had $10.0 million in commitments to sell loans and no outstanding commitment to purchase loans. The Corporation considers its 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, 2002, 2001 and 2000:
Year ended December 31, 2002 2001 2000 (In thousands) Cash flows from operating activities $ 5,348 $ 756 $ 2,028 Cash flows from investing activities: Purchase of securities (22,161) (19,262) (7,949) Proceeds from maturities of securities 4,217 5,204 8,297 Proceeds from sales of securities 7,951 3,689 2,002 Net loan (originations) repayments (10,385) (15,078) (26,165) Other (1,163) (3,079) (1,087) Cash flows from financing activities: Net increase (decrease) in deposits 16,258 15,346 15,974 Net increase (decrease) in borrowings 13,500 13,050 6,950 Purchase of stock (140) (1,182) (1,367) Other (456) (185) (353) ---------- -------- ----------- Net change in cash and cash equivalents $ 12,969 $ (741) $ (1,670) ========= ======== ==========
River Valley 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 includes a general loan loss allowance of $2.1 million at December 31, 2002. River Valley exceeded all of its regulatory capital requirements at December 31, 2002. The following table summarizes River Valley Financial's regulatory capital requirements and regulatory capital at December 31, 2002:
OTS Requirement Actual Amount Percent of Percent of Amount Assets Amount Assets(1) Amount of Excess ---------- ------ ----------- ------ --------- (Dollars in thousands) Tangible capital 1.50% $ 3,341 8.4% $ 18,637 $ 15,296 Core capital (2) 4.00% 8,909 8.4% 18,637 9,728 Risk-based capital 8.00% 12,888 12.8% 20,651 7,763
(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 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 were 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 were effective for fiscal years beginning after December 15, 2001. 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 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, 2002 and no impairment loss was identified. Acquisitions of Certain Financial Institutions. SFAS No. 147 amends SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method. SFAS No. 72 and FASB Interpretation No. 9 provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation No. 9, and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, No. 142, Goodwill and Other Intangible River Valley Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Effect of Recent Accounting Pronouncements (continued) Assets, No. 147. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions, such as depositor and borrower relationship, intangible assets, and credit cardholder intangible assets. Those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. The effective date of SFAS No. 147 was October 1, 2002, with earlier application relating to previously recognized permitted unidentifiable intangible assets. However, the Statement did not have a significant impact on the Company upon adoption. Accounting for Stock-Based Compensation---Transition and Disclosure. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of SFAS No. 123, companies that adopted the fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a "ramp-up" effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, SFAS No. 148 provides two additional methods of transition that reflect an entity's full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the "ramp-up" effect. SFAS No. 148 also improves the clarity and prominence of disclosures about the proforma effects of using the fair value based method of accounting for stock-based compensation for all companies -regardless of the accounting method used - by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, SFAS No. 148 improves the timeliness of those disclosures, by requiring that this information be included in interim, as well as annual financial statements. In the past, companies were required to make proforma disclosures only in annual financial statements. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company does not believe that adoption of this Statement will have a material effect on the Company's financial position or results of operations. 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, 2002 and 2001 River Valley Bancorp December 31, 2002, 2001 and 2000 Contents Independent Accountants' Report...........................................25 Financial Statements Consolidated Balance Sheets...........................................26 Consolidated Statements of Income.....................................27 Consolidated Statements of Comprehensive Income.......................28 Consolidated Statements of Stockholders' Equity.......................29 Consolidated Statements of Cash Flows.................................30 Notes to Consolidated Financial Statements............................31 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, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. 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 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 consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of River Valley Bancorp as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 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 January 21, 2003 River Valley Bancorp Consolidated Balance Sheets December 31, 2002 and 2001
Assets 2002 2001 ------------------------------------------- (In Thousands, Except Share Amounts) Cash and due from banks $ 5,094 $ 4,689 Interest-bearing demand deposits 13,516 952 --------------- --------------- Cash and cash equivalents 18,610 5,641 Investment securities available for sale 28,174 17,653 Loans held for sale 1,062 2,638 Loans, net of allowance for loan losses of $2,101 and $1,972 164,895 155,334 Premises and equipment 5,741 5,379 Federal Home Loan Bank stock 2,000 1,250 Interest receivable 1,467 1,475 Other assets 2,071 2,248 --------------- --------------- Total assets $ 224,020 $ 191,618 =============== =============== Liabilities Deposits Noninterest-bearing $ 11,115 $ 11,406 Interest-bearing 150,714 134,165 --------------- --------------- Total deposits 161,829 145,571 Borrowings 40,000 26,500 Interest payable 459 613 Other liabilities 1,099 963 --------------- --------------- Total liabilities 203,387 173,647 --------------- --------------- 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 - 810,844 and 809,251 shares 7,957 7,654 Retained earnings 12,654 10,802 Shares acquired by stock benefit plans (339) (532) Accumulated other comprehensive income 361 47 --------------- --------------- Total stockholders' equity 20,633 17,971 --------------- --------------- Total liabilities and stockholders' equity $ 224,020 $ 191,618 =============== =============== See Notes to Consolidated Financial Statements
River Valley Bancorp Consolidated Statements of Income Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 --------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Interest Income Loans receivable $ 11,604 $ 12,267 $ 10,365 Investment securities 898 554 435 Interest-earning deposits and other 253 263 318 --------------- --------------- --------------- Total interest income 12,755 13,084 11,118 --------------- --------------- --------------- Interest Expense Deposits 4,054 5,661 5,137 Borrowings 1,584 956 500 --------------- --------------- --------------- Total interest expense 5,638 6,617 5,637 --------------- --------------- --------------- Net Interest Income 7,117 6,467 5,481 Provision for loan losses 570 450 227 --------------- --------------- --------------- Net Interest Income After Provision for Loan Losses 6,547 6,017 5,254 --------------- --------------- --------------- Other Income Service fees and charges 1,355 1,099 931 Net realized gains (losses) on sales of available-for-sale securities 37 17 (2) Net gains on loan sales 1,226 772 44 Gain on sale of premises and equipment 352 -- 42 Other income 124 34 38 --------------- --------------- --------------- Total other income 3,094 1,922 1,053 --------------- --------------- --------------- Other Expenses Salaries and employee benefits 2,619 2,291 2,025 Net occupancy and equipment expenses 774 612 568 Data processing fees 228 190 151 Advertising 209 208 190 Amortization of mortgage servicing rights 345 238 24 Office supplies 159 101 96 Legal and professional fees 63 164 144 Other expenses 1,058 902 566 --------------- --------------- --------------- Total other expenses 5,455 4,706 3,764 --------------- --------------- --------------- Income Before Income Tax 4,186 3,233 2,543 Income tax expense 1,628 1,257 933 --------------- --------------- --------------- Net Income $ 2,558 $ 1,976 $ 1,610 =============== =============== =============== Basic Earnings per Share $ 3.29 $ 2.50 $ 1.88 =============== =============== =============== Diluted Earnings per Share $ 3.15 $ 2.44 $ 1.87 =============== =============== =============== See Notes to Consolidated Financial Statements
River Valley Bancorp Consolidated Statements of Comprehensive Income Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 --------------------------------------------------------------- (In Thousands) Net Income $ 2,558 $ 1,976 $ 1,610 Other comprehensive income, net of tax Unrealized gains on securities available for sale Unrealized holding gains arising during the period, net of tax expense of $220, $18 and $55 336 27 85 Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $15, $7 and $(1) 22 10 (1) --------------- --------------- --------------- 314 17 86 --------------- --------------- --------------- Comprehensive Income $ 2,872 $ 1,993 $ 1,696 =============== =============== =============== See Notes to Consolidated Financial Statements
River Valley Bancorp Consolidated Statements of Stockholders' Equity Years Ended December 31, 2002, 2001 and 2000 Shares Acquired Accumulated by Stock Other Common Common Retained Benefit Comprehensive Shares Stock Earnings Plans Income Total ------------------------------------------------------------------------------ Balances, January 1, 2000 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 7,654 10,802 (532) 47 17,971 Net income 2,558 2,558 Unrealized gains on securities, net of reclassification adjustment 314 314 Cash dividends ($.80 per share) (619) (619) Exercise of stock options 6,877 99 99 Tax benefit of stock options exercised and RRP 51 51 Contribution to stock benefit plans (22) (22) Amortization of expense related to stock benefit plans 206 215 421 Purchase of stock (5,284) (53) (87) (140) ------- ------ -------- ------- -------- -------- Balances, December 31, 2002 810,844 $ 7,957 $ 12,654 $ (339) $ 361 $ 20,633 ======= ====== ======== ======= ======== ======== See Notes to Consolidated Financial Statements
River Valley Bancorp Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ------------------------------------------------------ (In Thousands) Operating Activities Net income $ 2,558 $ 1,976 $ 1,610 Items not requiring (providing) cash Provision for loan losses 570 450 227 Depreciation and amortization 502 311 240 Deferred income tax 31 3 (77) Investment securities amortization (accretion), net 28 9 (26) Investment securities (gains) losses (37) (17) 2 Loans originated for sale in the secondary market (65,339) (48,428) (2,614) Proceeds from sale of loans in the secondary market 67,589 46,101 2,632 Gain on sale of loans (1,226) (772) (44) Amortization of deferred loan origination cost 175 157 99 Amortization of expense related to stock benefit plans 421 292 276 Gain on sale of premises and equipment (352) -- (42) Capitalized interest on construction (1) (89) (8) Net change in Interest receivable 8 (7) (425) Interest payable (154) 15 268 Other adjustments 575 755 (90) ------------- ------------- ------------- Net cash provided by operating activities 5,348 756 2,028 ------------- ------------- ------------- Investing Activities Purchase of FHLB stock (750) (307) -- Purchases of securities available for sale (22,161) (19,262) (7,949) Proceeds from maturities of securities available for sale 4,217 5,204 7,093 Proceeds from sales of securities available for sale 7,951 3,689 2,002 Proceeds from maturities of securities held to maturity -- -- 1,204 Net change in loans (10,385) (15,078) (26,165) Purchases of premises and equipment (1,141) (2,784) (1,143) Proceeds from sale of premises and equipment 630 -- 56 Proceeds from sale of real estate acquired through foreclosure 98 107 -- Premiums paid on life insurance -- (95) -- ------------- ------------- ------------- Net cash used in investing activities (21,541) (28,526) (24,902) ------------- ------------- ------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 3,891 9,643 (2,991) Certificates of deposit 12,367 5,703 18,965 Proceeds from borrowings 50,000 32,050 23,450 Repayment of borrowings (36,500) (19,000) (16,500) Cash dividends (543) (261) (350) Purchase of stock (140) (1,182) (1,367) Proceeds from exercise of stock options 99 68 -- Advances by borrowers for taxes and insurance 10 8 5 Acquisition of stock for stock benefit plans (22) -- (8) ------------- ------------- ------------- Net cash provided by financing activities 29,162 27,029 21,204 ------------- ------------- ------------- Net Change in Cash and Cash Equivalents 12,969 (741) (1,670) Cash and Cash Equivalents, Beginning of Year 5,641 6,382 8,052 ------------- ------------- ------------- Cash and Cash Equivalents, End of Year $ 18,610 $ 5,641 $ 6,382 ============= ============= ============= Additional Cash Flows Information Interest paid $ 5,792 $ 6,691 $ 5,369 Income tax paid 1,480 1,119 876 Investment securities held to maturity transferred to available for sale -- -- 1,934 See Notes to Consolidated Financial Statements
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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 accounting principles generally accepted in the United States of America 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, 2002, 2001 and 2000 (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 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. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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, 2002, 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, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) 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 - At December 31, 2002, the Company has a stock-based employee compensation plan, which is described more fully in Note 15. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
2002 2001 2000 -------------------------------------------------------- Net income, as reported $ 2,558 $ 1,976 $ 1,610 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (54) (35) (35) ------------- ------------- ------------- Pro forma net income $ 2,504 $ 1,941 $ 1,575 ============= ============= ============= Earnings per share Basic - as reported $ 3.29 $ 2.50 $ 1.88 ============= ============= ============= Basic - pro forma $ 3.22 $ 2.45 $ 1.83 ============= ============= ============= Diluted - as reported $ 3.15 $ 2.44 $ 1.87 ============= ============= ============= Diluted - pro forma $ 3.09 $ 2.40 $ 1.83 ============= ============= =============
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 2001 and 2000 consolidated financial statements have been made to conform to the 2002 presentation. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) 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, 2002, was $1,055,000. Note 3: Investment Securities
2002 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------- Available for sale Federal agencies $ 24,581 $ 567 $ -- $ 25,148 State and municipal 335 17 -- 352 Mortgage and other asset-backed securities 571 13 1 583 Corporate obligations 2,090 1 -- 2,091 ------------- ------------ ------------ ------------ Total investment securities $ 27,577 $ 598 $ 1 $ 28,174 ============= ============ ============ ============ 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 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 ============= ============ ============ ============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) The amortized cost and fair value of securities available for sale at December 31, 2002, 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 ----------------------------------------- Less than one year $ 100 $ 102 One to five years 26,846 27,423 Five to ten years 60 66 --------------- --------------- 27,006 27,591 Mortgage and other asset-backed securities 571 583 --------------- --------------- Totals $ 27,577 $ 28,174 =============== ===============
Securities with a carrying value of $10,818,506 and $622,000 were pledged at December 31, 2002 and 2001 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during 2002, 2001 and 2000 were $7,951,000, $3,689,000 and $2,002,000. Gross gains of $103,000, $33,000 and $10,000 and gross losses of $66,000, $16,000 and $12,000 were realized on those sales. On April 1, 2000, the Company adopted 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
2002 2001 ------------------------------------------- Residential real estate One-to-four family residential $ 73,197 $ 70,793 Multi-family residential 4,396 3,932 Construction 4,866 6,874 Nonresidential real estate and land 46,036 41,892 Commercial 26,203 19,216 Consumer and other 14,066 17,406 --------------- --------------- 168,764 160,113 Unamortized deferred loan costs 379 356 Undisbursed loans in process (2,147) (3,163) Allowance for loan losses (2,101) (1,972) --------------- --------------- Total loans $ 164,895 $ 155,334 =============== ===============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts)
2002 2001 2000 ---------------------------------------------------------------- Allowance for loan losses Balances, January 1 $ 1,972 $ 1,702 $ 1,522 Provision for losses 570 450 227 Recoveries on loans 60 31 37 Loans charged off (501) (211) (84) --------------- --------------- --------------- Balances, December 31 $ 2,101 $ 1,972 $ 1,702 =============== =============== ===============
Information on impaired loans is summarized below. 2002 2001 ------------------------------------------- Impaired loans with an allowance $ -- $ 339 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 749 357 --------------- --------------- Total impaired loans $ 749 $ 696 =============== =============== Allowance for impaired loans (included in the Company's allowance for loan losses) $ -- $ 78
2002 2001 ------------------------------------------- Average balance of impaired loans $ 663 $ 1,352 Interest income recognized on impaired loans 34 117 Cash-basis interest included above 35 110
At December 31, 2002 and 2001, the Company had non-accruing loans totaling $1,080,000 and $690,000, respectively. At December 31, 2002 and 2001, there were no accruing loans delinquent 90 days or more. Note 5: Premises and Equipment
2002 2001 ------------------------------------------- Land $ 1,450 $ 952 Buildings 3,395 3,457 Equipment 2,629 2,509 Construction in progress 81 -- --------------- --------------- Total cost 7,555 6,918 Accumulated depreciation and amortization (1,814) (1,539) --------------- --------------- Net $ 5,741 $ 5,379 =============== ===============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 6: Deposits
2002 2001 ----------------------------------------- Demand deposits $ 41,763 $ 42,321 Savings deposits 24,538 20,089 Certificates and other time deposits of $100,000 or more 41,901 30,343 Other certificates and time deposits 53,627 52,818 --------------- --------------- Total deposits $ 161,829 $ 145,571 =============== ===============
Certificates and other time deposits maturing in 2003 $ 73,737 2004 10,166 2005 2,046 2006 1,585 2007 7,574 Thereafter 420 --------------- $ 95,528
Note 7: Borrowings 2002 2001 ----------------------------------------- Federal Home Loan Bank advances $ 40,000 $ 25,000 Line of credit -- 1,500 --------------- --------------- Total borrowings $ 40,000 $ 26,500 =============== ===============
Maturities by year for advances at December 31, 2002 are $6,000,000 in 2003, $5,000,000 in 2004, $5,000,000 in 2005, $1,000,000 in 2006, $10,000,000 in 2007 and $13,000,000 thereafter. The weighted-average interest rate at December 31, 2002 and 2001 was 4.48% and 4.54%. The Federal Home Loan Bank advances are secured by first-mortgage loans and investment securities totaling $59,709,000 at December 31, 2002. Advances are subject to restrictions or penalties in the event of prepayment. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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 $76,544,000, $56,057,000 and $37,562,000 at December 31, 2002, 2001 and 2000, respectively. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2002, 2001 and 2000 totaled $631,000, $430,000 and $290,000. 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.
2002 2001 2000 --------------------------------------------------------------- Mortgage Servicing Rights Balances, January 1 $ 540 $ 227 $ 225 Servicing rights capitalized 546 441 26 Amortization of servicing rights (205) (128) (24) --------------- --------------- --------------- 881 540 227 Valuation allowance (250) (110) -- --------------- --------------- --------------- Balances, December 31 $ 631 $ 430 $ 227 =============== =============== ===============
Activity in the valuation allowance for mortgage servicing rights was as follows:
2002 2001 ------------------------------------------ Balance, beginning of year $ 110 $ -- Additions 140 110 Reductions -- -- Direct write downs -- -- --------------- --------------- Balance, end of year $ 250 $ 110 =============== ===============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 9: Income Tax
2002 2001 2000 --------------------------------------------------------------- Income tax expense (benefit) Currently payable Federal $ 1,318 $ 1,000 $ 805 State 279 254 205 Deferred Federal (23) 2 (61) State 54 1 (16) --------------- --------------- --------------- Total income tax expense $ 1,628 $ 1,257 $ 933 =============== =============== =============== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 1,423 $ 1,099 $ 865 Effect of state income taxes 220 168 125 Other (15) (10) (57) --------------- --------------- --------------- Actual tax expense $ 1,628 $ 1,257 $ 933 =============== =============== =============== Effective tax rate 38.9% 38.8% 36.7%
A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows:
2002 2001 ------------------------------------------- Assets Allowance for loan losses $ 807 $ 759 Deferred compensation 220 187 Pensions and employee benefits 21 35 Securities available for sale -- 72 Purchase accounting adjustments 71 80 Other 11 11 --------------- --------------- Total assets 1,130 1,144 --------------- --------------- Liabilities Depreciation and amortization (178) (119) Loan fees (147) (139) Mortgage servicing rights (249) (215) Securities available for sale (133) -- Other (5) (17) --------------- --------------- Total liabilities (712) (490) --------------- --------------- $ 418 $ 654 =============== ===============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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:
2002 2001 ------------------------------------------- Commitments to extend credit $ 15,656 $ 17,083 Standby letters of credit 347 258
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, 2002, 2001 and 2000 (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, 2002, the stockholders' equity of the Bank was $19,659,000, of which approximately $1,684,000 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, 2002, 2001 and 2000 (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, 2002 and 2001, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2002 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 ------------------------------------------------------------------------- 2002 Total risk-based capital 1 (to risk-weighted assets) $ 20,651 12.8% $ 12,888 8.0% $ 16,110 10.0% Tier 1 capital 1 (to risk-weighted assets) 18,637 11.6% 6,443 4.0% 9,666 6.0% Core capital 1 (to adjusted total assets) 18,637 8.4% 8,909 4.0% 11,136 5.0% Core capital 1 (to adjusted tangible assets) 18,637 8.4% 4,455 2.0% -- NA Tangible capital 1 (to adjusted total assets) 18,637 8.4% 3,341 1.5% -- NA 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 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, 2002, 2001 and 2000. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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 $31,000, $35,000 and $20,000 for the years ended December 31, 2002, 2001 and 2000. The Bank has a supplemental retirement plan which provides retirement benefits to all directors. The Bank's obligations under the plan have been funded by the purchase of key man life insurance policies, of which the Bank is the beneficiary. Expense recognized under the supplemental retirement plan totaled approximately $41,000, $42,000 and $24,000 for the years ended December 31, 2002, 2001 and 2000. The Company has an ESOP covering substantially all employees of the Company and Bank. The ESOP acquired 95,220 shares of the Company's common stock at $10 per share with funds provided by a loan from the Company. Unearned ESOP shares totaled 25,517 and 38,023 at December 31, 2002 and 2001, and had a fair value of $778,000 and $787,000 at those dates. 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, 2002, 2001 and 2000 was $331,000, $196,000 and $156,000. At December 31, 2002, the ESOP had 69,703 allocated shares, 25,517 suspense shares, and no committed-to-be released shares. At December 31, 2001, the ESOP had 57,197 allocated shares, 38,023 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 33,820 shares of the Company's common stock in the open market. At December 31, 2002, 33,408 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 $53,000, $98,000 and $105,000 for the years ended December 31, 2002, 2001 and 2000. 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, 2002, 2001 and 2000 (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, 2002 $ 1,144 Change in composition 113 New loans, including renewals 1,460 Payments, etc., including renewals (1,119) --------------- Balances, December 31, 2002 $ 1,598 =============== Deposits from related parties held by the Bank at December 31, 2002 and 2001 totaled $466,000 and $732,000. Note 15: Stock Option Plan Under the Company's incentive stock option plan, which is accounted for under the recognition and measurement principles of 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 is 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:
2002 2001 2000 ---------------------------------------------------------- Risk-free interest rates 3.5% 5.1% 6.5 and 5.9% Dividend yields 3.1% 2.8% 2.7% Volatility factors of expected market price of common stock 11.2% 7.8% 11.7% Weighted-average expected life of the options 10 years 10 years 10 years
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) The pro forma effect on net income is disclosed in Note 1. 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, 2002, 2001 and 2000.
2002 2001 2000 Weighted- Weighted- Weighted- Average Average Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 86,083 $ 14.16 99,345 $ 14.17 93,959 $ 14.58 Granted 7,000 26.50 2,000 17.90 24,000 13.17 Exercised (6,877) 14.39 (4,670) 14.61 -- Forfeited/expired (1,072) 14.78 (10,592) 14.78 (18,614) 14.78 ------- ------- ------- Outstanding, end of year 85,134 $ 15.15 86,083 $ 14.16 99,345 $ 14.17 ======= ======= ======= Options exercisable at year end 62,334 53,287 51,725 Weighted-average fair value of options granted during the year $ 3.04 $ 3.08 $ 3.18
As of December 31, 2002, options totaling 15,600 have exercise prices ranging from $10.75 to $12.63 and a weighted-average remaining contractual life of 7.0 years, options totaling 60,534 have exercise prices ranging from $13.97 to $14.78 and a weighted-average remaining contractual life of 5.0 years, options totaling 2,000 have an exercise price of $17.90 and a weighted-average remaining contractual life of 8.5 years, and options totaling 7,000 have an exercise price of $26.50 and a weighted-average remaining contractual life of 9.7 years. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) Note 16: Earnings Per Share
2002 2001 2000 Weighted- Weighted- Weighted- Per Average Per Share Average Per Share Average Share Income Shares Amount Income Shares Amount Income Shares Amount ------------------------------------------------------------------------------------------- Basic Earnings Per Share Income available to common stockholders $ 2,558 778,643 $ 3.29 $ 1,976 790,933 $ 2.50 $1,610 858,059 $ 1.88 ======== ======== ======== Effect Of Dilutive Stock Options 32,445 17,433 1,486 ------ ------- ------ ------- ----- ------- Diluted Earnings Per Share Income available to common stockholders and assumed conversions $ 2,558 811,088 $ 3.15 $ 1,976 808,366 $ 2.44 $1,610 859,545 $ 1.87 ====== ======= ======= ====== ======= ======= ===== ======= =======
Options to purchase 65,345 shares of common stock with a weighted-average exercise price of $14.78 per share were outstanding at December 31, 2000, 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. River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Federal Home Loan Bank Advances - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Line of Credit - The approximate market value for this variable borrowing approximates carrying value. Advance Payment by Borrowers for Taxes and Insurance - The fair value approximates carrying value. Off-Balance Sheet Commitments - Commitments include commitments to originate mortgage and consumer loans and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The estimated fair values of the Company's financial instruments are as follows:
2002 2001 Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------------------------------------- Assets Cash and cash equivalents $ 18,610 $ 18,610 $ 5,641 $ 5,641 Investment securities available for sale 28,174 28,174 17,653 17,653 Loans including loans held for sale, net 165,957 170,495 157,972 158,931 Interest receivable 1,467 1,467 1,475 1,475 Stock in FHLB 2,000 2,000 1,250 1,250 Liabilities Deposits 161,829 163,776 145,571 145,640 FHLB advances 40,000 41,975 25,000 25,284 Line of credit -- -- 1,500 1,500 Interest payable 459 459 613 613 Advance payments by borrowers for taxes and insurance 59 59 49 49
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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 2002 2001 ----------------------------------------- Assets Cash and due from banks $ 961 $ 400 Investment in common stock of subsidiary 19,659 19,016 Other assets 216 182 --------------- --------------- Total assets $ 20,836 $ 19,598 =============== =============== Liabilities Borrowings $ -- $ 1,500 Dividends payable 203 127 --------------- --------------- Total liabilities 203 1,627 Stockholders' Equity 20,633 17,971 --------------- --------------- Total liabilities and stockholders' equity $ 20,836 $ 19,598 =============== ===============
Condensed Statements of Income
2002 2001 2000 ------------------------------------------------------------- Income Dividends from subsidiary $ 2,601 $ 425 $ 1,621 Other income 35 45 65 --------------- --------------- --------------- Total income 2,636 470 1,686 --------------- --------------- --------------- Expenses Interest expense 23 55 63 Other expenses 142 153 120 --------------- --------------- --------------- Total expenses 165 208 183 --------------- --------------- --------------- Income before income tax and equity in undistributed (distribution in excess of) income of subsidiary 2,471 262 1,503 Income tax benefit 51 65 47 --------------- --------------- --------------- Income before equity in undistributed (distribution in excess of) income of subsidiary 2,522 327 1,550 Equity in undistributed income of subsidiary 36 1,649 60 --------------- --------------- --------------- Net Income $ 2,558 $ 1,976 $ 1,610 =============== =============== ===============
River Valley Bancorp Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (Table Dollar Amounts in Thousands Except Per Share Amounts) Condensed Statements of Cash Flows
2002 2001 2000 ------------------------------------------------------ Operating Activities Net income $ 2,558 $ 1,976 $ 1,610 Items not requiring (providing) cash 109 (1,453) (4) ------------- ------------- ------------- Net cash provided by operating activities 2,667 523 1,606 ------------- ------------- ------------- Financing Activities Purchase of stock (140) (1,182) (1,367) Proceeds from exercise of stock options 99 68 -- Acquisition of stock for stock benefit plans (22) -- (8) Proceeds from borrowings -- 1,050 450 Repayment of borrowings (1,500) -- (500) Cash dividends (543) (261) (350) ------------- ------------- ------------- Net cash used in financing activities (2,106) (325) (1,775) ------------- ------------- ------------- Net Change in Cash and Cash Equivalents 561 198 (169) Cash and Cash Equivalents at Beginning of Year 400 202 371 ------------- ------------- ------------- Cash and Cash Equivalents at End of Year $ 961 $ 400 $ 202 ============= ============= =============
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: (800) 837-2755 or (513) 579-5320 Tel: (812) 273-4949 Fax: (812) 273-4944 Monday thru Friday 8 a.m. to 5 p.m. EST http://investordirect.53.com 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 Fax: (812) 273-3143 Tel: (317) 236-1313 Fax: (317) 231-7433
Annual and Other Reports: Additional copies of this Annual Report to Shareholders and copies of the most recent Form 10-KSB may be obtained without charge by contacting the Corporation. Offices of River Valley Financial Bank: Hilltop: 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 16, 2003, at 3:00 PM, at 430 Clifty Drive, Madison, IN 47250. DIRECTORS OF THE COMPANY AND THE BANK Fred W. Koehler Chairman Robert W. Anger Director Jonnie L. Davis Director Matthew P. Forrester Director & President Michael J. Hensley Director L. Sue Livers Director Charles J. McKay Director ***************** Lonnie D. Collins Secretary EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK Matthew P. Forrester President, CEO Mark A. Goley Vice President of Lending Anthony D. Brandon Vice President of Loan Administration Barbara J. Eades Vice President of Retail Banking Larry C. Fouse Vice President of Finance Deanna J. Liter Vice President of Data Services Loy M. Skirvin Vice President of Human Resources Dawn M. Moore Internal Audit Compliance Officer John Muessel Vice President Trust Officer OFFICERS AND MANAGERS OF RIVER VALLEY FINANCIAL BANK Loan Officers Theresa A. Dryden Sherri Furnish Natasha Jenkins Rick T. Nelson Robert J. Schoenstein--AVP Customer Service Managers Angela D. Adams Debbie R. Finnegan Rachael A. Goble Sandy Stilwell Other Managers Kenneth L. Cull - Collection Officer Mary Ellen McClelland - Executive Secretary Luann Nay - Loan Administrator Kelly Shelton - Loan Operations Manager Teresa J. Smith - Data Processing Manager Mary Ellen Wehner - Commercial Loan Operations Manager