-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rgy51q+Zebfq0SScB8oRo2WLRTJ50QVEA8pDLATfHxJznFHtVU7KFU5ycP5LbgBw uKda2hIjRH+MI/c76GdddQ== 0000908834-03-000145.txt : 20030331 0000908834-03-000145.hdr.sgml : 20030331 20030331154052 ACCESSION NUMBER: 0000908834-03-000145 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER VALLEY BANCORP CENTRAL INDEX KEY: 0001015593 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351984567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21765 FILM NUMBER: 03630345 BUSINESS ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 BUSINESS PHONE: 8122734949 MAIL ADDRESS: STREET 1: 430 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 10KSB 1 rvb_10ksb.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 000-21765 RIVER VALLEY BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1984567 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 430 Clifty Drive P.O. box 1590 Madison, Indiana 47250-0590 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (812) 273-4949 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, without par value (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [ X ] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer had $15,849,000 in revenues for the fiscal year ended December 31, 2002. As of February 25, 2003, there were issued and outstanding 813,820 shares of the issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the issuer, computed by reference to the average sale price of such stock as of February 25, 2003, was $18,376,531.17. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2002 are incorporated into Part II. Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 39 pages RIVER VALLEY BANCORP Form 10-KSB INDEX Page FORWARD LOOKING STATEMENT......................................................3 PART I Item 1. Description of Business....................................3 Item 2. Description of Properties.................................30 Item 3. Legal Proceedings.........................................30 Item 4. Submission of Matters to a Vote of Security Holders.......30 Item 4.5. Executive Officers of the Registrant......................31 PART II Item 5. Market for Common Equity and Related Stockholder Matters...................................32 Item 5.5. Selected Consolidated Financial Data......................32 Item 6. Management's Discussion and Analysis or Plan of Operation.....................................32 Item 6A. Quantitative and Qualitative Disclosures About Market Risk.....................................32 Item 7. Financial Statements......................................32 Item 8. Changes in and Disagreements with Accountants Accounting and Financial Disclosure...................32 PART III Item 9. Directors and Executive Officers of the Registrant..........33 Item 10. Executive Compensation .....................................33 Item 11. Security Ownership of Certain Beneficial Owners and Management.................................33 Item 12. Certain Relationships and Related Transactions..............33 Item 13. Exhibits and Reports on Form 8-K............................34 Item 14. Controls and Procedures.....................................34 SIGNATURES....................................................................35 CERTIFICATIONS............................................................... 37 FORWARD LOOKING STATEMENT This Annual Report on Form 10-KSB ("Form 10-KSB") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-KSB and include statements regarding the intent, belief, outlook, estimates or expectations of the Holding Company (as defined below), its directors, or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-KSB are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-KSB identifies important factors that could cause such differences. These factors include but are not limited to changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Description of Business. General River Valley Bancorp, an Indiana corporation (the "Holding Company" and together with the "Bank", the "Company"), was organized in May 1996. On December 20, 1996, it acquired the common stock of Madison First Federal Savings and Loan Association ("First Federal") upon the conversion of First Federal from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), and acquired 120,434 shares of common stock, $8.00 par value per share (the "Citizens Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6% of the issued and outstanding shares of Citizens' common stock (the "Acquisition"). On November 22, 1997, Citizens merged with and into First Federal (the "Merger") pursuant to an Agreement and Plan of Reorganization entered into among the Holding Company, First Federal and Citizens dated September 26, 1997 (the "Agreement"). Pursuant to the Agreement, each outstanding share of Citizens common stock held by shareholders other than the Holding Company was converted into the right to receive $30 cash, payable by the Holding Company, and shares of Citizens held by the Holding Company and its subsidiaries were canceled. Also, pursuant to the Agreement, First Federal changed its corporate title to River Valley Financial Bank (the "Bank"). Following the effective time of the Merger, the Holding Company remained as the sole shareholder of the Bank, and Citizens' status as a national banking association terminated. For ease of reference, First Federal will be referred to as the "Bank" hereinafter both with respect to historical information concerning events and results of operations prior to the Merger and with respect to information relating to events occurring after the Merger. The Conversion of the Bank was accounted for in a manner similar to a pooling of interests, and the Acquisition of Citizens was accounted for as a purchase transaction. Under purchase accounting, the acquired assets and liabilities of Citizens were recorded at fair value as of December 20, 1996. Because the assets and liabilities of the Bank were recorded at fair value as of the date of the Acquisition, the financial data prior to December 20, 1996 provided herein does not include information derived from the financial statements of Citizens. Rather, such financial data provided herein includes only information derived from the financial statements of the Bank. From and after December 20, 1996, the operating results of Citizens and the Bank are consolidated with those of the Holding Company. The Merger was accounted for in a manner similar to a pooling of interests. The Bank was organized as a federally chartered savings and loan association in 1875. The Bank is the oldest independent financial institution headquartered in Jefferson County, Indiana. Citizens was organized as a national bank in 1981 and, until the Merger, conducted its business from four full-service offices, all located in Jefferson County, Indiana. Following the Merger, these offices became branch offices of the Bank. Prior to the Conversion, the Bank conducted its business from three full-service offices and one stand-alone drive-through branch, all located in Jefferson County, Indiana. As a result of the Acquisition, the Holding Company became subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System (the "FRB"). As a condition to the Holding Company obtaining the requisite approval from the FRB for the Acquisition, the Holding Company committed to cause the Bank to (i) enter into a definitive agreement to sell the Bank's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and deposits originated at that branch, within 180 days of consummation of the Acquisition. On February 28, 1997, the Bank sold its Hanover, Indiana branch to People's Trust Company based in Brookville, Indiana ("People's Trust"), pursuant to that commitment. Deposits totaling $6.8 million were assumed by People's Trust, and the Bank recorded an after tax gain of $125,000 on the transaction. As a result of the Merger and the resulting termination of Citizens' status as a national banking association, the Holding Company is no longer subject to regulation by the FRB as a bank holding company and is instead regulated by the Office of Thrift Supervision (the "OTS") as a savings and loan holding company. The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction, or refinancing of one- to four- family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 43.4% of the Bank's total loan portfolio at December 31, 2002. The Bank identified $1,062,000 in loans held for sale at December 31, 2002. The Bank also offers multi-family mortgage loans, non-residential real estate loans, land loans, construction loans, nonmortgage commercial loans and consumer loans. Its principal market area is Jefferson County, Indiana and adjoining counties. Loan Portfolio Data. The following table sets forth the composition of the Bank's loan portfolio, including loans held for sale, as of December 31, 2002, 2001, 2000, 1999 and 1998 by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process.
At December 31, ----------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ------------------ ------------------- ------------------ ------------------ Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- TYPE OF LOAN (Dollars in thousands) Residential real estate: One-to four-family $ 73,197 43.4% $ 73,431 45.1% $ 77,304 52.0% $ 69,588 58.6% $ 65,907 57.4% Multi-family 4,396 2.6 3,932 2.4 3,319 2.2 2,918 2.5 1,775 1.6 Construction 4,866 2.9 6,874 4.2 6,827 4.6 4,163 3.5 8,126 7.1 Nonresidential real estate 42,672 25.3 36,898 22.7 25,944 17.4 12,758 10.7 7,604 6.6 Land loans 3,364 2.0 4,994 3.1 4,269 2.9 10,079 8.5 6,300 5.5 Consumer loans: Automobile loans 9,494 5.6 12,320 7.6 11,118 7.5 6,922 5.8 6,828 5.9 Loans secured by deposits 401 .2 537 .3 574 .4 548 .5 723 .6 Home improvement loans -- -- -- -- 6 -- 34 -- -- -- Other 4,171 2.5 4,549 2.8 2,988 2.0 2,040 1.7 5,089 4.4 Commercial loans 26,203 15.5 19,216 11.8 16,361 11.0 9,780 8.2 12,461 10.9 -------- ----- -------- ------ -------- ------ -------- ------ -------- ------ Gross loans receivable 168,764 100.0 162,751 100.0 148,710 100.0 118,830 100.0 114,813 100.0 Add/(Deduct): Deferred loan origination costs 379 .2 356 .2 324 .2 245 .2 200 .2 Undisbursed portions of loans in process (2,147) (1.3) (3,163) (2.0) (6,362) (4.3) (2,422) (2.0) (1,151) (1.0) Allowance for loan losses (2,101) (1.3) (1,972) (1.3) (1,702) (1.1) (1,522) (1.3) (1,477) (1.3) --------- ----- -------- ------ -------- ------ -------- ------ -------- ------ Net loans receivable $ 164,895 97.6% $157,972 96.9% $140,970 94.8% $115,131 96.9% $ 112,385 97.9% ========= ===== ======== ====== ======== ====== ======== ====== ========= ======
The following table sets forth certain information at December 31, 2002 regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Due During Years Ended December 31, Balance ----------------------------------------------------------------- Outstanding at 2006 2008 2013 2018 December 31, to to to and 2002 2003 2004 2005 2007 2012 2017 following ------------------------ ---------------- -------- -------- -------- ----------------- (In thousands) Residential real estate loans: One-to four-family $ 73,197 $ 3,549 $ 170 $ 352 $1,033 $ 4,998 $12,192 $50,903 Multi-family 4,396 1 -- 11 -- 402 837 3,145 Construction 4,866 4,866 -- -- -- -- -- -- Nonresidential Real estate loans 42,672 408 37 224 248 1,488 10,064 30,203 Land loans 3,364 40 9 -- 51 322 713 2,229 Consumer loans: Loans secured by deposits 401 170 51 88 82 8 -- 2 Other loans 13,665 1,256 1,569 3,415 5,635 685 405 700 Commercial loans 26,203 12,313 1,151 665 2,542 2,985 2,340 4,207 -------- ------- ------ ------ ------ ------- ------- ------- Total $168,764 $22,603 $2,987 $4,755 $9,591 $10,888 $26,551 $91,389 ======== ======= ====== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 2002, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates. Due After December 31, 2003 ----------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- -------- (In thousands) Residential real estate loans: One-to four-family $10,096 $ 59,552 $ 69,648 Multi-family 1,092 3,303 4,395 Construction -- -- -- Non-residential real estate loans 6,918 35,346 42,264 Land loans 535 2,789 3,324 Consumer loans: Loans secured by deposits 231 -- 231 Other loans . 12,197 212 12,409 Commercial loans 6,514 7,376 13,890 -------- -------- -------- Total $37,583 $108,578 $146,161 ======== ======== ======== Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $73.2 million, or 43.4% of the Bank's portfolio of loans, at December 31, 2002, consisted of one- to four-family residential loans, of which approximately 85.5% had adjustable rates. The Bank currently offers adjustable rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, although until late 1995, the Bank's ARMs were indexed to the 11th District Cost of Funds. Some of the Bank's residential ARMs are originated at a discount or "teaser" rate which is generally 150 to 175 basis points below the "fully indexed" rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. The Bank's ARMs have a current margin above such index of 2.5% for owner-occupied properties and 3.0% for non-owner-occupied properties. A substantial portion of the ARMs in the Bank's portfolio at December 31, 2002 provide for maximum rate adjustments per year and over the life of the loan of 1% and 4%, respectively, although the Bank also originates residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1.5% and 6%, respectively. The Bank's ARMs generally provide for interest rate minimums of 1% below the origination rate. The Bank's residential ARMs are amortized for terms up to 30 years. Adjustable rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank currently offers fixed rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 30 years. At December 31, 2002, approximately 14.5% of the Bank's one- to four-family residential mortgage loans had fixed rates. The Bank currently underwrites its fixed-rate residential mortgage loans for potential sale to the Federal Home Loan Mortgage Corporation (the "FHLMC"). The Bank retains all servicing rights on the residential mortgage loans sold to the FHLMC. At December 31, 2002, the Bank had approximately $76.5 million of fixed rate residential mortgage loans which were sold to the FHLMC and for which the Bank provides servicing. The Bank generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the "Loan-to-Value Ratio") exceeds 95% and generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 80%. The Bank generally requires private mortgage insurance on all conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios in excess of 80%. The cost of such insurance is factored into the annual percentage yield on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. Substantially all of the one- to four-family residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, the Bank does permit assumptions of existing residential mortgage loans on a case-by-case basis. At December 31, 2002, the Bank had outstanding approximately $5.5 million of home equity loans, with unused lines of credit totaling approximately $7.1 million. One home equity loan was included in non-performing assets on that date in the amount of $5,000. The Bank's home equity lines of credit are adjustable rate lines of credit tied to the prime rate and are amortized based on a 10- to 20-year maturity. The Bank generally allows a maximum 90% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans equal 1.5% of the outstanding principal balance per month. The Bank also offers indemnification mortgage loans ("ID Mortgage Loans"), which are typically written as fixed rate second mortgage loans. The Bank's ID Mortgage Loans are written for terms of five years and generally have maximum Loan-to-Value Ratios of 80%. The Bank also offers standard second mortgage loans, which are adjustable rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity with a current margin above such index of 3%. The Bank's second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 1% and 4%, respectively. The Bank's second mortgage loans have terms of 10 to 30 years. At December 31, 2002, $494,000 of one- to four-family residential mortgage loan, or 0.3% of total loans, were included in the Bank's non-performing assets. Construction Loans. The Bank offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Generally, construction loans are written as 12-month fixed rate loans with interest calculated on the amount disbursed under the loan and payable on a semi-annual or monthly basis. The Bank generally requires an 80% Loan-to-Value Ratio for its construction loans, although the Bank may permit an 85% Loan-to-Value Ratio for one- to four-family residential construction loans. Inspections are generally made prior to any disbursement under a construction loan, and the Bank does not charge commitment fees for its construction loans. At December 31, 2002, $4.9 million, or 2.9% of the Bank's total loan portfolio, consisted of construction loans. The largest construction loan at December 31, 2002 totaled $741,000. Construction loans in the amount of $113,000, or 0.07% of total loans, were included in non-performing assets on that date. While providing the Bank with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and the Bank taking title to the project. Nonresidential Real Estate Loans. At December 31, 2002, $42.7 million, or 25.3% of the Bank's portfolio, consisted of nonresidential real estate loans. Nonresidential real estate loans are primarily secured by real estate such as churches, farms and small business properties. The Bank originates nonresidential real estate loans as one-year adjustable rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, written for maximum terms of 30 years. The Bank's adjustable rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 1% and 4%, respectively, and interest rate minimums of 1% below the origination rate. The Bank generally requires a Loan-to-Value Ratio of up to 80%, depending on the nature of the real estate collateral. The Bank underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, evaluates the borrower's ability to service the debt from the net operating income of the property. The Bank's largest nonresidential real estate loan as of December 31, 2002 was $2,656,000 and was secured by three commercial buildings in (or close in proximity to) Madison, Indiana. Nonresidential real estate loans totaling $252,000 were included in non-performing assets at December 31, 2002. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-family Loans. At December 31, 2002, approximately $4.4 million, or 2.6% of the Bank's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). The Bank writes multi-family loans on terms and conditions similar to its nonresidential real estate loans. The largest multi-family loan in the Bank's portfolio as of December 31, 2002 was $1,431,000 and was secured by a 46-unit apartment complex in Hanover, Indiana. No multi-family loans were included in non-performing assets on that date. Multi-family loans, like nonresidential real estate loans, involve a greater risk than residential loans. See "Nonresidential Real Estate Loans" above. Also, the loan-to-one borrower limitations restrict the ability of the Bank to make loans to developers of apartment complexes and other multi-family units. Land Loans. At December 31, 2002, approximately $3.4 million, or 2.0% of the Bank's total loan portfolio, consisted of mortgage loans secured by undeveloped real estate. The Bank's land loans are generally written on terms and conditions similar to its nonresidential real estate loans. Some of the Bank's land loans are land development loans; i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At December 31, 2002, the Bank's largest land loan totaled $700,000. Land loans totaling $82,000, or 0.05% of the Bank's total loan portfolio, were included in non-performing assets as of December 31, 2002. Such loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost-overruns rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause the Bank to take title to partially improved land that is unmarketable without further capital investment. Commercial Loans. At December 31, 2002, $26.2 million, or 15.5% of the Bank's total loan portfolio, consisted of nonmortgage commercial loans. The Bank's commercial loans are written on either a fixed rate or an adjustable rate basis with terms that vary depending on the type of security, if any. At December 31, 2002, approximately $24.7 million, or 94.3%, of the Bank's commercial loans were secured by collateral, such as equipment, inventory and crops. The Bank's adjustable rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At December 31, 2002, the largest commercial loan was $920,000. As of the same date, commercial loans totaling $79,000 were included in non-performing assets. Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than the Bank's average residential mortgage loans. Consumer Loans. The Bank's consumer loans, consisting primarily of auto loans, home improvement loans, unsecured installment loans, loans secured by deposits and mobile home loans aggregated approximately $14.1 million at December 31, 2002, or 8.3% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans, except loans secured by deposits, are fixed rate loans with terms that vary from six months (for unsecured installment loans) to 60 months (for home improvement loans and loans secured by new automobiles). At December 31, 2002, 88.5% of the Bank's consumer loans were secured by collateral. The Bank's loans secured by deposits are made in amounts up to 90% of the current account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate. The Bank offers both direct and indirect automobile loans. Under the Bank's indirect automobile program, participating automobile dealers receive loan applications from prospective purchasers of automobiles at the point of sale and deliver them to the Bank for processing. The dealer receives a portion of the interest payable on approved loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections depend upon the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2002, consumer loans amounting to $55,000 were included in non-performing assets. Origination, Purchase and Sale of Loans. The Bank historically originated its ARMs pursuant to its own underwriting standards which did not conform with the standard criteria of the FHLMC or Federal National Mortgage Association ("FNMA"). The Bank's ARMs varied from secondary market criteria because, among other things, the Bank did not require current property surveys in most cases and did not permit the conversion of those loans to fixed rate loans in the first three years of its term. If the Bank desired to sell its non-conforming ARMs, it may have experienced difficulty in selling such loans quickly in the secondary market. In 1996, the Bank began underwriting fixed rate residential mortgage loans for potential sale to the FHLMC on a servicing-retained basis. Loans originated for sale to the FHLMC in the secondary market are originated in accordance with the guidelines established by the FHLMC and are sold promptly after they are originated. The Bank receives a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. At December 31, 2002, the Bank serviced $76.5 million in loans sold to the FHLMC. The Bank confines its loan origination activities primarily to Jefferson County and surrounding counties. At December 31, 2002, the Bank held loans totaling approximately $4.9 million that were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from existing customers, real estate brokers and newspaper and periodical advertising. Loan applications are taken at any of the Bank's four full-service offices. The Bank's loan approval processes are intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank evaluates the employment and credit history and information on the historical and projected income and expenses of its borrowers. Under the Bank's lending policy, a loan officer may approve mortgage loans up to $175,000, a Senior Loan Officer may approve mortgage loans up to $250,000 and the President may approve mortgage loans up to $322,700. All other mortgage loans must be approved by at least four members of the Bank's Board of Directors. The lending policy further provides that loans secured by readily marketable collateral, such as stock, bonds and certificates of deposit may be approved by a Loan Officer for up to $75,000, by a Senior Loan Officer for up to $200,000 and by the President up to $300,000. Loans secured by other non-real estate collateral may be approved by a Loan Officer for up to $25,000, by a Senior Loan Officer up to $75,000 and by the President up to $175,000. Finally, the lending policy provides that unsecured loans may be approved by a Loan Officer up to $10,000 or up to $25,000 by a Senior Loan Officer or the President. All other unsecured loans or loans secured by non-real estate collateral must be approved by at least four members of the Bank's Board of Directors. The Bank generally requires appraisals on all real property securing its loans and requires an attorney's opinion or title insurance and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing the loan if the property is in a flood plain. The Bank also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%. The Bank does not require escrow accounts for insurance premiums or taxes. The Bank's underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations. The Bank occasionally purchases participations in commercial loans, nonresidential real estate and multi-family loans from other financial institutions. At December 31, 2002, the Bank held in its loan portfolio participations in these types of loans aggregating approximately $525,000 that it had purchased, all of which were serviced by others. The Bank generally does not sell participations in any loans that it originates. The following table shows loan origination and repayment activity for the Bank during the periods indicated: Year Ended December 31, ---------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) Loans Originated: Residential real estate loans (1) $ 98,791 $ 76,409 $ 24,630 Multi-family loans 864 730 133 Construction loans 16,980 12,638 13,120 Non-residential real estate loans 17,988 21,486 17,308 Land loans 4,537 2,363 2,499 Consumer and other loans 6,758 14,610 12,708 Commercial loans 25,505 19,626 14,768 -------- -------- -------- Total loans originated 171,423 147,862 85,166 Reductions: Sales 67,915 45,790 2,614 Principal loan repayments and other (2) 96,585 85,070 56,713 -------- -------- -------- Total reductions 164,500 130,860 59,327 -------- -------- -------- Net increase $ 6,923 $ 17,002 $ 25,839 ======== ======== ======== - ------------------ (1) Includes loans originated for sale in the secondary market. (2) Other items consist of amortization of deferred loan origination costs, the provision for losses on loans and net charges to the allowance for loan losses. Origination and Other Fees. The Bank realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when management determines that the collectibility of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. The Bank delivers delinquency notices with respect to all mortgage loans contractually past due 5 to 10 days. When loans are 30 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Commercial and consumer loans are treated similarly. Interest income on consumer, commercial and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued and the loan is written-off, or written down to the fair value of the collateral securing the loan. It is the Bank's policy to recognize losses on these loans as soon as they become apparent. Non-performing Assets. At December 31, 2002, $1,042,000, or 0.47% of consolidated total assets, were non-performing loans compared to $690,000, or 0.36% of consolidated total assets, at December 31, 2001. The Bank had no REO at December 31, 2002. The table below sets forth the amounts and categories of the Bank's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days. At December 31, ------------------------ 2002 2001 2000 ------ ------ ------ (In thousands) Non-performing assets: Non-performing loans $1,080 $ 690 $ 621 Troubled debt restructurings 848 1,486 1,314 ------- ------ ------ Total non-performing loans and troubled debt restructurings 1,928 2,176 1,935 ------- ------- ------- Total non-performing assets $1,928 $2,176 $1,935 ====== ====== ====== Total non-performing loans and troubled debt restructurings to total loans 1.14% 1.34% 1.30% ====== ===== ====== Total non-performing assets to total assets .86% 1.14% 1.19% ====== ====== ====== At December 31, 2002, the Bank held loans delinquent from 30 to 89 days totaling $505,000. Other than in connection with these loans and other delinquent loans disclosed in this section, management was not aware of any other borrowers who were experiencing financial difficulties. In addition, there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at December 31, 2002, 2001 and 2000 relating to delinquencies in the Bank's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 2002 At December 31, 2001 At December 31, 2000 ------------------------------------ ----------------------------------- ----------------------------------- 30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Principal Principal Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Residential real estate loans 9 $105 5 $ 499 5 $110 1 $ 37 4 $ 98 2 $171 Construction loans 2 100 1 113 -- -- -- -- -- -- 1 115 Land loans -- -- 1 82 1 52 1 18 -- -- 1 214 Non-residential real estate loans -- -- 2 252 -- -- 1 164 -- -- -- -- Consumer loans 42 270 10 55 44 333 19 125 17 82 13 72 Commercial loans 2 30 4 79 8 352 15 346 4 60 2 49 --- ---- --- ------ --- ---- --- ---- --- ---- --- ---- Total 55 $505 23 $1,080 58 $847 37 $690 25 $240 19 $621 === ==== === ====== == ==== == ==== == === === ==== Delinquent loans to total loans 0.94% 0.94% 0.58% ==== ==== ====
Classified Assets. Federal regulations and the Bank's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. At December 31, 2002, the aggregate amount of the Bank's classified assets are as follows: At December 31, 2002 -------------------- (In thousands) Substandard assets $2,780 Doubtful assets 204 Loss assets -- ------ Total classified assets $2,984 ====== The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Bank's classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb probable losses from loans at December 31, 2002. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the five years ended December 31, 2002.
Year Ended December 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (Dollars in thousands) Balance at beginning of period..................... $1,972 $1,702 $1,522 $1,477 $1,276 Charge-offs: Single-family residential..................... (132) (31) (4) (17) -- Consumer...................................... (258) (107) (71) (86) (140) Commercial.................................... (111) (73) (9) (20) (83) -------- --------- ---------- --------- --------- Total charge-offs........................... (501) (211) (84) (123) (223) Recoveries......................................... 60 31 37 28 149 --------- --------- --------- --------- -------- Net charge-offs................................. (441) (180) (47) (95) (74) Provision for losses on loans...................... 570 450 227 140 275 -------- -------- -------- -------- -------- Balance at end of period........................ $2,101 $1,972 $1,702 $1,522 $1,477 ====== ====== ====== ====== ====== Allowance for loan losses as a percent of total loans outstanding before net items........ 1.25% 1.21% 1.15% 1.28% 1.29% ==== ==== ==== ==== ==== Ratio of net charge-offs to average loans outstanding before net items.................... 0.27% 0.12% 0.03% 0.08% 0.06% ==== ==== ==== ==== ====
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank's allowance for loan losses at the dates indicated.
At December 31, ------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------- ------------------ ----------------- ------------------- ------------------ Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category to total to total to total to total to total Amount loans Amount loans Amount loans Amount loans Amount loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Balance at end of period applicable to: Residential real estate $ 827 48.9% $ 610 51.7% $ 346 58.8% $ 4 64.6% $ 11 66.1% Nonresidential real estate 131 27.3 156 25.8 -- 20.3 -- 19.2 -- 12.1 Consumer loans 452 8.3 626 10.7 403 9.9 109 8.0 111 10.9 Commercial loans 458 15.5 365 11.8 106 11.0 -- 8.2 -- 10.9 Unallocated 233 -- 215 -- 847 -- 1,409 -- 1,355 -- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- Total $2,101 100.0% $1,972 100.0% $1,702 100.0% $1,522 100.0% $1,477 100.0% ====== ===== ====== ===== ====== ====== ====== ====== ====== =======
Investments and Mortgage-Backed Securities Investments. The Bank's investment portfolio (excluding mortgage-backed securities) consists of U.S. government and agency obligations, corporate bonds, municipal securities and Federal Home Loan Bank ("FHLB") stock. At December 31, 2002, the investments in the portfolio had a carrying value of approximately $29.6 million, or 13.2%, of the consolidated total assets. The following table sets forth the amortized cost and the market value of the Bank's investment portfolio at the dates indicated.
At December 31, --------------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ---------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Available for Sale: U.S. Government and agency obligations $24,581 $25,148 $14,756 $14,835 $4,921 $4,989 Corporate bonds 2,090 2,091 1,645 1,640 -- -- Municipal securities 335 352 335 347 336 340 --------- ------ --------- ------ --------- ------ Total available for sale 27,006 27,591 16,736 16,822 5,257 5,329 FHLB stock 2,000 2,000 1,250 1,250 943 943 --------- ------ --------- ------ --------- ------ Total investments. $29,006 $29,591 $17,986 $18,072 $6,200 $6,272 ========= ======= ========= ======= ========= ======
The following table sets forth the amount of investment securities (excluding FHLB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2002.
Amount at December 31, 2002 which matures in ------------------------------------------------------------------------------------------ One Year One Year Five to After or Less to Five Years Ten Years Ten Years -------------------- -------------------- ------------------- -------------------- Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- ---------- ------- --------- -------- (Dollars in thousands) U.S. Government and agency obligations $ -- --% $24,581 3.34% $ -- --% $ -- --% Municipal Securities 100 4.34 175 4.80 60 5.70 -- -- Corporate Bonds. -- -- 2,090 1.90 -- -- -- --
Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed pass-through securities in the form of FHLMC, FNMA and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed pass-through securities generally entitle the Bank to receive a portion of the cash flows from an identified pool of mortgages and gives the Bank an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by its respective agencies as to principal and interest. Except for an $5,000 investment in interest-only certificates, the Bank does not invest in any derivative products. Although mortgage-backed securities generally yield less than individual loans originated by the Bank, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect the Bank's earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because they are guaranteed as to principal repayment by the issuing agency. In addition, the Bank has purchased adjustable rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, the Bank is subject to prepayment risk on such adjustable rate mortgage-backed securities. The Bank attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, the Bank is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans. At December 31, 2002, the Bank had mortgage-backed securities with a carrying value of approximately $583,000 all of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. The following table sets forth the amortized cost and market value of the Bank's mortgage-backed securities at the dates indicated.
At December 31, ------------------------------------------------------------------------- 2002 2001 2000 --------------------- ----------------------- -------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Available for Sale: Government agency securities $120 $122 $204 $207 $1,314 $1,289 Collateralized mortgage obligations 451 461 634 624 627 629 ----- ----- ----- ----- -------- -------- Total mortgage-backed securities $571 $583 $838 $831 $1,941 $1,918 ==== ==== ==== ==== ====== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2002.
Amount at December 31, 2002 which matures in --------------------------------------------------------------------------------------- One Year One Year After or Less to Five Years Five Years ----------------------- ------------------------- ----------------------- Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- (Dollars in thousands) Mortgage-backed securities available for sale $1 3.38% $570 5.74% $-- --%
The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the years ended December 31, 2002, 2001 and 2000.
Year Ended December 31, ------------------------------------------- 2002 2001 2000 ---------- ---------- ---------- (In thousands) Beginning balance............................................... $ 831 $1,918 $4,209 Purchases....................................................... -- -- 1,000 Sales proceeds.................................................. (44) (874) (1,006) Repayments...................................................... (217) (207) (2,297) Losses on sales................................................. -- (16) (12) Premium and discount amortization, net.......................... (6) (6) (20) Unrealized gains on securities available for sale............... 19 16 44 -------- --------- --------- Ending balance.................................................. $ 583 $ 831 $1,918 ====== ======= ======
Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its NOW and MMDAs are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. An analysis of the Bank's deposit accounts by type, maturity and rate at December 31, 2002 is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 2002 Deposits Rate - --------------- ------- ------------ -------- -------- (Dollars in thousands) Withdrawable: Non-interest bearing accounts $ 100 $ 11,115 6.9% .00% Savings accounts 50 24,538 15.2 1.47 MMDA 100 11,900 7.3 1.51 NOW accounts 100 18,748 11.6 .88 -------- ---- ---- Total withdrawable 66,301 41.0 1.06 Certificates (original terms): I.R.A. 250 6,661 4.1 3.71 3 months 2,500 584 .4 1.54 6 months 2,500 1,295 .8 1.98 9 months 2,500 547 .3 2.48 12 months 500 17,315 10.7 2.65 15 months 500 7,203 4.4 2.82 18 months 500 2,340 1.4 3.27 24 months 500 7,376 4.6 4.65 30 months 500 1,814 1.1 3.94 36 months 500 1,590 1.0 4.77 48 months 500 1,272 .8 4.81 60 months 500 5,630 3.5 4.99 Jumbo certificates 100,000 41,901 25.9 2.70 -------- ----- ---- Total certificates 95,528 59.0 3.14 -------- ----- ---- Total deposits $161,829 100.0% 2.29 ======== =====
The following table sets forth by various interest rate categories the composition of time deposits of the Bank at the dates indicated: At December 31, --------------------------------------------- 2002 2001 . 2000 ---------- ---------- ---------- (In thousands) 0.00 to 3.00% $63,261 $10,647 $ -- 3.01 to 5.00% 21,412 43,307 26,782 5.01 to 6.00% 8,187 11,417 5,997 6.01 to 7.00% 2,346 15,972 42,370 7.01 to 8.00% 322 . 1,818 2,309 ------- ------- ------- Total $95,528 $83,161 $77,458 ======= ======= ======= The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 2002. Matured certificates, which have not been renewed as of December 31, 2002, have been allocated based upon certain rollover assumptions. Amounts at December 31, 2002 -------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years -------- ----- ----- ------------ (In thousands) 0.00 to 3.00% $60,689 $ 2,063 $ 106 $ 403 3.01 to 5.00% 7,985 7,053 996 5,378 5.01 to 6.00% 2,522 1,038 829 3,798 6.01 to 7.00% 2,320 12 14 -- 7.01 to 8.00% 221 -- 101 -- ------- ------- ------ ------ Total $73,737 $10,166 $2,046 $9,579 ======= ======= ====== ====== The following table indicates the amount of the Bank's jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2002. At December 31, 2002 -------------------- Maturity Period (In thousands) - --------------- Three months or less $19,435 Greater than three months through six months 4,126 Greater than six months through twelve months 14,429 Over twelve months 3,911 ------- Total $41,901 ======= The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 2002 Deposits 2001 2001 Deposits 2000 2000 Deposits ------------ -------- ---------- ------------ -------- ---------- ------------ -------- (Dollars in thousands) Withdrawable: Non-interest bearing accounts $ 11,115 6.9% $ (291) $ 11,406 7.9% $ 2,236 $ 9,170 7.0% Savings accounts 24,538 15.2 4,449 20,089 13.8 (1,119) 21,208 16.3 MMDA 11,900 7.3 (1,524) 13,424 9.2 6,114 7,310 5.6 NOW accounts 18,748 11.6 1,257 17,491 12.0 2,412 15,079 11.6 -------- ----- --------- -------- ----- -------- -------- ----- Total withdrawable 66,301 41.0 3,891 62,410 42.9 9,643 52,767 40.5 Certificates (original terms): I.R.A. 6,661 4.1 716 5,945 4.1 (551) 6,496 5.0 3 months 584 .4 520 64 -- 22 42 -- 6 months 1,295 .8 (1,564) 2,859 2.0 338 2,521 1.9 9 months 547 .3 (323) 870 .6 (6,006) 6,876 5.3 12 months 17,315 10.7 133 17,182 11.8 610 16,572 12.7 15 months 7,203 4.4 (1,747) 8,950 6.1 5,158 3,792 2.9 18 months 2,340 1.4 (794) 3,134 2.2 (2,730) 5,864 4.5 24 months 7,376 4.6 (1,553) 8,929 6.1 4,913 4,016 3.1 30 months 1,814 1.1 125 1,689 1.2 (90) 1,779 1.4 36 months 1,590 1.0 314 1,276 .9 935 341 .3 48 months 1,272 .8 709 563 .4 195 368 .3 60 months 5,630 3.5 4,273 1,357 .9 274 1,083 .8 Jumbo certificates 41,901 25.9 11,558 30,343 20.8 2,635 27,708 21.3 -------- ----- -------- -------- ----- -------- -------- ----- Total certificates 95,528 59.0 12,367 83,161 57.1 5,703 77,458 59.5 -------- ----- -------- -------- ----- -------- -------- ----- Total deposits $161,829 100.0% $16,258 $145,571 100.0% $ 15,346 $130,225 100.0% ======== ===== ======= ======== ===== ======== ======== =====
Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments, or borrowings. At December 31, 2002, the Bank had $40 million in FHLB advances. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Holding Company's and the Bank's borrowings at or for the years ended December 31, 2002, 2001 and 2000.
At or for the Year Ended December 31, 2002 2001 2000 ---------- ---------- ---------- (In thousands) FHLB Advances and Other Borrowed Money: Outstanding at end of period $40,000 $26,500 $13,450 Average balance outstanding for period 32,475 17,385 8,813 Maximum amount outstanding at any month-end during the period 40,000 26,500 13,450 Weighted average interest rate during the period 4.88% 5.50% 5.67% Weighted average interest rate at end of period 4.48% 4.53% 6.42%
Service Corporation Subsidiaries Office of Thrift Supervision regulations permit federal savings associations to invest in the capital stock, obligations or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 2% of the association's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries (other than special purpose finance subsidiaries) in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's regulatory capital is in compliance with applicable regulations. A savings association that acquires a non-savings association subsidiary, or that elects to conduct a new activity within a subsidiary, must give the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the Department of Financial Institutions at least 30 days advance written notice. The Federal Deposit Insurance Corporation may, after consultation with the Office of Thrift Supervision, prohibit specified activities if it determines such activities pose a serious threat to the Savings Association Insurance Fund. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). The Bank currently owns one subsidiary, Madison First Service Corporation, which was incorporated under the laws of the State of Indiana on July 3, 1973. Madison First Service Corporation currently holds land but does not otherwise engage in significant business activities. Employees As of December 31, 2002, the Bank employed 57 persons on a full-time basis and 10 persons on a part-time basis. None of the employees is represented by a collective bargaining group. Management considers its employee relations to be good. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Jefferson County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions and certain nonbanking consumer lenders that provide similar services in Jefferson County and which have significantly larger resources available to them than does the Bank. In total, there are 11 financial institutions located in Jefferson County, Indiana, including the Bank. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services they provide borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable. REGULATION General As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. For example, the Bank must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines the Bank's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. A savings association must pay a semi-annual assessment to the OTS based upon a marginal assessment rate that decreases as the asset size of the savings association increases, and which includes a fixed-cost component that is assessed on all savings associations. The assessment rate that applies to a savings association depends upon the institution's size, condition and the complexity of its operations. The Bank's semi-annual assessment is approximately $27,000. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuances or retirements of its securities, and limitations upon other aspects of banking operations. In addition, the Bank's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation, antitrust laws and regulations protecting the confidentiality of consumer financial information. Savings and Loan Holding Company Regulation As the holding company for the Bank, the Holding Company is regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and is thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without obtaining the prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company currently operates as a unitary savings and loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") in 1999, there were no restrictions on the permissible business activities of a unitary savings and loan holding company. The GLB Act included a provision that prohibits any new unitary savings and loan holding company, defined as a company that acquires a thrift after May 4, 1999, from engaging in commercial activities. This provision also includes a grandfather clause, however, that permits a company that was a savings and loan holding company as of May 4, 1999, or had an application to become a savings and loan holding company on file with the OTS as of that date, to acquire and continue to control a thrift and to continue to engage in commercial activities. Because the Holding Company qualifies under this grandfather provision, the GLB Act did not affect the Holding Company's authority to engage in diversified business activities. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies, to the same extent as if the Holding Company were a bank holding company and the Bank were a bank. See "-Qualified Thrift Lender." At December 31, 2002, the Bank's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple savings and loan holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend or make a capital distribution on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System The Bank is a member of the FHLB system, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member financial institutions. At December 31, 2002, the Bank's investment in stock of the FHLB of Indianapolis was $2 million. For the fiscal year ended December 31, 2002, the FHLB of Indianapolis paid approximately $95,000 in dividends to the Bank, for an annual rate of 5.9%. All 12 FHLB's are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in the Bank's capital. The FHLB of Indianapolis serves as a reserve or central bank for its member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as the Bank, and for banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. In addition to the assessment for deposit insurance, savings institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation ("FICO"), which is a federally-chartered corporation that was organized to provide some of the financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments for SAIF members approximated 6.10 basis points, while BIF members paid 1.22 basis points. By law, payments on FICO obligations have been shared equally between BIF members and SAIF members since January 1, 2000. Legislation is pending before Congress that would increase the deposit insurance assessments paid by all financial institutions, including the Bank. Although Congress has considered merging the SAIF and the BIF, until then, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. The OTS requires a core capital level of 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and no less than 4% for all other savings associations. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 2002, the Bank was in compliance with all capital requirements imposed by law. The OTS issued a final rule in 1993 which sets forth a methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS delayed the implementation of this rule, however, and in 2002 deleted this interest rate risk component from the capital requirements applicable to savings associations. If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2002, the Bank was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations The OTS also restricts the amount of "capital distributions" that may be made by savings associations. The regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The regulation exempts certain savings associations from filing either a notice or an application with the OTS before making any capital distribution, and requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because the Bank is a subsidiary of a savings and loan holding company, this latter provision requires, at a minimum, that the Bank file a notice with the OTS 30 days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, the Bank's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires the Bank to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits the Bank from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew, or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on the Bank's current operations. Liquidity The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the former statutory requirement that all savings associations maintain an average daily balance of liquid assets in a minimum amount of not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. The OTS adopted an interim final rule in March 2001 that implemented this revised statutory requirement, although savings associations remain subject to the OTS regulation that requires them to maintain sufficient liquidity to ensure their safe and sound operation. Safety and Soundness Standards The federal banking agencies have adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation, interest rate exposure, asset quality and earnings standards. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and be appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 2002, the Bank did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on the Bank's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test that requires the association to maintain an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise to qualify as a QTL. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 2002, the Bank was in compliance with its QTL requirement, with approximately 81.3% of its portfolio assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; and (iii) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must dispose of any investment or activity not permissible for a national bank and a savings association. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law, which became effective in 1996, authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. Transactions with Affiliates The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which limits credit transactions between a bank or savings association and its executive officers and its affiliates. These provisions also prescribe terms and conditions deemed to be consistent with safe and sound banking practices for transactions between a financial institution and its affiliates, and restrict the types of collateral security permitted in connection with a financial institution's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following the Bank's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although the Holding Company anticipates incurring additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating - outstanding, satisfactory, needs to improve, and substantial noncompliance - and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated the Bank's record of meeting community credit needs as satisfactory. Predatory Lending The Federal Reserve Board issued a regulation that became effective on October 1, 2002 that is aimed at curbing "predatory lending." The term "predatory lending" encompasses a variety of practices, but the term generally is used to refer to abusive lending practices involving fraud, deception or unfairness. Predatory lending typically involves one or more of the following: (i) making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation ("asset-based lending"); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ("loan flipping"); or (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower. The Federal Reserve Board's new regulation, which amends Regulation Z, broadens the scope of loans subject to the protections of the Home Ownership and Equity Protection Act of 1994 ("HOEPA"). Among other things, the regulation brings within the scope of HOEPA first-lien mortgage loans with interest rates that are at least 8 percentage points above Treasury securities having a comparable maturity. In addition, the regulation requires that the cost of optional insurance and similar debt protection products paid by a borrower at closing be included in calculating the finance charge paid by the borrower. HOEPA coverage is triggered if such finance charges exceed 8 percent of the total loan. Finally, the regulation restricts creditors from engaging in repeated refinancings of their own HOEPA loans over a short time period when the transactions are not in the borrower's interest. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid. The Bank is unable at this time to determine the impact that these new regulations, or any similar state predatory lending regulations, may have on its financial condition or results of operation. USA Patriot Act of 2001 On October 26, 2001, President Bush signed the USA Patriot Act of 2001. The Patriot Act is intended is to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws. On July 23, 2002, the Treasury Department proposed regulations requiring institutions to incorporate into their written money laundering plans a board-approved customer identification program implementing reasonable procedures for: (i) verifying the identity of any person seeking to open an account, to the extent reasonable and practicable; (ii) maintaining records of the information used to verify the person's identity; and (iii) determining whether the person appears on any list of known or suspected terrorists or terrorist organizations. The Bank does not anticipate that these requirements will materially affect its operations. TAXATION Federal Taxation Historically, savings associations, such as the Bank, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank can no longer use the percentage of taxable income method of computing its allowable tax bad debt deduction and instead must compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code or (ii) excess dividends or distributions are paid out by the Bank or the Bank redeems its own stock. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. The Holding Company and the Bank elected to file a consolidated federal income tax return for 2001 and 2000. The Bank was taxed separately on its earnings in years prior to 2000. The Holding Company has been taxed as an ordinary corporation in years prior to 2000. State Taxation The Bank and the Holding Company are subject to Indiana's Financial Bank Tax ("IFBT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of IFBT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Bank's state income tax returns have not been audited in recent years. Item 2. Description of Properties. The following table provides certain information with respect to the Bank's offices as of December 31, 2002.
Net Book Value of Property, Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ------------------------------------ -------------- ----------------- ----------------- (Dollars in thousands) Locations in Madison, Indiana: Downtown Office: 233 E. Main Street 1952 $ 451 9,110 Drive-Through Branch: 401 E. Main Street 1984 96 375 Hilltop Location: 430 Clifty Drive 1983 4,072 32,000 Wal-mart Banking Center: 567 Ivy Tech Drive 1995 1 517 Location in Hanover, Indiana: 10 Medical Plaza Drive 1995 455 656 Location in Charlestown, Indiana: 1025 Highway 62 2002 391 1,500 Location in Sellersburg, Indiana: Highway 311 2002 275 --
The Bank owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by the Bank was approximately $338,000 at December 31, 2002. The Bank operates nine automated teller machines ("ATMs"), one at each office location (the main office has two), one at Hanover College, one at a Kroger supermarket, one at a BP gas station, all in Madison, Indiana, and one in Carrolton, Kentucky. The Bank's ATMs participate in the Shazam(R) network. The Bank performs its own data processing and reporting services. Item 3. Legal Proceedings. Neither the Holding Company nor the Bank is a party to any pending legal proceedings, other than routine litigation incidental to the Holding Company's or the Bank's business. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 2002. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Bank are elected annually by the Holding Company's Board of Directors.
Position with the Position Name Holding Company with the Bank - -------------------- ----------------- -------------------------- Matthew P. Forrester President and Chief President and Chief Executive Officer Executive Officer Lonnie D. Collins Secretary Secretary Larry C. Fouse Vice President of Finance Vice President of Finance Deanna Liter Vice President of Data Services Vice President of Data Services Barbara Eades Vice President of Retail Banking Vice President of Retail Banking Loy Skirvin Vice President of Human Vice President of Human Resources Resources Mark A. Goley Vice President of Lending Vice President of Lending Anthony D. Brandon Vice President of Loan Vice President of Loan Administration Administration John Muessel Vice President - Trust Officer Vice President - Trust Officer
Matthew P. Forrester (age 46) has served as the Bank and Holding Company President and Chief Executive Officer since October 1999. Prior to that, Mr. Forrester served as the Chief Financial Officer for Home Loan Bank in Fort Wayne, Indiana and Senior Vice President and Treasurer for its holding company, Home Bancorp. Prior to joining Home Loan Bank, Mr. Forrester was an examiner for the Indiana Department of Financial Institutions. Lonnie D. Collins (age 54) has served as Secretary of the Bank since September 1994 and as Secretary of the Holding Company since 1996. Mr. Collins has also practiced law since October 1975 and has served as the Bank's outside counsel since 1980. Larry C. Fouse (age 57) has served as the Holding Company's Controller since 1997. From 1993 to 1997, he served as the Chief Financial Officer and Controller of Citizens and from 1989 to 1993 served as Citizens' Vice President and Operations Officer. Deanna Liter (age 39) has served as Vice President of Data Services since 1999. From 1986 to 1997, she was manager of the Citizens' Data Processing Department. Barbara Eades (age 53) has served as Vice President of Retail Banking since 2000. From 1997 to 1999, she was Branch Manager of the downtown branch. She served as Assistant Vice President for Madison First Federal from 1990 to 1996. Loy Skirvin (age 54) has served as Vice President of Human Resources since 1998. From 1991 to 1997, she was Human Resources Manager for a manufacturing firm. Mark A. Goley (age 47) has served as Vice President of Loan Services since 1997. From 1989 to 1997, he served as Senior Loan Officer for Citizens. Anthony D. Brandon (age 31) has served as Vice President of Loan Administration since September of 2001. Prior to joining the Bank, he served as President of Republic Bank of Indiana. John Muessel (age 50) has served as Vice President - Trust Officer since April of 2002. Prior to joining the Bank, he served as Trust Officer of National City Bank of Indiana. PART II Item 5. Market for Common Equity and Related Stockholder Matters. The Holding Company's common stock, without par value ("Common Stock"), is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market, under the symbol "RIVR." Since the Holding Company has no independent operation or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to its shareholders directly depends upon the ability of the Bank to pay dividends to the Holding Company and upon the earnings on its investment securities. Any dividend distributions by the Bank to the Holding Company in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from the Bank's accumulated bad debt reserves, which could result in increased federal income tax liability for the Bank. Moreover, the Bank may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of the Bank. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the Bank's financial condition. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. Other information required by this item is incorporated by reference to the material under the heading "Market Price of the Corporation's Common Shares and Related Shareholder Matters" on pages 2 and 3 of the Holding Company's 2002 Shareholder Annual Report (the "Shareholder Annual Report"). Item 5.5. Selected Consolidated Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data" on pages 4 and 5 of the Shareholder Annual Report. Item 6. Management's Discussion and Analysis or Plan of Operation. The information required by this item is incorporated by reference to pages 6 through 21 of the Shareholder Annual Report. Item 6A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is incorporated by reference to pages 14 through 16 of the Shareholder Annual Report. Item 7. Financial Statements. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 26 through 49 in the Shareholder Annual Report are incorporated herein by reference. Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. There are no such changes and disagreements to report during the applicable period. PART III Item 9. Directors and Executive Officers of the Registrant. The information required by this item with respect to directors is incorporated by reference to pages 2 through 5 and page 9 of the Holding Company's Proxy Statement for its Annual Shareholder Meeting to be held April 16, 2003 (the "2003 Proxy Statement"). Information concerning the Registrant's executive officers is included in Item 4.5 in Part I of this report. Item 10. Executive Compensation. The information required by this item with respect to executive compensation is incorporated by reference to pages 5 and 6 of the 2003 Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to pages 1 and 2 of the 2003 Proxy Statement. The following table sets forth certain information pertaining to the Bank's equity compensation plans: Equity Compensation Plan Information
Number of securities Number of securities remaining available for to be issued upon exercise Weighted-average future issuance under of outstanding options, exercise price of equity compensation warrants and rights as of outstanding options, plans (excluding securities December 31, 2002 warrants and rights reflected in Column (a)) Plan Category (a) (b) (c) - ------------------------- -------------------------- -------------------- --------------------------- Equity compensation plans approved by security holders 85,134 (1) $15.15 (1) 21,154 (1) 4,220 (2) -0- (2) 14,202 (2) Equity compensation plans not approved by security holders --- --- -- Total 89,354 $15.15 (3) 35,356
- ---------------------------- (1) River Valley Bancorp Stock Option Plan. (2) River Valley Bancorp Recognition and Retention Plan and Trust ("RRP"). Column (a) includes 4,220 shares granted to management but not yet vested. In addition, 29,188 shares granted to management have fully vested, and shares have been issued to management in connection therewith. (3) The total in Column (b) includes only the weighted-average price of stock options, as the restricted shares awarded under the RRP plan have no exercise price. Item 12. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to pages 7 and 8 of the 2003 Proxy Statement. Item 13. Exhibits and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Financial Statements Page No. - ------------------------------------------------------- ------------- Independent Accountants' Report...............................................25 Consolidated Balance Sheets at December 31, 2002 and 2001.....................26 Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000...........................................................27 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000..............................................28 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000..............................................29 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000...........................................................30 Notes to Consolidated Financial Statements....................................31 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 2002. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. Item 14. Controls and Procedures. Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including its President and Vice President of Finance, of the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on the Company's evaluation, its President and Vice President of Finance have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of this evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVER VALLEY BANCORP By:/s/ Matthew P. Forrester ----------------------------------- Matthew P. Forrester, President and Chief Executive Officer Date: March 31, 2003 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date (1) Principal Executive Officer: ) ) ) /s/ Matthew P. Forrester ) - ----------------------------------- ) Matthew P. Forrester President and ) Chief Executive Officer ) ) ) ) (2) Principal Financial and Accounting ) Officer: ) ) /s/ Larry C. Fouse ) - ----------------------------------- Treasurer ) Larry C. Fouse ) ) ) March 31, 2003 ) ) (3) The Board of Directors: ) ) ) ) /s/ Robert W. Anger Director ) - ----------------------------------- ) Robert W. Anger ) ) ) /s/ Jonnie L. Davis Director ) - ----------------------------------- ) Jonnie L. Davis ) ) ) /s/ Matthew P. Forrester Director ) - ----------------------------------- ) Matthew P. Forrester ) ) ) /s/ Michael J. Hensley Director ) - ----------------------------------- ) Michael J. Hensley ) ) ) March 31, 2003 /s/ L. Sue Livers Director ) - ----------------------------------- ) L. Sue Livers ) ) ) /s/ Fred W. Koehler Director ) - ----------------------------------- ) Fred W. Koehler ) ) ) /s/ Charles J. McKay Director ) - ----------------------------------- ) Charles J. McKay ) ) CERTIFICATION I, Matthew P. Forrester, certify that: 1. I have reviewed this annual report on Form 10-KSB of River Valley Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 31, 2003 /s/ Matthew P. Forrester ---------------------------------------- Matthew P. Forrester President and Chief Executive Officer CERTIFICATION I, Larry C. Fouse, certify that: 1. I have reviewed this annual report on Form 10-KSB of River Valley Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 31, 2003 /s/ Larry C. Fouse -------------------------------------- Larry C. Fouse Vice President of Finance CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of River Valley Bancorp. Signed this 31st day of March, 2003. /s/ Matthew P. Forrester /s/ Larry C. Fouse - ------------------------------------ --------------------------------------- Matthew P. Forrester Larry C. Fouse President and Chief Executive Officer Vice President of Finance EXHIBIT INDEX Exhibit No. Description 3 (1) Registrant's Articles of Incorporation are incorporated by reference to Exhibit 3(1) to the Registration Statement on Form S-1 (Registration No. 333-05121) (the "Registration Statement") (2) Registrant's Amended Code of By-Laws are incorporated by reference to Exhibit 3(2) to the Registrant's Form 10-K for the fiscal year ending December 31, 1997 10 (1) Employment Agreement between River Valley Financial Bank and Matthew P. Forrester is incorporated by reference to Exhibit 10(1) of Registrant's Form 10-K for 1999 (2) Director Deferred Compensation Master Agreement is incorporated by reference to Exhibit 10(8) to the Registration Statement (3) Director Deferred Compensation Joinder Agreement -- Robert W. Anger is incorporated by reference to Exhibit 10(10) to the Registration Statement (4) Director Deferred Compensation Joinder Agreement -- Earl W. Johann is incorporated by reference to Exhibit 10(12) to the Registration Statement (5) Director Deferred Compensation Joinder Agreement -- Frederick W. Koehler is incorporated by reference to Exhibit 10(13) to the Registration Statement (6) Director Deferred Compensation Joinder Agreement -- Michael Hensley is incorporated by reference to Exhibit 10(15) to the Registration Statement (7) Special Termination Agreement between River Valley Financial Bank, as successor to Madison First Federal Savings and Loan Association and Robert W. Anger is incorporated by reference to Exhibit 10(18) to the Registration Statement (8) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Larry Fouse is incorporated by reference to Exhibit 10(20) to the Registration Statement (9) Special Termination Agreement between River Valley Financial Bank, as successor to Citizens National Bank of Madison and Mark Goley is incorporated by reference to Exhibit 10(21) to the Registration Statement (10) Exempt Loan and Share Purchase Agreement between Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp is incorporated by reference to Exhibit 10(22) to the Registration Statement (11) River Valley Bancorp Recognition and Retention Plan and Trust is incorporated by reference to Exhibit B of Registrant's Schedule 14A filed May 12, 1997 (12) River Valley Bancorp Stock Option Plan is incorporated by reference to Exhibit A of Registrant's Schedule 14A filed May 12, 1997 13 Shareholder Annual Report 21 Subsidiaries of the Registrant 23 Consent of BKD, LLP EX-13 3 ar_02.txt ANNUAL REPORT FOR RIVER VALLEY EXHIBT 13 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 EX-21 4 ex_21.txt SUBS OF RVB Exhibit 21 SUBSIDIARIES OF RIVER VALLEY BANCORP Subsidiaries of River Valley Bancorp: Name Jurisdiction of Incorporation ---------------------------------- ----------------------------- River Valley Financial Bank Federal Madison First Service Corporation Indiana EX-23 5 rvb_ex23-1.txt CONSENT OF BKD, LLP Exhibit 23.1 Consent of Independent Public Accountants We hereby consent to the incorporation by reference to the Registration Statement on Form S-8 of River Valley Bancorp (the "Company"), File Number 000-21765, of our report dated January 21, 2003 on the consolidated financial statements of the Company which report is incorporated by reference in the Company's 2002 Annual Report on Form 10-KSB filed pursuant to the Securities and Exchange Act of 1934. /s/ BKD, LLP Indianapolis, Indiana March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----