UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-32643
INDIAN RIVER BANKING COMPANY
----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2931518
------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
958 20th Place, Vero Beach, Florida 32960
- ----------------------------------- -----
(Address of principal executive offices) (Zip Code)
772.569.9200
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of July 31, 2003, the registrant had 2,172,417 shares of Common Stock
outstanding.
Part I Financial Information
Item 1 - Financial Statements
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS June 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash and due from banks $ 12,570 $ 18,856
Federal funds sold 1,044 1,001
------------------------------
Total cash and cash equivalents 13,614 19,857
Securities available for sale 241,756 176,383
Securities held to maturity 7,284 9,742
Other securities 2,513 2,370
Loans held for sale 6,329 13,186
Loans, net of allowance for loan loss 237,144 229,588
Bank premises and equipment, net 4,366 4,084
Accrued interest receivable 2,047 2,207
Other assets 1,284 780
------------------------------
TOTAL ASSETS $516,337 $458,197
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 23,404 $ 66,883
Interest-bearing deposits:
NOW and money market 135,563 51,777
Savings 116,551 116,028
Time deposits 130,818 130,205
------------------------------
TOTAL DEPOSITS 406,336 364,893
Guaranteed preferred beneficial interests in Company's
subordinated debentures 7,000 7,000
Other borrowings 64,661 50,269
Other liabilities 1,385 1,186
------------------------------
TOTAL LIABILITIES 479,382 423,348
------------------------------
Stockholders' Equity
Common stock 2,172 2,163
Capital surplus 27,630 27,427
Retained earnings 5,424 2,979
Accumulated other comprehensive income 1,729 2,280
------------------------------
TOTAL STOCKHOLDERS' EQUITY 36,955 34,849
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $516,337 $458,197
==============================
See Notes to Condensed Consolidated Financial Statements.
2
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(In Thousands, Except Per Share Data)
2003 2002
- -------------------------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $4,051 $4,215
Investment securities and due from banks 2,133 2,263
Federal funds sold 5 28
-------------------------
6,189 6,506
-------------------------
Interest expense:
Deposits 1,656 1,948
Other 538 385
-------------------------
2,194 2,333
-------------------------
NET INTEREST INCOME 3,995 4,173
Provision for loan losses 90 130
-------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,905 4,043
-------------------------
Other income:
Service charges and fees 601 427
Gain on sale of securities 20 61
Gain on sale of loans 652 390
Other 233 232
-------------------------
1,506 1,110
-------------------------
Other expense:
Salaries and benefits 1,801 1,466
Occupancy and equipment 485 385
Data processing 397 324
Other operating expenses 806 752
-------------------------
3,489 2,927
-------------------------
INCOME BEFORE INCOME TAXES 1,922 2,226
Provision for income taxes 719 835
-------------------------
NET INCOME $1,203 $1,391
=========================
Basic earnings per share $ 0.55 $ 0.65
=========================
Diluted earnings per share $ 0.53 $ 0.63
=========================
Dividends per share $ -- $ --
=========================
See Notes to Condensed Consolidated Financial Statements.
3
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(In Thousands, Except Per Share Data)
2003 2002
- ---------------------------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $ 8,223 $ 8,386
Investment securities and due from banks 4,098 4,317
Federal funds sold 39 105
---------------------------
12,360 12,808
---------------------------
Interest expense:
Deposits 3,226 4,156
Other 1,068 767
---------------------------
4,294 4,923
---------------------------
NET INTEREST INCOME 8,066 7,885
Provision for loan losses 265 260
---------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,801 7,265
---------------------------
Other income:
Service charges and fees 1,171 825
Gain on sale of securities 167 751
Gain on sale of loans 1,233 687
Other 430 395
---------------------------
3,001 2,658
---------------------------
Other expense:
Salaries and benefits 3,543 2,843
Occupancy and equipment 915 766
Data processing 765 676
Other operating expenses 1,654 1,439
---------------------------
6,877 5,724
---------------------------
INCOME BEFORE INCOME TAXES 3,925 4,559
Provision for income taxes 1,467 1,714
---------------------------
NET INCOME $ 2,458 $ 2,845
===========================
Basic earnings per share $ 1.13 $ 1.33
===========================
Diluted earnings per share $ 1.09 $ 1.30
===========================
Dividends per share $ -- $ --
===========================
See Notes to Condensed Consolidated Financial Statements.
4
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(In Thousands)
Accumulated Comprehen-
Common Stock Other Total sive
--------------------- Capital Retained Comprehensive Stockholders' Income
Shares Amount Surplus Earnings Income Equity (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 1,772 $ 1,772 $ 16,456 $ 8,478 $ 998 $ 27,704
10% stock dividend, applied
retroactively 177 177 4,422 (4,599) -- --
------------------------------------------------------------------------
Balance, January 1, 2002, as
adjusted 1,949 1,949 20,878 3,879 998 27,704
Fractional shares -- -- -- (8) -- (8)
Stock options exercised 2 2 45 -- -- 47
Stock-based compensation -- -- 1 -- -- 1
Comprehensive Income:
Net income -- -- -- 2,845 -- 2,845 $ 2,845
Other comprehensive
income, unrealized gain
on securities, net of tax -- -- -- -- 239 239 239
--------
Comprehensive Income $ 3,084
------------------------------------------------------------------------------------
Balance, June 30, 2002 1,951 $ 1,951 $ 20,924 $ 6,716 $ 1,237 $ 30,828
========================================================================
Balance, January 1, 2003 1,966 $ 1,966 $ 21,201 $ 9,402 $ 2,280 $ 34,849
10% stock dividend, applied
retroactively 197 197 6,226 (6,423) -- --
------------------------------------------------------------------------
Balance, January 1, 2003, as adjusted
2,163 2,163 27,427 2,979 2,280 34,849
Fractional shares (13) (13)
Stock options exercised 9 9 170 179
Stock-based compensation 33 33
Comprehensive Income:
Net income 2,458 2,458 2,458
Other comprehensive
income, unrealized loss
on securities, net of tax (551) (551) (551)
--------
Comprehensive Income $ 1,907
------------------------------------------------------------------------------------
Balance, June 30, 2003 2,172 $ 2,172 $ 27,630 $ 5,424 $ 1,729 $ 36,955
========================================================================
See Notes to Condensed Consolidated Financial Statements
5
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(In Thousands)
2003 2002
- -------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 2,458 $ 2,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 332 290
Provision for loan losses 265 260
Proceeds from sale of loans originated for resale 62,014 30,965
Origination of loans for resale (53,924) (26,630)
Gain on sale of loans (1,233) (56)
Stock-based compensation 33 1
Amortization of premiums and discounts, net 1,299 42
Gain on sale of securities (167) (751)
Decrease in accrued interest receivable 160 451
Decrease in other assets (178) 12
Increase in other liabilities 199 83
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,258 7,512
-------------------------------
Cash Flows From Investing Activities
Cash flows from securities, net (65,067) (23,585)
Loan originations, net of collections (7,821) (11,441)
Purchases of premises and equipment (614) (333)
-------------------------------
NET CASH USED BY INVESTING ACTIVITIES (73,502) (35,359)
-------------------------------
Cash Flows From Financing Activities
Net increase in deposits 41,443 19,474
Net increase in other borrowings 14,392 7,538
Proceeds from exercise of stock options 179 47
Cash paid for fractional shares (13) (8)
-------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,001 27,051
-------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,243) (796)
Cash and cash equivalents:
Beginning 19,857 23,367
-------------------------------
Ending $ 13,614 $ 22,571
===============================
See Notes to Condensed Consolidated Financial Statements.
6
INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Indian River
Banking Company, which are unaudited, except for the condensed consolidated
balance sheet at December 31, 2002, which is derived from the audited
consolidated balance sheet at that date, have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statement presentation. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six-month
periods ended June 30, 2003, are not necessarily indicative of the results that
may be expected for the full year. For further information, refer to Indian
River Banking Company's consolidated financial statements and the notes thereto
for the year ended December 31, 2002.
The accompanying condensed consolidated financial statements include the
accounts of Indian River Banking Company ("Indian River") and its wholly-owned
subsidiaries, Indian River National Bank ("Indian River Bank"), a
federally-chartered independent community bank and its wholly owned subsidiary
Indian River Real Estate, LLC, Indian River Title Company, LLC, IRNB Insurance
Services, LLC, and Indian River Capital Trust I, collectively referred to as
"Indian River". All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2. INVESTMENT SECURITIES
Securities held to maturity: The amortized cost and fair values of securities
held to maturity as of June 30, 2003 and December 31, 2002 are summarized as
follows.
(In ,000s) June 30, 2003
------------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------
State, county and municipal securities $ 7,284 $ 487 $ (3) 7,768
------------------------------------------------------------------
$ 7,284 $ 487 $ (3) $ 7,768
==================================================================
December 31, 2002
------------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------
Mortgage-backed securities $ 3,814 $ -- $ (11) $ 3,803
State, county and municipal securities 5,928 252 -- 6,180
------------------------------------------------------------------
$ 9,742 $ 252 $ (11) $ 9,983
==================================================================
7
Securities available for sale: The amortized cost and fair values of securities
available for sale as of June 30, 2003 and December 31, 2002 are summarized as
follows:
(In ,000s) June 30, 2003
-----------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Government corporations and agencies $ 31,029 $ 1,141 $ -- $ 32,170
Corporate securities 4,924 366 -- 5,290
Mortgage-backed securities 203,059 1,624 (387) 204,296
-----------------------------------------------------------------
$ 239,012 $ 3,131 $ (387) $ 241,756
=================================================================
December 31, 2002
-----------------------------------------------------------------
Estimated Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Government corporations and agencies $ 26,060 $ 1,172 $ -- $ 27,232
Corporate securities 10,470 422 (5) 10,887
Mortgage-backed securities 136,234 2,139 (109) 138,264
-----------------------------------------------------------------
$ 172,764 $ 3,733 $ (114) $ 176,383
=================================================================
NOTE 3. LOANS
The composition of net loans is as follows at June 30, 2003 and December 31,
2002:
(In ,000s) June 30, December 31,
2003 2002
-----------------------------------
Real estate:
Construction, land development and other land loans $ 48,871 $ 45,913
Farmland 2,029 3,181
One-to-four family residential 91,473 87,841
Multifamily residential 2,349 2,506
Nonfarm, nonresidential 66,815 64,458
Agriculture 1,244 1,788
Commercial and industrial 14,829 13,257
Consumer 10,937 11,645
Other 1,952 2,262
-----------------------------------
240,500 232,851
Less: Allowance for loan losses (3,352) (3,259)
Unearned discounts and loan fees (4) (4)
-----------------------------------
Loans, net $ 237,144 $ 229,588
===================================
Indian River's recorded investment in impaired loans for which a specific
allowance was recognized was $335,000 and $585,000 at June 30, 2003 and December
31, 2002, respectively. The specific allowance associated with these loans was
$75,000 and $100,000 at June 30, 2003 and December 31, 2002, respectively. The
average recorded investment in impaired loans during the second quarter of 2003
was $651, 000 compared to $145,000 for the comparable quarter in 2002. The
average recorded investment in impaired loans for the first half of 2003 was
$460,000 compared to $143,000 for the first half of 2002. Interest income
recognized on impaired loans, recognized for cash payments during the second
quarter and the first half of 2003 and 2002 was not significant.
8
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30, 2003
and 2002 is as follows:
(In Thousands)
2003 2002
------- -------
Balance, beginning $ 3,259 $ 2,819
------- -------
Charge-offs:
1-4 Family Real Estate (34) --
Nonfarm, nonresidential (62) --
Commercial and industrial (14) (2)
Loans to individuals (20) (51)
Credit Cards (29) (26)
Other loans (41) (13)
------- -------
Total (200) (92)
------- -------
Recoveries:
1-4 Family Real Estate -- 7
Loans to individuals 12 18
Credit Cards 4 1
Other loans 12 2
------- -------
Total 28 28
------- -------
Net charge-offs (172) (64)
Provision for loan losses 265 260
------- -------
Balance, ending $ 3,352 $ 3,015
======= =======
NOTE 5. EARNINGS PER SHARE
Basic earnings per-share amounts are computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding, adjusted
for stock dividends and splits occurring subsequent to period-end (the
denominator). Diluted earnings per-share amounts assume the conversion, exercise
or issuance of all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from continuing
operations. Diluted earnings per share are calculated using the Treasury Method.
Following is information about the computation of the earnings per share data
for the three and six months ended June 30, 2003 and 2002 respectively (after
adjusting for 10% stock dividends in 2003 and 2002):
(In Thousands, Except Per Share Data) Common Per-Share
Net Earnings Shares Amounts
---------------------------------------------------
Three Months Ended June 30, 2003:
Basic earnings, income available to
common stockholders $1,203 2,172 $ 0.55
========
Effect of dilutive securities, options -- 79
----------------------------
Diluted earnings $1,203 2,251 $ 0.53
==================================================
Common Per-Share
Net Earnings Shares Amounts
---------------------------------------------------
Three Months Ended June 30, 2002:
Basic earnings, income available to
common stockholders $1,391 2,145 $ 0.65
========
Effect of dilutive securities, options -- 51
----------------------------
Diluted earnings $1,391 2,196 $ 0.63
==================================================
9
(In Thousands, Except Per Share Data) Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------
Six Months Ended June 30, 2003:
Basic earnings, income available to
common stockholders $2,458 2,167 $ 1.13
========
Effect of dilutive securities, options -- 79
--------------------------
Diluted earnings $2,458 2,246 $ 1.09
================================================
Common Per-Share
Net Earnings Shares Amounts
--------------------------------------------------
Six Months Ended June 30, 2002:
Basic earnings, income available to
common stockholders $2,845 2,145 $ 1.33
========
Effect of dilutive securities, options -- 52
--------------------------
Diluted earnings $2,845 2,197 $ 1.30
================================================
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following at June 30, 2003 and December 31,
2002:
(In Thousands) June 30, December 31,
2003 2002
----------------------------
Advance under line of credit with Colonial Bank, interest
payable quarterly at an adjustable rate, 4.75% at June 30, 2003 $ -- $ --
Federal Home Loan Bank advances:
Advance, interest payable monthly at a fixed rate of 6.44%,
with equal semiannual principal payments of $142
through September 2004 429 571
Convertible advance due March 2008, interest payable quarterly
at a fixed rate of 5.51% 2,000 2,000
Convertible advance due January 2011, interest payable quarterly
at a fixed rate of 4.41% 10,000 10,000
Convertible advance due May 2011, interest payable quarterly
at a fixed rate of 3.95% 15,000 15,000
Convertible advance due November 2012, interest payable quarterly
at a fixed rate of 2.47% 6,000 6,000
Convertible advance due November 2012, interest payable quarterly
at a fixed rate of 3.35% 5,000 5,000
Securities sold under repurchase agreements 14,482 2,398
Federal funds purchased, interest payable daily at a rate that adjusts daily 11,750 9,300
-------------------------
$64,661 $50,269
=========================
NOTE 7. STOCK DIVIDEND
Stockholders' equity accounts have been retroactively adjusted in the
accompanying balance sheet as of December 31, 2002 to reflect a 10% stock
dividend declared in January 2003.
10
NOTE 8. TRUST PREFERRED SECURITIES
On September 30, 2002, a wholly-owned statutory business trust established by
Indian River issued $7 million in guaranteed preferred beneficial interests in
the trust ("trust-preferred securities"). The sole assets of the statutory
business trust are a series of subordinated debentures of Indian River in the
amount of $7 million and related payments. Indian River has fully and
unconditionally guaranteed the statutory business trust's obligations under the
trust-preferred securities, to the extent set forth in the guarantee agreement.
The subordinated debentures are unsecured and subordinate to all senior debt (as
defined) of Indian River. The subordinated debentures bear interest at a
variable rate of 3 month LIBOR plus 3.45%, 4.79% for the quarterly period ended
June 30, 2003 and mature on November 7, 2032. They are redeemable in whole or in
part on or after November 7, 2007. The trust preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their maturity or earlier redemption.
NOTE 9. STOCK BASED COMPENSATION
Under the terms of the 1999 Stock Option Plan, options to purchase shares of
Indian River's common stock may be granted to directors and key
officers/employees at a price that is not less than the fair market value of
such stock at the date of the grant. Options granted to employees under the plan
may be designated as incentive stock options. All options expire no more than
ten years from the date of the grant, or three months after an employee's
termination. In accordance with the plan, the aggregate number of shares for
which options may be granted, the number of shares covered for each outstanding
option, and the exercise price per share for each such option shall be
proportionately adjusted for the payment of stock dividends or similar
adjustments to the number of shares of common stock effected without the receipt
of consideration by Indian River. At June 30, 2003, the number of shares
eligible to be issued under the Plan was 366,025 and approximately 113,000
shares remained available for granting.
In December 1999, the Board of Directors adopted the Director Fee Stock Option
Plan, under which each director is entitled to receive options to purchase
shares of common stock in lieu of cash compensation for attendance at committee
meetings. Options granted have an exercise price equal to the fair value of the
common stock at the date of grant.
The following is a summary of stock option transactions during the six-month
periods ended June 30, 2003 and 2002 (All options and option price per share
information has been adjusted to reflect the stock dividend in 2002 and 2003):
Weighted-Average
Shares Exercise Price
------------------------------
Outstanding at December 31, 2001 145,718 $ 16.68
Granted 37,776 23.81
Exercised (2,426) 19.34
Forfeited (1,973) 15.66
--------------------------
Outstanding at June 30, 2002 179,095 $ 18.16
==========================
Outstanding at December 31, 2002 162,200 $ 18.41
Granted 50,490 32.73
Exercised (9,559) 18.75
Forfeited (377) 30.64
--------------------------
Outstanding at June 30, 2003 202,754 $ 21.94
==========================
11
NOTE 9. STOCK BASED COMPENSATION (CONTINUED)
Indian River accounts for its stock option plans using the intrinsic value
method provided under APB Opinion No. 25, Accounting for Stock Issued to
Employees. Generally, Indian River has recognized no compensation cost for stock
options granted, as all options granted had an exercise price equal to the
estimated market value of the underlying common stock on the date of grant.
Option holders may elect a "cashless exercise" of their vested options, under
which they receive shares of common stock with a fair value equal to the
intrinsic value of the options at the date of exercise, without any payment.
Those option awards expected to be exercised via this cashless exercise are
accounted for as variable plan awards and, as such, Indian River recognizes
compensation expense equal to the change in the intrinsic value of such options
during the period. The following table illustrates the effect on net income and
earnings per share if Indian River had applied fair value recognition provisions
to stock-based employee compensation.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions for
grants during 2003: risk-free interest rate of 4.9%, no dividends and expected
lives of 8 years. Volatility was assumed to be zero because there is currently
no market for Indian River's stock. The weighted-average fair value of options
granted during 2003 was $11.45.
(Dollars in ,000s, except per share data) Three Months Ending Three Months Ending
June 30, 2003 June 30, 2002
---------------------------------------------
Net income, as reported $ 1,203 $ 1,391
Add total stock-based employee compensation expense determined
under the intrinsic value based method for all awards, net of
related tax effects 11 1
Deduct total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (77) (48)
---------------------------------------------
Pro forma net income $ 1,137 $ 1,344
=============================================
Basic earnings per share As reported $ 0.55 $ 0.65
Pro forma 0.52 0.63
Diluted earnings per share As reported $ 0.53 $ 0.63
Pro forma 0.51 0.61
(Dollars in ,000s, except per share data) Six Months Ending Six Months Ending
June 30, 2003 June 30, 2002
---------------------------------------------
Net income, as reported $ 2,458 $ 2,845
Add total stock-based employee compensation expense determined
under the intrinsic value based method for all awards, net of
related tax effects 21 21
Deduct total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (105) (210)
---------------------------------------------
Pro forma net income $ 2,374 $ 2,269
=============================================
Basic earnings per share As reported $ 1.13 $ 1.33
Pro forma 1.05 1.28
Diluted earnings per share As reported $ 1.09 $ 1.30
Pro forma 1.01 1.25
12
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Indian River, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized on
the balance sheet. The contractual amounts of these instruments reflect Indian
River's involvement in particular classes of financial instruments.
Indian River's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. Indian River uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
These commitments were as follows at June 30, 2003:
(Dollars in Thousands) 2003
-------
Commitments to extend credit $57,662
Credit card arrangements 4,158
Standby letters of credit 910
-------
$62,730
=======
NOTE 11. ADDITIONAL CASH FLOW INFORMATION
(Dollars in Thousands) Six Months Ended June 30,
2003 2002
-------------------------
Cash flows from securities:
Securities available-for-sale:
Proceeds from sales $ 21,721 $ 82,303
Maturities, calls and paydowns 65,595 8,208
Purchases (154,682) (114,096)
Securities held to maturity:
Purchases (1,358) --
Maturities, calls and paydowns 3,800 --
Purchase of other securities (143) --
-------------------------
$ (65,067) $ (23,585)
=========================
Supplemental disclosures of cash flow information
Cash payments for interest $ 4,323 $ 5,086
=========================
Cash payments for income taxes $ 1,467 $ 1,714
=========================
13
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
- --------------------------
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"Indian River expects," "Indian River believes," "Indian River anticipates,"
may, should or words of similar import. Such forward-looking statements involve
known and unknown risks including, but not limited to, changes in general
economic and business conditions, interest rate fluctuations, competition within
and from outside the banking industry, new products and services in the banking
industry, risk inherent in making loans such as repayment risks and fluctuating
collateral values, problems with technology utilized by the Indian River,
changing trends in customer profiles and changes in laws and regulations
applicable to Indian River. Although Indian River believes that its expectations
with respect to the forward-looking statements are based upon reliable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results, performance or achievements of
Indian River will not differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.
General
- -------
Indian River Banking Company ("Indian River") is a one-bank holding
company for Indian River National Bank ("Indian River Bank") and is
headquartered in Vero Beach, Florida. Indian River Bank is a growing community
bank serving individuals and small to medium sized businesses with special focus
on real estate related lending and the professional community. The Bank operates
four branches in Indian River County and four branches in Brevard County. The
Bank offers deposit accounts and associated services to businesses and
individuals and makes loans and invests in qualified securities. In addition,
the Bank's income includes fees on deposit accounts and loans, and gains from
the sale of mortgage loans originated for sale in the secondary market.
FINANCIAL CONDITION
- -------------------
Total Assets
- ------------
Indian River's total assets were $516.3 million at June 30, 2003, a
12.7% increase from $458.2 million at December 31, 2002. The increase in Indian
River's asset base was due to deposit growth of $41.4 million and a $14.4
million increase in other borrowings.
Investments
- -----------
Indian River's investment portfolio increased $63.1 million during the
first six months of 2003, primarily as a result of a $55.8 million growth in
deposits and other borrowings. Net loans outstanding (both portfolio loans and
loans held for sale) increased only $699,000 during the same period. Portfolio
loans were up $7.6 million or 3.3% in the six month period ending June 30, 2003
and loans held for sale declined $6.9 million during the same period. Due to
processing delays with purchasers at year-end 2002, Indian River had a
significantly higher amount of loans held for sale outstanding than is normal.
During the six months ended June 30, 2003, the average daily balance of loans
held for sale was $6.7 million compared to the $13.2 million outstanding on
December 31, 2003.
During the first half of 2003 Indian River purchased $156.2 million in
securities. In addition to funding growth, Indian River's existing investment
securities generated $91.1 million in cash flow from sales, maturities,
securities being called, and repayments on mortgage-backed securities. In
investing excess funds in the current rate environment Indian River attempts to
maximize return while minimizing possible adverse exposure to rising rates. In
balancing these somewhat conflicting objectives, Indian River's purchases during
the six months ended June 30, 2003 were primarily weighted towards planned
amortization class collateralized mortgage obligations, callable US Government
agency securities and amortizing mortgage-backed securities with final
maturities of ten years or less. These instruments should have the most stable
average lives in the current rate environment.
14
Indian River examines the investment portfolio's sensitivity to the
effects of potential rising interest rates by monitoring overall portfolio
duration. This is particularly critical during periods when excess cash results
in significant purchases of investment securities. At June 30, 2003 the modified
duration of Indian River's investment portfolio was 2.64 years compared to 2.54
years at December 31, 2002. It is Indian River's current strategy to maintain
the portfolio's duration at three years or less. This level is consistent with
Indian River's overall asset/liability management policies.
Indian River anticipates that the investment portfolio will continue to
generate considerable cash flow as consumers refinance the residential mortgages
underlying many of the securities in the portfolio. This will consequently
result in significant investment security purchases during the remainder of
2003, irrespective of excess funds generated from deposit growth
Loans
- -----
Loans totaled $237.1 million at June 30, 2003, an increase of $7.6
million, or 3.2%, from December 31, 2002. Loan growth since December 31, 2002
was in one-to-four family residential real estate loans ($3.6 million, or a
4.13% increase), construction, land development and other land loans ($3.0
million, or a 6.4% increase) nonfarm, nonresidential real estate loans ($2.4
million or a 3.66% increase) and in commercial and industrial loans ($1.6
million or a 11.9% increase). Indian River experienced net loan repayments in
agricultural related loans ($-1.7 million or a 34.1% decrease) as well as in
multi-family residential, consumer and other loans (-$1.2 million or a 7.2%
decrease).
Deposits
- --------
Indian River's deposits increased $41.4 million, or 11.4%, from $364.9
million at December 31, 2002 to $406.3 million at June 30, 2003. Increases
occurred in NOW and money market accounts ($83.8 million, or 161.8%). The
increase in NOW and money market account balances can be primarily attributed to
a special money market rate that was offered with the opening of the new Sarno
Branch, Indian River's eighth branch, during the first quarter of 2003 as well
as the implementation of a deposit reclassification program to reduce the amount
of reserves required to be maintained in accordance with Regulation D of the
Federal Reserve. At June 30, 2003 Indian River had reclassified $40.8 million of
demand deposit account balances and $30.9 million in NOW account balances as
money market account balances. The deposit reclassification program was
implemented on May 25th after notification to the Federal Reserve Bank of
Atlanta and did not impact totals at December 31, 2002 or March 31, 2003. Under
Federal Reserve guidelines and subject to proper customer disclosure Indian
River is able to sweep Demand deposit and NOW account balances into a
corresponding money market account nightly as long as return sweeps do not
exceed Federal Reserve limitations. The swept funds earn the same interest rate
in the money market account that they would have earned in the original account.
Some of Indian River's demand deposit and NOW account balances are subject to a
10% reserve requirement while money market account balances are only subject to
a 3% reserve requirement. Reclassification frees up additional non-earning
assets for investment.
In the six months ended June 30, 2003, savings accounts increased
slightly (+$523, 000, or 0.5%) and time deposit account balances were also up
modestly (+$613, 000 or 0.5%).
There was also a $43.5 million, or 65.0%, decrease in noninterest
bearing demand deposits. This can be primarily attributed to the movement of
over $10 million from a noninterest-bearing deposit to an overnight repurchase
agreement account at the beginning of 2003 as well as the implementation of the
deposit reclassification program discussed above, and the movement of over $10
million from a noninterest bearing deposit to an overnight repurchase agreement
account at the beginning of 2003. At year end 2002 the funds were moved out of
the repurchase agreement account and into a noninterest bearing deposit account
and moved back into a repurchase agreement account at the beginning of 2003.
Stockholders' Equity
- --------------------
Total stockholders' equity increased by $2.1 million or 6.0%, during
the first six months of 2003. Net income of $2.5 million and option exercises of
$179,000 were offset by a $551,000 decrease in accumulated other comprehensive
income. Accumulated other comprehensive income for Indian River consists of the
net unrealized gain or loss on securities available for sale.
15
Results of Operations
- ---------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Net Income
- ----------
For the first six months of 2003, Indian River recorded net income of
$2.46 million. This was $387,000 or 13.6%, less than the $2.84 million in net
income recorded for the first six months of 2002. Basic earnings per share
decreased $0.20 during the six months ended June 30, 2003, to $1.13, compared to
$1.33 per share during the comparable period of 2002 (as adjusted to reflect the
10% stock dividend in 2003 and 2002). Diluted earnings per share decreased from
$1.30 to $1.09 during the first six months of 2003, compared to the same period
in 2002. Before the effect of gains from security transactions, the Indian River
earned $2.35 million in the first six months of 2003, compared to $2.38 million
earned in the first six months of 2002. During the first quarter of 2002, Indian
River began restructuring its investment portfolio to reduce credit and interest
rate risk and exposure to corporate securities, and as a result recognized an
unusually high level of gains.
Net interest income increased $181,000, or 2.3%, for the first six
months of 2003 compared to the same period in 2002. Noninterest income rose
$343,000 or 12.9% in the six months ended June 30, 2003 compared to the
comparable period in 2002. Indian River also noted an increase in non-interest
expenses of $1.15 million or 20.1% in the first half of 2003 compared to the
prior period. The provision for loan losses was essentially unchanged.
Net Interest Income
- -------------------
Net interest income increased slightly to $8.07 million for the first
six months of 2003 from $7.89 million for the same period in 2002. Both interest
income and interest expenses fell during the six months ended June 30, 2003
compared to same period in 2002. The $181,000, or 2.3%, increase in net interest
income was mainly the result of a $629 ,000, or 12.78% decrease in interest
expense exceeding the $448,000 or 3.5% decrease in interest income. Yields on
Indian River's interest-earning assets decreased by 121 basis points, and the
rates paid on Indian River's interest-bearing liabilities decreased by 85 basis
points. This resulted in a decrease in the interest rate spread to 3.21% for the
first six months of 2003 from 3.57% for the first six months of 2002. Net
interest margin also decreased to 3.51% from 4.06%. The ratio of average
interest-earning assets to average interest-bearing liabilities for the first
six months of 2003 was 1.16, down slightly from the 1.19 for the first six
months of 2002.
Total interest income for the first six months of 2003 was $12.4
million compared to $12.8 million for the same period in 2002. The main factor
in the $448,000, or 3.5%, decrease in interest income is due to the 121 basis
point decrease in the average yields on interest-earning assets. This decrease
more than offset the $71.6 million, or 18.3%, increase in average
interest-earning assets.
Indian River's average loans outstanding balances increased $19.3
million, or 8.7%, and the related yield decreased to 6.89% for the first six
months of 2003 from 7.63% in 2002. During the same period, average investment
securities balances increased $58.2 million, or 36.9%, and the related yield
decreased to 3.83% from 5.52%. Yields on investment securities were impacted
more dramatically due to the increase in the total portfolio size from the first
six months of 2002. Additionally, the sale and call of investment securities
during the first six months of 2003 resulted in the reinvestment of the proceeds
in lower yielding securities. Indian River's average federal funds sold
decreased by $5.9 million, or 46.2%, and the related yield decreased to 1.15%
for the first six months of 2003 from 1.66% in 2002. The decrease in yields on
earning assets was largely offset by the 85 basis point decrease in average
rates paid on deposits and other borrowings.
16
Total interest expense for the first six months of 2003 was $4.3
million, a decrease of 12.8% from $4.9 million for the same period in 2002. The
decrease in total expense can be attributed to the decrease in the related rates
on deposits and other borrowings, which offset the $71.5 million, or 21.8%,
increase in the average balances outstanding of interest-bearing liabilities for
the first six months of 2003 compared to the same period in 2002. The related
average rate decreased to 2.17% for the first six months of 2003 from 3.02% in
2002. The average rate paid on certificates of deposit decreased to 2.89% for
the first six months of 2003 from 3.90% for the first six months of 2002. Rates
on other short term borrowings decreased from 1.93% in 2002 to 1.80% in 2003.
Short term borrowings include federal funds purchased and overnight repurchase
agreements. Rates on other long term borrowings decreased from 4.33% to 4.11%.
Long term borrowings include Federal Home Loan Bank advances and proceeds from
issuance of trust preferred securities.
The following table provides certain information relating to Indian
River's average consolidated balance sheets and reflects the interest income on
interest-earning assets and interest expense of interest-bearing liabilities for
the periods indicated and the average yields earned and rates paid for the
periods indicated. These yields and costs are derived by dividing income or
expense by the average daily balance of the related assets or liabilities for
the periods presented.
Six months Ended June 30,
2003 2002
---------------------------------------------------------------------------------
(In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
-------- -------- ------- -------- -------- -------
Investments (1) $215,938 $ 4,098 3.83% $157,770 $ 4,317 5.52%
Federal funds sold 6,843 39 1.15% 12,718 105 1.66%
Loans (2) less loans in process 240,820 8,223 6.89% 221,517 8,386 7.63%
-------- ---------------------- -------- ----------------------
Total interest-earning assets 463,601 12,360 5.38% 392,005 12,808 6.59%
---------------------- ----------------------
Noninterest-earning assets 30,662 17,593
-------- --------
Total $494,263 $409,598
======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $ 87,569 $ 497 1.14% $ 46,474 $ 232 1.01%
Savings accounts 116,280 802 1.39% 117,628 1,605 2.75%
Certificates of deposit 134,522 1,927 2.89% 119,811 2,319 3.90%
Other short term borrowings 16,431 147 1.80% 16,547 158 1.93%
Other long term borrowings 45,489 931 4.11% 28,320 609 4.33%
-------- ---------------------- -------- ----------------------
Total interest-bearing
liabilities 400,291 4,294 2.17% 328,780 4,923 3.02%
---------------------- ----------------------
Noninterest-bearing
Liabilities 58,033 51,797
Stockholders' equity 35,939 29,021
-------- --------
Total $494,263 $409,598
======== ========
Net interest income and net yield
on interest-earning assets $ 8,066 3.51% $ 7,885 4.06%
---------------------- ----------------------
- --------------------------
(1) Includes securities available for sale, securities held to maturity, other
securities and interest-bearing deposits. Yields on securities available for
sale have been calculated on the basis of historical cost and do not give effect
to changes in fair value of such securities, which are reflected as a component
of stockholder's equity.
(2) Includes loans for which the accrual of interest has been suspended.
17
Other Income
- ------------
Other income increased by $343,000, or 12.9%, for the first six months
of 2003 compared to the same period of 2002. This increase was the result of a
$346,000 increase (+ 41.9%) in service charges and fees and a $546,000 increase
(+79.5%) in gains on the sale of loans that Indian River recognized during the
first six months of 2003 compared to the results for the first six months of
2002. These increases were partially offset by a $584,000 decrease (-77.8%) in
gain on the sale of investment securities.
The increase in service charge and fee income was primarily the result
of the $68.1 million, or 20.1%, increase in deposits since June 2002. Most of
this growth ($58.4 million or 85.8% of total deposit growth) has occurred in
transactional related account types (demand deposits, NOW accounts and money
market accounts) that generate fee income. Also contributing to this increase is
an increase in fees earned on debit card transactions. These fees increased as a
result of renegotiating a contract with a third party processor that allowed a
greater percentage of network fees to be passed through to Indian River.
As noted Indian River had a $546,000, or 79.5%, increase in gain on
sale of loans, which is a result of the increase in 1-4 family real estate loans
originated and then sold in the secondary market. The gains and fees on mortgage
loans held for sale are volatile as this source of income is highly sensitive to
fluctuations in interest rates, consumer confidence, economic conditions
nationally and in our market, and housing market conditions.
Other Expenses
- --------------
Indian River's other expenses increased $1.15 million, or 20.1%, for
the first six months of 2003 compared to the same period in 2002. The increase
was primarily the result of a $700,000, or 24.6%, increase in salaries and
benefits. This is largely the result of the hiring of employees to staff the new
Sarno Branch, which opened in February 2003. The new branch also has a loan
operation department, requiring additional staff. Salaries and benefits expense
was also negatively impacted by a significant increase in group hospitalization
insurance premiums that went into effect in June, 2002. These premiums were up
$66,000 (+48.6%) in the six months ended June 30, 2003 compared to the same
period in 2002.
There was a $215,000, or 1494%, increase in other operating expenses,
primarily due to the increase in advertising and public relation expenses
associated with the opening of the new Sarno Branch. There was an $89,000, or
13.2%, increase in data processing expense for the six months ended June 30,
2003 compared to the same period 2002. There was also a $149,000, or 19.5%,
increase in occupancy and equipment expense for the first six months of 2003
compared to the same period in 2002.
Provision for Loan Losses
- -------------------------
Indian River makes provisions for loan losses in amounts deemed
necessary to maintain the allowance for loan losses at an appropriate level as
determined by management. At June 30, 2003, total nonperforming loans totaled
$151,000, or 0.1% of total loans, compared to $738,000, or 0.3% of total loans
at December 31, 2002. The decrease is primarily due to the resolution of one
nonperforming loan totaling $585,000. The loan was sold without recourse to a
private investor resulting in a $65,000 chargeoff to Indian River.
The allowance for loan losses is a valuation reserve established by
management in an amount it deems adequate to provide for losses in the
portfolio. Management assesses the adequacy of the allowance for loan losses
based upon a number of factors including, among others: analytical reviews of
loan loss experience in relationship to outstanding loans and commitments;
unfunded loan commitments; problem and nonperforming loans and other loans
presenting credit concerns; trends in loan growth, portfolio composition and
quality; appraisals of the value of collateral; and management's judgment with
respect to current and expected economic conditions and their impact on the
existing loan portfolio.
The allowance for loan losses is increased by provisions for loan
losses charged to expense. Charge-offs of loan amounts determined by management
to be uncollectable decrease the allowance, and recoveries of previous
charge-offs are added to the allowance.
18
Calculating the allowance for loan losses is divided into three primary
allocation groups: (1) specific allocation loans, (2) past due/problem loans and
(3) all other passing grade loans. For specific allocation loans, the Bank has
determined a reserve amount to set aside which it believes is sufficient to
cover a collateral shortfall. As of June 30, 2003, Indian River had three loans
with specific allocations in the aggregate amount of $75,000. Problem loans are
identified by the Asset Liability Committee and are assigned a risk grade. Loans
graded special mention are multiplied by an inherent loss factor of 5% to
determine the amount to be reserved. Loans graded substandard are multiplied by
a loss factor of 10%, loans graded doubtful are multiplied by a loss factor of
50% and loans graded loss are multiplied by a loss factor of 100%. Past due
loans are graded based on the number of days which the loan is past due, and are
multiplied by the same loss factors as problem loans. Loans past due 30-59 days
are graded special mention, loans past due 60-89 days are graded substandard and
loans past due 90 days or more are graded doubtful. As of June 30, 2003, 10.3%
of the allowance for loan losses reflected specific loan allocations and past
due/problem loans. All other loans are graded pass and are categorized into six
loan groups (real estate loans are further sub-categorized) and multiplied by an
historical experience factor to determine the appropriate level of the allowance
for loan losses. Due to Indian River's low loss history, the historical
experience factors are based on FDIC quarterly banking profile report as of
March 31, 2003 for all institutions. Indian River feels that these factors are a
better indication of overall loan performance in the nation. The second quarter
2003 factors are: 0.12% for real estate loans, 1.39% for all non real estate
commercial loans, 5.68% for credit card loans, 3.04% for consumer loans, 0.46%
for non-real estate agricultural loans, and 0.19% for other revolving loans. In
addition to historical experience factors, Indian River also provides for losses
due to economic factors, concentration of credit and portfolio composition
changes.
The following table allocates the allowance for loan losses by loan
category, along with the percent of actual loans per category as of June 30,
2003 and December 31, 2002. The allocation of the allowance to each category is
not necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
(In Thousands) June 30, 2003 December 31, 2002
---------------------------------------
Amount % Amount %
---------------------------------------
Commercial, Agricultural $ 384 7% $ 420 6%
Real estate construction 467 20 484 19
Real estate mortgage 1,652 68 1,617 69
Consumer, other 732 5 646 6
Unallocated 117 -- 92 --
-------------- ----------------
Total Allowance for loan losses $3,352 100% $3,259 100%
============== ================
See Note 4, Allowance for Loan Losses, in the Notes to Unaudited
Condensed Consolidated Financial Statements for additional information.
Nonperforming Assets. Indian River Bank's nonperforming assets, which
are comprised of loans delinquent 90 days or more, nonaccrual loans, and other
real estate owned ("OREO"), totaled $169,000 at June 30, 2003 compared to
$738,000 at December 31, 2002. The percentage of nonperforming assets to total
assets decreased to 0.1% at June 30, 2003 from 0.2% at December 31, 2002.
Nonperforming assets at June 30, 2003 consisted of nonaccrual loans in
the amount of $146,000, loans past due over 90 days of $5,000, and other real
estate owned of $18,000.
Indian River did not have any other real estate owned as of December
31, 2002. Indian River evaluates the fair value of each OREO property annually.
These evaluations may be appraisals or other market studies.
19
Indian River places credit card loans on nonaccrual status when they
are 180 days delinquent. All other consumer and commercial loans are placed on
nonaccrual at 90 days delinquent or when determined uncollectable by management.
The following table allocates the nonperforming loans by loan type.
(In Thousands)
June 30, 2003 December 31, 2002
-----------------------------------
Nonaccrual Loans Amount % Amount %
- --------------------------------------------------------------------------------
Real estate mortgage $146 100% $678 100%
June 30, 2003 December 31, 2002
Accrual Loans - past due 90 days or -----------------------------------
more Amount % Amount %
- --------------------------------------------------------------------------------
Real estate mortgage $ -- -- $ 39 65%
Installment -- -- 21 35%
Credit cards 5 100% -- --
---- --- ---- ---
$ 5 100% $ 60 100%
==== === ==== ===
For the six months ended June 30, 2003, $5,000 in gross interest income
would have been recorded if the $146,000 of nonaccrual loans had been accruing
interest throughout this period.
At June 30, 2003, there were no performing loans considered potential
problem loans, defined as loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems causes management to have serious doubt as to the
ability of the borrowers to comply with the present loan repayment terms.
Income Tax Provision
- --------------------
Indian River's income tax provision was $1.5 million, or 37.4% of
income before taxes, for the first six months of 2003 and $1.7 or 37.6% of
income before income taxes, for the same period in 2002.
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Net Income
- ----------
For the second quarter of 2003, Indian River recorded net income of
$1.2 million. This was $188,000 or 13.5%, less than the $1.4 million in net
income recorded for the second quarter of 2002. Basic earnings per share
decreased $0.10 during the three months ended June 30, 2003, to $0.55, compared
to $0.65 per share during the comparable period of 2002 (as adjusted to reflect
the 10% stock dividend in 2003 and 2002). Diluted earnings per share decreased
from $0.63 to $0.53 during the second quarter of 2003, compared to the same
period in 2002.
Net interest income declined $178,000 or 4.3%, in the second quarter of
2003 compared to the same period in 2002. Also impacting results in the three
months ended June 30, 2003 compared to the same period in 2002 was an increase
in other income of $396 ,000, or 35.7%, a decrease in the provision for loan
losses of $40,000 or 30.8%, an increase in other expenses of $562 ,000, or
19.2%. There was a corresponding decrease in taxes on income of $116, 000, or
13.9%.
Net Interest Income
- -------------------
Net interest income declined to $4.0 million in the second quarter of
2003 from $4.2 million for the same period in 2002. The $178,000 or 4.3%,
decrease in net interest income was the result of a $317,000, or 4.9%
20
decrease in interest income exceeding the $139,000 or 6.0% reduction in interest
expense. Yields on Indian River's interest-earning assets decreased by 135 basis
points, and the rates paid on Indian River's interest-bearing liabilities
decreased by only 72 basis points. This resulted in a decrease in the interest
rate spread to 3.07% for the second of 2003 from 3.70% earned in the second
quarter of 2002. Net interest margin also decreased to 3.32% from 4.17%. The
ratio of average interest-earning assets to average interest-bearing liabilities
in the second quarter of 2003 was 1.14, compared with the 1.18 in the second
quarter of 2002. Adjusting for the impact of the deposit reclassification
program, the ratio of average interest-earning assets to average
interest-bearing liabilities in the second quarter of 2003 was 1.18.
Total interest income for the second quarter of 2003 was $6.2 million
compared to $6.5 million for the same period in 2002. The main factor in the
$317,000, or 4.9%, decrease in interest income is due to the 135 basis point
decrease in the average yields on interest-earning assets. This decrease more
than offset the $80.7 million, or 20.1%, increase in average interest-earning
assets. Contributing to the overall decline in average yields was a shift in the
composition of earning assets. In the second quarter of 2003, average loans
receivable comprised 49.5% of earning assets. During the comparable period in
2002 loans averaged 56.5%.
Indian River's average loans receivable increased $11.8 million, or
5.2% during the second quarter of 2003 compared to the same period in 2002 and
the related yield decreased to 6.80% for the second three months of 2003 from
7.45% in 2002. During the same period, average investment securities increased
$73.8 million, or 43.9%, and the related yield decreased to 3.55% from 5.40%.
Yields on investment securities were impacted more dramatically due to the
increase in the size of the total portfolio in the three months ended June 30,
2003 compared to the comparable period in 2002. Additionally, the sale and call
of investment securities during the second of 2003 resulted in the reinvestment
of the proceeds in lower yielding securities. Indian River's average federal
funds sold decreased by $4.9 million, or 73.5% and the related yield decreased
to 1.14% in the second quarter of 2003 from 1.67% in 2002. The decrease in
yields on earning assets was partially offset by the 72 basis point decrease in
average rates paid on deposits and other borrowings.
Total interest expense for the three months ended June 30, 2003 was
$2.2 million, a decrease of 5.7% from $2.3 million for the same period in 2002.
The decrease in total expense can be attributed to the decrease in the related
rates on deposits and other borrowings, which offset the $90.4 million, or
27.1%, increase in the average balances outstanding of interest-bearing
liabilities in the second quarter of 2003 compared to the same period in 2002.
The related rate decreased to 2.08% for the three months ended June 30, 2003
from 2.80% in 2002. The average rate paid on certificates of deposit decreased
to 2.84% in the second quarter of 2003 from 3.58% in the second quarter of 2002.
Rates on other short term borrowings decreased from 1.94% in 2002 to 1.76% in
2003. Short term borrowings include federal funds purchased and overnight
repurchase agreements. Rates on other long term borrowings decreased from 4.33%
to 4.08%. Long term borrowings include Federal Home Loan Bank advances and
proceeds from issuance of trust preferred securities.
21
The following table provides certain information relating to Indian
River's average consolidated balance sheets and reflects the interest income on
interest-earning assets and interest expense of interest-bearing liabilities for
the periods indicated and the average yields earned and rates paid for the
periods indicated. These yields and costs are derived by dividing income or
expense by the average daily balance of the related assets or liabilities for
the periods presented.
Three months Ended June 30,
2003 2002
---------------------------------------------------------------------------------
((In Thousands)
Average Average Average Average
Assets: Balance Interest Yield Balance Interest Yield
-------- -------- ------- -------- -------- -------
Investments (1) $241,853 $ 2,133 3.55% $168,043 $ 2,263 5.40%
Federal funds sold 1,761 5 1.14% 6,653 28 1.67%
Loans (2) less loans in process 238,830 4,051 6.80% 227,059 4,215 7.45%
-------- ---------------------- -------- ----------------------
Total interest-earning assets 482,444 6,189 5.15% 401,755 6,506 6.50%
---------------------- ----------------------
Noninterest-earning assets 29,724 15,662
-------- --------
Total $512,168 $417,417
======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
NOW & money market accts $109,396 $ 334 1.22% $ 48,903 $ 114 0.94%
Savings accounts 116,759 371 1.27% 118,629 748 2.53%
Certificates of deposit 134,297 951 2.84% 121,692 1,086 3.58%
Other short term borrowings 18,484 81 1.76% 16,500 80 1.94%
Other long term borrowings 45,428 457 4.08% 28,245 305 4.33%
-------- ---------------------- -------- ----------------------
Total interest-bearing
liabilities 424,367 2,194 2.08% 333,969 2,333 2.80%
---------------------- ----------------------
Noninterest-bearing
Liabilities 51,424 53,406
Stockholders' equity 36,380 30,042
-------- --------
Total $512,168 $417,417
======== ========
Net interest income and net yield
on interest-earning assets $ 3,995 3.32% $ 4,173 4.17%
====================== ======================
- ------------------------
(1) Includes securities available for sale, securities held to maturity, other
securities and interest-bearing deposits. Yields on securities available for
sale have been calculated on the basis of historical cost and do not give effect
to changes in fair value of such securities, which are reflected as a component
of stockholder's equity.
(2) Includes loans for which the accrual of interest has been suspended.
22
Other Income
- ------------
Other income increased by $396, 000, or 35.7%, in the three months
ended June 30, 2003 compared to the same period of 2002. This increase was the
result of a 40.8% ($174,000) increase in service charges and fees on deposit
accounts in the second quarter of 2003 compared to the same period in 2002 and a
$262,000 (+67.2%) increase in gains on the sale of loans during the same period.
These increases were partially offset by a $41,000 declines in gains on the sale
of investment securities in the same period in 2002.
As noted in the discussion of results for the six months ended June 30,
2003, the increase in service charge and fee income was primarily the result of
the $68.1 million, or 20.1%, increase in deposits since June 2002. Most of this
growth ($58.4 million or 85.8% of total deposit growth) has occurred in
transactional related account types (demand deposits, NOW accounts and money
market accounts) that generate fee income. Also contributing to this increase is
an increase in fees earned on debit card transactions. These fees increased as a
result of renegotiating a contract with a third party processor that allowed a
greater percentage of network fees to be passed through to Indian River.
Indian River had a $262,000 or 67.2%, increase in gain on sale of
loans, which is a result of the increase in 1-4 family real estate loans
originated and then sold in the secondary market. The gains and fees on mortgage
loans held for sale are volatile as this source of income is highly sensitive to
fluctuations in interest rates, consumer confidence, economic conditions
nationally and in our market, and housing market conditions.
Other Expenses
- --------------
Indian River's other expenses increased $562,000 or 19.2%, in the
second quarter of 2003 compared to the same period in 2002. The increase was
primarily the result of a $335,000 or 22.9%, increase in salaries and benefits.
This is largely the result of the hiring of employees to staff the new Sarno
Branch, which opened in February 2003. The new branch also has a loan operation
department, requiring additional staff. Salaries and benefits expense was also
negatively impacted by a significant increase in group hospitalization insurance
premiums that went into effect in June, 2002. These premiums were up $33,000
(+48.6%) in the three months ended June 30, 2003 compared to the same period in
2002.
There was a $100,000 or 26.0%, increase in occupancy and equipment
expense, again primarily due to the opening of the new Sarno Branch. There was a
$73,000, or 22.5%, increase in data processing expense for the three months
ended June 30, 2003 compared to the same period 2002.
Income Tax Provision
- --------------------
Indian River's income tax provision was $719,000, or 37.4% of income
before taxes, in the second quarter of 2003 and $835,000 or 37.5% of income
before taxes, for the same period in 2002.
Liquidity
- ---------
Liquidity management enables us to maintain sufficient cash flow to
fund operations and to meet financial obligations to depositors and borrowers.
Indian River's liquidity is enhanced by its ability to attract and retain
deposits and by principal and interest payments on loans and maturing securities
in the investment portfolio. Indian River's core deposit base, consisting of
demand deposits, money market, and savings accounts supplemented by other
deposits of varying maturities and rates, contributes to liquidity. Our
liquidity position, those assets invested in federal funds and securities
available for sale of $242.8 million at June 30, 2003, reflected an increase of
$65.4 million from December 31, 2002, or 36.9%. Funds available through
short-term borrowing and asset maturities are considered adequate to meet all
current needs. At June 30, 2003, Indian River had available credit of $23.0
million under lines of credit at correspondent banks. Although management
believes that the liquidity position is adequate, increased loan demand could
have an adverse impact on liquidity. Indian River also has a $54.2 million
borrowing line with the Federal Home Loan Bank of Atlanta. The outstanding
balance on this line increased to $46.4 million as of June 30, 2003, from $38.6
at December 31, 2002. Included in this balance was $8 million outstanding at
June
23
30, 2003 as an overnight advance. This line has been utilized by Indian
River as a funding source at a lower cost, by locking in borrowings at lower
rates. In addition, the Asset/Liability Management Committee has established
minimum standards and key ratios of asset quality and performance. These
standards and ratios provide the framework for guidance and measurement.
Management evaluates these standards and ratios on an ongoing basis.
Capital Resources
- -----------------
In the first six months of 2003, total stockholders' equity increased
$2.1 million, or 6.0%, as a result of earnings and option exercises which were
partially offset by a decrease in accumulated other comprehensive income.
Earnings contributed $2.5 million to stockholders' equity for the six month
period. Accumulated other comprehensive losses decreased stockholders' equity by
$551,000 during this six month period.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board of Governors
("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. On
June 30, 2003, Indian River exceeded all capital requirements, having a total
risk-based capital ratio of 16.11%, a Tier 1 risk-based capital ratio of 14.93%,
and a leverage ratio of 8.29%. These ratios have increased in part due to the
issuance of $7 million aggregate liquidation amount of trust preferred
securities, which are included in Tier 1 capital. See Note 8 to the Unaudited
Consolidated Financial Statements for additional information. As of June 30,
2003, Indian River Bank also met the criteria for categorization as a
"well-capitalized" institution under the prompt corrective action rules
promulgated under the Federal Deposit Insurance Act, having total and tier 1
risk based capital ratios of 13.6% and 12.4%, and a leverage ratio of 6.9%.
Designation of the Bank as a "well-capitalized" institution under these
regulations does not constitute a recommendation or endorsement of Indian River
Bank by Federal bank regulators.
Effects of Inflation
- --------------------
The unaudited consolidated financial statements and related unaudited
financial data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America and practices
within the banking industry which require the measurement of financial position
and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk is that portion of the variation in Indian River's
performance attributable to changes in interest rates. Management closely
monitors Indian River's exposure to how changes in market conditions can impact
the Indian River's future performance and considers strategies to reduce any
negative results.
Interest rate risk takes place because of unbalanced changes in
interest income and expense, and asset and liability market value when rates
change. The imbalances flow through to create variability in net interest
income, net income, and the market value of equity. The ultimate cause of
interest rate risk is a repricing mismatch between the assets and liabilities on
Indian River's balance sheet and, if relevant, off-balance sheet positions.
Indian River's exposure to interest rate risk is managed primarily
through the Company's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting potential negative effects of changes in
market interest rates. Since Indian River's primary source of interest-bearing
liabilities is customer deposits, the ability to manage the types and terms of
such deposits may be somewhat limited by customer preferences in the market
areas served by the Company. Borrowings, which include FHLB advances, short-term
borrowings and long-term borrowings, are generally structured with specific
terms which in management's judgment, when aggregated with the terms for
outstanding deposits and matched with interest-earning assets, mitigate Indian
River's exposure to interest rate risk. The rates, terms and interest rate
indices of Indian River's interest-earning assets result primarily from the
Company's strategies of investing in loans
24
and securities which permit the Company to limit its exposure to interest rate
risk, together with credit risk, while achieving a positive interest rate spread
from the difference between the income earned on interest-earning assets and the
cost of interest-bearing liabilities.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management uses a quarterly model which measures Indian River's exposure
to interest rate risk. The model calculates the present value of assets,
liabilities, off-balance sheet financial instruments and equity at current
interest rates, and at hypothetical higher and lower interest rates (but not
below 0%) at various intervals. The present value of each major category of
financial instrument is calculated by the model using estimated cash flows based
upon weighted-average contractual rates and terms at discount rates representing
the estimated current market interest rate for similar financial instruments.
The resulting present value of longer term fixed-rate financial instruments are
more sensitive to change in a higher or lower market interest rate scenario,
while adjustable-rate financial instruments largely reflect only a change in
present value representing the difference between the contractual and discounted
rates until the next interest rate repricing opportunity.
The following table presents Indian River's exposure over the
subsequent twelve month periods to immediate, hypothetical changes in interest
rates at the dates indicated:
June 30, 2003 June 30, 2002
----------------------------------------------------------------------------------------
Percentage Percentage
Change in Change in Change in
Interest Percentage Market Percentage Market
Rates Change in Percentage Value of Change in Percentage Value of
(Basis Net Interest Change in Portfolio Net Interest Change in Portfolio
Points) income Net Income Equity income Net Income Equity
- ----------------------------------------------------------------------------------------------------------
+200 -14.90% -28.58% -22.79% -4.82% -6.43% -13.34%
+100 -7.42% -14.24% -7.87% -1.62% -2.54% -6.41%
0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
-100 3.47% 6.65% 3.31% -2.97% -1.54% -1.04%
-200 -2.95% -5.69% 7.04% -5.98% -3.40% -5.99%
As the table indicates, the Bank is susceptible to lower earnings in a
rising rate environment and will experience slightly higher earnings in a 100
basis point declining rate situation. The Bank has a negative GAP position which
is reflected in the table. The Bank's GAP position has improved since the
quarter ended June 30, 2002 when the Bank was susceptible to lower earnings in
either a rising or a declining rate scenario (a condition known as negative
convexity). The improvement in a 100 basis point declining rate scenario is a
result of two factors: (1) the Bank's cost of funds has declined to the point
that in the hypothetical downward shifts contemplated in the table, much of the
bank's deposits would not earn any interest which would further reduce the cost
of funds and (2) the Bank's projected loan growth has increased to the point
that increased interest income would exceed the effects of accelerated
repayments of loans and investments that are inherent in significant downward
shifts in market rates. In a rising rate environment the Bank would be
susceptible to lower net interest income (and consequently to lower net income)
due to funding costs rising faster than the Bank's ability to reprice earning
assets resulting in margin compression. In a 200 basis point declining rate
scenario, the cost of the Bank's non-fixed term liabilities would drop to zero.
However, a significant portion of the Bank's earning assets would experience
accelerated repayment/refinancing and those cash flows would have to be
reinvested at very low rates. Although the Bank's static GAP position has
improved somewhat, a significant immediate increase in rates would slow down
anticipated cash flows from both the loan and investment portfolios resulting
less interest income from reinvesting those cash flows at higher rates.
Indian River has been in a liability sensitive position during 2003 and
2002, which is reflected in the above tables. The nature of Indian River's
current asset and liability structure is such that it will be liability
sensitive for the foreseeable future. Indian River monitors its GAP position and
interest sensitivity position monthly to insure they stay within the established
ranges.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or repricing periods, they may react in different
25
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
In addition, the previous table does not necessarily indicate the
impact of general interest rate movements on Indian River's net interest income
because the repricing of certain categories of assets and liabilities are
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicating as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
Management uses the model to ascertain general levels of risk and to
consider specific strategies to mitigate that risk
Item 4 - Controls and Procedures
Indian River's management, under the supervision and with the
participation of Indian River's Chief Executive Officer and Chief Financial
Officer, evaluated, as of the last day of the period covered by this report, the
effectiveness of the design and operation of Indian River's disclosure controls
and procedures, as defined in Rule13a-15(e) under the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that Indian River's disclosure controls and
procedures were adequate. There were no changes in the Company's internal
control over financial reporting (as defined in Rule 13a-15 under the Securities
Act of 1934) during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
26
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time the Company is a participant in various
legal proceedings incidental to its business. In the opinion of management, the
liabilities (if any) resulting from such legal proceedings will not have a
material effect on the financial position of the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 2003, the annual meeting of shareholders of the
Company was held for the purposes of electing two (2) directors to serve until
the annual meeting of shareholders to be held in 2006, and until their
successors are duly elected and qualified. The name of each director elected at
the meeting and the votes cast are set forth below:
For Against Abstentions
-------------------------------------------
William C. Graves IV 1,514,512 0 3,256
Daniel R. Richey 1,514,512 0 3,256
Following the meeting, the persons elected at the meeting,
together with the following persons, constituted the entire Board of Directors:
Paul A. Beindorf, Griffin A. Greene, Robert A. Grice, William B. Marine, John L.
Minton, Keith H. Morgan Jr., Mary M. Rogers and John David Smith.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Articles of Incorporation of Indian River, as amended (1)
3(b) Bylaws of Indian River (1)
4(a) Indenture, dated as of September 30, 2002 between Indian
River Banking Company and Wells Fargo Bank, National
Association, as trustee (2)
4(b) Amended and Restated Declaration of Trust, dated as of
September 30, 2002 among Indian River Banking Company, Wells
Fargo Bank, National Association as Property Trustee, and
Paul A. Beindorf, Diana L. Walker and Phillip L. Tasker as
Administrative Trustees (2)
4(c) Guarantee Agreement dated as of September 30, 2002, between
Indian River Banking Company and Wells Fargo Bank, National
Association, as trustee (2)
10(a) Indian River 1999 Stock Option Plan (3)
10(b) Employment Agreement between Indian River National Bank and
Paul A. Beindorf(4)
10(c) Employment Agreement between Indian River National Bank and
Jeffrey R. Morton(4)
10(d) Change in Control Agreement between Indian River Banking
Company, Indian River National Bank and Diana L. Walker(4)
11 Statement of Computation of Per Share Earnings Please refer
to Note 5 to the Condensed Consolidated Financial Statements
21 Subsidiaries of the Registrant
31(a) Certification of Paul A. Beindorf
31(b) Certification of Phillip L. Tasker
32(a) Certification of Paul A. Beindorf
32(b) Certification of Phillip L. Tasker
27
- --------------------------
(1) Incorporated by reference to exhibit of same number to Indian River's
registration statement on Form SB-2 (No. 333-36688)
(2) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. Indian River agrees to provide a copy of these documents to the
Commission upon request.
(3) Incorporated by reference to exhibit 10(d) to Indian River's registration
statement on Form SB-2 (No. 333-36688)
(4) Incorporated by reference to exhibit of same number to Indian River's Annual
Report on Form 10-K for the year ended December 31, 2002.
(b) Reports on Form 8-K
On April 9, 2003, Indian River filed a report on Form 8-K, under Item 5
thereof, reporting earnings for the quarter ended March 31, 2003.
On April 15, 2003, Indian River filed a report on Form 8-K, under Item
4 thereof, regarding a change in its certifying accountant.
On July 16, 2003, Indian River filed a report on Form 8-K, under Item
5, 9 and 12 thereof, reporting earnings for the quarter ended June 30, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIAN RIVER BANKING COMPANY
(Registrant)
August 1, 2003 By: /s/ Paul A. Beindorf
-----------------------------------------------
Paul A. Beindorf, President and Chief Executive
Officer
August 1, 2003 By: /s/ Phillip Tasker
-----------------------------------------------
Phillip Tasker, Chief Financial Officer
29