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. 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"), and River Valley Financial and Citizens merged on
November 20, 1997.
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 1,659,227 common shares of River Valley Bancorp outstanding at
February 25, 2004, held of record by approximately 365 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". On December 26, 2003, the shares of River Valley underwent a
2-for-1 stock split in order to create a more liquid market for the stock.
Presented below are the high and low sale prices for the Corporation's
common shares, as well as cash distributions paid thereon since December 2001.
Such sales prices do not include retail financial markups, markdowns or
commissions. Information relating to sales prices has been obtained from Nasdaq.
Quarter Ended High Low Cash Distributions
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2003
December 31, 2003 $30.25 $29.43 $0.170
September 30, 2003 20.33 19.88 0.150
June 30, 2003 20.75 20.13 0.150
March 31, 2003 16.08 15.62 0.125
2002
December 31, 2002 $15.88 $13.18 $0.125
September 30, 2002 14.13 11.87 0.100
June 30, 2002 13.85 11.90 0.100
March 31, 2002 13.00 10.10 0.075
2001
December 31, 2001 $10.35 $ 9.75 $0.075
September 30, 2001 10.54 8.86 0.063
June 30, 2001 9.00 8.01 0.063
March 31, 2001 8.50 7.60 0.050
The high and low sales prices for River Valley's common shares between December
31, 2003 and February 25, 2004 were $29.42 and $26.50, respectively (the 2-for-1
stock split was effected during this period and share prices were adjusted
accordingly).
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 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 Bank and 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.
At December 31,
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2003 2002 2001 2000 1999
--------------------------------------------------
Selected consolidated financial condition data: (In thousands)
Total amount of:
Assets $255,076 $224,020 $191,618 $162,130 $138,695
Loans receivable - net (1) 192,266 165,957 157,972 140,970 115,131
Cash and cash equivalents (2) 12,512 18,610 5,641 6,382 8,052
Mortgage-backed and related securities 175 583 831 1,918 4,209
Investment securities 34,382 27,591 16,822 5,329 5,230
Deposits 179,954 161,829 145,571 130,225 114,251
FHLB advances and other borrowings 50,000 40,000 26,500 13,450 6,500
Shareholders' equity - net 22,855 20,633 17,971 17,184 16,866
At December 31,
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2003 2002 2001 2000 1999
--------------------------------------------------
Summary of consolidated earnings data: (In thousands, except share data)
Total interest income $ 12,653 $ 12,755 $ 13,084 $ 11,118 $ 9,734
Total interest expense 5,348 5,638 6,617 5,637 4,617
-------- -------- -------- -------- --------
Net interest income 7,305 7,117 6,467 5,481 5,117
Provision for losses on loans 508 570 450 227 140
-------- -------- -------- -------- --------
Net interest income after provision for
losses on loans 6,797 6,547 6,017 5,254 4,977
Other income 3,354 3,094 1,922 1,053 844
General, administrative and other expense 5,831 5,455 4,706 3,764 4,080
-------- -------- -------- -------- --------
Earnings before income tax expense 4,320 4,186 3,233 2,543 1,741
Income tax expense 1,665 1,628 1,257 933 702
-------- -------- -------- -------- --------
Net earnings $ 2,655 $ 2,558 $ 1,976 $ 1,610 $ 1,039
======== ======== ======= ======== ========
Basic earnings per share $ 1.67 $ 1.64 $ 1.25 $ .94 $ .52
======== ======== ======= ======== ========
Diluted earnings per share $ 1.59 $ 1.58 $ 1.22 $ .94 $ .52
======== ======== ======= ======== ========
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(1) Includes loans held for sale.
(2) Includes certificates of deposit in other financial institutions.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND
OTHER DATA (CONTINUED)
Year ended December 31,
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Selected financial ratios and other data: 2003 2002 2001 2000 1999
--------------------------------------------------
Interest rate spread during period 3.21% 3.39% 3.58% 3.47% 3.63%
Net yield on interest-earning assets (1) 3.28 3.56 3.80 3.79 3.94
Return on assets (2) 1.11 1.22 1.09 1.05 0.76
Return on equity (3) 12.22 13.21 11.27 9.45 5.87
Equity to assets (4) 8.96 9.21 9.38 10.60 12.16
Average interest-earning assets to
average interest-bearing liabilities 102.86 106.18 105.94 108.02 108.81
Non-performing assets to total assets (4) 0.18 0.48 0.36 0.38 0.62
Allowance for loan losses to total
loans outstanding (4) 1.07 1.27 1.25 1.21 1.28
Allowance for loan losses to
non-performing loans (4) 399.70 194.54 285.80 274.07 164.41
Net charge-offs to average total
loans outstanding 0.31 0.27 0.12 0.04 0.08
General, administrative and other expense
to average assets (5) 2.43 2.60 2.60 2.47 2.97
Dividend payout ratio 37.74 25.40 20.49 18.45 25.73
Number of full service offices (4) 5 4 4 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.
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,
2003 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
25 through 27 contains a summary of the Corporation's significant accounting
policies for the year ended December 31, 2003. Certain of these policies are
important to the portrayal of the Corporation'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. Management believes
that its critical accounting policies include determining 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 allowance for loan losses represents management's estimate of probable
losses inherent in the Corporation's loan portfolios. In determining the
appropriate amount of the allowance for loan losses, management makes numerous
assumptions, estimates and assessments.
The Corporation's strategy for credit risk management includes
conservative, centralized credit policies, and uniform underwriting criteria for
all loans as well as an overall credit limit for each customer significantly
below legal lending limits. The strategy also emphasizes diversification on a
geographic, industry and customer level, regular credit quality reviews and
quarterly management reviews of large credit exposures and loans experiencing
deterioration of credit quality.
The Corporation's allowance consists of three components: probable losses
estimated from individual reviews of specific loans, probable losses estimated
from historical loss rates, and probable losses resulting from economic or other
deterioration above and beyond what is reflected in the first two components of
the allowance.
Larger commercial loans that exhibit probable or observed credit weaknesses
are subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Corporation. Included in the review of
individual loans are those that are impaired as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan. Any allowances for impaired loans are measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or fair value of the underlying collateral. The
Corporation evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are applied to
other commercial loans not subject to specific reserve allocations.
Homogenous loans, such as consumer installment and residential mortgage
loans are not individually risk graded. Rather, standard credit scoring systems
are used to assess credit risks. Reserves are established for each pool of loans
based on the expected net charge-offs for one year. Loss rates are based on the
average net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, credit score migration comparisons, asset quality
trends, risk management and loan administration, changes in the internal lending
policies and credit standards, collection practices and examination results from
bank regulatory agencies and the Corporation's internal loan review.
An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating reserves for individual loans or
pools of loans. Allowances on individual loans and historical loss rates are
reviewed quarterly and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
The Corporation's primary market area for lending is southeastern Indiana.
When evaluating the adequacy of allowance, consideration is given to this
regional geographic concentration and the closely associated effect changing
economic conditions have on the Corporation's customers.
The Corporation has not substantively changed any aspect to its overall
approach in the determination of the allowance for loan losses. There have been
no material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.
Mortgage Servicing Rights
The Corporation 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
income statement.
Discussion of Changes in Financial Condition from December 31, 2002 to December
31, 2003
At December 31, 2003, River Valley's consolidated assets totaled $255.1
million, representing an increase of $31.1 million over the December 31, 2002
total. This increase in assets was funded in part by a $18.2 million increase in
deposits and a $10.0 million increase in borrowings. Deposits increased to
$180.0 million as of December 31, 2003 from $161.8 million while borrowings
increased from $40.0 million as of December 31, 2002 to $50.0 million as of
December 31, 2003. The Bank was able to increase deposits due to new and
expanding relationships with its customers. The Bank felt that its marketing
plan was both effective and timely. Increased borrowings were the result of the
advantageous rates that were available. Shareholders' equity was $22.9 million
as December 31, 2003, a net increase of $2.3 million from $20.6 million as of
December 31, 2002.
Liquid assets (i.e., cash, federal funds sold, interest-earning deposits
and certificates of deposit) decreased by $6.1 million from December 31, 2002
levels to a total of $12.5 million at December 31, 2003. This decrease was in
response to funding needs for lending operations, as well as the low rate of
return of these funds. Investment securities totaled $34.4 million at December
31, 2003, an increase of $6.8 million over December 31, 2002. Mortgage-backed
securities decreased by $408,000, to a total of $175,000 at December 31, 2003,
primarily due to principal repayments and the sale of several issues. The Bank
had several small issues that were sold to cut down on maintenance of the
portfolio.
Loans receivable, including loans held for sale, totaled $192.3 million at
December 31, 2003, an increase of $26.3 million over the $166.0 million total at
December 31, 2002. The increase resulted primarily from loan originations during
2003 of $196.1 million, which were partially offset by principal repayments of
$55.9 million and sales of $69.5 million. Loan origination volume for 2003
exceeded that of 2002 by $24.7 million, or 14.4%. There were increases in all
types of lending with the exception of consumer loans. The volume of loan sales
into the secondary mortgage market increased during 2003 from the 2002 volume by
$3.2 million, due in large part to low interest rates. Due to the historically
low interest rate environment for the past two years and the level of refinance
activity, it may be assumed that the volume of loan sales will be lower in
successive years.
River Valley's consolidated allowance for loan losses totaled approximately
$2.1 for the year ended December 31, 2003, which represented 1.07% of total
loans at that date. The allowance for loan losses totaled $2.1 million, or 1.27%
of total loans for the period ended December 31, 2002. Non-performing loans
(defined as loans delinquent greater than 90 days and loans on nonaccrual
status) totaled $0.5 million and $1.1 million at December 31, 2003 and 2002,
respectively. The consolidated allowance for loan losses represented 400% and
195% of non-performing loans at December 31, 2003 and 2002, respectively. Due to
aggressive collections efforts, problematic loans were addressed early.
Outstanding consumer loan balances historically have been a source of both
delinquency and losses. The Corporation has de-emphasized consumer lending
because of risk/reward opportunities.
Although management believes that its allowance for loan losses at December
31, 2003 was adequate based upon the available facts and circumstances, there
can be no assurance that additions to such allowance will not be necessary in
future periods, which could negatively affect the Corporation's results of
operations.
Deposits increased by $18.2 million, or 11.2%, to a total of $180.0 million
at December 31, 2003, compared to $161.8 million total at December 31, 2002.
Savings and demand deposits increased by $19.1 million, or 28.7%, during 2003,
while certificates of deposit decreased by $0.9 million, or 1.0%. These
fluctuations in balances were attributed to competitive rates and the flight of
money from equity investments.
Advances from the Federal Home Loan Bank ("FHLB") and other borrowed money
increased by $10.0 million from the total at December 31, 2002, as current
period borrowings of $50.0 million were used in part to fund loan growth. The
low interest rate environment has allowed for prudent long term funding.
Shareholders' equity totaled $22.9 million at December 31, 2003, an
increase of $2.3 million from the $20.6 million total at December 31, 2002. The
increase resulted primarily from net income of $2.7 million, which was partially
offset by a modest repurchase of shares totaling $366,000 and cash dividends of
$955,000. This net increase also includes a net increase of $681,000 related to
stock benefit plans, proceeds of $313,000 from the exercise of stock options and
a reduction in unrealized gain on securities available for sale of $106,000.
Comparison of Results of Operations for the Years Ended December 31, 2003 and
2002
General
River Valley's net earnings for the year ended December 31, 2003, totaled
$2.66 million, an increase of $97,000, or 3.8%, from net earnings reported in
2002. The increase in net earnings in the 2003 period was primarily attributable
to an increase of $260,000 in other income, while net interest income increased
by $188,000, while general, administrative and other expense were $376,000
higher in the current period. The provision for federal income taxes was $37,000
more in fiscal year 2003 as compared to the same period in 2002. The provision
for loan losses in 2003 was $508,000 as compared to $570,000 in 2002.
Net Interest Income
Total interest income for the year ended December 31, 2003, amounted to
$12.7 million, a decrease of $102,000, or 0.8%, from the 2002 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 $22.9 million, however, the yield on those
assets decreased from an average yield of 6.38% in 2002 to 5.68% in 2003.
Interest income on loans and mortgage-backed securities totaled $11.4 million
for 2003, a decrease of approximately $230,000, or 2.0%, from 2002. Interest
income on investments, FHLB stock and interest-earning deposits increased by
$127,000, or 11.3%, due to higher average balances on those investments.
Interest expense on deposits decreased by $0.8 million, or 19.6%, to a
total of $3.3 million for the year ended December 31, 2003, due primarily to
lower costs of funding higher average balances. The cost of deposits decreased
from 2.6% in 2002 to 1.9% in fiscal 2003. Interest expense on borrowings totaled
$2.1 million for the year ended December 31, 2003, an increase of $504,000 from
2002. The increase resulted primarily from higher average borrowings
year-to-year, offset by a 30 basis point decrease in average cost.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased during 2003 by $188,000, or 2.6%,
compared to 2002. The interest rate spread decreased by 18 basis points for
2003, to 3.21% from 3.39% in the 2002 period, while the net interest margin
amounted to 3.28% in 2003 and 3.56% in 2002.
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 $508,000
provision for losses on loans in 2003, a decrease of $62,000, or 10.9%, compared
to the $570,000 provision recorded in 2002. The current period provision
generally reflects growth in the loan portfolio, coupled with a change in the
loan mix, that is more 1-4 family residential loans and less consumer loans.
Non-performing loans for the period ended December 31, 2003 were $0.5
million, a decrease of approximately $600,000 from the $1.1 million recorded as
of fiscal year ended 2002. Net charge-offs amounted to $553,000 in 2003,
compared to $441,000 in 2002. While management believes that the allowance for
losses on loans is adequate at December 31, 2003, based upon available facts and
circumstances, there can be no assurance that the loan loss allowance will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income amounted to $3.4 million for the year ended December 31, 2003,
an increase of $260,000, or 8.4%, compared to 2002, due primarily to an increase
in service fees and charges of $117,000. Net gains on loan sales increased from
$1.2 million in 2002 to $1.6 million in 2003, an increase of $418,000. The
volume of loan sales increased from $67.6 million in 2002 to $70.5 million in
2003.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.8 million for the year
ended December 31, 2003, an increase of $376,000 over the 2002 total. Employee
compensation and benefits increased by $296,000 in fiscal 2003 as compared to
2002 primarily from additional staffing, cost of living, benefit expense and
increase in Employee Stock Ownership Plan ("ESOP") expenses. Occupancy and
equipment expense increased by $45,000 in fiscal 2003 as compared to 2002 due to
higher depreciation costs and equipment maintenance expenses. Other operating
expenses increased by $35,000 primarily from increases in office supplies, data
processing, charitable contributions and mortgage servicing.
Income Taxes
The provision for income taxes increased by $37,000, or 2.3%, for the year
ended December 31, 2003, as compared to 2002. The effective tax rates were 38.6%
and 38.9% for the years ended December 31, 2003 and 2002, respectively.
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, while 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 million, 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 on 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 collectibility 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.
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 ended 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 assets 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 $352,000.00 gain on sale of a bank
property, and an increase in service fees and charges of $256,000.00. 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 $68.1 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
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.
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,
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 8,774 $ 112 1.28% $ 10,186 $ 158 1.55% $ 5,042 $ 185 3.67%
Other securities (1) 32,652 1,029 3.15 23,136 867 3.75 8,480 481 5.67
Mortgage-backed and
related securities 355 10 2.82 730 31 4.25 1,259 73 5.80
Loans receivable (2) 179,026 11,395 6.36 164,306 11,604 7.06 154,171 12,267 7.96
FHLB stock 2,053 107 5.21 1,623 95 5.85 1,055 78 7.39
-------- ------- -------- -------- -------- -------
Total interest-earning assets 222,860 12,653 5.68 199,981 12,755 6.38 170,007 13,084 7.70
------- ---- -------- -------- -------- -------
Non-interest earning assets,
net of allowance
for loan losses 17,067 9,786 10,922
-------- -------- --------
Total assets $239,927 $209,767 $180,929
======== ======== ========
Liabilities/shareholder equity
Interest-bearing liabilities:
Savings deposits $ 43,454 468 1.08 $ 35,878 698 1.95 $ 32,108 1,006 3.13
Interest bearing demand (5) 32,018 129 .40 30,475 233 0.76 26,719 330 1.24
Certificates of deposit 95,559 2,663 2.79 89,514 3,123 3.49 84,262 4,325 5.13
FHLB advances and other borrowings 45,636 2,088 4.58 32,475 1,584 4.88 17,385 956 5.50
-------- ------- ---- -------- -------- -------- -------
Total interest-bearing liabilities 216,667 5,348 2.47 188,342 5,638 2.99 160,474 6,617 4.12
------- -------- -------
Other liabilities 1,528 2,052 2,915
-------- -------- --------
Total liabilities 218,195 190,394 163,389
Total equity 21,732 19,373 17,540
-------- -------- --------
Total liabilities and equity $239,927 $209,767 $180,929
======== ======== ========
Net interest earning assets $ 6,193 $ 11,639 $ 9,533
======== ======== ========
Net interest income $ 7,305 $ 7,117 $ 6,467
======= ======= =======
Interest rate spread (3) 3.21% 3.39% 3.58%
Net yield on weighted average
interest-earning assets (4) 3.28% 3.56% 3.80%
Average interest-earning assets to
average bearing liabilities 102.86% 106.18% 105.94%
- -------------------------------
(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 $13,021, $9,985 and $8,512.
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,
----------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
----------------------------------------------------------------
(In thousands)
Interest-earning assets:
Interest-earning deposits and other $ (3) $ (37) $ (34) $ 155 $ (165) $ (10)
Investment securities 316 (154) 162 596 (210) 386
Mortgage-backed and related securities (13) (8) (21) (26) (16) (42)
Loans receivable, net 991 (1,200) (209) 773 (1,436) (663)
------ ------- ------ ------ ------ ------
Total 1,297 (1,399) (102) 1,498 (1,827) (329)
------ ------- ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 337 (1,131) (794) 406 (2,013) (1,607)
FHLB advances and other borrowings 607 (103) 504 747 (119) 628
------ ------- ------ ------ ------ ------
Total 944 (1,234) (290) 1,153 (2,132) (979)
------ ------- ------ ------ ------ ------
Net change in interest income $ 353 $ (165) $ 188 $ 345 $ 305 $ 650
====== ======== ====== ====== ====== =====
Asset and Liability Management
Like other financial institutions, River Valley Financial 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 Financial is using the Net Portfolio
Value ("NPV") methodology adopted by the OTS as part of its capital regulations.
Although River Valley Financial is not subject to the NPV regulation because
such regulation does not apply to institutions with less than $300 million in
assets and risk-based capital in excess of 12%, the application of the NPV
methodology can illustrate River Valley Financial's degree of interest rate
risk.
Presented on the following table is an analysis of River Valley Financial's
interest rate risk, as of December 31, 2003 (the latest information available)
and December 31, 2002, as measured by changes in NPV for an instantaneous and
sustained parallel shift of 100 through 300 basis points in market interest
rates.
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, 2003
(Dollars in thousands)
Change in
Interest Rates Estimated Amount
(basis points) NPV of Change Percent
-------------- --------- --------- -------
+300 $33,347 $ 650 2%
+200 33,819 1,123 3%
+100 33,640 943 3%
-- 32,697 --
-100 31,122 (1,575) -5%
-200 (1) -- -- --
-300 (1) -- -- --
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) -- -- --
- ------------------------
(1) At December 31, 2003 and 2002, the OTS did not provide information as to
interest rate risk for 200 and 300 point decreases.
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, 2003, River Valley Financial Bank had commitments to originate
loans totaling $4.0 million and in addition, had undisbursed loans in process,
unused lines of credit and standby letters of credit totaling $23.5 million. At
such date, River Valley Financial bank had $0.5 million in commitments to sell
loans and no outstanding commitment to purchase loans. The Corporation considers
River Valley Financial Bank's liquidity and capital resources sufficient to meet
outstanding short and long term needs.
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, 2003, 2002 and 2001:
Year ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
(In thousands)
Cash flows from operating activities $ 5,043 $ 5,348 $ 756
Cash flows from investing activities:
Purchase of securities (17,151) (22,161) (19,262)
Proceeds from maturities of securities 5,387 4,217 5,204
Proceeds from sales of securities 5,095 7,951 3,689
Net loan originations (27,287) (10,385) (15,078)
Other (4,383) (1,163) (3,079)
Cash flows from financing activities:
Net increase in deposits 18,125 16,258 15,346
Net increase in borrowings 10,000 13,500 13,050
Purchase of stock (366) (140) (1,182)
Other (561) (456) (185)
--------- --------- --------
Net increase (decrease) in cash
and cash equivalents $ (6,098) $ 12,969 $ (741)
======== ========= ========
River Valley Financial is required by applicable law and regulation to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement, or leverage ratio, and a
risk-based capital requirement.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus
intangible assets. "Core capital" is comprised of common shareholders' equity
(including retained earnings), noncumulative preferred stock and related
surplus, minority interests in consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual associations. OTS
regulations require savings associations to maintain core capital generally
equal to 4% of the association's total assets except those associations with the
highest examination rating and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of "risk-weighted assets." Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of River Valley Financial includes a general loan loss
allowance of $2.1 million at December 31, 2003.
River Valley Financial exceeded all of its regulatory capital requirements
at December 31, 2003. The following table summarizes River Valley Financial's
regulatory capital requirements and regulatory capital at December 31, 2003:
OTS Requirement Actual Amount
--------------------------------------------------------
Percent of Percent of Amount
Assets Amount Assets (1) Amount of Excess
--------------------------------------------------------
Tangible capital 1.50% $ 3,758 10.0% $24,968 $21,210
Core capital (2) 4.00% 10,021 10.0 24,968 14,947
Risk-based capital 8.00% 14,917 14.5 26,970 12,053
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that adopted by the Office of the
Comptroller of the Currency for national banks. The regulation requires
core capital of at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety and
soundness, and 4% to 5% for all other savings associations. River Valley
Financial is in compliance with this requirement.
Impact of Accounting Changes
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. The FASB's Staff Position 150-3 deferred indefinitely the
guidance in SFAS No. 150 on certain mandatorily redeemable noncontrolling
interests.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, and in December 2003 the FASB deferred certain effective dates of
Interpretation No. 46. For all variable interest entities other than special
purpose entities, the revised Interpretation is effective for periods ending
after March 15, 2004. For variable interest entities meeting the definition of
special purpose entities under earlier accounting rules, the Interpretation
remains effective for periods ending after December 31, 2003. The Interpretation
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling interest through
ownership of a majority voting interest in the entity. The Corporation has
determined that all such instruments covered under this statement have been or
will be properly reported under SFAS No. 150 and Staff Position Bulletin 150-3.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies
reporting of contracts as either derivatives or hybrid instruments. The
Corporation has determined that it has no such instruments.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation - Transition and Disclosure, which provides guidance for transition
from the intrinsic value method of accounting for stock-based compensation under
Accounting Principles Board ("APB") Opinion No. 25 to SFAS No. 123's fair value
method of accounting, if a Corporation so elects. The Corporation applies APB
Opinion No. 25 and related Interpretations in accounting for the stock option
plan. Accordingly, no compensation costs have been recognized, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant. Had compensation cost for the Corporation's stock
option plan been recorded based on the fair value at the grant dates for awards
under the plan consistent with the method prescribed by SFAS No. 123, net income
and net income per share would have been adjusted to the proforma amounts
indicated in Note 1.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others was issued. FIN 45 requires the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The most
significant FIN 45 instruments of the Corporation are standby letters of credit.
The Corporation has determined that its standby letters of credit obligations
under FIN 45 are not material for disclosure.
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, 2003 and 2002
River Valley Bancorp
December 31, 2003, 2002 and 2001
Contents
Independent Accountants' Report...............................................19
Consolidated Financial Statements
Balance Sheets.......................................................20
Statements of Income.................................................21
Statements of Comprehensive Income...................................22
Statements of Stockholders' Equity...................................23
Statements of Cash Flows.............................................24
Notes to Financial Statements........................................25
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, 2003 and 2002, 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, 2003. 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 referred to above
present fairly, in all material respects, the consolidated financial position of
River Valley Bancorp as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
/s/ BKD, LLP
BKD, LLP
Indianapolis, Indiana
January 20, 2004
River Valley Bancorp
Consolidated Balance Sheets
December 31, 2003 and 2002
2003 2002
------------------------------------
(In Thousands, Except Share Amounts)
Assets
Cash and due from banks $ 4,443 $ 5,094
Interest-bearing demand deposits 8,069 13,516
-------- --------
Cash and cash equivalents 12,512 18,610
Investment securities available for sale 34,557 28,174
Loans held for sale 100 1,062
Loans, net of allowance for loan losses
of $2,056 and $2,101 192,166 164,895
Premises and equipment 5,980 5,741
Federal Home Loan Bank stock 2,176 2,000
Interest receivable 1,489 1,467
Cash surrender value of life insurance 5,093 1,326
Other assets 1,003 745
-------- --------
Total assets $255,076 $224,020
======== ========
Liabilities
Deposits
Noninterest-bearing $ 11,828 $ 11,115
Interest-bearing 168,126 150,714
-------- --------
Total deposits 179,954 161,829
Borrowings 50,000 40,000
Interest payable 381 459
Other liabilities 1,886 1,099
-------- --------
Total liabilities 232,221 203,387
-------- --------
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 - 1,646,680
and 1,621,688 shares 8,705 7,957
Retained earnings 14,088 12,654
Shares acquired by stock benefit plans (193) (339)
Accumulated other comprehensive income 255 361
-------- --------
Total stockholders' equity 22,855 20,633
-------- --------
Total liabilities and stockholders' equity $255,076 $224,020
======== ========
See Notes to Consolidated Financial Statements
River Valley Bancorp
Consolidated Statements of Income
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---------------------------------------
(In Thousands, Except Per Share Amounts)
Interest Income
Loans receivable $11,395 $11,604 $12,267
Investment securities 1,039 898 554
Interest-earning deposits and other 219 253 263
------- ------- -------
Total interest income 12,653 12,755 13,084
------- ------- -------
Interest Expense
Deposits 3,260 4,054 5,661
Borrowings 2,088 1,584 956
------- ------- -------
Total interest expense 5,348 5,638 6,617
------- ------- -------
Net Interest Income 7,305 7,117 6,467
Provision for loan losses 508 570 450
------- ------- -------
Net Interest Income After Provision for Loan Losses 6,797 6,547 6,017
------- ------- -------
Other Income
Service fees and charges 1,472 1,355 1,099
Net realized gains on sales of
available-for-sale securities 4 37 17
Net gains on loan sales 1,644 1,226 772
Gain on sale of premises and equipment -- 352 --
Other income 234 124 34
------- ------- -------
Total other income 3,354 3,094 1,922
------- ------- -------
Other Expenses
Salaries and employee benefits 2,915 2,619 2,291
Net occupancy and equipment expenses 819 774 612
Data processing fees 163 228 190
Advertising 242 209 208
Amortization of mortgage servicing rights 407 345 238
Office supplies 161 159 101
Legal and professional fees 131 63 164
Other expenses 993 1,058 902
------- ------- -------
Total other expenses 5,831 5,455 4,706
------- ------- -------
Income Before Income Tax 4,320 4,186 3,233
Income tax expense 1,665 1,628 1,257
------- ------- -------
Net Income $ 2,655 $ 2,558 $ 1,976
======= ======= =======
Basic Earnings per Share $ 1.67 $ 1.64 $ 1.25
======= ======= =======
Diluted Earnings per Share $ 1.59 $ 1.58 $ 1.22
======= ======= =======
See Notes to Consolidated Financial Statements
River Valley Bancorp
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------------------
(In Thousands)
Net Income $2,655 $2,558 $1,976
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains (losses) arising during
the period, net of tax expense (benefit) of
$(68), $220 and $18 (104) 336 27
Less: Reclassification adjustment for gains
included in net income, net of tax expense of
$2, $15 and $7 2 22 10
------ ------ ------
(106) 314 17
------ ------ ------
Comprehensive Income $2,549 $2,872 $1,993
====== ====== ======
See Notes to Consolidated Financial Statements
River Valley Bancorp
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2003, 2002 and 2001
Shares
Acquired Accumulated
by Stock Other
Common Retained Benefit Comprehensive
Shares Stock Earnings Plans Income Total
- ------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2001 1,737,748 $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 ($.25 per share) (388) (388)
Exercise of stock options 9,340 68 68
Tax benefit of stock options exercised
and RRP 4 4
Amortization of expense related to stock
benefit plans 90 202 292
Purchase of stock (128,586) (643) (539) (1,182)
--------- ----- ------ ---- ---- --------
Balances, December 31, 2001 1,618,502 7,654 10,802 (532) 47 17,971
Net income 2,558 2,558
Unrealized gains on securities, net of
reclassification adjustment 314 314
Cash dividends ($.40 per share) (619) (619)
Exercise of stock options 13,754 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 (10,568) (53) (87) (140)
--------- ----- ------ ---- ---- --------
Balances, December 31, 2002 1,621,688 7,957 12,654 (339) 361 20,633
Net income 2,655 2,655
Unrealized losses on securities, net of
reclassification adjustment (106) (106)
Cash dividends ($.595 per share) (955) (955)
Exercise of stock options 44,992 313 313
Tax benefit of stock options exercised
and RRP 236 236
Amortization of expense related to stock
benefit plans 299 146 445
Purchase of stock (20,000) (100) (266) (366)
--------- ----- ------ ---- ---- --------
Balances, December 31, 2003 1,646,680 $8,705 $14,088 $(193) $255 $22,855
========= ====== ======= ===== ==== ========
See Notes to Consolidated Financial Statements
River Valley Bancorp
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
-------------------------------
(In Thousands)
Operating Activities
Net income $ 2,655 $ 2,558 $ 1,976
Items not requiring (providing) cash
Provision for loan losses 508 570 450
Depreciation and amortization 507 502 311
Deferred income tax 517 31 3
Investment securities gains (4) (37) (17)
Loans originated for sale in the secondary market (68,536) (65,339) (48,428)
Proceeds from sale of loans in the secondary market 70,512 67,589 46,101
Gain on sale of loans (1,644) (1,226) (772)
Amortization of deferred loan origination cost 138 175 157
Amortization of expense related to stock benefit plans 445 421 292
(Gain) loss on sale of premises and equipment 2 (352) --
Net change in
Interest receivable (22) 8 (7)
Interest payable (78) (154) 15
Other adjustments 43 602 675
-------- --------- ---------
Net cash provided by operating activities 5,043 5,348 756
-------- --------- ---------
Investing Activities
Purchase of FHLB stock (48) (750) (307)
Purchases of securities available for sale (17,151) (22,161) (19,262)
Proceeds from maturities of securities available for sale 5,387 4,217 5,204
Proceeds from sales of securities available for sale 5,095 7,951 3,689
Net change in loans (27,287) (10,385) (15,078)
Purchases of premises and equipment (749) (1,141) (2,784)
Proceeds from sale of premises and equipment 1 630 --
Proceeds from sale of real estate acquired through foreclosure 48 98 107
Premiums paid on life insurance (3,635) -- (95)
-------- --------- ---------
Net cash used in investing activities (38,339) (21,541) (28,526)
-------- --------- ---------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 19,051 3,891 9,643
Certificates of deposit (926) 12,367 5,703
Proceeds from borrowings 16,000 50,000 32,050
Repayment of borrowings (6,000) (36,500) (19,000)
Cash dividends (878) (543) (261)
Purchase of stock (366) (140) (1,182)
Proceeds from exercise of stock options 313 99 68
Advances by borrowers for taxes and insurance 4 10 8
Acquisition of stock for stock benefit plans -- (22) --
-------- --------- ---------
Net cash provided by financing activities 27,198 29,162 27,029
-------- --------- ---------
Net Change in Cash and Cash Equivalents (6,098) 12,969 (741)
Cash and Cash Equivalents, Beginning of Year 18,610 5,641 6,382
-------- --------- ---------
Cash and Cash Equivalents, End of Year $12,512 $ 18,610 $ 5,641
======== ========== =========
Additional Cash Flows Information
Interest paid $ 5,426 $ 5,792 $ 6,691
Income tax paid 1,435 1,480 1,119
See Notes to Consolidated Financial Statements
River Valley Bancorp
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(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 subsidiaries, River Valley Financial Bank (Bank) and RIVR Statutory
Trust I (Trust), 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, the Trust 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.
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 nonaccrual 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, 2003, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the areas within which the Company 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.
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, 2003, the Company has a stock-based employee
compensation plan, which is described more fully in Note 16. 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.
2003 2002 2001
------------------------------
Net income, as reported $2,655 $2,558 $1,976
Less: Total stock-based employee compensation
cost determined under the fair value based method,
net of income taxes (25) (54) (35)
------- ------- -------
Pro forma net income $2,630 $2,504 $1,941
======= ======= =======
Earnings per share
Basic - as reported $ 1.67 $ 1.64 $ 1.25
======= ======= =======
Basic - pro forma $ 1.65 $ 1.61 $ 1.23
======= ======= =======
Diluted - as reported $ 1.59 $ 1.58 $ 1.22
======= ======= =======
Diluted - pro forma $ 1.57 $ 1.54 $ 1.20
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 and have been restated to give effect to a
2-for-1 stock split on the Company's outstanding shares announced on December 9,
2003. Unearned ESOP shares have been excluded from the computation of average
shares outstanding.
Reclassifications of certain amounts in the 2002 and 2001 consolidated financial
statements have been made to conform to the 2003 presentation.
Note 2: Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 2003 was
$1,168,000.
Note 3: Investment Securities
2003
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
Available for sale
Federal agencies $33,483 $438 $24 $33,897
State and municipal 475 10 -- 485
Mortgage and other asset-backed securities 177 -- 2 175
------- ---- --- -------
Total investment securities $34,135 $448 $26 $34,557
======= ==== === =======
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
======= ==== === =======
At December 31, 2003, of the Company's investment securities with unrealized
losses, only one asset-backed security, with an unrealized loss of $900, has
been in a continuous unrealized-loss position for more than a year.
The amortized cost and fair value of securities available for sale at December
31, 2003, 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 $ 9,014 $ 9,156
One to five years 23,950 24,235
Five to ten years 994 991
------- -------
33,958 34,382
Mortgage and other asset-backed securities 177 175
------- -------
Totals $34,135 $34,557
======= =======
Securities with a carrying value of $10,425,000 and $10,819,000 were pledged at
December 31, 2003 and 2002 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 2003, 2002 and 2001
were $5,095,000, $7,951,000 and $3,689,000. Gross gains of $10,000, $103,000 and
$33,000 and gross losses of $6,000, $66,000 and $16,000 were realized on those
sales.
Note 4: Loans and Allowance
2003 2002
- -----------------------------------------------------------------------
Residential real estate
One-to-four family residential $90,492 $ 73,197
Multi-family residential 5,009 4,396
Construction 8,689 4,866
Nonresidential real estate and land 56,388 46,036
Commercial 26,764 26,203
Consumer and other 10,287 14,066
------- --------
197,629 168,764
Unamortized deferred loan costs 461 379
Undisbursed loans in process (3,868) (2,147)
Allowance for loan losses (2,056) (2,101)
------- --------
Total loans $192,166 $164,895
======== ========
2003 2002 2001
- ----------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $2,101 $1,972 $1,702
Provision for losses 508 570 450
Recoveries on loans 190 60 31
Loans charged off (743) (501) (211)
------- ------- -------
Balances, December 31 $2,056 $2,101 $1,972
======= ======= =======
Information on impaired loans is summarized below.
2003 2002
-------------
Impaired loans for which the discounted
cash flows or collateral value exceeds
the carrying value of the loan $1,100 $749
2003 2002 2001
------------------------
Average balance of impaired loans $1,242 $663 $1,352
Interest income recognized on impaired loans 107 34 117
Cash-basis interest included above 97 35 110
At December 31, 2003 and 2002, the Company had non-accruing loans totaling
$514,000 and $1,080,000, respectively. At December 31, 2003 and 2002, there were
no accruing loans delinquent 90 days or more.
Note 5: Premises and Equipment
2003 2002
---------------
Land $1,450 $1,450
Buildings 3,577 3,395
Equipment 3,148 2,629
Construction in progress 90 81
------- ------
Total cost 8,265 7,555
Accumulated depreciation and amortization (2,285) (1,814)
------- ------
Net $5,980 $5,741
======= =======
Note 6: Deposits
2003 2002
--------------------------
Demand deposits $ 58,874 $ 41,763
Savings deposits 26,478 24,538
Certificates and other time deposits of $100,000 or more 38,609 41,901
Other certificates and time deposits 55,993 53,627
--------- ---------
Total deposits $ 179,954 $ 161,829
========= =========
Certificates and other time deposits maturing in
2004 $10,232
2005 56,952
2006 7,014
2007 1,624
2008 2,786
Thereafter 15,994
-------
$94,602
=======
Note 7: Borrowings
2003 2002
-------------------------
Federal Home Loan Bank advances $43,000 $40,000
Trust preferred securities 7,000 --
------- -------
Total borrowings $50,000 $40,000
======= =======
Maturities by year for advances at December 31, 2003 are $10,000,000 in 2004,
$9,000,000 in 2005, $1,000,000 in 2006, $10,000,000 in 2007, $1,000,000 in 2008
and $12,000,000 thereafter. The weighted-average interest rate at December 31,
2003 and 2002 was 4.08% and 4.48%.
The Federal Home Loan Bank advances are secured by first-mortgage loans totaling
$73,002,000 at December 31, 2003. Advances are subject to restrictions or
penalties in the event of prepayment.
On March 13, 2003, the Company formed RIVR Statutory Trust I (Trust). On March
26, 2003, the Trust issued 7,000 Fixed/Floating Rate Capital Securities with a
liquidation amount of $1,000 per Capital Security in a private placement to an
offshore entity for an aggregate offering price of $7,000,000, and 217 Common
Securities with a liquidation amount of $1,000 per Common Security to the
Company for $217,000. The aggregate proceeds of $7,217,000 were used by the
Trust to purchase $7,217,000 in Fixed/Floating Rate Junior Subordinated
Deferrable Interest Debentures from the Company. The Debentures and the Common
and Capital Securities have a term of 30 years, bear interest at the annual rate
of 6.4% for five years and thereafter bear interest at the rate of the 3-Month
LIBOR plus 3.15%. The Company has guaranteed payment of amounts owed by the
Trust to holders of the Capital Securities.
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 $91,639,000, $76,544,000 and $56,057,000 at December 31, 2003, 2002 and
2001, respectively.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2003, 2002 and 2001 totaled $854,000, $631,000 and $430,000. 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.
2003 2002 2001
-----------------------
Mortgage Servicing Rights
Balances, January 1 $ 881 $ 540 $ 227
Servicing rights capitalized 630 546 441
Amortization of servicing rights (302) (205) (128)
------ ------ ------
1,209 881 540
Valuation allowance (355) (250) (110)
------ ------ ------
Balances, December 31 $ 854 $ 631 $ 430
====== ====== ======
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Balance, beginning of year $250 $110 $ --
Additions 105 140 110
---- ---- ----
Balance, end of year $355 $250 $110
==== ==== ====
Note 9: Income Tax
2003 2002 2001
------------------------------
Income tax expense (benefit)
Currently payable
Federal $ 878 $1,318 $1,000
State 269 279 254
Deferred
Federal 459 (23) 2
State 59 54 1
------ ------ ------
Total income tax expense $1,665 $1,628 $1,257
====== ====== ======
Reconciliation of federal statutory
to actual tax expense (benefit)
Federal statutory income tax at 34% $1,469 $1,423 $1,099
Effect of state income taxes 217 220 168
Qualified Zone Academy Credit (65) -- --
Bank-owned life insurance (45) -- --
ESOP expense in excess of cost 102 -- --
Other (13) (15) (10)
------ ------ ------
Actual tax expense $1,665 $1,628 $1,257
====== ====== ======
Effective tax rate 38.5% 38.9% 38.8%
A cumulative net deferred tax asset (liability) is included in the balance
sheets. The components of the asset (liability) are as follows:
2003 2002
------------------------
Assets
Allowance for loan losses $ 794 $ 807
Deferred compensation 125 220
Pensions and employee benefits 15 21
Purchase accounting adjustments 66 71
Qualified Zone Academy Bond credits 11 11
------- -------
Total assets 1,011 1,130
======= =======
Liabilities
Depreciation and amortization (409) (178)
Loan fees (178) (147)
Mortgage servicing rights (330) (249)
Federal Home Loan Bank stock dividends (58) --
Securities available for sale (65) (133)
Other (1) (5)
------- -------
Total liabilities (1,041) (712)
------- -------
$ (30) $ 418
======= =======
Income tax expense attributable to securities gains was $2,000, $14,000 and
$7,000 for the years ended December 31, 2003, 2002 and 2001.
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:
2003 2002
----------------
Commitments to extend credit $27,353 $17,002
Standby letters of credit 339 347
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, equipment, and income-producing commercial properties.
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: Stockholders' Equity
On December 9, 2003, the Company announced a 2-for-1 stock split, under which
each share of its common stock outstanding at the close of business on December
26, 2003 was converted into two shares of common stock. The additional
certificates were distributed to stockholders on January 9, 2004. As a result of
the stock split, the number of shares outstanding increased from 823,340 to
1,646,680 shares. Unless otherwise noted, all share and per share data have been
restated for the 2-for-1 split.
Note 12: 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, 2003, the stockholder's equity of the Bank was $26,280,000, of
which approximately $23,911,000 was restricted from dividend distribution to the
Company.
Note 13: 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.
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, 2003 and 2002,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 2003 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
------------------------------------------------------------
2003
Total risk-based capital(1)
(to risk-weighted assets) $26,970 14.5% $14,917 8.0% $18,646 10.0%
Tier 1 capital1 (to risk-weighted
assets) 24,968 13.4% 7,458 4.0% 11,187 6.0%
Core capital(1) (to adjusted total
assets) 24,968 10.0% 10,021 4.0% 12,527 5.0%
Core capital1 (to adjusted
tangible assets) 24,968 10.0% 5,011 2.0% -- N/A
Tangible capital(1) (to adjusted total
assets) 24,968 10.0% 3,758 1.5% -- N/A
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 capital1 (to adjusted total
assets) 18,637 8.4% 8,909 4.0% 11,136 5.0%
Core capital1 (to adjusted
tangible assets) 18,637 8.4% 4,455 2.0% -- N/A
Tangible capital(1) (to adjusted
total assets) 18,637 8.4% 3,341 1.5% -- N/A
(1) As defined by regulatory agencies
Note 14: 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 related
to this plan for the years ended December 31, 2003, 2002 and 2001.
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 $43,000, $31,000 and $35,000
for the years ended December 31, 2003, 2002 and 2001.
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 $51,000, $41,000 and $42,000 for the years ended December 31,
2003, 2002 and 2001.
The Company has an ESOP covering substantially all employees of the Company and
Bank. The ESOP acquired 190,440 shares of the Company's common stock at $10 per
share with funds provided by a loan from the Company. Unearned ESOP shares
totaled 29,044 and 51,034 at December 31, 2003 and 2002 and had a fair value of
$855,000 and $778,000 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, 2003, 2002 and 2001 was $410,000,
$331,000 and $196,000. At December 31, 2003, the ESOP had 161,396 allocated
shares, 29,044 suspense shares and no committed-to-be released shares. At
December 31, 2002, the ESOP had 139,406 allocated shares, 51,034 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 95,220 shares of the Company's stock to members
of the Board of Directors and management. The RRP has purchased 67,640 shares of
the Company's common stock in the open market. At December 31, 2003, 66,816
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 $35,000, $53,000 and $98,000 for the
years ended December 31, 2003, 2002 and 2001.
Note 15: 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.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, January 1, 2003 $1,598
Change in composition 109
New loans, including renewals 1,057
Payments, etc., including renewals (1,632)
-------
Balances, December 31, 2003 $1,132
=======
Deposits from related parties held by the Bank at December 31, 2003 and 2002
totaled $2,198,000 and $466,000.
Note 16: 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 238,050 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
-----------------
Risk-free interest rates 3.5% 5.1%
Dividend yields 3.1% 2.8%
Volatility factors of expected market price of common stock 11.2% 7.8%
Weighted-average expected life of the options 10 years 10 years
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, 2003, 2002 and
2001.
2003 2002 2001
-----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding, beginning
of year 170,268 $7.58 172,166 $7.08 198,690 $7.09
Granted -- -- 14,000 13.25 4,000 8.95
Exercised (44,992) 7.36 (13,754) 7.20 (9,340) 7.31
Forfeited/expired -- -- (2,144) 7.39 (21,184) 7.39
-------- ----- -------- --------
Outstanding, end of
year 125,276 $7.63 170,268 $7.58 172,166 $7.08
======== ======== ========
Options exercisable at
year end 94,076 124,668 106,574
Weighted-average fair
value of options
granted during
the year $ -- $1.52 $1.54
As of December 31, 2003, options totaling 25,048 have exercise prices ranging
from $5.38 to $6.32 and a weighted-average remaining contractual life of 6.0
years, options totaling 85,428 have exercise prices ranging from $6.99 to $7.39
and a weighted-average remaining contractual life of 4.3 years, options totaling
2,400 have an exercise price of $8.95 and a weighted-average remaining
contractual life of 7.5 years, and options totaling 12,400 have an exercise
price of $13.25 and a weighted-average remaining contractual life of 8.7 years.
Note 17: Earnings Per Share
2003 2002 2001
Weighted- Per Weighted- Per Weighted- Per
Average Shares Average Shares Average Shares
Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to
common stockholders $2,655 1,590,732 $1.67 $2,558 1,557,286 $1.64 $1,976 1,581,866 $1.25
===== =====
Effect of Dilutive
Stock Options 79,418 64,890 34,866
------ --------- ------ --------- ------ ---------
Diluted Earnings Per Share
Income available to
common stockholders
and assumed conversions $2,655 1,670,150 $1.59 $2,558 1,622,176 $1.58 $1,976 1,616,732 $1.22
====== ========= ===== ====== ========= ===== ====== ========= =====
Note 18: 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.
Cash Surrender Value of Life Insurance - The fair value of cash surrender value
of life insurance approximates carrying value.
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.
Other Borrowings - The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt.
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:
2003 2002
-----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------
Assets
Cash and cash equivalents $ 12,512 $ 12,512 $ 18,610 $ 18,610
Investment securities available for sale 34,557 34,557 28,174 28,174
Loans including loans held for sale, net 192,266 195,278 165,957 170,495
Interest receivable 1,489 1,489 1,467 1,467
Stock in FHLB 2,176 2,176 2,000 2,000
Cash surrender value of life insurance 5,093 5,093 1,326 1,326
Liabilities
Deposits 179,954 181,170 161,829 163,776
FHLB advances 43,000 44,372 40,000 41,975
Other borrowings 7,000 7,000 -- --
Interest payable 381 381 459 459
Advance payments by borrowers for taxes
and insurance 63 63 59 59
Note 19: 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
2003 2002
------------------
Assets
Cash and due from banks $ 3,060 $ 961
Investment in common stock of subsidiary 26,280 19,659
Investment in RVB Trust I 217 --
Other assets 795 216
-------- -------
Total assets $ 30,352 $20,836
======== =======
Liabilities
Borrowings $ 7,217 $ --
Dividends payable 280 203
-------- --------
Total liabilities 7,497 203
Stockholders' Equity 22,855 20,633
-------- --------
Total liabilities and stockholders' equity $30,352 $20,836
======== ========
Condensed Statements of Income
2003 2002 2001
------------------------------
Income
Dividends from subsidiary $ 632 $2,601 $ 425
Other income 63 35 45
------ ------ ------
Total income 695 2,636 470
------ ------ ------
Expenses
Interest expense 346 23 55
Other expenses 232 142 153
------ ------ ------
Total expenses 578 165 208
------ ------ ------
Income before income tax and equity in
undistributed income of subsidiary. 117 2,471 262
Income tax benefit 204 51 65
------ ------ ------
Income before equity in undistributed income of
subsidiary 321 2,522 327
Equity in undistributed income of subsidiary 2,334 36 1,649
------ ------ ------
Net Income $2,655 $2,558 $1,976
====== ====== ======
Condensed Statements of Cash Flows
2003 2002 2001
------------------------------
Operating Activities
Net income $2,655 $2,558 $1,976
Items not requiring (providing) cash (2,625) 109 (1,453)
------ ------ ------
Net cash provided by operating activities 30 2,667 523
Financing Activities
Purchase of stock (366) (140) (1,182)
Proceeds from exercise of stock options 313 99 68
Acquisition of stock for stock benefit plans -- (22) --
Proceeds from borrowings 7,000 -- 1,050
Repayment of borrowings -- (1,500) --
Capital contribution to subsidiary (4,000) -- --
Cash dividends (878) (543) (261)
------ ------ ------
Net cash provided by (used in) financing activities 2,069 (2,106) (325)
------ ------ ------
Net Change in Cash and Cash Equivalents 2,099 561 198
Cash and Cash Equivalents at Beginning of Year 961 400 202
------ ------ ------
Cash and Cash Equivalents at End of Year $3,060 $ 961 $ 400
====== ====== ======
GENERAL INFORMATION FOR SHAREHOLDERS
Transfer Agent and Registrar: Shareholder and General Inquiries:
Registrar and Transfer Company River Valley Bancorp
10 Commerce Drive Attn: Matthew P. Forrester
Cranford, NJ 07016-3572 430 Clifty Drive, P.O. Box 1590
Tel: 1-800-368-5948 Madison, Indiana 47250
www.rtco.com Tel: (812) 273-4949
Fax: (812) 273-4944
Corporate Counsel: Special Counsel:
Lonnie D. Collins, Attorney Barnes & Thornburg
307 Jefferson Street 11 S. Meridian Street
Madison, Indiana 47250 Indianapolis, Indiana 46204
Tel: (812) 265-3616 Tel: (317) 236-1313
Fax: (812) 273-3143 Fax: (317) 231-7433
Annual and Other Reports:
Additional copies of this Annual Report to Shareholders and copies of the most
recent Form 10-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
Charleston: 1025 Highway 62
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 Matthew P. Forrester Charles J. McKay
Chairman Director & President Director
Robert W. Anger Michael J. Hensley *****************
Director Director
Jonnie L. Davis L. Sue Livers Lonnie D. Collins
Director Director Secretary
EXECUTIVE OFFICERS OF RIVER VALLEY FINANCIAL BANK
Matthew P. Forrester Barbara J. Eades Loy M. Skirvin
President, CEO Vice President of Retail Banking Vice President of Human Resources
Mark A. Goley Larry C. Fouse Vickie Grimes
Vice President of Lending Vice President of Finance Internal Auditor
Anthony D. Brandon Deanna J. Liter John Muessel
Vice President of Vice President of Data Services Vice President
Loan Administration Trust Officer
OFFICERS AND MANAGERS OF RIVER VALLEY FINANCIAL BANK
Loan Officers Other Managers
Theresa A. Dryden Kenneth L. Cull - Collection Officer
Sherri Furnish Laura Denning - Loan Processing Manager
Natasha Jenkins Luann Nay - Loan Administrator
Rick T. Nelson Kelly Shelton - Loan Operations Manager
Robert J. Schoenstein - AVP Teresa J. Smith - Data Processing Manager
Don Bennett Mary Ellen Wehner - Commercial Loan Operations Manager
Customer Service Managers Elizabeth Baxter - Accounting Manager
Angela D. Adams Mary Ellen McClelland - Executive Secretary
Debbie R. Finnegan
Rachael A. Goble
Sandy Stilwell