10-Q 1 form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 000-32643 INDIAN RIVER BANKING COMPANY ---------------------------- (Exact name of registrant as specified in its charter) Florida 59-2931518 ------- ---------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 958 20th Place, Vero Beach, Florida 32960 ----------------------------------- ----- (Address of principal executive offices) (Zip Code) 772.569.9200 ------------ (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer [ ] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 31, 2003, the registrant had 2,172,417 shares of Common Stock outstanding. Part I Financial Information Item 1 - Financial Statements INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)

ASSETS ~~September~~June 30, ~~2002~~2003 December 31, ~~2001~~2002 ------------------------------------------------------------------------------------------------------------ (Unaudited) Cash and due from banks $ 1512,~~528~~570 $ 1318,~~334~~856 Federal funds sold 71,~~381~~044 101,~~033~~001 ------------------------------ Total cash and cash equivalents 13,614 19,857 Securities available for sale ~~154~~241,~~121~~756 ~~128~~176,~~758~~383 Securities held to maturity 137,~~687~~284 139,~~562~~742 Other securities 12,~~899~~513 12,~~899~~370 Loans held for sale 36,~~469~~329 513,~~795~~186 Loans, net ~~224~~of allowance for loan loss 237,~~033~~144 ~~208~~229,~~043~~588 Bank premises and equipment, net 4,~~072~~366 4,~~052~~084 Accrued interest receivable 2,~~214~~047 2,~~783~~207 Other assets ~~709~~1,284 ~~886~~780 -------------------------------- TOTAL ASSETS $~~427~~516,~~113~~337 $~~389~~458,~~145~~197 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Noninterest-bearing demand deposits $ 5123,~~337~~404 $ 4966,~~062~~883 Interest-bearing deposits: NOW and money market 47135,~~376~~563 4051,~~390~~777 Savings ~~108~~116,~~767~~551 ~~108~~116,~~628~~028 Time deposits ~~126~~130,~~590~~818 ~~120~~130,~~726~~205 -------------------------------- TOTAL DEPOSITS ~~334~~406,~~070~~336 ~~318~~364,~~806~~893 Guaranteed preferred beneficial interests in Company's subordinated debentures 7,000 --7,000 Other borrowings 5164,~~407~~661 4150,~~583~~269 Other liabilities 1,~~514~~385 1,~~052~~186 -------------------------------- TOTAL LIABILITIES ~~393~~479,~~991~~382 ~~361~~423,~~441~~348 -------------------------------- Stockholders' Equity ~~Preferred stock -- --~~ Common stock 12,~~954~~172 12,~~949~~163 Capital surplus 2027,~~978~~630 2027,~~878~~427 Retained earnings 85,~~113~~424 32,~~879~~979 Accumulated other comprehensive income 1,729 2,~~077~~280 ~~998~~ -------------------------------- TOTAL STOCKHOLDERS' EQUITY 3336,~~122~~955 2734,~~704~~849 -------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $~~427~~516,~~113~~337 $~~389~~458,~~145~~197 ================================

See Notes to Condensed Consolidated Financial Statements. 2 INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In Thousands, Except Per Share Data)

2003 2002 ~~2001~~ ------------------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans $4,~~253~~051 $4,~~437~~215 Investment securities and due from banks 2,~~167~~133 2,~~078~~263 Federal funds sold 145 ~~104~~28 ------------------------- 6,~~434~~189 6,~~619~~506 ------------------------- Interest expense: Deposits 1,~~738~~656 21,~~729~~948 Other ~~424~~538 ~~552~~385 ------------------------- 2,~~162~~194 32,~~281~~333 ------------------------- NET INTEREST INCOME 43,~~272~~995 34,~~338~~173 Provision for loan losses ~~180~~90 ~~180~~130 ------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 43,~~092~~905 34,~~158~~043 ------------------------- Other income: Service charges and fees ~~448~~601 ~~418~~427 Gain on sale of securities 6220 ~~165~~61 Gain on sale of loans ~~347~~652 ~~174~~390 Other ~~243~~233 ~~186~~232 ------------------------- 1,~~100~~506 ~~943~~1,110 ------------------------- Other expense: Salaries and benefits 1,~~561~~801 1,~~251~~466 Occupancy and equipment ~~408~~485 ~~386~~385 Data processing ~~294~~397 ~~320~~324 ~~Office~~Other operating expenses ~~and~~806 ~~insurance~~752 ~~694 574~~ ------------------------- 23,~~957~~489 2,~~531~~927 ------------------------- INCOME BEFORE INCOME TAXES 21,~~235~~922 12,~~570~~226 Provision for income taxes ~~838~~719 ~~560~~835 ------------------------- NET INCOME $1,~~397~~203 $1,~~010~~391 ========================= Basic earnings per share $ 0.7255 $ 0.5265 ========================= Diluted earnings per share $ 0.7053 $ 0.5163 ========================= Dividends per share $ -- $ -- =========================

See Notes to Condensed Consolidated Financial Statements. 3 INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In Thousands, Except Per Share Data)

2003 2002 ~~2001~~ --------------------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans $12 8,~~639~~223 $13 8,~~274~~386 Investment securities and due from banks 64,~~484~~098 54,~~998~~317 Federal funds sold ~~119~~39 ~~173~~105 --------------------------- 1912,~~242~~360 1912,~~445~~808 --------------------------- Interest expense: Deposits 53,~~894~~226 84,~~310~~156 Other 1,~~191~~068 ~~1,527~~767 --------------------------- 74,~~085~~294 94,~~837~~923 --------------------------- NET INTEREST INCOME 128,~~157~~066 97,~~608~~885 Provision for loan losses ~~440~~265 ~~420~~260 --------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 117,~~717~~801 97,~~188~~265 --------------------------- Other income: Service charges and fees 1,~~273~~171 ~~1,195~~825 Gain on sale of securities ~~813~~167 ~~222~~751 Gain on sale of loans 1,~~034~~233 ~~863~~687 Other ~~638~~430 ~~542~~395 --------------------------- 3,~~758~~001 2,~~822~~658 --------------------------- Other expense: Salaries and benefits 43,~~404~~543 42,~~149~~843 Occupancy and equipment ~~1,174~~915 ~~1,134~~766 Data processing ~~970~~765 ~~954~~676 ~~Office~~Other operating expenses ~~and insurance 2~~1,~~133~~654 21,~~028~~439 --------------------------- 86,~~681~~877 85,~~265~~724 --------------------------- INCOME BEFORE INCOME TAXES 63,~~794~~925 34,~~745~~559 Provision for income taxes 21,~~552~~467 1,~~363~~714 --------------------------- NET INCOME $ 42,~~242~~458 $ 2,~~382~~845 =========================== Basic earnings per share $ 21.1813 $ 1.2233 =========================== Diluted earnings per share $ 21.1309 $ 1.2030 =========================== Dividends per share $ -- $ -- ===========================

See Notes to Condensed Consolidated Financial Statements. 4 INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In Thousands)

~~2002~~Accumulated ~~2001~~Comprehen- Common Stock Other Total sive --------------------- Capital Retained Comprehensive Stockholders' Income Shares Amount Surplus Earnings Income Equity (Loss) ------------------------------------------------------------------------------------------------------------------------------------ ~~Net~~Balance, ~~income~~January $1, 2002 1,~~397~~772 $ 1,~~010~~772 ~~Other~~$ ~~comprehensive~~16,456 ~~income~~$ 8,478 ~~net~~$ of998 ~~tax:~~$ ~~Unrealized~~27,704 ~~gain~~10% onstock ~~investments~~dividend, ~~available-for-sale~~applied ~~arising~~retroactively ~~during~~177 ~~the~~177 ~~period~~4,422 ~~net~~(4,599) of-- ~~taxes~~-- of------------------------------------------------------------------------ ~~$516~~Balance, ~~and~~January ~~$550~~1, in 2002, ~~and~~as ~~2001~~adjusted 1,949 ~~respectively~~1,949 20,878 3,879 ~~932~~998 ~~Less~~27,704 ~~reclassification~~Fractional ~~adjustment~~shares ~~for~~-- ~~net~~-- ~~gains~~-- ~~included~~(8) in-- ~~net~~(8) Stock options exercised 2 2 45 -- -- 47 Stock-based compensation -- -- 1 -- -- 1 Comprehensive Income: Net income -- -- -- 2,845 -- 2,845 $ 2,845 Other comprehensive income, unrealized gain on securities, net of ~~taxes~~tax of-- ~~$23~~-- ~~and~~-- -- 239 239 239 -------- Comprehensive Income $61 in3,084 ------------------------------------------------------------------------------------ Balance, June 30, 2002 ~~and~~1,951 ~~2001~~$ 1,951 ~~respectively~~$ ~~(39)~~20,924 ~~(104)~~$ 6,716 $ 1,237 $ 30,828 ======================================================================== Balance, January 1, 2003 1,966 $ 1,966 $ 21,201 $ 9,402 $ 2,280 $ 34,849 10% stock dividend, applied retroactively 197 197 6,226 (6,423) -- -- ------------------------------------------------------------------------ Balance, January 1, 2003, as adjusted 2,163 2,163 27,427 2,979 2,280 34,849 Fractional shares (13) (13) Stock options exercised 9 9 170 179 Stock-based compensation 33 33 Comprehensive Income: Net income 2,458 2,458 2,458 Other comprehensive income, unrealized loss on securities, net of tax (551) (551) (551) -------- Comprehensive Income $ 1,907 ------------------------------------------------------------------------------------ Balance, June 30, 2003 2,~~237~~172 $ 2,172 $ 27,630 $ 5,424 $ 1,~~838~~729 $ 36,955 ========================================================================

See Notes to Condensed Consolidated Financial Statements 5 INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In Thousands)

2003 2002 ~~2001~~ ------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 42,~~242~~458 $ 2,~~382~~845 ~~Other~~Adjustments ~~comprehensive~~to reconcile net income, to net ofcash ~~tax~~provided by operating activities: ~~Unrealized~~Depreciation ~~gain~~and onamortization ~~investments~~332 ~~available-~~290 Provision for- loan losses 265 260 Proceeds from sale ~~arising~~of ~~during~~loans ~~the~~originated ~~period~~for resale 62,014 ~~net~~30,965 Origination of ~~taxes~~loans offor ~~$935~~resale ~~and~~(53,924) $1(26,~~062~~630) inGain ~~2002~~on ~~and~~sale ~~2001~~of loans (1,233) ~~respectively~~(56) Stock-based compensation 33 1 Amortization of premiums and discounts,~~591~~ net 1,~~808~~299 ~~Less~~42 ~~reclassification~~Gain ~~adjustment~~on ~~for~~sale ~~net~~of ~~gains~~securities ~~included~~(167) (751) Decrease in accrued interest receivable 160 451 Decrease in other assets (178) 12 Increase in other liabilities 199 83 ------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 11,258 7,512 ------------------------------- Cash Flows From Investing Activities Cash flows from securities, net ~~income~~(65,067) (23,585) Loan originations, net of ~~taxes~~collections (7,821) (11,441) Purchases of ~~$301~~premises and ~~$82~~equipment (614) (333) ------------------------------- NET CASH USED BY INVESTING ACTIVITIES (73,502) (35,359) ------------------------------- Cash Flows From Financing Activities Net increase in ~~2002~~deposits ~~and~~41,443 ~~2001~~19,474 ~~respectively~~Net increase in other borrowings 14,392 7,538 Proceeds from exercise of stock options 179 47 Cash paid for fractional shares (~~512~~13) (~~140~~8) ~~=========================~~------------------------------- ~~Comprehensive~~NET ~~income~~CASH PROVIDED BY FINANCING ACTIVITIES 56,001 27,051 ------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (6,243) (796) Cash and cash equivalents: Beginning 19,857 23,367 ------------------------------- Ending $ 513,~~321~~614 $ 422,~~050~~571 ===============================

See Notes to Condensed Consolidated Financial Statements. 6 INDIAN RIVER BANKING COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Indian River Banking Company, which are unaudited, except for the condensed consolidated balance sheet at December 31, 2002, which is derived from the audited consolidated balance sheet at that date, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2003, are not necessarily indicative of the results that may be expected for the full year. For further information, refer to Indian River Banking Company's consolidated financial statements and the notes thereto for the year ended December 31, 2002. The accompanying condensed consolidated financial statements include the accounts of Indian River Banking Company ("Indian River") and its wholly-owned subsidiaries, Indian River National Bank ("Indian River Bank"), a federally-chartered independent community bank and its wholly owned subsidiary Indian River Real Estate, LLC, Indian River Title Company, LLC, IRNB Insurance Services, LLC, and Indian River Capital Trust I, collectively referred to as "Indian River". All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2. INVESTMENT SECURITIES Securities held to maturity: The amortized cost and fair values of securities held to maturity as of June 30, 2003 and December 31, 2002 are summarized as follows.

~~Accumulated~~(In ~~Common~~,000s) ~~Stock~~June ~~Other~~30, ~~Total~~2003 ------------------------------- ~~Capital Retained Comprehensive Stockholders' Shares Amount Surplus Earnings Income Equity~~ -----------------------------------~~-----------------------------------------------------------------------------------------------~~ ~~Balance,~~Estimated ~~January~~Estimated 1,Estimated ~~2001~~Amortized ~~1,604~~Unrealized $Unrealized ~~1,604~~Market $Cost ~~14,195~~Gains $Losses ~~7,136~~Value ~~$ 265 $ 23,200 10% stock dividend, applied retroactively 160 160 2,177 (2,337)~~ -- -- --------------------------------------------------------------~~----------------------------~~ ~~Balance~~State, ~~January~~county 1,and ~~2001,~~municipal assecurities ~~adjusted~~$ 17,~~764~~284 ~~1,764~~$ ~~16,372~~487 ~~4,799~~$ ~~265 23,200 Fractional shares -- -- --~~ (3) ~~-- (3) Shares issued 3 3 33 -- -- 36 Net income -- -- -- 2~~7,~~382~~768 -- ~~2,382 Other comprehensive income, unrealized gain on securities, net of tax~~ -- -- -- -- ~~1,668 1,668~~ --------------------------------------------------------~~----------------------------------~~ ~~Balance,~~$ ~~September 30~~7,284 ~~2001 1,767~~ $ ~~1,767~~487 $ ~~16,405~~(3) $ 7,~~178~~768 ~~$ 1,933 $ 27,283~~ ==================================================================~~========================~~ ~~Balance,~~December ~~January 1~~31, 2002 ~~1,772 $ 1,772 $ 16,456 $ 8,478 $ 998 $ 27,704 10% stock dividend, applied retroactively 177 177 4,422 (4,599)~~ -- -- -------------------------------------------------------------- Estimated Estimated Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------------------- ~~Balance, January 1, 2002, as adjusted 1,949 1.949 20,878 3,879 998 27,704 Fractional shares~~ -- -- -- ~~(8)~~ -- ~~(8) Shares issued 5 5 100~~ -- -- ~~105 Net income~~ -- -- -- ~~4,242~~ -- ~~4,242 Other comprehensive income, unrealized gain on securities, net of tax~~ -- -- -- -- ~~1,079 1,079~~ ---------- Mortgage-backed securities $ 3,814 $ -- $ (11) $ 3,803 State, county and municipal securities 5,928 252 -- 6,180 ------------------------------------------------------------------~~---------~~ ~~Balance, September 30, 2002 1,954~~ $ 19,~~954~~742 $ ~~20,978~~252 $ ~~8,113~~(11) $ 29,~~077~~983 ~~$ 33,122~~ ==================================================================~~========================~~

7 Securities available for sale: The amortized cost and fair values of securities available for sale as of June 30, 2003 and December 31, 2002 are summarized as follows:

~~2002~~(In ~~2001~~,000s) June 30, 2003 ----------------------------------------------------------------- Estimated Estimated Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------------------------------------------------------------- ~~Cash~~U.S. ~~Flows~~Government ~~From~~corporations ~~Operating~~and ~~Activities~~agencies ~~Net income~~ $ 431,~~242~~029 $ 21,~~382~~141 ~~Adjustments~~$ to-- ~~reconcile~~$ ~~net~~32,170 ~~income~~Corporate tosecurities ~~net~~4,924 ~~cash~~366 ~~provided~~-- by5,290 ~~operating~~Mortgage-backed ~~activities: Gain on sale of~~ securities ~~(813)~~203,059 ~~(222) Depreciation and amortization 637 538 Provision for loan losses 440 420 Decrease (increase) in loans held for sale 2~~1,~~326~~624 (~~789~~387) ~~Decrease (increase) in other assets 323 (416) Increase in other liabilities 462 1~~204,~~047~~296 ------------------- ~~NET CASH PROVIDED BY OPERATING ACTIVITIES 7,617 2,960~~ ---------------------------------------------- ~~Cash~~$ ~~Flows~~239,012 ~~From~~$ ~~Investing Activities Cash flows from securities~~3,131 ~~net~~$ (~~23,151~~387) (4$ 241,~~233)~~756 ~~Loan~~================================================================= ~~originations~~December ~~and~~31, ~~principal~~2002 ~~collections~~----------------------------------------------------------------- onEstimated ~~loans,~~Estimated ~~net~~Estimated ~~(16,430)~~Amortized ~~(16,241)~~Unrealized ~~Purchases~~Unrealized ofMarket ~~premises~~Cost ~~and~~Gains ~~equipment~~Losses ~~(469)~~Value ~~(817)~~ ------------------- ~~NET CASH USED BY INVESTING ACTIVITIES (40,050) (21,291)~~ ---------------------------------------------- ~~Cash~~U.S. ~~Flows~~Government ~~From~~corporations ~~Financing~~and ~~Activities~~agencies ~~Net~~$ ~~increase~~26,060 in$ ~~deposits 15~~1,~~264~~172 ~~20,417~~$ ~~Increase~~-- in$ ~~other borrowings~~27,232 ~~net~~Corporate ~~9,824~~securities 1610,~~305~~470 ~~Cash~~422 ~~paid for fractional shares~~ (85) ~~(3)~~10,887 ~~Proceeds~~Mortgage-backed ~~from~~securities ~~issuance~~136,234 of2,139 ~~common~~(109) ~~stock 105 36 Proceeds from issuance of trust preferred securities 6~~138,~~790~~264 -- ------------------- ~~NET CASH PROVIDED BY FINANCING ACTIVITIES 31,975 36,755~~ ------------------- ~~NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (458) 18,424 Cash and cash equivalents: Beginning 23,367 10,830~~ ------------------------- ~~Ending~~$ 172,764 $ 223,~~909~~733 $ 29(114) $ 176,~~254~~383 =================================================================

NOTE 3. LOANS The composition of net loans is as follows at June 30, 2003 and December 31, 2002:

(In ~~Thousands~~,000s) ~~September~~June 30, December 31, 2003 2002 ----------------------------------- Real estate: Construction, land development and other land loans $ 48,871 $ 45,913 Farmland 2,029 3,181 One-to-~~-----------~~four ~~Estimated~~family ~~Estimated~~residential ~~Estimated~~91,473 ~~Amortized~~87,841 ~~Unrealized~~Multifamily ~~Unrealized~~residential ~~Market~~2,349 ~~Cost~~2,506 ~~Gains~~Nonfarm, ~~Losses~~nonresidential ~~Value~~66,815 64,458 Agriculture 1,244 1,788 Commercial and industrial 14,829 13,257 Consumer 10,937 11,645 Other 1,952 2,262 -----------------------------------~~--------------~~ ~~U.S.~~240,500 ~~Government corporations and agencies $ 3~~232,~~366~~851 $Less: --Allowance $for ~~(19)~~loan $losses (3,~~347~~352) ~~Mortgage-backed securities 5,028 --~~ (163,259) ~~5,012~~Unearned ~~State,~~discounts ~~county~~ and ~~municipal~~loan ~~securities~~fees ~~5,293~~(4) ~~304~~(4) -- ~~5,597~~ ---------------------------------~~------------~~ ~~$ 13~~Loans,~~687~~ $net ~~304~~ $ ~~(35)~~237,144 $ 13229,~~956~~588 ===================================~~==========~~

Indian River's recorded investment in impaired loans for which a specific allowance was recognized was $335,000 and $585,000 at June 30, 2003 and December 31, 2002, respectively. The specific allowance associated with these loans was $75,000 and $100,000 at June 30, 2003 and December 31, 2002, respectively. The average recorded investment in impaired loans during the second quarter of 2003 was $651, 000 compared to $145,000 for the comparable quarter in 2002. The average recorded investment in impaired loans for the first half of 2003 was $460,000 compared to $143,000 for the first half of 2002. Interest income recognized on impaired loans, recognized for cash payments during the second quarter and the first half of 2003 and 2002 was not significant. 8 NOTE 4. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the six months ended June 30, 2003 and 2002 is as follows: (In Thousands) 2003 2002 ------- ------- Balance, beginning $ 3,259 $ 2,819 ------- ------- Charge-offs: 1-4 Family Real Estate (34) -- Nonfarm, nonresidential (62) -- Commercial and industrial (14) (2) Loans to individuals (20) (51) Credit Cards (29) (26) Other loans (41) (13) ------- ------- Total (200) (92) ------- ------- Recoveries: 1-4 Family Real Estate -- 7 Loans to individuals 12 18 Credit Cards 4 1 Other loans 12 2 ------- ------- Total 28 28 ------- ------- Net charge-offs (172) (64) Provision for loan losses 265 260 ------- ------- Balance, ending $ 3,352 $ 3,015 ======= ======= NOTE 5. EARNINGS PER SHARE Basic earnings per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding, adjusted for stock dividends and splits occurring subsequent to period-end (the denominator). Diluted earnings per-share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce the loss or increase the income per common share from continuing operations. Diluted earnings per share are calculated using the Treasury Method. Following is information about the computation of the earnings per share data for the three and six months ended June 30, 2003 and 2002 respectively (after adjusting for 10% stock dividends in 2003 and 2002):

~~December~~(In 31Thousands, ~~2001~~Except Per Share Data) Common Per-Share Net Earnings Shares Amounts --------------------------------------------------- ~~Estimated~~Three ~~Estimated~~Months ~~Estimated~~Ended ~~Amortized~~June ~~Unrealized~~30, ~~Unrealized~~2003: ~~Market~~Basic ~~Cost~~earnings, ~~Gains~~income ~~Losses~~available ~~Value~~to common stockholders $1,203 2,172 $ 0.55 ======== Effect of dilutive securities, options -- 79 ---------------------------- Diluted earnings $1,203 2,251 $ 0.53 ================================================== Common Per-Share Net Earnings Shares Amounts --------------------------------------------------- ~~U.S.~~Three ~~Government~~Months ~~corporations~~Ended ~~and~~June ~~agencies~~30, $2002: 3Basic earnings,~~232~~ $income --available $to ~~(12)~~common $stockholders 3$1,~~220~~391 ~~Mortgage-backed securities 5~~2,~~037~~145 38$ --0.65 ~~5,075~~======== ~~State,~~Effect ~~county~~of ~~and~~dilutive ~~municipal~~ securities 5,~~293~~ 38options ~~(121)~~-- ~~5,210~~51 ----------------------------~~------------------~~ $Diluted ~~13,562~~earnings $1,391 762,196 $ ~~(133)~~0.63 ~~$ 13,505~~ ==================================================

(In Thousands, Except Per Share Data) ~~September~~Common ~~30,~~Per-Share ~~2002~~Net Earnings Shares Amounts --------------------------------------------------~~-------------------~~ ~~Estimated~~Six ~~Estimated~~Months ~~Estimated~~Ended ~~Amortized~~June ~~Unrealized~~30, ~~Unrealized~~2003: ~~Market~~Basic ~~Cost~~earnings, ~~Gains~~income ~~Losses~~available ~~Value~~to common stockholders $2,458 2,167 $ 1.13 ======== Effect of dilutive securities, options -- 79 -------------------------- Diluted earnings $2,458 2,246 $ 1.09 ================================================ Common Per-Share Net Earnings Shares Amounts -------------------------------------------------- U.Six S.Months ~~Government~~Ended ~~corporations~~June ~~and~~30, ~~agencies~~2002: $Basic 29earnings,~~010~~ $income ~~1,241~~available $to -common stockholders $2,845 302,~~251~~145 ~~Corporate~~$ ~~securities~~1.33 ~~10,484~~======== ~~460~~Effect ~~(8)~~of ~~10,936~~dilutive ~~Mortgage-backed~~ securities ~~111~~,~~330~~ ~~1,685~~options ~~(81)~~-- ~~112,934~~52 --------------------------~~-------------------------------------------~~ Diluted earnings $~~150~~2,~~824~~845 ~~$ 3~~2,~~386~~197 $ ~~(89)~~1.30 ~~$ 154,121~~ ================================================~~=====================~~

NOTE 6. OTHER BORROWINGS Other borrowings consist of the following at June 30, 2003 and December 31, 2002:

(In Thousands) June 30, December 31, ~~2001~~2003 2002 ----------------------------~~-----------------------------------------~~ ~~Estimated~~Advance ~~Estimated~~under ~~Estimated~~line ~~Amortized~~of ~~Unrealized~~credit ~~Unrealized~~with ~~Market~~Colonial ~~Cost~~Bank, ~~Gains~~interest ~~Losses~~payable ~~Value~~quarterly at an adjustable rate, 4.75% at June 30, 2003 $ -- $ --~~-----------------------------------------------------------------~~ U.Federal SHome Loan Bank advances: Advance, interest payable monthly at a fixed rate of 6.44%, ~~Government~~with ~~corporations~~equal ~~and~~semiannual ~~agencies~~principal payments of $142 58through September 2004 429 571 Convertible advance due March 2008,~~972~~ $interest 1payable quarterly at a fixed rate of 5.51% 2,~~145~~000 $2,000 ~~(397)~~Convertible $advance 59due January 2011,~~720~~ ~~Corporate~~interest ~~securities~~payable 56quarterly at a fixed rate of 4.41% 10,~~768~~000 ~~904~~10,000 ~~(193)~~Convertible 57advance due May 2011,~~479~~ ~~Mortgage-backed~~interest ~~securities~~payable 11quarterly at a fixed rate of 3.95% 15,~~434~~000 ~~166~~15,000 ~~(41)~~Convertible advance due November 2012, interest payable quarterly at a fixed rate of 2.47% 6,000 6,000 Convertible advance due November 2012, interest payable quarterly at a fixed rate of 3.35% 5,000 5,000 Securities sold under repurchase agreements 14,482 2,398 Federal funds purchased, interest payable daily at a rate that adjusts daily 11,~~559~~750 9,300 -------------------------~~--------------------------------------------~~ $ ~~127~~64,~~174~~661 $ 250,~~215~~269 ~~$ (631) $ 128,758~~ =========================~~============================================~~

NOTE 7. STOCK DIVIDEND Stockholders' equity accounts have been retroactively adjusted in the accompanying balance sheet as of December 31, 2002 to reflect a 10% stock dividend declared in January 2003. 10 NOTE 8. TRUST PREFERRED SECURITIES On September 30, 2002, a wholly-owned statutory business trust established by Indian River issued $7 million in guaranteed preferred beneficial interests in the trust ("trust-preferred securities"). The sole assets of the statutory business trust are a series of subordinated debentures of Indian River in the amount of $7 million and related payments. Indian River has fully and unconditionally guaranteed the statutory business trust's obligations under the trust-preferred securities, to the extent set forth in the guarantee agreement. The subordinated debentures are unsecured and subordinate to all senior debt (as defined) of Indian River. The subordinated debentures bear interest at a variable rate of 3 month LIBOR plus 3.45%, 4.79% for the quarterly period ended June 30, 2003 and mature on November 7, 2032. They are redeemable in whole or in part on or after November 7, 2007. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their maturity or earlier redemption. NOTE 9. STOCK BASED COMPENSATION Under the terms of the 1999 Stock Option Plan, options to purchase shares of Indian River's common stock may be granted to directors and key officers/employees at a price that is not less than the fair market value of such stock at the date of the grant. Options granted to employees under the plan may be designated as incentive stock options. All options expire no more than ten years from the date of the grant, or three months after an employee's termination. In accordance with the plan, the aggregate number of shares for which options may be granted, the number of shares covered for each outstanding option, and the exercise price per share for each such option shall be proportionately adjusted for the payment of stock dividends or similar adjustments to the number of shares of common stock effected without the receipt of consideration by Indian River. At June 30, 2003, the number of shares eligible to be issued under the Plan was 366,025 and approximately 113,000 shares remained available for granting. In December 1999, the Board of Directors adopted the Director Fee Stock Option Plan, under which each director is entitled to receive options to purchase shares of common stock in lieu of cash compensation for attendance at committee meetings. Options granted have an exercise price equal to the fair value of the common stock at the date of grant. The following is a summary of stock option transactions during the six-month periods ended June 30, 2003 and 2002 (All options and option price per share information has been adjusted to reflect the stock dividend in 2002 and 2003): Weighted-Average Shares Exercise Price ------------------------------ Outstanding at December 31, 2001 145,718 $ 16.68 Granted 37,776 23.81 Exercised (2,426) 19.34 Forfeited (1,973) 15.66 -------------------------- Outstanding at June 30, 2002 179,095 $ 18.16 ========================== Outstanding at December 31, 2002 162,200 $ 18.41 Granted 50,490 32.73 Exercised (9,559) 18.75 Forfeited (377) 30.64 -------------------------- Outstanding at June 30, 2003 202,754 $ 21.94 ========================== 11 NOTE 9. STOCK BASED COMPENSATION (CONTINUED) Indian River accounts for its stock option plans using the intrinsic value method provided under APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, Indian River has recognized no compensation cost for stock options granted, as all options granted had an exercise price equal to the estimated market value of the underlying common stock on the date of grant. Option holders may elect a "cashless exercise" of their vested options, under which they receive shares of common stock with a fair value equal to the intrinsic value of the options at the date of exercise, without any payment. Those option awards expected to be exercised via this cashless exercise are accounted for as variable plan awards and, as such, Indian River recognizes compensation expense equal to the change in the intrinsic value of such options during the period. The following table illustrates the effect on net income and earnings per share if Indian River had applied fair value recognition provisions to stock-based employee compensation. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for grants during 2003: risk-free interest rate of 4.9%, no dividends and expected lives of 8 years. Volatility was assumed to be zero because there is currently no market for Indian River's stock. The weighted-average fair value of options granted during 2003 was $11.45.

(InDollars ~~Thousands~~in ,000s, except per share data) ~~September~~Three Months Ending Three Months Ending June 30, ~~December~~2003 31June 30, 2002 ~~2001~~ --------------------------------------------- ~~Real~~Net ~~estate:~~income, ~~Construction~~as reported $ 1,203 ~~land~~$ ~~development~~1,391 ~~and~~Add ~~other~~total ~~land~~stock-based ~~loans~~employee $compensation ~~40,226~~expense $determined ~~32,778~~under ~~Farmland~~the ~~2,992~~intrinsic 2value based method for all awards,~~943~~ ~~One~~net toof ~~four~~related ~~family~~tax ~~residential~~effects ~~84,652~~11 ~~74,917~~1 ~~Multifamily~~Deduct ~~residential~~total ~~2,414~~stock-based ~~3,521~~employee ~~Nonfarm,~~compensation ~~nonresidential~~expense ~~66,465~~determined 62under the fair value based method for all awards,~~660~~ ~~Agriculture~~net of related tax effects (77) (48) --------------------------------------------- Pro forma net income $ 1,~~875~~137 2$ 1,~~454~~344 ~~Commercial~~============================================= ~~and~~Basic ~~industrial~~earnings ~~13,161~~per ~~14,948~~share ~~Consumer~~As ~~13,298~~reported 14$ 0.55 $ 0.65 Pro forma 0.52 0.63 Diluted earnings per share As reported $ 0.53 $ 0.63 Pro forma 0.51 0.61 (Dollars in ,~~421~~000s, ~~Other~~except 2per share data) Six Months Ending Six Months Ending June 30,~~105~~ 22003 June 30,~~225~~ 2002 --------------------------------------------- ~~227~~Net income,~~188~~ ~~210~~as reported $ 2,~~867~~458 ~~Less:~~$ ~~Allowance~~2,845 ~~for~~Add ~~loan~~total ~~losses~~stock-based (3employee compensation expense determined under the intrinsic value based method for all awards,~~151)~~ (2net of related tax effects 21 21 Deduct total stock-based employee compensation expense determined under the fair value based method for all awards,~~819)~~ ~~Unearned~~net ~~discount~~of related tax effects (4105) (5210) --------------------------------------------- ~~Loans,~~Pro forma net income $ ~~224~~2,~~033~~374 $~~208~~ 2,~~043~~269 ============================================= Basic earnings per share As reported $ 1.13 $ 1.33 Pro forma 1.05 1.28 Diluted earnings per share As reported $ 1.09 $ 1.30 Pro forma 1.01 1.25

12 NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Indian River, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. The contractual amounts of these instruments reflect Indian River's involvement in particular classes of financial instruments. Indian River's exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. Indian River uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments were as follows at June 30, 2003: (Dollars in Thousands) 2003 ------- Commitments to extend credit $57,662 Credit card arrangements 4,158 Standby letters of credit 910 ------- $62,730 ======= NOTE 11. ADDITIONAL CASH FLOW INFORMATION (Dollars in Thousands) Six Months Ended June 30, 2003 2002 ------------------------- Cash flows from securities: Securities available-for-sale: Proceeds from sales $ 21,721 $ 82,303 Maturities, calls and paydowns 65,595 8,208 Purchases (154,682) (114,096) Securities held to maturity: Purchases (1,358) -- Maturities, calls and paydowns 3,800 -- Purchase of other securities (143) -- ------------------------- $ (65,067) $ (23,585) ========================= Supplemental disclosures of cash flow information Cash payments for interest $ 4,323 $ 5,086 ========================= Cash payments for income taxes $ 1,467 $ 1,714 ========================= 13 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements -------------------------- Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as "Indian River expects," "Indian River believes," "Indian River anticipates," may, should or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Indian River, changing trends in customer profiles and changes in laws and regulations applicable to Indian River. Although Indian River believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of Indian River will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. General ------- Indian River Banking Company ("Indian River") is a one-bank holding company for Indian River National Bank ("Indian River Bank") and is headquartered in Vero Beach, Florida. Indian River Bank is a growing community bank serving individuals and small to medium sized businesses with special focus on real estate related lending and the professional community. The Bank operates four branches in Indian River County and four branches in Brevard County. The Bank offers deposit accounts and associated services to businesses and individuals and makes loans and invests in qualified securities. In addition, the Bank's income includes fees on deposit accounts and loans, and gains from the sale of mortgage loans originated for sale in the secondary market. FINANCIAL CONDITION ------------------- Total Assets ------------ Indian River's total assets were $516.3 million at June 30, 2003, a 12.7% increase from $458.2 million at December 31, 2002. The increase in Indian River's asset base was due to deposit growth of $41.4 million and a $14.4 million increase in other borrowings. Investments ----------- Indian River's investment portfolio increased $63.1 million during the first six months of 2003, primarily as a result of a $55.8 million growth in deposits and other borrowings. Net loans outstanding (both portfolio loans and loans held for sale) increased only $699,000 during the same period. Portfolio loans were up $7.6 million or 3.3% in the six month period ending June 30, 2003 and loans held for sale declined $6.9 million during the same period. Due to processing delays with purchasers at year-end 2002, Indian River had a significantly higher amount of loans held for sale outstanding than is normal. During the six months ended June 30, 2003, the average daily balance of loans held for sale was $6.7 million compared to the $13.2 million outstanding on December 31, 2003. During the first half of 2003 Indian River purchased $156.2 million in securities. In addition to funding growth, Indian River's existing investment securities generated $91.1 million in cash flow from sales, maturities, securities being called, and repayments on mortgage-backed securities. In investing excess funds in the current rate environment Indian River attempts to maximize return while minimizing possible adverse exposure to rising rates. In balancing these somewhat conflicting objectives, Indian River's purchases during the six months ended June 30, 2003 were primarily weighted towards planned amortization class collateralized mortgage obligations, callable US Government agency securities and amortizing mortgage-backed securities with final maturities of ten years or less. These instruments should have the most stable average lives in the current rate environment. 14 Indian River examines the investment portfolio's sensitivity to the effects of potential rising interest rates by monitoring overall portfolio duration. This is particularly critical during periods when excess cash results in significant purchases of investment securities. At June 30, 2003 the modified duration of Indian River's investment portfolio was 2.64 years compared to 2.54 years at December 31, 2002. It is Indian River's current strategy to maintain the portfolio's duration at three years or less. This level is consistent with Indian River's overall asset/liability management policies. Indian River anticipates that the investment portfolio will continue to generate considerable cash flow as consumers refinance the residential mortgages underlying many of the securities in the portfolio. This will consequently result in significant investment security purchases during the remainder of 2003, irrespective of excess funds generated from deposit growth Loans ----- Loans totaled $237.1 million at June 30, 2003, an increase of $7.6 million, or 3.2%, from December 31, 2002. Loan growth since December 31, 2002 was in one-to-four family residential real estate loans ($3.6 million, or a 4.13% increase), construction, land development and other land loans ($3.0 million, or a 6.4% increase) nonfarm, nonresidential real estate loans ($2.4 million or a 3.66% increase) and in commercial and industrial loans ($1.6 million or a 11.9% increase). Indian River experienced net loan repayments in agricultural related loans ($-1.7 million or a 34.1% decrease) as well as in multi-family residential, consumer and other loans (-$1.2 million or a 7.2% decrease). Deposits -------- Indian River's deposits increased $41.4 million, or 11.4%, from $364.9 million at December 31, 2002 to $406.3 million at June 30, 2003. Increases occurred in NOW and money market accounts ($83.8 million, or 161.8%). The increase in NOW and money market account balances can be primarily attributed to a special money market rate that was offered with the opening of the new Sarno Branch, Indian River's eighth branch, during the first quarter of 2003 as well as the implementation of a deposit reclassification program to reduce the amount of reserves required to be maintained in accordance with Regulation D of the Federal Reserve. At June 30, 2003 Indian River had reclassified $40.8 million of demand deposit account balances and $30.9 million in NOW account balances as money market account balances. The deposit reclassification program was implemented on May 25th after notification to the Federal Reserve Bank of Atlanta and did not impact totals at December 31, 2002 or March 31, 2003. Under Federal Reserve guidelines and subject to proper customer disclosure Indian River is able to sweep Demand deposit and NOW account balances into a corresponding money market account nightly as long as return sweeps do not exceed Federal Reserve limitations. The swept funds earn the same interest rate in the money market account that they would have earned in the original account. Some of Indian River's demand deposit and NOW account balances are subject to a 10% reserve requirement while money market account balances are only subject to a 3% reserve requirement. Reclassification frees up additional non-earning assets for investment. In the six months ended June 30, 2003, savings accounts increased slightly (+$523, 000, or 0.5%) and time deposit account balances were also up modestly (+$613, 000 or 0.5%). There was also a $43.5 million, or 65.0%, decrease in noninterest bearing demand deposits. This can be primarily attributed to the movement of over $10 million from a noninterest-bearing deposit to an overnight repurchase agreement account at the beginning of 2003 as well as the implementation of the deposit reclassification program discussed above, and the movement of over $10 million from a noninterest bearing deposit to an overnight repurchase agreement account at the beginning of 2003. At year end 2002 the funds were moved out of the repurchase agreement account and into a noninterest bearing deposit account and moved back into a repurchase agreement account at the beginning of 2003. Stockholders' Equity -------------------- Total stockholders' equity increased by $2.1 million or 6.0%, during the first six months of 2003. Net income of $2.5 million and option exercises of $179,000 were offset by a $551,000 decrease in accumulated other comprehensive income. Accumulated other comprehensive income for Indian River consists of the net unrealized gain or loss on securities available for sale. 15 Results of Operations --------------------- FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 Net Income ---------- For the first six months of 2003, Indian River recorded net income of $2.46 million. This was $387,000 or 13.6%, less than the $2.84 million in net income recorded for the first six months of 2002. Basic earnings per share decreased $0.20 during the six months ended June 30, 2003, to $1.13, compared to $1.33 per share during the comparable period of 2002 (as adjusted to reflect the 10% stock dividend in 2003 and 2002). Diluted earnings per share decreased from $1.30 to $1.09 during the first six months of 2003, compared to the same period in 2002. Before the effect of gains from security transactions, the Indian River earned $2.35 million in the first six months of 2003, compared to $2.38 million earned in the first six months of 2002. During the first quarter of 2002, Indian River began restructuring its investment portfolio to reduce credit and interest rate risk and exposure to corporate securities, and as a result recognized an unusually high level of gains. Net interest income increased $181,000, or 2.3%, for the first six months of 2003 compared to the same period in 2002. Noninterest income rose $343,000 or 12.9% in the six months ended June 30, 2003 compared to the comparable period in 2002. Indian River also noted an increase in non-interest expenses of $1.15 million or 20.1% in the first half of 2003 compared to the prior period. The provision for loan losses was essentially unchanged. Net Interest Income ------------------- Net interest income increased slightly to $8.07 million for the first six months of 2003 from $7.89 million for the same period in 2002. Both interest income and interest expenses fell during the six months ended June 30, 2003 compared to same period in 2002. The $181,000, or 2.3%, increase in net interest income was mainly the result of a $629 ,000, or 12.78% decrease in interest expense exceeding the $448,000 or 3.5% decrease in interest income. Yields on Indian River's interest-earning assets decreased by 121 basis points, and the rates paid on Indian River's interest-bearing liabilities decreased by 85 basis points. This resulted in a decrease in the interest rate spread to 3.21% for the first six months of 2003 from 3.57% for the first six months of 2002. Net interest margin also decreased to 3.51% from 4.06%. The ratio of average interest-earning assets to average interest-bearing liabilities for the first six months of 2003 was 1.16, down slightly from the 1.19 for the first six months of 2002. Total interest income for the first six months of 2003 was $12.4 million compared to $12.8 million for the same period in 2002. The main factor in the $448,000, or 3.5%, decrease in interest income is due to the 121 basis point decrease in the average yields on interest-earning assets. This decrease more than offset the $71.6 million, or 18.3%, increase in average interest-earning assets. Indian River's average loans outstanding balances increased $19.3 million, or 8.7%, and the related yield decreased to 6.89% for the first six months of 2003 from 7.63% in 2002. During the same period, average investment securities balances increased $58.2 million, or 36.9%, and the related yield decreased to 3.83% from 5.52%. Yields on investment securities were impacted more dramatically due to the increase in the total portfolio size from the first six months of 2002. Additionally, the sale and call of investment securities during the first six months of 2003 resulted in the reinvestment of the proceeds in lower yielding securities. Indian River's average federal funds sold decreased by $5.9 million, or 46.2%, and the related yield decreased to 1.15% for the first six months of 2003 from 1.66% in 2002. The decrease in yields on earning assets was largely offset by the 85 basis point decrease in average rates paid on deposits and other borrowings. 16 Total interest expense for the first six months of 2003 was $4.3 million, a decrease of 12.8% from $4.9 million for the same period in 2002. The decrease in total expense can be attributed to the decrease in the related rates on deposits and other borrowings, which offset the $71.5 million, or 21.8%, increase in the average balances outstanding of interest-bearing liabilities for the first six months of 2003 compared to the same period in 2002. The related average rate decreased to 2.17% for the first six months of 2003 from 3.02% in 2002. The average rate paid on certificates of deposit decreased to 2.89% for the first six months of 2003 from 3.90% for the first six months of 2002. Rates on other short term borrowings decreased from 1.93% in 2002 to 1.80% in 2003. Short term borrowings include federal funds purchased and overnight repurchase agreements. Rates on other long term borrowings decreased from 4.33% to 4.11%. Long term borrowings include Federal Home Loan Bank advances and proceeds from issuance of trust preferred securities. The following table provides certain information relating to Indian River's average consolidated balance sheets and reflects the interest income on interest-earning assets and interest expense of interest-bearing liabilities for the periods indicated and the average yields earned and rates paid for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balance of the related assets or liabilities for the periods presented.

Six months Ended June 30, 2003 2002 --------------------------------------------------------------------------------- (In Thousands) ~~2002~~Average ~~2001~~Average Average Average Assets: Balance, ~~beginning~~Interest $Yield ~~2,819~~Balance $Interest ~~2,453~~Yield -------- -------- ------- -------- ~~Charge~~-~~offs:~~------- ~~Construction,~~------- ~~land~~Investments ~~development~~(1) -$215,938 ($ 4),098 ~~Commercial~~3.83% ~~and~~$157,770 ~~industrial~~$ ~~(2)~~4,317 ~~(62)~~5.52% ~~Loans~~Federal tofunds ~~individuals~~sold ~~(71)~~6,843 ~~(86)~~39 ~~Credit~~1.15% ~~Cards~~12,718 ~~(36)~~105 1.66% Loans (302) ~~Other~~less loans ~~(32)~~in process 240,820 8,223 6.89% 221,517 8,386 7.63% -------- ---------------------- -------- ---------------------- Total ~~(141)~~interest-earning ~~(182)~~assets 463,601 12,360 5.38% 392,005 12,808 6.59% ---------------------- ---------------------- ~~Recoveries: 1~~Noninterest-4earning ~~Family~~assets ~~Real~~30,662 ~~Estate~~17,593 6-------- -------- ~~Commercial~~Total $494,263 $409,598 ======== ======== Liabilities and ~~industrial~~Stockholders' 1Equity: Interest-bearing ~~Loans~~liabilities toNOW ~~individuals~~& 20money -market ~~Credit~~accts ~~Cards~~$ 87,569 $ 497 1.14% $ 46,474 $ 232 1.01% Savings accounts 116,280 802 1.39% 117,628 1,605 2.75% 5Certificates of deposit 134,522 1,927 2.89% 119,811 2,319 3.90% Other ~~loans~~short term borrowings 16,431 147 1.80% 16,547 158 1.93% Other long term borrowings 45,489 931 4.11% 1428,320 609 4.33% -------- -------- --------------- ~~Total 33 19~~ -------- -------- --------------- ~~Net~~Total ~~charge~~interest-~~offs~~bearing ~~(110)~~liabilities ~~(163)~~400,291 ~~Provision~~4,294 ~~for~~2.17% ~~loan~~328,780 ~~losses~~4,923 ~~440~~3.02% ~~420~~ ---------------------- ---------------------- ~~Balance~~Noninterest-bearing Liabilities 58,033 ~~ending~~51,797 $Stockholders' 3equity 35,~~151~~939 29,021 -------- -------- Total $494,263 2$409,~~710~~598 ========~~========~~ ========~~=======~~ Net interest income and net yield on interest-earning assets $ 8,066 3.51% $ 7,885 4.06% ---------------------- ----------------------

-------------------------- (1) Includes securities available for sale, securities held to maturity, other securities and interest-bearing deposits. Yields on securities available for sale have been calculated on the basis of historical cost and do not give effect to changes in fair value of such securities, which are reflected as a component of stockholder's equity. (2) Includes loans for which the accrual of interest has been suspended. 17 Other Income ------------ Other income increased by $343,000, or 12.9%, for the first six months of 2003 compared to the same period of 2002. This increase was the result of a $346,000 increase (+ 41.9%) in service charges and fees and a $546,000 increase (+79.5%) in gains on the sale of loans that Indian River recognized during the first six months of 2003 compared to the results for the first six months of 2002. These increases were partially offset by a $584,000 decrease (-77.8%) in gain on the sale of investment securities. The increase in service charge and fee income was primarily the result of the $68.1 million, or 20.1%, increase in deposits since June 2002. Most of this growth ($58.4 million or 85.8% of total deposit growth) has occurred in transactional related account types (demand deposits, NOW accounts and money market accounts) that generate fee income. Also contributing to this increase is an increase in fees earned on debit card transactions. These fees increased as a result of renegotiating a contract with a third party processor that allowed a greater percentage of network fees to be passed through to Indian River. As noted Indian River had a $546,000, or 79.5%, increase in gain on sale of loans, which is a result of the increase in 1-4 family real estate loans originated and then sold in the secondary market. The gains and fees on mortgage loans held for sale are volatile as this source of income is highly sensitive to fluctuations in interest rates, consumer confidence, economic conditions nationally and in our market, and housing market conditions. Other Expenses -------------- Indian River's other expenses increased $1.15 million, or 20.1%, for the first six months of 2003 compared to the same period in 2002. The increase was primarily the result of a $700,000, or 24.6%, increase in salaries and benefits. This is largely the result of the hiring of employees to staff the new Sarno Branch, which opened in February 2003. The new branch also has a loan operation department, requiring additional staff. Salaries and benefits expense was also negatively impacted by a significant increase in group hospitalization insurance premiums that went into effect in June, 2002. These premiums were up $66,000 (+48.6%) in the six months ended June 30, 2003 compared to the same period in 2002. There was a $215,000, or 1494%, increase in other operating expenses, primarily due to the increase in advertising and public relation expenses associated with the opening of the new Sarno Branch. There was an $89,000, or 13.2%, increase in data processing expense for the six months ended June 30, 2003 compared to the same period 2002. There was also a $149,000, or 19.5%, increase in occupancy and equipment expense for the first six months of 2003 compared to the same period in 2002. Provision for Loan Losses ------------------------- Indian River makes provisions for loan losses in amounts deemed necessary to maintain the allowance for loan losses at an appropriate level as determined by management. At June 30, 2003, total nonperforming loans totaled $151,000, or 0.1% of total loans, compared to $738,000, or 0.3% of total loans at December 31, 2002. The decrease is primarily due to the resolution of one nonperforming loan totaling $585,000. The loan was sold without recourse to a private investor resulting in a $65,000 chargeoff to Indian River. The allowance for loan losses is a valuation reserve established by management in an amount it deems adequate to provide for losses in the portfolio. Management assesses the adequacy of the allowance for loan losses based upon a number of factors including, among others: analytical reviews of loan loss experience in relationship to outstanding loans and commitments; unfunded loan commitments; problem and nonperforming loans and other loans presenting credit concerns; trends in loan growth, portfolio composition and quality; appraisals of the value of collateral; and management's judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The allowance for loan losses is increased by provisions for loan losses charged to expense. Charge-offs of loan amounts determined by management to be uncollectable decrease the allowance, and recoveries of previous charge-offs are added to the allowance. 18 Calculating the allowance for loan losses is divided into three primary allocation groups: (1) specific allocation loans, (2) past due/problem loans and (3) all other passing grade loans. For specific allocation loans, the Bank has determined a reserve amount to set aside which it believes is sufficient to cover a collateral shortfall. As of June 30, 2003, Indian River had three loans with specific allocations in the aggregate amount of $75,000. Problem loans are identified by the Asset Liability Committee and are assigned a risk grade. Loans graded special mention are multiplied by an inherent loss factor of 5% to determine the amount to be reserved. Loans graded substandard are multiplied by a loss factor of 10%, loans graded doubtful are multiplied by a loss factor of 50% and loans graded loss are multiplied by a loss factor of 100%. Past due loans are graded based on the number of days which the loan is past due, and are multiplied by the same loss factors as problem loans. Loans past due 30-59 days are graded special mention, loans past due 60-89 days are graded substandard and loans past due 90 days or more are graded doubtful. As of June 30, 2003, 10.3% of the allowance for loan losses reflected specific loan allocations and past due/problem loans. All other loans are graded pass and are categorized into six loan groups (real estate loans are further sub-categorized) and multiplied by an historical experience factor to determine the appropriate level of the allowance for loan losses. Due to Indian River's low loss history, the historical experience factors are based on FDIC quarterly banking profile report as of March 31, 2003 for all institutions. Indian River feels that these factors are a better indication of overall loan performance in the nation. The second quarter 2003 factors are: 0.12% for real estate loans, 1.39% for all non real estate commercial loans, 5.68% for credit card loans, 3.04% for consumer loans, 0.46% for non-real estate agricultural loans, and 0.19% for other revolving loans. In addition to historical experience factors, Indian River also provides for losses due to economic factors, concentration of credit and portfolio composition changes. The following table allocates the allowance for loan losses by loan category, along with the percent of actual loans per category as of June 30, 2003 and December 31, 2002. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. (In Thousands) June 30, 2003 December 31, 2002 --------------------------------------- Amount % Amount % --------------------------------------- Commercial, Agricultural $ 384 7% $ 420 6% Real estate construction 467 20 484 19 Real estate mortgage 1,652 68 1,617 69 Consumer, other 732 5 646 6 Unallocated 117 -- 92 -- -------------- ---------------- Total Allowance for loan losses $3,352 100% $3,259 100% ============== ================ See Note 4, Allowance for Loan Losses, in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Nonperforming Assets. Indian River Bank's nonperforming assets, which are comprised of loans delinquent 90 days or more, nonaccrual loans, and other real estate owned ("OREO"), totaled $169,000 at June 30, 2003 compared to $738,000 at December 31, 2002. The percentage of nonperforming assets to total assets decreased to 0.1% at June 30, 2003 from 0.2% at December 31, 2002. Nonperforming assets at June 30, 2003 consisted of nonaccrual loans in the amount of $146,000, loans past due over 90 days of $5,000, and other real estate owned of $18,000. Indian River did not have any other real estate owned as of December 31, 2002. Indian River evaluates the fair value of each OREO property annually. These evaluations may be appraisals or other market studies. 19 Indian River places credit card loans on nonaccrual status when they are 180 days delinquent. All other consumer and commercial loans are placed on nonaccrual at 90 days delinquent or when determined uncollectable by management. The following table allocates the nonperforming loans by loan type.

(In Thousands,) ~~Except~~June ~~Per~~30, ~~Share~~2003 ~~Data)~~December ~~Common~~31, ~~Per~~2002 -~~Share~~---------------------------------- ~~Net~~Nonaccrual ~~Earnings~~Loans ~~Shares~~Amount ~~Amounts~~% Amount % -------------------------------------------------------------------------------- ~~Three~~Real ~~Months~~estate ~~Ended~~mortgage ~~September~~$146 ~~30,~~100% ~~2002:~~$678 ~~Basic~~100% ~~earnings~~June ~~per share~~30, ~~income~~2003 ~~available~~December to31, ~~common~~2002 ~~stockholders~~Accrual $Loans ~~1,397~~- ~~1,952~~past $due ~~0.72~~90 ~~===================~~days ~~Effect~~or of----------------------------------- ~~dilutive~~more ~~securities,~~Amount ~~options~~% 47Amount % -------------------------------------------------------------------------------- ~~Diluted~~Real ~~earnings~~estate ~~per~~mortgage ~~share~~$ -- -- $ ~~1,397~~39 ~~1,999~~65% Installment -- -- 21 35% Credit cards 5 100% -- -- ---- --- ---- --- $ ~~0.70~~5 100% $ 60 100% ==== === ==== ===~~==================================~~

For the six months ended June 30, 2003, $5,000 in gross interest income would have been recorded if the $146,000 of nonaccrual loans had been accruing interest throughout this period. At June 30, 2003, there were no performing loans considered potential problem loans, defined as loans which are not included in the past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to have serious doubt as to the ability of the borrowers to comply with the present loan repayment terms. Income Tax Provision -------------------- Indian River's income tax provision was $1.5 million, or 37.4% of income before taxes, for the first six months of 2003 and $1.7 or 37.6% of income before income taxes, for the same period in 2002. FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 Net Income ---------- For the second quarter of 2003, Indian River recorded net income of $1.2 million. This was $188,000 or 13.5%, less than the $1.4 million in net income recorded for the second quarter of 2002. Basic earnings per share decreased $0.10 during the three months ended June 30, 2003, to $0.55, compared to $0.65 per share during the comparable period of 2002 (as adjusted to reflect the 10% stock dividend in 2003 and 2002). Diluted earnings per share decreased from $0.63 to $0.53 during the second quarter of 2003, compared to the same period in 2002. Net interest income declined $178,000 or 4.3%, in the second quarter of 2003 compared to the same period in 2002. Also impacting results in the three months ended June 30, 2003 compared to the same period in 2002 was an increase in other income of $396 ,000, or 35.7%, a decrease in the provision for loan losses of $40,000 or 30.8%, an increase in other expenses of $562 ,000, or 19.2%. There was a corresponding decrease in taxes on income of $116, 000, or 13.9%. Net Interest Income ------------------- Net interest income declined to $4.0 million in the second quarter of 2003 from $4.2 million for the same period in 2002. The $178,000 or 4.3%, decrease in net interest income was the result of a $317,000, or 4.9% 20 decrease in interest income exceeding the $139,000 or 6.0% reduction in interest expense. Yields on Indian River's interest-earning assets decreased by 135 basis points, and the rates paid on Indian River's interest-bearing liabilities decreased by only 72 basis points. This resulted in a decrease in the interest rate spread to 3.07% for the second of 2003 from 3.70% earned in the second quarter of 2002. Net interest margin also decreased to 3.32% from 4.17%. The ratio of average interest-earning assets to average interest-bearing liabilities in the second quarter of 2003 was 1.14, compared with the 1.18 in the second quarter of 2002. Adjusting for the impact of the deposit reclassification program, the ratio of average interest-earning assets to average interest-bearing liabilities in the second quarter of 2003 was 1.18. Total interest income for the second quarter of 2003 was $6.2 million compared to $6.5 million for the same period in 2002. The main factor in the $317,000, or 4.9%, decrease in interest income is due to the 135 basis point decrease in the average yields on interest-earning assets. This decrease more than offset the $80.7 million, or 20.1%, increase in average interest-earning assets. Contributing to the overall decline in average yields was a shift in the composition of earning assets. In the second quarter of 2003, average loans receivable comprised 49.5% of earning assets. During the comparable period in 2002 loans averaged 56.5%. Indian River's average loans receivable increased $11.8 million, or 5.2% during the second quarter of 2003 compared to the same period in 2002 and the related yield decreased to 6.80% for the second three months of 2003 from 7.45% in 2002. During the same period, average investment securities increased $73.8 million, or 43.9%, and the related yield decreased to 3.55% from 5.40%. Yields on investment securities were impacted more dramatically due to the increase in the size of the total portfolio in the three months ended June 30, 2003 compared to the comparable period in 2002. Additionally, the sale and call of investment securities during the second of 2003 resulted in the reinvestment of the proceeds in lower yielding securities. Indian River's average federal funds sold decreased by $4.9 million, or 73.5% and the related yield decreased to 1.14% in the second quarter of 2003 from 1.67% in 2002. The decrease in yields on earning assets was partially offset by the 72 basis point decrease in average rates paid on deposits and other borrowings. Total interest expense for the three months ended June 30, 2003 was $2.2 million, a decrease of 5.7% from $2.3 million for the same period in 2002. The decrease in total expense can be attributed to the decrease in the related rates on deposits and other borrowings, which offset the $90.4 million, or 27.1%, increase in the average balances outstanding of interest-bearing liabilities in the second quarter of 2003 compared to the same period in 2002. The related rate decreased to 2.08% for the three months ended June 30, 2003 from 2.80% in 2002. The average rate paid on certificates of deposit decreased to 2.84% in the second quarter of 2003 from 3.58% in the second quarter of 2002. Rates on other short term borrowings decreased from 1.94% in 2002 to 1.76% in 2003. Short term borrowings include federal funds purchased and overnight repurchase agreements. Rates on other long term borrowings decreased from 4.33% to 4.08%. Long term borrowings include Federal Home Loan Bank advances and proceeds from issuance of trust preferred securities. 21 The following table provides certain information relating to Indian River's average consolidated balance sheets and reflects the interest income on interest-earning assets and interest expense of interest-bearing liabilities for the periods indicated and the average yields earned and rates paid for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balance of the related assets or liabilities for the periods presented.

~~Common~~Three ~~Per-Share~~months ~~Net~~Ended ~~Earnings~~June ~~Shares~~30, ~~Amounts~~2003 2002 --------------------------------------------------------------------------------- ~~Three~~((In ~~Months~~Thousands) ~~Ended~~Average ~~September~~Average ~~30,~~Average ~~2001~~Average Assets: ~~Basic~~Balance ~~earnings~~Interest ~~per~~Yield ~~share,~~Balance ~~income~~Interest ~~available~~Yield to-------- ~~common~~-------- ~~stockholders~~------- -------- -------- ------- Investments (1) $241,853 $ 2,133 3.55% $168,043 $ 2,263 5.40% Federal funds sold 1,~~010~~761 5 1.14% 6,~~944~~653 $28 01.5267% Loans (2) less loans in process 238,830 4,051 6.80% 227,059 4,215 7.45% -------- ---------------------- -------- ---------------------- Total interest-earning assets 482,444 6,189 5.15% 401,755 6,506 6.50% ---------------------- ---------------------- Noninterest-earning assets 29,724 15,662 -------- -------- Total $512,168 $417,417 ======== ========~~===~~ ~~Effect~~Liabilities and Stockholders' Equity: Interest-bearing liabilities NOW & money market accts $109,396 $ 334 1.22% $ 48,903 $ 114 0.94% Savings accounts 116,759 371 1.27% 118,629 748 2.53% Certificates of ~~dilutive~~deposit ~~securities~~134,297 ~~options~~951 352.84% 121,692 1,086 3.58% Other short term borrowings 18,484 81 1.76% 16,500 80 1.94% Other long term borrowings 45,428 457 4.08% 28,245 305 4.33% -------- ---------------------- ~~Diluted~~-------- ~~earnings~~---------------------- ~~per~~Total ~~share~~interest-bearing $liabilities 1424,~~010~~367 12,~~979~~194 $2.08% 0333,969 2,333 2.80% ---------------------- ---------------------- Noninterest-bearing Liabilities 51,424 53,406 Stockholders' equity 36,380 30,042 -------- -------- Total $512,168 $417,417 ======== ======== Net interest income and net yield on interest-earning assets $ 3,995 3.32% $ 4,173 4.17% ====================== ======================

------------------------ (1) Includes securities available for sale, securities held to maturity, other securities and interest-bearing deposits. Yields on securities available for sale have been calculated on the basis of historical cost and do not give effect to changes in fair value of such securities, which are reflected as a component of stockholder's equity. (2) Includes loans for which the accrual of interest has been suspended. 22 Other Income ------------ Other income increased by $396, 000, or 35.7%, in the three months ended June 30, 2003 compared to the same period of 2002. This increase was the result of a 40.8% ($174,000) increase in service charges and fees on deposit accounts in the second quarter of 2003 compared to the same period in 2002 and a $262,000 (+67.2%) increase in gains on the sale of loans during the same period. These increases were partially offset by a $41,000 declines in gains on the sale of investment securities in the same period in 2002. As noted in the discussion of results for the six months ended June 30, 2003, the increase in service charge and fee income was primarily the result of the $68.1 million, or 20.1%, increase in deposits since June 2002. Most of this growth ($58.4 million or 85.8% of total deposit growth) has occurred in transactional related account types (demand deposits, NOW accounts and money market accounts) that generate fee income. Also contributing to this increase is an increase in fees earned on debit card transactions. These fees increased as a result of renegotiating a contract with a third party processor that allowed a greater percentage of network fees to be passed through to Indian River. Indian River had a $262,000 or 67.2%, increase in gain on sale of loans, which is a result of the increase in 1-4 family real estate loans originated and then sold in the secondary market. The gains and fees on mortgage loans held for sale are volatile as this source of income is highly sensitive to fluctuations in interest rates, consumer confidence, economic conditions nationally and in our market, and housing market conditions. Other Expenses -------------- Indian River's other expenses increased $562,000 or 19.2%, in the second quarter of 2003 compared to the same period in 2002. The increase was primarily the result of a $335,000 or 22.9%, increase in salaries and benefits. This is largely the result of the hiring of employees to staff the new Sarno Branch, which opened in February 2003. The new branch also has a loan operation department, requiring additional staff. Salaries and benefits expense was also negatively impacted by a significant increase in group hospitalization insurance premiums that went into effect in June, 2002. These premiums were up $33,000 (+48.6%) in the three months ended June 30, 2003 compared to the same period in 2002. There was a $100,000 or 26.0%, increase in occupancy and equipment expense, again primarily due to the opening of the new Sarno Branch. There was a $73,000, or 22.5%, increase in data processing expense for the three months ended June 30, 2003 compared to the same period 2002. Income Tax Provision -------------------- Indian River's income tax provision was $719,000, or 37.4% of income before taxes, in the second quarter of 2003 and $835,000 or 37.5% of income before taxes, for the same period in 2002. Liquidity --------- Liquidity management enables us to maintain sufficient cash flow to fund operations and to meet financial obligations to depositors and borrowers. Indian River's liquidity is enhanced by its ability to attract and retain deposits and by principal and interest payments on loans and maturing securities in the investment portfolio. Indian River's core deposit base, consisting of demand deposits, money market, and savings accounts supplemented by other deposits of varying maturities and rates, contributes to liquidity. Our liquidity position, those assets invested in federal funds and securities available for sale of $242.8 million at June 30, 2003, reflected an increase of $65.4 million from December 31, 2002, or 36.9%. Funds available through short-term borrowing and asset maturities are considered adequate to meet all current needs. At June 30, 2003, Indian River had available credit of $23.0 million under lines of credit at correspondent banks. Although management believes that the liquidity position is adequate, increased loan demand could have an adverse impact on liquidity. Indian River also has a $54.2 million borrowing line with the Federal Home Loan Bank of Atlanta. The outstanding balance on this line increased to $46.4 million as of June 30, 2003, from $38.6 at December 31, 2002. Included in this balance was $8 million outstanding at June 23 30, 2003 as an overnight advance. This line has been utilized by Indian River as a funding source at a lower cost, by locking in borrowings at lower rates. In addition, the Asset/Liability Management Committee has established minimum standards and key ratios of asset quality and performance. These standards and ratios provide the framework for guidance and measurement. Management evaluates these standards and ratios on an ongoing basis. Capital Resources ----------------- In the first six months of 2003, total stockholders' equity increased $2.1 million, or 6.0%, as a result of earnings and option exercises which were partially offset by a decrease in accumulated other comprehensive income. Earnings contributed $2.5 million to stockholders' equity for the six month period. Accumulated other comprehensive losses decreased stockholders' equity by $551,000 during this six month period. Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board of Governors ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. On June 30, 2003, Indian River exceeded all capital requirements, having a total risk-based capital ratio of 16.11%, a Tier 1 risk-based capital ratio of 14.93%, and a leverage ratio of 8.29%. These ratios have increased in part due to the issuance of $7 million aggregate liquidation amount of trust preferred securities, which are included in Tier 1 capital. See Note 8 to the Unaudited Consolidated Financial Statements for additional information. As of June 30, 2003, Indian River Bank also met the criteria for categorization as a "well-capitalized" institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act, having total and tier 1 risk based capital ratios of 13.6% and 12.4%, and a leverage ratio of 6.9%. Designation of the Bank as a "well-capitalized" institution under these regulations does not constitute a recommendation or endorsement of Indian River Bank by Federal bank regulators. Effects of Inflation -------------------- The unaudited consolidated financial statements and related unaudited financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Item 3 - Quantitative and Qualitative Disclosures About Market Risk. Interest rate risk is that portion of the variation in Indian River's performance attributable to changes in interest rates. Management closely monitors Indian River's exposure to how changes in market conditions can impact the Indian River's future performance and considers strategies to reduce any negative results. Interest rate risk takes place because of unbalanced changes in interest income and expense, and asset and liability market value when rates change. The imbalances flow through to create variability in net interest income, net income, and the market value of equity. The ultimate cause of interest rate risk is a repricing mismatch between the assets and liabilities on Indian River's balance sheet and, if relevant, off-balance sheet positions. Indian River's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting potential negative effects of changes in market interest rates. Since Indian River's primary source of interest-bearing liabilities is customer deposits, the ability to manage the types and terms of such deposits may be somewhat limited by customer preferences in the market areas served by the Company. Borrowings, which include FHLB advances, short-term borrowings and long-term borrowings, are generally structured with specific terms which in management's judgment, when aggregated with the terms for outstanding deposits and matched with interest-earning assets, mitigate Indian River's exposure to interest rate risk. The rates, terms and interest rate indices of Indian River's interest-earning assets result primarily from the Company's strategies of investing in loans 24 and securities which permit the Company to limit its exposure to interest rate risk, together with credit risk, while achieving a positive interest rate spread from the difference between the income earned on interest-earning assets and the cost of interest-bearing liabilities. In addition to periodic gap reports comparing the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates, management uses a quarterly model which measures Indian River's exposure to interest rate risk. The model calculates the present value of assets, liabilities, off-balance sheet financial instruments and equity at current interest rates, and at hypothetical higher and lower interest rates (but not below 0%) at various intervals. The present value of each major category of financial instrument is calculated by the model using estimated cash flows based upon weighted-average contractual rates and terms at discount rates representing the estimated current market interest rate for similar financial instruments. The resulting present value of longer term fixed-rate financial instruments are more sensitive to change in a higher or lower market interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing opportunity. The following table presents Indian River's exposure over the subsequent twelve month periods to immediate, hypothetical changes in interest rates at the dates indicated:

~~Common~~June ~~Per-Share~~30, ~~Net~~2003 ~~Earnings~~June ~~Shares~~30, ~~Amounts~~2002 ---------------------------------------------------------------------------------------- ~~Nine~~Percentage ~~months~~Percentage ~~Ended~~Change ~~September~~in ~~30,~~Change ~~2002:~~in ~~Basic~~Change ~~earnings~~in ~~per~~Interest ~~share,~~Percentage ~~income~~Market ~~available~~Percentage toMarket ~~common~~Rates ~~stockholders~~Change $in ~~4,242~~Percentage ~~1,951~~Value $of ~~2.18~~Change ~~===================~~in ~~Effect~~Percentage Value of ~~dilutive~~(Basis ~~securities,~~Net ~~options~~Interest 47Change in Portfolio Net Interest Change in Portfolio Points) income Net Income Equity income Net Income Equity ---------------------------------------------------------------------------------------------------------- ~~Diluted~~+200 ~~earnings~~-14.90% ~~per~~-28.58% ~~share~~-22.79% $ -4~~,242~~.82% -6.43% -13.34% +100 -7.42% -14.24% -7.87% -1~~,998~~.62% $-2.54% -6.41% 0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -100 3.47% 6.65% 3.31% -2.1397% ~~================================================~~-1.54% -1.04% -200 -2.95% -5.69% 7.04% -5.98% -3.40% -5.99%

As the table indicates, the Bank is susceptible to lower earnings in a rising rate environment and will experience slightly higher earnings in a 100 basis point declining rate situation. The Bank has a negative GAP position which is reflected in the table. The Bank's GAP position has improved since the quarter ended June 30, 2002 when the Bank was susceptible to lower earnings in either a rising or a declining rate scenario (a condition known as negative convexity). The improvement in a 100 basis point declining rate scenario is a result of two factors: (1) the Bank's cost of funds has declined to the point that in the hypothetical downward shifts contemplated in the table, much of the bank's deposits would not earn any interest which would further reduce the cost of funds and (2) the Bank's projected loan growth has increased to the point that increased interest income would exceed the effects of accelerated repayments of loans and investments that are inherent in significant downward shifts in market rates. In a rising rate environment the Bank would be susceptible to lower net interest income (and consequently to lower net income) due to funding costs rising faster than the Bank's ability to reprice earning assets resulting in margin compression. In a 200 basis point declining rate scenario, the cost of the Bank's non-fixed term liabilities would drop to zero. However, a significant portion of the Bank's earning assets would experience accelerated repayment/refinancing and those cash flows would have to be reinvested at very low rates. Although the Bank's static GAP position has improved somewhat, a significant immediate increase in rates would slow down anticipated cash flows from both the loan and investment portfolios resulting less interest income from reinvesting those cash flows at higher rates. Indian River has been in a liability sensitive position during 2003 and 2002, which is reflected in the above tables. The nature of Indian River's current asset and liability structure is such that it will be liability sensitive for the foreseeable future. Indian River monitors its GAP position and interest sensitivity position monthly to insure they stay within the established ranges. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different 25 degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. In addition, the previous table does not necessarily indicate the impact of general interest rate movements on Indian River's net interest income because the repricing of certain categories of assets and liabilities are subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicating as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes. Management uses the model to ascertain general levels of risk and to consider specific strategies to mitigate that risk Item 4 - Controls and Procedures Indian River's management, under the supervision and with the participation of Indian River's Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of Indian River's disclosure controls and procedures, as defined in Rule13a-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Indian River's disclosure controls and procedures were adequate. There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 26 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS From time to time the Company is a participant in various legal proceedings incidental to its business. In the opinion of management, the liabilities (if any) resulting from such legal proceedings will not have a material effect on the financial position of the Company. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 30, 2003, the annual meeting of shareholders of the Company was held for the purposes of electing two (2) directors to serve until the annual meeting of shareholders to be held in 2006, and until their successors are duly elected and qualified. The name of each director elected at the meeting and the votes cast are set forth below: For Against Abstentions ------------------------------------------- William C. Graves IV 1,514,512 0 3,256 Daniel R. Richey 1,514,512 0 3,256 Following the meeting, the persons elected at the meeting, together with the following persons, constituted the entire Board of Directors: Paul A. Beindorf, Griffin A. Greene, Robert A. Grice, William B. Marine, John L. Minton, Keith H. Morgan Jr., Mary M. Rogers and John David Smith. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(a) Articles of Incorporation of Indian River, as amended (1) 3(b) Bylaws of Indian River (1) 4(a) Indenture, dated as of September 30, 2002 between Indian River Banking Company and Wells Fargo Bank, National Association, as trustee (2) 4(b) Amended and Restated Declaration of Trust, dated as of September 30, 2002 among Indian River Banking Company, Wells Fargo Bank, National Association as Property Trustee, and Paul A. Beindorf, Diana L. Walker and Phillip L. Tasker as Administrative Trustees (2) 4(c) Guarantee Agreement dated as of September 30, 2002, between Indian River Banking Company and Wells Fargo Bank, National Association, as trustee (2) 10(a) Indian River 1999 Stock Option Plan (3) 10(b) Employment Agreement between Indian River National Bank and Paul A. Beindorf(4) 10(c) Employment Agreement between Indian River National Bank and Jeffrey R. Morton(4) 10(d) Change in Control Agreement between Indian River Banking Company, Indian River National Bank and Diana L. Walker(4) 11 Statement of Computation of Per Share Earnings Please refer to Note 5 to the Condensed Consolidated Financial Statements 21 Subsidiaries of the Registrant 31(a) Certification of Paul A. Beindorf 31(b) Certification of Phillip L. Tasker 32(a) Certification of Paul A. Beindorf 32(b) Certification of Phillip L. Tasker 27 -------------------------- (1) Incorporated by reference to exhibit of same number to Indian River's registration statement on Form SB-2 (No. 333-36688) (2) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation SK. Indian River agrees to provide a copy of these documents to the Commission upon request. (3) Incorporated by reference to exhibit 10(d) to Indian River's registration statement on Form SB-2 (No. 333-36688) (4) Incorporated by reference to exhibit of same number to Indian River's Annual Report on Form 10-K for the year ended December 31, 2002. (b) Reports on Form 8-K On April 9, 2003, Indian River filed a report on Form 8-K, under Item 5 thereof, reporting earnings for the quarter ended March 31, 2003. On April 15, 2003, Indian River filed a report on Form 8-K, under Item 4 thereof, regarding a change in its certifying accountant. On July 16, 2003, Indian River filed a report on Form 8-K, under Item 5, 9 and 12 thereof, reporting earnings for the quarter ended June 30, 2003. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDIAN RIVER BANKING COMPANY (Registrant) August 1, 2003 By: /s/ Paul A. Beindorf ----------------------------------------------- Paul A. Beindorf, President and Chief Executive Officer August 1, 2003 By: /s/ Phillip Tasker ----------------------------------------------- Phillip Tasker, Chief Financial Officer 29

Common Per-Share Net Earnings Shares Amounts ------------------------------------------------ Nine months Ended September 30, 2001: Basic earnings per share, income available to common stockholders $ 2,382 1,943 $ 1.22 =================== Effect of dilutive securities, options 44 ----------------------------- Diluted earnings per share $ 2,382 1,987 $ 1.20 ================================================

(In Thousands) September 30, December 31, 2002 2001 ------------------------------- Advance under line of credit with Colonial Bank, interest payable quarterly at an adjustable rate, 4.75% at September 30, 2002. $ 635 $ 570 Advances under line of credit with Federal Home Loan Bank: Advance, interest payable monthly at a fixed rate of 6.44%, with equal semiannual principal payments of $142 through September 2004 572 857 Convertible advance due March 2008, interest payable quarterly at a fixed rate of 5.51%. 2,000 2,000 Convertible advance due January 2011, interest payable quarterly at a fixed rate of 4.41%. 10,000 10,000 Convertible advance due May 2011, interest payable quarterly at a fixed rate of 3.95%. 15,000 15,000 Overnight repurchase agreements payable 18,400 13,156 Overnight advance, interest payable monthly at a rate that adjusts daily 4,800 - ------------------------------- $ 51,407 $41,583 ===============================

Nine months Ended September 30, 2002 2001 ----------------------------------- ----------------------------------- (In Thousands) Average Average Average Average Assets: Balance Interest Yield Balance Interest Yield --------- --------------------- ---------- --------------------- Investments (1) $ 161,754 $ 6,484 5.36% $ 124,078 $ 5,998 6.46% Federal funds sold 9,543 119 1.66% 6,339 173 3.66% Loans receivable (2) less loans in process 220,840 12,639 7.65% 209,173 13,274 8.48% --------- ---------------- --------- ---------------- Total interest-earning assets 392,137 19,242 6.56% 339,590 19,445 7.66% --------------------- ----------------- Noninterest-earning assets 21,154 16,568 --------- ---------- Total $ 413,291 $ 356,158 ========= ========== Liabilities and Stockholders' Equity: Interest-bearing liabilities NOW & money market accts $ 47,331 $ 343 0.97% 30,542 $ 269 1.18% Savings accounts 115,530 2,179 2.52% 75,052 1,928 3.43% Certificates of deposit 122,259 3,372 3.69% 140,661 6,113 5.81% Other 46,295 1,191 3.44% 42,229 1,527 4.84% --------- --------------------- ---------- ------------------- Total interest-bearing liabilities 331,415 7,085 2.86% 288,484 9,837 4.56% --------------------- ------------------- Noninterest-bearing Liabilities 51,675 43,031 Stockholders' equity 30,201 24,643 --------- ---------- Total $ 413,291 $ 356,158 ========= ========= Net interest income and net yield on interest-earning assets $ 12,157 4.14% $ 9,608 3.78% ===================== ===================

(In Thousands) September 30, 2002 December 31, 2001 ----------------------------------------------------- Amount % Amount % ----------------------------------------------------- Commercial, Agricultural $ 503 6.6 % $ 524 8.3 % Real estate construction 410 17.7 154 15.5 Real estate mortgage 1,472 68.9 1,775 68.3 Consumer, other 669 6.8 366 7.9 Unallocated 97 - - - ------ ------- Total Allowance for loan losses $3,151 100.0 % $ 2,819 100.0 % ====== =======

(In Thousands) September 30, 2002 December 31, 2001 -------------------------------------------------------------------------- Nonaccrual Loans Amount % Amount % --------------------------------------------------------------------------------------------------------------------- Real estate mortgage $ 705 100 % $ 120 90.2 % Installment - - 13 9.8 Accrual Loans - past due 90 days or more September 30, 2002 December 31, 2001 --------------------------------------------------------------------------------------------------------------------- Amount % Amount % -------------------------------------------------------------------------- Real estate mortgage $ 85 76.6 % $ 125 79.6 % Installment 25 23.4 32 20.4

Three Months Ended September 30, 2002 2001 ------------------------------------------------------------------------------------- (In Thousands) Average Average Average Average Assets: Balance Interest Yield Balance Interest Yield ------------- ---------- ----------- ------------ ---------- ----------- Investments (1) $ 169,592 $ 2,167 5.07% $ 133,609 $ 2,078 6.17% Federal funds sold 3,297 14 1.66% 12,189 104 3.37% Loans receivable(2) less loans in process 225,867 4,253 7.47% 213,506 4,437 8.25% ------------- ---------- ----------- ------------ ---------- ----------- Total interest-earning assets 398,756 6,434 6.40% 359,304 6,619 7.31% ---------- ----------- ---------- ----------- Noninterest-earning assets 21,800 18,277 ------------- ------------ Total $ 420,556 $ 377,581 ============= ============ Liabilities and Stockholders' Equity: Interest-bearing liabilities NOW & money market accts $ 49,015 $ 111 0.90% $ 31,955 $ 99 1.22% Savings accounts 111,403 574 2.04% 89,163 786 3.50% Certificates of deposit 127,076 1,053 3.29% 136,533 1,844 5.36% Other 49,104 424 3.43% 50,060 552 4.40% ------------- ---------- ----------- ------------ ---------- ----------- Total interest-bearing Liabilities 336,598 2,162 2.55% 307,711 3,281 4.23% ---------- ----------- ---------- ----------- Noninterest-bearing Liabilities 51,436 43,543 Stockholders' equity 32,522 26,327 ------------- ------------ Total $ 420,556 $ 377,581 ============= ============ Net interest income and net yield on interest-earning assets $ 4,272 4.25% $ 3,338 3.69% ========== =========== ========== ===========

September 30, 2002 September 30, 2001 --------------------------------------------- --------------------------------------------- Percentage Percentage Percentage Change in Percentage Change in Change in Change in Percentage Market Value Change in Percentage Market Value Interest Rates Net Interest Change in of Portfolio Net Interest Change in of Portfolio (Basis Points) income Net Income Equity income Net Income Equity ----------------- -------------- --------------- -------------- --------------- -------------- -------------- +200 -4.83% -10.13% -18.60% -4.59% -3.93% -11.15% +100 -2.42% -5.06% -7.68% -1.92% -1.82% -4.36% 0 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -100 2.42% 5.10% 3.06% 0.97% 2.00% -0.46% -200 4.23% 8.86% 5.04% 1.72% 3.39% -3.08%

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