FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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
0-24501
BLUE RIVER BANCSHARES, INC.
----------------------------------------
(Exact name of small business issuer as specified in its charter)
Indiana 35-2016637
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
29 East Washington Street
Shelbyville, Indiana 46176
- ------------------------------- -------------------------------
(Address of principal executive (Zip Code)
office)
Issuer's telephone number, including area code:
(317) 398-9721
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
As of September 30, 1998, there were 1,490,000 shares of the Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format.
(Check one):
Yes No X
--- ---
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
September 30, 1998 of the Successor (Unaudited) 3
Consolidated Statements of Earnings for the three month
period ended September 30, 1998 of the Successor
and 1997 of the Predecessor (Unaudited) 4
Consolidated Statements of Earnings for the period from
July 1, 1998 to September 30, 1998 of the Successor,
January 1, 1998 to June 30, 1998 of the Predecessor
and the nine month period ended September 30, 1997 of the
Predecessor (Unaudited) 5
Consolidated Statements of Cash Flows for the period from
July 1, 1998 to September 30, 1998 of the Successor,
January 1, 1998 to June 30, 1998 of the Predecessor
and the nine month period ended September 30, 1997 of the
Predecessor (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-17
PART II. OTHER INFORMATION: 18-19
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 20
2
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited)
AS OF SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SUCCESSOR
--------------
<S> <C>
Cash and due from banks $ 827,864
Interest-bearing deposits with banks 12,645,778
Securities available for sale 10,627,943
Securities held-to-maturity 701,920
Loans receivable, net 88,682,897
Accrued interest receivable 784,791
FHLB of Indianapolis stock 1,220,100
Prepaid expenses and other assets 577,138
Premises and equipment, net 1,784,804
Goodwill, net 3,759,597
-------------
TOTAL ASSETS $ 121,612,832
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 84,449,405
FHLB advances and other borrowings 20,043,924
Amounts payable to former shareholders of Shelby County Bancorp 137,335
Accrued expenses and other liabilities 800,220
Accrued interest payable 192,932
-------------
Total liabilities 105,623,816
-------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, without par value: 1,500,000 shares
issued and 1,490,000 outstanding 16,193,094
Treasury stock, without par value: 10,000 shares (106,004)
Accumulated deficit (196,652)
Unrealized gain on available for sale securities 98,578
-------------
Total shareholders' equity 15,989,016
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 121,612,832
=============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------- -------------
1998 1997
<S> <C> <C>
INTEREST INCOME:
Loans receivable $ 1,904,304 $ 1,599,752
Securities 223,138 119,016
Interest-bearing deposits 53,642 11,375
Dividends from FHLB 24,598 18,107
----------- -----------
Total interest income 2,205,682 1,748,250
----------- -----------
INTEREST EXPENSE:
Interest expense on deposits 825,068 739,403
Interest expense on FHLB advances and other borrowings 287,643 255,818
----------- -----------
Total interest expense 1,112,711 995,221
----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES 1,092,971 753,029
PROVISION FOR LOAN LOSSES (75,000) (27,000)
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,017,971 726,029
----------- -----------
NON-INTEREST INCOME:
Service charges and fees 57,695 67,756
Other 51,536 31,367
----------- -----------
Total non-interest income 109,231 99,123
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 339,833 236,860
Premises and equipment 82,352 69,910
Federal deposit insurance 39,809 22,323
Data processing 71,960 73,732
Advertising & promotion 65,625 57,221
Bank fees and charges 16,087 13,429
Professional fees 77,232 65,230
Stationery, supplies & printing 22,395 14,978
State franchise tax 21,362 19,399
Other 108,937 52,015
Goodwill amortization 63,722 0
----------- -----------
Total non-interest expense 909,314 625,097
----------- -----------
EARNINGS BEFORE INCOME TAX EXPENSE 217,888 200,055
INCOME TAX EXPENSE 88,257 67,403
----------- -----------
NET EARNINGS $ 129,631 $ 132,652
=========== ===========
BASIC EARNINGS PER SHARE $.09 N/A
DILUTIVE EARNINGS PER SHARE $.09 N/A
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------- ---------------------------------
Period from Period from Period from
July 1, 1998 January 1, 1998 January 1, 1997
through through through
September 30, June 30, September 30,
1998 1998 1997
------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 1,904,304 $ 3,548,608 $ 4,626,740
Securities 223,138 218,483 345,462
Interest-bearing deposits 53,642 49,006 86,474
Dividends from FHLB 24,598 38,075 46,813
----------- ----------- -----------
Total interest income 2,205,682 3,854,172 5,105,489
----------- ----------- -----------
INTEREST EXPENSE:
Interest expense on deposits 825,068 1,763,279 2,238,537
Interest expense on FHLB advances and other borrowings 287,643 527,044 750,242
----------- ----------- -----------
Total interest expense 1,112,711 2,290,323 2,988,779
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,092,971 1,563,849 2,116,710
PROVISION FOR LOAN LOSSES (75,000) (480,000) (81,000)
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,017,971 1,083,849 2,035,710
----------- ----------- -----------
NON-INTEREST INCOME:
Service charges and fees 57,695 122,338 189,643
Other 51,536 91,125 74,837
----------- ----------- -----------
Total non-interest income 109,231 213,463 264,480
----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 339,833 489,553 716,586
Premises and equipment 82,352 132,766 203,735
Federal deposit insurance 39,809 69,123 48,451
Data processing 71,960 138,281 194,898
Advertising & promotion 65,625 52,767 126,327
Bank fees and charges 16,087 34,801 61,532
Professional fees 77,232 307,243 144,237
Stationery, supplies & printing 22,395 26,269 58,806
State franchise tax 21,362 10,305 56,157
Environmental charges 0 145,780 0
Other 108,937 110,534 97,291
Goodwill amortization 63,722 0 0
----------- ----------- -----------
Total non-interest expense 909,314 1,517,422 1,708,020
----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 217,888 (220,110) 592,170
PROVISION (CREDIT) FOR INCOME TAXES 88,257 (83,642) 207,718
----------- ----------- -----------
NET EARNINGS (LOSS) $ 129,631 $ (136,468) $ 384,452
========== =========== ===========
BASIC EARNINGS PER SHARE $.09 N/A N/A
DILUTIVE EARNINGS PER SHARE $.09 N/A N/A
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR PREDECESSOR
------------ --------------- ---------------
Period from Period from Period from
July 1, 1998 January 1, 1998 January 1, 1998
through through through
September 30 June 30 September 30
1998 1998 1997
------------ --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 129,631 $ (136,468) $ 384,452
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 161,150 79,288 119,307
Gain (loss) on sale of securities available for sale 0 13,569 (5,549)
Provision for loan losses 75,000 480,000 81,000
Changes in assets and liabilities:
Accrued interest receivable (70,654) 53,570 (42,882)
Other assets 34,902 (254,462) 146,070
Other liabilities 71,495 112,898 (173,707)
------------ ------------ -----------
Net cash from operating activities 401,524 348,395 508,691
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of principal repayments (178,311) (10,438,581) (7,046,567)
Principal maturities collected on securities 11,599,494 234,534 695,003
Payment to former shareholders of Shelby County Bancorp (10,367,915) 0 0
Investment in FHLB stock (221,200) (78,700) (195,200)
Capital expenditures (82,019) (52,657) 2,922
Proceeds from sale of securities available for sale 0 3,380,483 4,346,341
Purchase of securities available for sale 0 (3,315,370) (4,749,966)
------------ ------------ -----------
Net cash from investing activities 750,049 (10,270,291) (6,947,467)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
FHLB advances and other borrowings 7,400,000 2,409,293 3,500,000
Payment of FHLB advances and other borrowings (6,237,759) (1,581,787) (10,372)
Net change in deposits 8,740,459 4,069,563 345,496
Cash dividends paid 0 (21,994) (52,779)
Proceeds from issuance of Common Stock 0 65,550 0
Repurchase of stock (106,004) 0 0
------------ ------------ -----------
Net cash from financing activities 9,796,696 4,940,625 3,782,345
------------ ------------ -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 10,948,269 (4,981,271) (2,656,431)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,525,373 5,667,588 5,092,614
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,473,642 $ 686,317 $ 2,436,183
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,067,000 $ 2,544,000 $ 3,017,575
Income taxes paid $ 69,000 $ 265,000 $ 212,000
Loans transferred to real estate owned $ 36,727
</TABLE>
See notes to consolidated financial statements (unaudited).
6
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
- ------------------------------------------------------------------------------
1. BASIS OF CONSOLIDATION AND PRESENTATION
The unaudited consolidated financial statements include the accounts of
Blue River Bancshares, Inc. (the "Successor"), Shelby County Bancorp (the
"Predecessor") and its wholly-owned subsidiary Shelby County Bank
(formerly, Shelby County Savings Bank, FSB - the "Bank"). Summary of
significant accounting policies is set forth in Note 1 of the Notes to the
Consolidated Financial Statements of the Predecessor included in the
September 30, 1997 Annual Report to Shareholders of Predecessor.
The accompanying consolidated interim financial statements at September
30, 1998 and for the nine month period ended September 30, 1998 and 1997
are unaudited and have been prepared in accordance with instructions to
Form 10-QSB. In the opinion of management, the financial statements
include all the adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows for such periods.
2. SHAREHOLDER'S EQUITY (SUCCESSOR)
On June 26, 1998, the Successor completed an initial public offering. The
Successor received approximately $16.2 million, net of offering costs of
approximately $1.8 million, due to the issuance and sale of 1,500,000
shares of Common Stock at $12 per share. The Successor's Common Stock
currently trades on the Nasdaq SmallCap Market under the BRBI symbol.
Effective June 18, 1998, the Successor amended and restated its articles
of incorporation to revise the total number of authorized shares of
capital stock to 12,000,000 shares, consisting of 10,000,000 shares
designated as "Common Stock" and 2,000,000 shares designated as "Preferred
Stock."
Stock Option Plan - The Successor has adopted separate stock option plans
for Directors and for key employees. Under the option plans, options for
the purchase of 150,000 shares of Common Stock may be granted. Options for
106,500 shares at an option price of $12 per share have been granted and
remain unexercised under the plans as of September 30, 1998.
EARNINGS PER SHARE
The following is a reconciliation of the weighted average common shares
for the basic and diluted earnings per share computations in accordance
with Statement Financial Accounting Standards (SFAS No. 128):
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Weighted average common shares 1,495,217 N/A
Diluted earnings per share:
Weighted average common shares 1,495,217 N/A
Dilutive effect of stock options (1) --- ---
Weighted average common shares
and incremental shares 1,495,217 N/A
========= ===
</TABLE>
(1) No dilutive effect of stock options for the three months ended
September 30, 1998 was used in the calculation as the effects of the stock
options were anti-dilutive.
7
<PAGE>
3. ACQUISITION OF SHELBY COUNTY BANCORP
On February 5, 1998, the Successor, the Predecessor and the Bank entered
into an Agreement of Affiliation and Merger as amended and restated on
March 12, 1998 and further amended on June 2, 1998, pursuant to which the
Successor would acquire the Bank pursuant to the merger of the Predecessor
into the Successor. On June 26, 1998, the effective date of the merger,
pursuant to the merger agreement each outstanding share of common stock of
the Predecessor was converted into the right to receive $56.00 per share
from the Successor. The merger has been accounted for by the purchase
method of accounting. Accordingly, the excess of the purchase price over
the fair value of the net assets acquired has been allocated to goodwill.
For financial reporting purposes, the Successor reported the transaction
as if it was effective June 30, 1998. The statement of earnings and
statement of cash flows for the four day period from June 26, 1998 to June
30, 1998, of the Successor was not material.
The consideration given and the assets acquired and liabilities assumed
were comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 10,626,000
Acquisition costs 168,263
------------
Total purchase price $ 10,794,263
============
Net cost of acquisition $ 10,794,263
Less Shelby County Bancorp shareholders' equity at June 26, 1998 (7,770,311)
------------
Excess consideration over book value 3,023,952
------------
Adjustments to reflect fair value:
Investment securities held to maturity 14,406
Loans (375,478)
Deposits (737,602)
Other liabilities (225,000)
Tax effect of above adjustments 524,307
------------
Total fair value adjustments (799,367)
------------
Total goodwill $ 3,823,319
============
</TABLE>
Generally accepted accounting principles provide for an allocation period,
generally not to exceed one year, to identify and quantify the fair value
of assets acquired and liabilities assumed. Therefore, the allocations
reflected in the accompanying financial statements are subject to change
as additional information concerning fair values becomes available.
4. NEW ACCOUNTING PRONOUNCEMENTS AND POLICIES (SUCCESSOR)
Goodwill - The excess of the cost over the fair value of net assets
acquired is amortized using the straight-line method over 15 years.
The Successor adopted Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The adoption of SFAS No. 125 had no
effect on the Successor's financial statements due to no covered
transactions existing.
8
<PAGE>
The Successor adopted SFAS No. 130, "Comprehensive Income", effective June
26, 1998. It requires that changes in the amounts of certain items,
including gains and losses on certain securities, be shown in the
financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but
does require that an amount representing total comprehensive income be
reported in that statement. All prior year financial statements have been
reclassified for comparative purposes.
The following is a summary of total comprehensive income(loss) for the
Successor's three month period ended September 30, 1998, the Predecessor's
three month ended September 30, 1997, the six month period ended June 30,
1998 and the nine month period ended September 30, 1997 under SFAS No.
130:
<TABLE>
<CAPTION>
Three Months Six Months Nine Months
Ended Ended Ended
September 30 June 30 June 30
1998 1997 1998 1997
Successor Predecessor Predecessor Predecessor
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income(loss) 129,631 132,652 (136,468) 384,452
Other comprehensive income,
net of tax:
Unrealized gains on
securities available
for sale 98,578 29,643 54,420 225,722
--------- ----------- --------- -----------
Other comprehensive income 98,578 29,643 54,420 225,722
--------- ----------- --------- -----------
COMPREHENSIVE INCOME(LOSS) 228,209 162,115 (82,048) 610,174
========= =========== ========= ===========
</TABLE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued in June 1997. This statement is effective for
fiscal years beginning after December 15, 1997, and will change the way
corporations report information about products, services and segments of
their business in their annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. Management has not yet determined the effect, if any, of
SFAS 131 on the consolidated financial statements. The Successor will
include the appropriate segment information beginning in the annual
financial statements for the year ending December 31, 1998 and all
quarterly reports thereafter.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. This statement is effective for
fiscal years beginning after June 15, 1999, and standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. Management has not yet
determined the adjustments or additional disclosures, if any, SFAS No. 133
will require for the consolidated financial statements.
5. SHAREHOLDERS' EQUITY (PREDECESSOR)
In connection with the acquisition of Shelby County Bancorp by Blue River
Bancshares, Inc., all outstanding options of the predecessor were
exercised prior to the acquisition. Upon completion of the merger, the
Predecessor stock option plan was terminated.
On March 16, 1998, the Board of Directors of the Predecessor declared a
quarterly cash dividend of $.125 per share. The dividend was paid April
13, 1998 to shareholders of record as of March 30, 1998.
Earnings per share are not presented for the consolidated statements of
earnings of the predecessor since the information is not considered
meaningful.
9
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Certain statements throughout this section regarding the Successor's,
Predecessor's and the Bank's financial position, business strategy and
plans and objectives of management for future operations are
forward-looking statements rather than historical or current facts. When
used in this section, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to the
Successor, Predecessor and the Bank or their respective management,
identify forward-looking statements. Such forward-looking statements are
based on the beliefs of management of the Successor, Predecessor and the
Bank as well as assumptions made by and information currently available to
management of the Successor, Predecessor and the Bank. Such statements are
inherently uncertain, and there can be no assurance that the underlying
assumptions will prove to be valid. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of
certain factors, including but not limited to competitive factors and
pricing pressures, changes in legal and regulatory requirements,
technological change, product development risks and general economic
conditions, including, but not limited to, changes in interest rates, loss
of deposits and loans to other savings and financial institutions,
substantial changes in financial markets, substantial changes in real
estate values and the real estate market and unanticipated results in
pending legal proceedings. Such statements reflect the current view of the
Successor, Predecessor and the Bank with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of
the Successor, Predecessor and the Bank.
FINANCIAL CONDITION:
--------------------
The merger was accounted for by the purchase method of accounting.
Accordingly, the fair value of the assets acquired and liabilities assumed
have been adjusted in accordance with APB 16, "Business Combinations" as
noted in footnote 3. Therefore, the changes in financial condition
described below include purchase accounting adjustments recorded by the
Successor.
Total assets at September 30, 1998, were $121,613,000, an increase of
$31,004,000 from total assets of $90,609,000 at September 30, 1997. Total
net loans receivable increased from $76,038,000 at September 30, 1997 to
$88,683,000 at September 30, 1998. Residential mortgages at September 30,
1998 were $55,819,000, an increase of $9,324,000 from $46,495,000 at
September 30, 1997. Commercial loans secured with real estate were
$15,796,000 at September 30, 1998 compared to $12,867,000 at September 30,
1997. Interest bearing deposits increased $10,873,000 to $12,646,000 at
September 30, 1998. This increased liquidity, primarily balances held at
the Federal Home Loan Bank was accumulated to assist in managing interest
rate risk, and due to the market conditions which did not afford premiums
for longer term investment periods. Investments available-for-sale
increased $2,741,000 compared to September 30, 1997. Goodwill increased
$3,760,000 compared to September 30, 1997 as a result of the acquisition
of the Bank by Blue River Bancshares, which was accounted for Using the
purchase method of accounting.
10
<PAGE>
<TABLE>
<CAPTION>
(SUCCESSOR) (PREDECESSOR)
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Residential mortgages $ 55,819,482 $ 46,495,268
Commercial loans secured by real estate 15,795,596 12,866,733
Commercial, agriculture 10,096,328 9,441,544
Consumer loans 6,493,072 6,563,125
Home equity loans 1,335,896 1,062,927
Less allowance for Loan Losses (857,477) (391,677)
------------- -------------
Total Net Loans $ 88,682,897 $ 76,037,920
============= =============
</TABLE>
Total liabilities at September 30, 1998 were $105,624,000, an increase of
$22,186,000 compared to $83,438,000 at September 30, 1997. Deposits at
September 30, 1998 were $84,449,000 compared to $64,633,000 at September
30, 1997. Transaction accounts, including Savings, NOW, and Money Market
accounts resulted in $10,075,000 of the increase for the comparative
periods. Also included in liabilities at September 30, 1998 are remaining
amounts payable to former shareholders of Shelby County Bancorp for the
acquisition of $137,335.
Shareholders' equity at September 30, 1998 was $15,989,000, an increase of
$8,818,000 over September 30, 1997 of $7,171,000, which is a result of the
capital raised from the initial public offering of Blue River Bancshares,
Inc.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Non-performing assets consists of the following:
Non-accrual loans $ 545,497 $ 416,601
Real estate owned-net 118,218 36,727
--------- ---------
Total non-performing loans $ 663,715 $ 453,328
========= =========
Non-performing assets to total assets 0.54% 0.50%
</TABLE>
The Bank stops accruing interest on loans that become delinquent in excess
of 90 days. At September 30, 1998 loans in non-accruing status were
$664,000, an increase of $211,000 over September 30, 1997. The Bank's
real estate owned, containing properties foreclosed upon, have increased
to $118,000 at September 30, 1998 compared to $37,000 at September 30,
1997.
11
<PAGE>
Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
Period from Period from Period from
July 1, 1998 January 1, 1998 January 1, 1997
through through through
September 30, 1998 June 30, 1998 September 30, 1997
------------------ --------------- ------------------
<S> <C> <C> <C>
Balance, beginning of period $ 776,502 $ 422,376 $ 325,900
Add:
Provision for loan losses 75,000 480,000 104,000
Recoveries of loans previously charged off 17,068 7,677 1,146
Less gross charge-offs:
Residential real estate loans (11,093) (80,000)
Consumer loans (53,551) (39,369)
--------- --------- ---------
Balance, end of period $ 857,477 $ 776,502 $ 391,677
========= ========= =========
Net charge-offs to total average loans outstanding (0.03)% 0.30% 0.07%
Allowance to total average loans outstanding 0.96% 0.50% 0.54%
</TABLE>
Allowance for loan losses at September 30, 1998 was $857,000, an increase
of $465,000 from September 30, 1997. The increase in the allowance
included $375,000 of additional provisions being recorded in the first
quarter to address conditions observed during an OTS safety and soundness
examination prior to the effective date of merger. Specific reserves had
been established to address concerns related to certain classified loans.
In addition, the shift in loan mix to higher levels of non-residential
mortgage lending increased the inherent risks of the underlying portfolio,
and slight declines in asset quality ratios have been factored in to
strengthen the allowance position of the Bank.
RESULTS OF OPERATIONS: Three Month Period Ended September 30, 1998
-------------------------------------------------------------------
During the three month period ended September 30, 1998, net earnings were
$130,000 compared to net earnings of $133,000 during the three month
period ended September 30, 1997. This reduction is the result of an
increase to net interest income before provision for loan losses of
$340,000, an increase in non-interest income of $10,000, offset by an
increase to provision for loan losses of $48,000, an increase in
non-interest expenses of $284,000, and a corresponding reduction in
federal income taxes.
Net interest income was $1,018,000, after provision for loan losses, for
the three month period ended September 30, 1998, compared to $726,000 for
the three month period ended September 30, 1997. Net interest income
before provision for loan losses improved to $1,093,000 compared to
$753,000 for the three month period ended September 30, 1998 and 1997,
respectively.
12
<PAGE>
Interest income increased from $1,748,000 for the three month period ended
September 30, 1997 to $2,206,000 for the three month period ended
September 30, 1998. Interest income from loans was $1,904,000 for the
three month period ended September 30, 1998, an increase of $304,000 over
the same period in 1997. The increase in loan interest income consists of
a favorable volume variance of $307,000 offset by an unfavorable rate
variance of $4,000. Interest expense for the three month period ended
September 30, 1998 was $1,113,000 compared to $995,000 for the three month
period ended September 30, 1997. Interest expense on deposit accounts
increased from $739,000 for the three month period ended September 30,
1997 to $825,000 for the three month period ended September 30, 1998. The
increase in interest expense on deposits consists of a $162,000 increase
due to increased deposit balances, offset by a reduction of $78,000 due to
a decrease in the rates related to the deposit portfolio. Interest expense
on advances from the Federal Home Loan Bank ("FHLB") increased to $281,000
for the three months ended September 30, 1998 compared to $253,000 for the
three months ended September 30, 1997. The increase in balances related to
FHLB funding accounts for an increase of $55,000, however, rates on such
advances declined, resulting in a $27,000 favorable rate variance.
Total non-interest income was $109,000 for the three month period ended
September 30, 1998, compared to $99,000 for the same period in 1997. This
increase was due primarily to increases in loan fees collected by the
Bank. This increase is partially due to increased loan volume, as well as
the introduction of new fees during the quarter, namely loan documentation
fees on newly originated consumer loans.
Non-interest expense totaled $909,000 for the three month period ended
September 30, 1998 compared to $625,000 for the same period in the prior
year. Salaries and benefits have increased $103,000 to $340,000 for the
three month period ended September 30, 1998. For the three month period
ended September 30, 1998, goodwill amortization of $64,000 has been
recognized, while no such expense existed for the same period in 1997.
With increased deposits, deposit insurance premiums have increased $17,000
over 1997 levels. Other non-interest expenses for the quarter ended
September 30, 1998 were increased $57,000 over the prior year.
RESULTS OF OPERATIONS: Nine Month Period Ended September 30, 1998
------------------------------------------------------------------
The consolidated statement of earnings for the nine month period ended
September 30, 1998 includes the Successor statement of earnings for the
three months ended September 30, 1998 and the Predecessor statement of
earnings for the six month period ended June 30, 1998. Therefore, the
results of operations includes Management's Discussion and Analysis of the
Successor for the three months ended September 30, 1998 (pages 12-13), and
the following paragraph containing Management's Discussion and Analysis of
the Predecessor for the six months ended June 30, 1998.
Six Month Period Ended June 30, 1998
During the six month period ended June 30, 1998, net losses were $136,000
compared to net earnings of $252,000 during the six month period ended
June 30, 1997. The decrease in earnings is primarily the result of an
increase in the provision for loan losses of $426,000, expensing $146,000
in estimated costs of environmental remediation at the St. Paul site, and
an increase of $224,000 of professional expenses associated with the
merger.
Net interest income was $1,084,000, after provision for loan losses, for
the six month period ended June 30, 1998, compared to $1,310,000 for the
six month period ended June 30, 1997. Net interest income before provision
for loan losses improved to $1,564,000 compared to $1,364,000 for the six
month period ended June 30, 1998 and 1997, respectively. Net interest
margin before provision for loan losses declined by 1 basis point from the
six month period ended June 30, 1997.
13
<PAGE>
Interest income increased from $3,357,000 for the six month period ended
June 30, 1997 to $3,854,000 for the six month period ended June 30, 1998.
Interest income from loans was $3,549,000 for the six month period ended
June 30, 1998, an increase of $522,000 over the same period in 1997. This
variance in loan income contains a favorable volume variance of $556,000
offset by an unfavorable rate variance of $34,000. Interest expense for
the six month period ended June 30, 1998 was $2,290,000 compared to
$1,994,000 for the six month period ended June 30, 1997. Interest expense
on deposit accounts increased from $1,499,000 for the six month period
ended June 30, 1997 to $1,763,000 for the six month period ended June 30,
1998. The increased interest expense on deposits was comprised of a
$195,000 increase due to increased deposit balances, and $69,000 due to an
increase in the rates related to the deposit portfolio. Interest expense
on advances from the FHLB increased to $527,000 for 1998 compared to
$494,000 for 1997. The increase in balances related to FHLB funding
accounts for an increase of $110,000, however, rates on such advances
declined, resulting in a $77,000 favorable rate variance.
Total non-interest income was $213,000 for the six month period ended June
30, 1998, compared to $165,000 for the same period in 1997.
Non-interest expense totaled $1,517,000 for the six month period ended
June 30, 1998 compared to $1,083,000 for the same period in the prior
year. The primary increase in non-interest expense was related to
professional services for the merger with Blue River Bancshares, Inc. and
expensing costs associated with environmental remediation at the St. Paul
branch. Professional expenses for the six month period ended June 30, 1998
included $224,000 for services performed by legal counsel, auditors, and
Shelby County Bancorp's investment advisor with respect to the merger.
Also included in the six month period is a charge of $146,000 for
remediation programs at the St. Paul branch.
14
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
The Successor is subject to regulation as a savings and loan holding
company, and is subject to certain restrictions in its dealings with the
Bank. The Bank is subject to the regulatory requirements applicable to a
federal savings bank. Current capital regulations require savings
institutions to have minimum tangible capital equal to 1.5% to total
assets and a core capital ratio equal to 4.0% of total assets.
Additionally, savings institutions are required to meet a risk based
capital ratio equal to 8.0% for risk-weighted assets. At September 30,
1998, the Bank satisfied all capital requirements.
The following is a summary of the Bank's regulatory capital and capital
requirements at September 30, 1998 based on capital regulations currently
in effect for savings institutions.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------- ----------- -----------
<S> <C> <C> <C>
Regulatory capital $ 8,520,000 $ 8,520,000 $ 9,377,000
Minimum capital requirements 1,712,000 4,565,000 6,720,000
----------- ----------- -----------
Excess capital $ 6,808,000 $ 3,955,000 $ 2,657,000
=========== =========== ===========
Regulatory capital ratio 7.46% 7.46% 11.16%
Required capital ratio 1.50% 4.00% 8.00%
</TABLE>
Liquidity measures the Bank's ability to meet its savings withdrawals and
lending commitments. Management believes that the Bank's liquidity is
adequate to meet current requirements, such as the funding of $1,822,000
in loan commitments as of September 30, 1998. The Bank maintains liquidity
of at least 4% of net withdrawable assets. At September 30, 1998, its
regulatory liquidity ratio was 11.29%.
15
<PAGE>
Year 2000 Disclosure
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Successor's computer
programs and those of third-party computer related providers may recognize a
date using "00" as the year 1900 rather than the year 2000. This situation could
result in system failures or miscalculations causing disruption of operations
that could affect the ability of the Successor to operate effectively and
service customers.
I. THE SUCCESSOR'S STATE OF READINESS
The Successor is preparing for the year 2000 by testing and evaluating both its
information technology (IT) and non-information technology systems. The
Successor does not have any mission critical processes that are dependent on
non-IT systems. The non-IT systems, such as the telephone system, are either
currently compliant or are expected to be compliant in the fiscal year 1999. The
IT systems used by the Successor have been or are being tested. The components
of the IT systems being examined are: personal computers (hardware and
software), data service bureau, and other service providers.
In 1998, a comprehensive project plan to address the Year 2000 issue as it
relates to the Successor's operation was developed, approved by the Board of
Directors and implemented. The scope of the plan includes phases of Awareness,
Assessment, Renovation, Validation, and Implementation as defined by federal
banking regulatory agencies. The Successor's project team consists of key
members of the technology staff, representatives of functional business units,
and senior management. The project team estimates that the Successor's Year
2000 readiness project is 60% complete and that activities involved in assessing
external risks and operational issues are 70% complete overall. The following
table provides a summary of the current status of the five phases involved in
Year 2000 readiness and a projected timetable for completion.
<TABLE>
<CAPTION>
PROJECT PHASE % COMPLETED PROJECTED COMPLETION COMMENTS
------------- ----------- -------------------- --------
<S> <C> <C> <C>
Awareness 100% Completed
Assessment 100% Completed
Renovation 75% March 31, 1999
Validation 50% March 31, 1999
Implementation 10% June 30, 1999
</TABLE
An assessment of the impact of the Year 2000 issue on the Successor's computer
systems has been completed. The scope of the project also includes other
operational and environmental systems since they may be impacted if embedded
computer chips control the functionality of those systems. From the assessment,
the Successor has identified and prioritized those systems deemed to be mission
critical or those that have a significant impact on normal operations.
The Successor relies on third party vendors and service providers for its data
processing capabilities and to maintain its computer systems. Formal
communications with these providers were initiated in 1998 to assess the Year
2000 readiness of their products and services. Their progress in meeting their
targeted schedules is being monitored for any indication that they may not be
able to address the problems in time. Thus far, responses indicate that most of
the significant providers currently have compliant versions available or are
well into the renovation and testing phases with completion schedule for the
first quarter of 1999.
16
<PAGE>
Additionally, the Successor has implemented a plan to manage the potential risk
imposed by the impact of the Year 2000 issue on its major customers. Formal
communications have been initiated, and the assessment is scheduled to be
significantly completed by December 31, 1998.
II. THE COSTS TO ADDRESS THE SUCCESSOR'S YEAR 2000 ISSUES
The Successor has thus far primarily used and expects to continue to primarily
use internal resources to implement its readiness plan and to upgrade or replace
and test systems affected by the Year 2000 issue. The total cost to the
Successor of those Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position or results of operations in
any given year. In total, the Successor estimates that its costs, excluding
personnel expenses, for Year 2000 remediation and testing of its computer
systems will amount to less than $60,000 over the two year period from 1998
through 2000. Not included in this estimate is the cost to replace fully
depreciated systems during this period, which occurs in the normal course of
business and is not directly attributable to the Year 2000 issue.
The costs and the estimated timing in which the Successor plans to complete the
Year 2000 readiness activities are based on management's best estimates, which
were derived using numerous assumptions of future events including the continued
availability of certain resources, third party readiness plans and other
factors. The Successor can make no guarantee that these estimates will be
achieved, and actual results could differ from such plans.
III. THE RISKS OF THE SUCCESSOR'S YEAR 2000 ISSUES
The Successor is substantially dependent upon the services of Intrieve,
Incorporated of Cincinnati, Ohio. Intrieve is a provider of data processing
services for financial institutions throughout the United States. Intrieve is
concentrating on Year 2000 preparedness, including a recent migration to a new
processing system upon which testing is currently being conducted. A proxy test
was concluded in October 1998 with results soon to be released to client
institutions for their review. The Successor continues to monitor the Intrieve
efforts related to Year 2000 compliance due to the potential risk to the
Successor in the failure of Intrieve to realize Year 2000 preparedness.
The Successor has established parameters and processes for management to
identify material customers, evaluate their preparedness, assess their credit
risk and implement controls to manage the risk arising from their failure to
properly address Year 2000 technology issues. The Successor faces increased
credit and liquidity risk when customers encounter Year 2000 related problems.
Customers that must be evaluated and monitored are those that, if adversely
impacted by Year 2000 technology issues, represent a significant financial
exposure to the Successor in terms of either credit loss or liquidity. The
organizations that have been identified as material customers of the Successor
will be monitored because of their reliance on technology for their successful
business operations.
Failure of borrowers, or servicers to address Year 2000 problems may increase
credit risk to the Successor through the inability of these parties to meet the
terms of their contracts and make timely payments of principal and interest to
the Successor. Liquidity risk may result if depositors, or lenders experience
Year 2000 related business disruption or operational failures and are unable to
provide funds or fulfill funding commitments to the Successor.
IV. THE SUCCESSOR'S CONTINGENCY PLAN
Realizing that some disruption may occur despite its best efforts, the Successor
is in the process of developing contingency plans for each critical system in
the event that one or more of those systems fail. While this is an ongoing
process, the Successor expects to have the plan substantially documented by
March 31, 1999.
17
<PAGE>
II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Neither the Successor nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time, the Bank
is a party to legal proceedings wherein it enforces its security
interest in mortgage loans made by it.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(1) The Successor completed its initial public offering pursuant to a
Registration Statement on Form SB-2 (File No. 333-48269) declared
effective by the Securities and Exchange Commission on June 22,
1998 and issued 1,500,000 shares of its Common Stock, no par, to
the public at a price of $12.00 per share.
(2) The offering pursuant to the Registration Statement was commenced
on June 23, 1998.
(3) The offer terminated after 1,500,000 shares of common stock
registered under the Registration Statement were sold.
(i) The underwriter for the initial public offering was Roney
Capital Markets, a division of First Chicago Capital
Markets, Inc.
(ii) The Registration Statement registered 1,725,000 shares of
common stock which included 225,000 shares of common stock
for the Underwriter to cover over-allotments. The
Underwriter did not exercise its option to purchase these
225,000 shares of common stock.
(iii) From June 22, 1998 through September 30, 1998, the Successor
incurred the following expenses in connection with the
issuance and distribution of the securities registered
pursuant to the Registration Statement, none of which
constituted direct or indirect payments to directors,
officers or general partners of the Successor (other
expenses represent a reasonable estimate of actual costs
incurred):
Underwriting discounts and commissions $1,194,000
Finders fees
Expenses paid to or for Underwriters
Other expenses 10,500
----------
Total expenses $1,204,500
----------
(iv) The net proceeds to the Successor of the offering pursuant
to the Registration Statement, after deducting the expenses
listed in (iii) above are $16,795,500. The Successor
received approximately $16,200,000 of cash from the initial
public offering, net of underwriting discounts, commissions,
and other offering costs and expenses.
(v) From June 22, 1998 through September 30, 1998, the Successor
has applied the following amounts of its net proceeds from
the offering pursuant to the Registration Statement, none of
which constituted direct or indirect payments to the
Company's affiliates, 10 percent stockholders, directors,
officers or general partners or their associates, direct or
indirect payments to others, except for repayment of
indebtedness to Steven R. Abel, Robert C. Reed and D. Warren
Robison (collectively, the "Founders"), each of whom is an
officer and shareholder of the Successor:
18
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Construction of plant, building and facilities $
Purchase and installation of machinery and equipment
Purchases of real estate
Acquisitions of other business(es) 10,367,915
Repayment of indebtedness to the Founders 346,000
Working capital (Holding Company) 2,848,750
Contribution of Capital to the Bank 2,500,000
Temporary investments (specified below) 137,335
Other uses of at least $100,000 (specified below)
</TABLE>
Temporary investments consist of high quality, short term, liquid
investments.
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibit 27--Financial Data Schedule
b) Report on Form 8-K, dated July 2, 1998 reporting the consummation
of the merger of the Predecessor into the Successor and the
acquisition of the Bank by the Successor. The Form 8-K also
reported the removal by the Office of the Thrift Supervision of
certain restrictions on commercial lending by the Bank effective
on June 26, 1998 (the effective date of the merger).
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereto duly authorized.
Blue River Bancshares, Inc.
Date: November 12, 1998 By /s/ Bradley A. Long
----------------- -------------------------------
Bradley A. Long, Vice President,
Chief Financial Officer and Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ISSUER'S
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998. THE
REVENUES AND EXPENDITURES CONTAINED HEREIN ARE COMPILED BY COMBINING THE
SUCCESSOR THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 WITH THE PREDECESSOR
SIX MONTH PERIOD ENDED JUNE 30, 1998 AS PRESENTED ON PAGE 5 OF FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 827,864
<INT-BEARING-DEPOSITS> 12,645,778
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 701,920
<INVESTMENTS-MARKET> 10,627,943
<LOANS> 89,540,374
<ALLOWANCE> 857,477
<TOTAL-ASSETS> 121,612,832
<DEPOSITS> 84,449,405
<SHORT-TERM> 20,374,191
<LIABILITIES-OTHER> 800,220
<LONG-TERM> 0
0
0
<COMMON> 16,193,094
<OTHER-SE> (204,078)
<TOTAL-LIABILITIES-AND-EQUITY> 121,612,832
<INTEREST-LOAN> 5,362,912
<INTEREST-INVEST> 442,621
<INTEREST-OTHER> 165,321
<INTEREST-TOTAL> 6,059,854
<INTEREST-DEPOSIT> 2,588,347
<INTEREST-EXPENSE> 814,687
<INTEREST-INCOME-NET> 2,426,736
<LOAN-LOSSES> 555,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,383,294
<INCOME-PRETAX> (2,222)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,837)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.2
<LOANS-NON> 663,715
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 422,376
<CHARGE-OFFS> 133,551
<RECOVERIES> 13,652
<ALLOWANCE-CLOSE> 857,477
<ALLOWANCE-DOMESTIC> 857,477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
