As Filed with the Securities and Exchange Commission on March 19, 1998
Registration No. 333-____________
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
BLUE RIVER BANCSHARES, INC.
(Name of small business issuer as in its charter)
Indiana 6035 35-2016637
(State or jurisdiction (Primary Standard (I.R.S. Employee
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
P.O. Box 927
Shelbyville, Indiana 46176
(317) 392-7700
(Address and telephone number of principal executive offices and
principal place of business or intended principal place of business)
Robert C. Reed, President
Blue River Bancshares, Inc.
P.O. Box 927
Shelbyville, Indiana 46176
(317) 392-7700
(Name, address, and telephone number of agent for service)
Copies to:
Timothy M. Harden, Esq. Mark B. Barnes, Esq.
Michael J. Messaglia, Esq. Leagre Chandler & Millard
Krieg DeVault Alexander & Capehart 9100 Keystone Crossing, Suite 800
One Indiana Square, Suite 2800 Indianapolis, IN 46250
Indianapolis, IN 46204 Telephone: (317) 843-1655
Telephone: (317) 636-4341 Fax: (317) 846-7900
Fax: (317) 636-1507
----------------
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Title
of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities to be to be Offering Price Aggregate Registration
Registered Registered (1) per Share (1) Offering Price (1) Fee (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
no par value 1,437,500 shares $12.00 $17,250,000 $5,089
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 187,500 shares of Common Stock which may be purchased by the
Underwriter to cover over-allotments.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
==============================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a) OF
THE SECURITIES ACT OF 1933, MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED ______________, 1998
PROSPECTUS
[LOGO]
1,250,000 SHARES
BLUE RIVER BANCSHARES, INC.
Common Stock
______________________________
Blue River Bancshares, Inc. (the "Company"), an Indiana corporation,
is offering for sale 1,500,000 shares of its no par value common stock (the
"Common Stock"). The Company is a proposed unitary savings and loan holding
company which will acquire all of the outstanding common stock of Shelby
County Savings Bank, FSB (the "Bank"), through the merger of the Bank's
holding company, Shelby County Bancorp ("SCB"), into the Company (the
"Merger"), pursuant to a merger agreement between the parties. The Bank is
headquartered in Shelbyville, Indiana which is part of the greater
Indianapolis metropolitan area. The Company has never conducted any business
operations other than matters related to its initial organization, activities
relating to the acquisition or formation of a bank to be headquartered in
Shelbyville, Indiana and the raising of capital. See "BUSINESS OF BLUE RIVER
BANCSHARES, INC." The Bank was established in 1937 as a federally-chartered
mutual savings and loan association and converted to a federally-chartered
stock savings bank in 1991. Upon consummation of the Merger, SCB's separate
corporate existence will cease and shares of common stock of SCB will no
longer be traded. There has been no public trading market for the Common
Stock. Roney & Co., L.L.C. has advised the Company that it anticipates
making a market in the Common Stock following completion of the offering,
although there can be no assurance that an active trading market will develop.
See "UNDERWRITING" for a discussion of the factors considered in determining
the initial public offering price. The Company expects that the quotations
for the Common Stock will be reported on the NASDAQ Small-Cap Market under the
symbol "BRBI." The directors and officers of the Company have indicated their
non-binding expressions of interest to purchase at least of the
shares of Common Stock in the offering.
______________________________
THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A SIGNIFICANT AMOUNT OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND THEY ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================
Price to Underwriting Proceeds to
Public Discounts (1) (2) Company (1)(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $12.00 $ $
- ---------------------------------------------------------------------------------------------------------
Total (1) $15,000,000 $ $
=========================================================================================================
</TABLE>
(1) The Company has granted the Underwriter a 30-day option to purchase
up to additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriter exercises such option in
full, the Price to Public, Underwriting Discounts, and Proceeds to
Company will be approximately $ , $
and $ , respectively. See "UNDERWRITING." The Underwriter
has agreed to limit the Underwriting Discounts to 4.0% of the Price
to Public for up to shares sold by the Underwriter to
officers and directors of the Company or their immediate families,
and certain other persons. See "UNDERWRITING." If shares
are so purchased, Underwriting Discounts will be reduced by, and
Proceeds to Company will be increased by, $ .
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting".
(3) Before deducting estimated offering expenses payable by the
Company of $ .
______________________________
The shares of Common Stock are offered by the Underwriter
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, and subject to the right of the Underwriter to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It
is expected that delivery of the shares of Common Stock will be made
through the facilities of The Depository Trust Company in New York, New
York, on or about , 1998,
against payment therefor in immediately available funds.
______________________________
RONEY & CO.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
[MAP OF SHELBY COUNTY SAVINGS BANK, FSB SERVICE AREA]
<PAGE>
______________________________
AVAILABLE INFORMATION
The Company is not currently a reporting company pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), but will be
subject to the informational requirements of the Exchange Act following the
completion of the offering, and in accordance therewith, will file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York, 10048, and
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
information is also available on the World Wide Web site maintained by the
Commission at http://www.sec.gov.
Requests for such documents also may be directed to Bradley A. Long,
Vice President and Chief Financial Officer of Blue River Bancshares, Inc., at
P.O. Box 927, Shelbyville, Indiana 46176. The Company's current telephone
number is (317) 392-7700. The Company's address following completion of the
Merger will be 29 East Washington Street, P.O. Box 927, Shelbyville, Indiana
46176 and its telephone number will be (317) 398-9721.
SCB is subject to the informational requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by SCB with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 7 World Trade Center, Suite 1300, New York, New York, 10048, and 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The information is
also available on the World Wide Web site maintained by the Commission at
http://www.sec.gov.
All information contained in this Prospectus with respect to the
Company has been supplied by the Company, and all information contained in
this Prospectus with respect to SCB or the Bank has been supplied by SCB or
the Bank.
______________________________
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
-3-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Except as otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriter's over-allotment option.
BLUE RIVER BANCSHARES, INC.
Blue River Bancshares, Inc. (the "Company"), an Indiana corporation,
was organized on March 18, 1997 for the purpose of acquiring or forming a bank
to be headquartered in Shelbyville, Indiana, which is part of the greater
Indianapolis metropolitan area. The Company has no operating history. This
Prospectus covers shares of Common Stock to be offered by the Company. The
Company's primary purpose will be to own and operate Shelby County Savings
Bank, FSB (the "Bank"), headquartered in Shelbyville, Indiana, as the Bank's
parent company and sole shareholder. The Bank was established in 1937 as a
federal savings and loan. Shelby County Bancorp ("SCB") currently is the
Bank's parent company and sole shareholder. As of December 31, 1997 SCB had
total assets of $97.2 milllion and total deposits of $70.8 million. The
Company will acquire the Bank pursuant to the Amended and Restated Agreement
of Affiliation and Merger dated March 12, 1998 (the "Merger Agreement") among
the Company, SCB, and the Bank, through the merger of SCB with and into the
Company (the "Merger"). At the closing of the Merger, the Bank's name will be
changed to "Shelby County Bank," the separate corporate existence of SCB will
cease and shares of common stock of SCB will no longer be traded. The Bank's
main office is located in Shelbyville, Indiana and its branch offices are
located in Shelbyville, Morristown and St. Paul in Shelby County, Indiana.
The Bank's retail strategy will be to offer, primarily in Shelby
County, a wide range of basic banking products and services that will be
reasonably priced and easily understood by the customer. The Bank's
commercial strategy will center on small to medium- sized businesses.
Completion of the offering will be conditioned upon, among other things, the
Company and the Bank having received all necessary regulatory approvals with
respect to the Merger and satisfying certain conditions contained therein and
the other conditions set forth in the Merger Agreement. Management
anticipates that the Merger will be consummated in the second quarter of 1998.
The Company intends to implement a business strategy aimed at making
the Bank's operations more like a commercial bank than a traditional thrift.
In this regard, the Company's business strategy for the Bank following the
Merger will include the following:
- Increase the volume of commercial lending.
Commercial lending by the Bank has been nominal to
date. The Company intends to expand the types of
commercial products offered by the Bank to include
commercial loans secured by equipment, inventory,
accounts receivables and real estate and loans to
individuals and organizations in the agricultural
industry in the Bank's primary market area. The
Shelby County Chamber of Commerce has indicated that
there are 1,100 businesses in Shelby County, the
Company intends to focus on these businesses.
- Establish a mortgage secondary market operation.
The Company believes a secondary market operation
will enhance fee income, improve asset/liability
management and increase liquidity. The Company
believes this will enable the Bank to improve net
interest income by converting a portion of the
Bank's lower yielding fixed-rate mortgages into
adjustable rate and balloon mortgages and higher
yielding shorter-term commercial and consumer loans.
-4-
<PAGE>
- Increase the volume of consumer lending. The Bank
intends to begin purchasing indirect auto loans
through a select group of auto dealers that are
located in the Bank's primary market area and that
are well-known to the management of the Company. The
Bank also intends to "cross-sell" its consumer loan
products, including home equity loans, to its
existing mortgage and other customers.
- Increase deposits. The Bank intends to offer an
expanded mix of checking account products which are
designed to meet the diverse needs of businesses and
individuals and lower the cost of funding the loans
made by the Bank.
The Company's business strategy is intended to combine the commercial
banking skills of the Company's management with the existing reputation and
presence of the Bank as one of the leading single-family mortgage lenders in
Shelby County. Accordingly, as part of its business strategy, and as soon as
is practical after the Merger, the Company intends to convert the Bank from a
federally-chartered savings bank to an Indiana state-chartered commercial
bank.
All of the financial institutions in Shelby County, Indiana, except
the Bank, are affiliated either with large, out-of-state holding companies or
with medium-sized holding companies headquartered outside of Shelby County.
Management of the Company believes that this situation has created a favorable
opportunity for the Bank to continue as a locally-managed bank headquartered
in Shelbyville, Indiana that demonstrates an interest in the business and
personal financial affairs of its customers. Management further believes that
the Bank can be successful in attracting small and medium sized businesses,
professionals and individuals in Shelby County who desire to deal with a
locally-managed bank.
PENDING TRANSACTION
Pursuant to the Merger Agreement, the Company will acquire the Bank
through the Merger. Following the Merger, the Bank will be a wholly-owned
subsidiary of the Company. At the closing of the Merger, the outstanding
shares of common stock of SCB ("SCB Common Stock") will be converted into the
right to receive a cash amount totaling $11,005,500 (the "Merger
Consideration"), assuming that all of the outstanding options for shares of
SCB Common Stock have been exercised prior to the closing of the Merger and
that no SCB shareholder asserts and perfects dissenters' rights in accordance
with Indiana law. Upon consummation of the Merger, the separate corporate
existence of SCB will cease and shares of SCB Common Stock will cease to be
traded. See "USE OF PROCEEDS" and "PRO FORMA COMBINED FINANCIAL INFORMATION."
The closing of the Merger is subject to various conditions,
including, among others, obtaining requisite and satisfactory shareholder and
regulatory approvals and the receipt of certain opinions and certificates.
The Company and SCB are in compliance with all conditions and other
requirements required to have been satisfied prior to the date hereof. None
of the shares of Common Stock offered hereby will be sold unless the Company
and the Underwriter determine that all the material conditions precedent to
the closing of the Merger have been or will be fulfilled, or waived to the
satisfaction of the Underwriter, concurrently with or immediately following
the sale of the shares of Common Stock offered hereby. Completion of the
Merger is conditioned upon the closing of the offering since no alternative
financing for the Merger Consideration has been arranged or is currently
contemplated by the Company. The offering is expected to be completed
immediately prior to the closing of the Merger and as soon as practicable
following receipt of shareholder approvals and all necessary regulatory
approvals. See "PENDING TRANSACTION" AND "UNDERWRITING."
-5-
<PAGE>
For additional information regarding the Company, see "BLUE RIVER
BANCSHARES, INC.," "BUSINESS OF BLUE RIVER BANCSHARES, INC." and "FINANCIAL
STATEMENTS - BLUE RIVER BANCSHARES, INC."
For additional information regarding SCB and the Bank, see "SHELBY
COUNTY BANCORP," "BUSINESS OF SHELBY COUNTY BANCORP," "SELECTED CONSOLIDATED
FINANCIAL DATA OF SHELBY COUNTY BANCORP," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SHELBY COUNTY
BANCORP," "BUSINESS OF SHELBY COUNTY BANCORP" and "CONSOLIDATED FINANCIAL
STATEMENTS - SHELBY COUNTY BANCORP."
For additional information regarding the Company and SCB, see "PRO
FORMA COMBINED FINANCIAL INFORMATION."
[Flow Chart of Merger]
MANAGEMENT AND BOARD OF DIRECTORS
The Company has assembled a management team and a Board of Directors
that have strong banking and business experience in the Bank's market area and
a shared vision and commitment to the future growth and success of the Bank.
The Company intends for the Bank to compete aggressively for its banking
business through a systematic program of direct calling on both prospective
customers and referral sources such as attorneys, accountants and other
business people, many of whom the Company's directors and officers have come
to know during their professional careers.
Robert C. Reed, age 32, President and Chief Executive Officer of the
Company, has over thirteen years of banking experience in the community. Mr.
Reed will serve as the Bank's President and Chief Executive Officer following
the closing of the Merger. Prior to his employment by the Company, from
April, 1996 to August, 1997, Mr. Reed was Vice President, Regional Director
and a member of the management committee of Citizens Bank of Central Indiana
("Citizens Bank"), which is a subsidiary of CNB Bancshares, Inc., Evansville,
Indiana. Prior to his employment by Citizens Bank, Mr. Reed served in various
lending and administrative positions in Shelby County with Farmers National
Bank (now a part of National City Bank, Indiana), Irwin Union Bank and Trust
Company and Norwest Mortgage, Inc. Mr. Reed is currently a member of the
Shelby County Chamber of Commerce and the Morristown Chamber of Commerce and
is the past President of the Town Council in Morristown, Indiana.
Bradley A. Long, age 34, Vice President and Chief Financial Officer
of the Company, has over eleven years of banking experience. Mr. Long will
serve as the Senior Vice President and Treasurer of the Bank following the
closing of the Merger. Prior to his employment by the Company, Mr. Long
served as the Vice President and Controller of First of America's Bankcard
Division in Kalamazoo, Michigan from March 1997 to February 1998 and he served
as Vice President-Financial Analysis Manager of First of America in
Indianapolis, Indiana from April 1994 to March 1997. Prior to Mr. Long's
employment by First of America, he served as the Assistant Vice
President-Accounting/Special Projects for STAR Financial Group, Marion,
Indiana, the holding company of STAR Financial Bank, from May 1986 to April
1994.
The Company has assembled a Board of Directors comprised of
individuals with a broad background in banking, business and agriculture and a
high level of community involvement. Steven R. Abel, age 48, is a licensed
real estate appraiser with Hoosier Appraisal Service, Inc. and farmer and has
over eighteen years of banking experience. He served as Vice President of
Fifth Third Bank of Central Indiana and its predecessor, the New Palestine
Bank, and served on their respective senior management teams. Mr. Abel was
-6-
<PAGE>
also a Vice President and Senior Lending Officer of Central Indiana Bank (now
a part of Key Bank). Ralph W. Van Natta, age 68, is a local businessman and
former Mayor of Shelbyville and past Commissioner of the Indiana Bureau of
Motor Vehicles. D. Warren Robison, age 32, is a licensed real estate
appraiser and is the President and sole shareholder of Hoosier Appraisal
Service, Inc. Immediately following the closing of the Merger, the Company
intends to add James M. Robison, age 70, Chairman of SCB and the Bank, and
Leonard J. Fischer, age 61, a director of SCB and the Bank, as directors of
the Company, both of who have advised that they intend to serve when elected
to the Board of Directors and to continue as directors of the Bank.
The Company expects that the Bank will hire a Vice President and
Chief Credit Officer shortly following consummation of the Merger.
The officers and employees of the Bank are expected to continue as
officers and employees of the Bank following completion of the Merger, except
that Mr. Reed will be the President and Chief Executive Officer of the Bank
and Mr. Abel will be the Chairman of the Bank. The current President and
Chief Executive Officer of the Bank, Rodney L. Meyerholtz, and the current
Chairman of the Bank, James M. Robison, will each resign their respective
positions with the Bank at the closing of the Merger. Although Mr. Robison
will continue to serve as a director of the Bank. See "PENDING TRANSACTION -
Related Agreements and Transactions" and "MANAGEMENT OF THE COMPANY AND THE
BANK."
The directors and executive officers of the Company have indicated
their non-binding expressions of interest to purchase, alone or with their
associates, at least shares in the offering. See "PRINCIPAL
SHAREHOLDERS."
The management team and the Board represent a significant asset to
the Company and the Bank. These individuals have many years of personal
experience in the financial services industry. The Company believes that
these individuals and their relationships in the Bank's market area should
offer the Bank a substantial opportunity to attract new relationships.
MARKET AREA
Shelby County is in the top one-third out of 92 counties in the State
of Indiana in terms of personal income and population growth from 1990 through
1995 based on estimates of the Ball State University's Bureau of Business
Research. Following the Merger, the Bank's primary service area will
continue to be Shelby County which is located approximately 25 miles southeast
of Indianapolis, Indiana. Management of the Company believes that this
community has an expanding and diverse economic base, which includes a wide
range of small to medium-sized businesses engaged in manufacturing, services
and retail. There are approximately 1,100 businesses in Shelby County. As of
December 31, 1997, the unemployment rate for Shelby County was 2.8%, compared
with the statewide average of approximately 3.4%, according to Ball State
University's Bureau of Business Research.
The Company's address following completion of the Merger will be 29
East Washington Street, P.O. Box 927, Shelbyville, Indiana 46176 and its
telephone number will be (317) 398-9721. The Company's current mailing
address is P.O. Box 927, Shelbyville, Indiana 46176 and its telephone number
is (317) 392-7700.
THE OFFERING
Securities Offered by the Company ........ 1,250,000 shares of Common Stock.
In addition, the Company has
granted the Underwriter an option
to purchase up to an additional
shares to cover
-7-
<PAGE>
over-allotments. See "DESCRIPTION
OF CAPITAL STOCK" and
"UNDERWRITING."
Common Stock to be Outstanding
After the Offering ........................ 1,250,000 shares (1,437,500 shares
if the over-allotment option
is exercised in full).
Use of Proceeds by the Company ............ (a) Payment of the Merger
Consideration, (b) contribution
of additional capital to the
Bank, (c) repayment of borrowings
that have financed expenses and
costs of the Company and (d)
general corporate purposes,
including possible branch
expansion. See "USE OF PROCEEDS."
Proposed NASDAQ Small-Cap
Market Symbol ............................. BRBI
-8-
<PAGE>
SUMMARY CONDENSED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA OF BLUE RIVER BANCSHARES, INC.
AND SHELBY COUNTY BANCORP
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
Historical Data. The following table presents certain condensed consolidated
historical financial and operating data of SCB as of and for each of the years
in the two year period ended September 30, 1997 and as of and for each of the
three month periods ended December 31, 1997 and 1996. The following table
should be read in conjunction with the consolidated financial statements of
SCB, including the respective notes thereto, which appear elsewhere in this
Prospectus. See "CONSOLIDATED FINANCIAL STATEMENTS--Shelby County Bancorp".
In the opinion of management of SCB, the data presented for the three month
periods ended December 31, 1997 and 1996 reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
such data. Results for the three month periods ending December 31, 1997 and
1996 are not necessarily indicative of results that may be expected for any
other interim period or the year as a whole.
Pro Forma Data. The following table presents certain unaudited pro forma
condensed combined financial data for the Company giving effect to the Merger
as if it had occurred as of the beginning of the earliest period indicated
herein and after giving effect to the pro forma adjustments described in the
Notes to Blue River Bancshares, Inc. and Shelby County Bancorp Unaudited Pro
Forma Combined Financial Statements. The Merger will be accounted for as a
purchase, and the SCB assets acquired and liabilities assumed will be recorded
at their estimated fair values, with the excess of the purchase price over the
net fair market value recorded as goodwill. The purchase accounting
adjustments are based on preliminary estimates of fair values. Actual fair
values will be determined at the date of the Merger, and, accordingly the
adjustments that have been included in the pro forma financial information are
subject to change pending the final allocation of the total purchase cost of
the Merger. This information should be read in conjunction with (i) the pro
forma financial information, including the notes thereto, which appear
elsewhere in this Prospectus, and (ii) the historical consolidated financial
statements of the Company and SCB, including the respective notes thereto,
which appear elsewhere in the Prospectus. See "PRO FORMA COMBINED FINANCIAL
INFORMATION," and "CONSOLIDATED FINANCIAL STATEMENTS--Shelby County Bancorp"
and "FINANCIAL STATEMENTS--Blue River Bancshares, Inc." The pro forma
financial data does not give effect to any revenue enhancements or operating
efficiencies that the Company's management believes may result from the
transaction. The pro forma adjustments reflect (i) the aggregate amount of
cash to be paid to the shareholders of SCB by the Company as a result of the
Merger and the related purchase accounting adjustments, (ii) the consummation
of the offering, (iii) the termination of the Company's subchapter S election
under the Code. The pro forma financial data is not necessarily indicative of
the results that actually would have occurred had the Merger been consummated
on the dates indicated or that may occur in the future.
-9-
<PAGE>
<TABLE>
<CAPTION>
Blue River
Shelby County Bancorp Bancshares, Inc.
At or for the Three At or for the At or for the
Months Ended Year Ended Year Ended
December 31, September 30, December 31,
------------------- -------------- -------------
Historical Historical Pro Forma
------------------- -------------- -------------
1997 1996 1997 1996 1997
------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income $1,867 $1,603 $6,708 $5,839 $6,701
Interest expense 1,117 904 3,892 3,341 3,801
------------------ ---------------- ---------
Net interest income 750 699 2,816 2,498 2,900
Provision for loan losses 30 23 104 100 111
Non-interest income 101 85 349 518 365
Non-interest expense 534 545 2,253 2,546 2,731
------------------ ---------------- ---------
Income before income taxes 287 216 808 370 423
Provision for income taxes 113 87 295 134 223
------------------ ---------------- ---------
Net income $174 $129 $513 $236 $200
================== ================ =========
PER SHARE DATA: (6)
Basic earnings per share N/A N/A N/A N/A $0.16
Diluted earnings per share N/A N/A N/A N/A 0.16
Cash dividends per share N/A N/A N/A N/A 0.00
Book value per share N/A N/A N/A N/A 10.87
Tangible book value per share (4) N/A N/A N/A N/A 8.32
BALANCE SHEET DATA:
Total assets $97,221 $86,108 $90,609 $82,676 $104,500
Loans, net 79,591 69,579 76,038 66,098 80,533
Allowance for loan losses 422 335 392 326 422
Securities 8,948 8,624 8,695 8,511 8,960
Goodwill - - - - 3,177
Deposits 70,784 64,288 64,633 65,286 71,464
Shareholders' equity 7,488 6,614 6,546 6,103 13,583
Tangible shareholders' equity (5) 7,488 6,614 6,546 6,103 10,406
PERFORMANCE RATIOS: (1)
Return on average assets 0.72% 0.62% 0.60% 0.32% -
Return on average shareholders' equity 10.45 8.30 8.12 3.93 -
Net interest margin 3.09 3.36 3.29 3.25 -
Non-interest income to total average assets 0.42 0.41 0.41 0.69 -
Non-interest expense to total average assets 2.22 2.62 2.62 3.41 -
Efficiency ratio (2) 0.63 0.70 0.71 0.84 -
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.77% 0.46% 0.55% 0.37% -
Allowance for loan losses to total loans 0.53 0.48 0.52 0.49 -
Allowance for loan losses to non-performing loans 0.69 1.05 0.86 1.32 -
Net charge-off loans to average loans (1) 0.00 0.02 0.05 0.02 -
CAPITAL RATIOS: (3)
Shareholders' equity to assets 7.70% 7.68% 7.91% 7.78% -
Tangible capital ratio 6.02 6.33 6.32 6.40 -
Core capital ratio 6.02 6.33 6.32 6.40 -
Total risk-based capital ratio 9.46 10.13 9.50 10.30 -
</TABLE>
- -------------------
(1) Performance ratios for the three months ended December 31, 1997 and 1996
are stated on an annualized basis.
(2) Efficiency ratio is equal to non-interest expense divided by net interest
income plus non-interest income less gains or losses on security
transactions.
(3) For definitions and further information relating to the Bank's regulatory
capital requirements, see "REGULATION AND SUPERVISION -- Regulation of
the Bank as a Savings Bank, Savings Association Regulatory Capital"
and "-- Regulations Applicable to the Bank as a Savings Bank or
Commercial Bank, Prompt Corrective Action"
(4) Tangible book value per share is equal to total shareholders' equity less
goodwill divided by the weighted average common shares outstanding.
(5) Tangible shareholders' equity is equal to total shareholders' equity less
goodwill.
(6) Per share data for the historical periods of SCB have not been presented.
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RISK FACTORS
The Common Stock offered hereby involves significant risk. The following
constitute some of the potential risks of an investment in the Common Stock
and should be carefully considered by prospective investors prior to
purchasing shares of Common Stock. The order of the following factors is not
intended to be indicative of the relative importance of any described risk nor
is the following intended to be inclusive of all risks of investment in the
Common Stock.
LACK OF OPERATING HISTORY
The Company has no operating history and the business of the Company is
subject to the risks inherent to the establishment of a new business
enterprise. Although the Company will be acquiring the Bank which has a long
history of operations, the Company has not commenced operations and,
therefore, prospective investors do not have access to all of the information
that, in assessing their proposed investment, is available to the purchasers
of securities of a company with a history of operations.
IMPLEMENTATION OF BUSINESS STRATEGY
The Company's acquisition of the Bank is subject to certain risks that
could adversely affect its financial condition and profitability. These risks
may include, among others, incorrectly assessing the Bank's financial
condition and future earnings potential or encountering difficulty in
implementing the Company's business strategy for the Bank. The Company's
strategy for the Bank includes converting the Bank to an Indiana
state-chartered commercial bank (the "Conversion") which requires the prior
approval of the Indiana Department of Financial Institutions (the
"Department"). Additionally, the Conversion is subject to the prior approval
of the Board of Governors of the Federal Reserve System (the "Federal
Reserve") with respect to the Company becoming a bank holding company under
the federal Bank Holding Company Act of 1956, as amended (the "BHC Act").
There can be no assurance that such approvals will be received or upon what
terms and conditions, if any, such approvals will be issued. If such
approvals are not received, the Company's business strategy for the Bank will
be limited to that permitted under a thrift charter and, thus, would generally
limit the ability of the Bank to make commercial loans. See "REGULATION AND
SUPERVISION -- Regulation of the Bank as a Savings Bank, Qualified Thrift
Lender."
LENDING RISKS AND LENDING LIMITS
The risk of nonpayment of loans is inherent in banking, and such
nonpayment, if it occurs, may have a material adverse effect on the Company's
earnings and overall financial condition as well as the value of the Common
Stock. Moreover, the Company's business strategy to increase consumer and
commercial lending, and reduce the dependence of the Bank on single-family
residential real estate loans, will likely result in a larger concentration by
the Bank on consumer and commercial loans. As a result, the Bank may assume
greater risks than banks which have a lesser concentration of consumer and
commercial loans.
Commercial loans rely primarily on the operations of the borrower for
repayment and secondarily on the underlying collateral. Underwriting
commercial loans involves an assessment of certain criteria, including, among
others, management, products, markets, cash flow, capital, income and
collateral of the borrower. Failure of management to properly assess such
underwriting criteria or the deterioration of the borrower's business or
collateral could result in credit losses.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for home equity lines of credit,
usually involve more credit risk than mortgage loans because of
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the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability,
and are thus likely to be adversely affected by job loss, illness and personal
bankruptcy. In many cases, repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of depreciation of the underlying collateral.
Agricultural loans generally have shorter terms and higher interest rates
than residential mortgage loans and usually involve more credit risk than
mortgage loans because of the type and nature of the collateral (crops and
farm equipment). In addition, agricultural loans rely primarily upon crops
which may be adversely affected by weather, disease and market prices.
Management of the Company will attempt to minimize the Bank's credit
exposure by carefully monitoring the concentration of its loans within
specific industries and by prudent loan application and approval procedures.
The Bank also will manage credit risk and the credit approval process by
adhering to written policies which will generally specify underwriting
standards for each type of loan. All such policies will be reviewed by the
Board of Directors of the Bank. However, there can be no assurance that such
monitoring, procedures and policies will reduce certain lending risks. Loan
losses can cause insolvency and failure of a financial institution and, in
such event, its shareholders could lose their entire investment.
The Bank's legal lending limit will be determined by applicable law. The
Bank's legal lending limit for loans to one borrower is expected to increase
from approximately $987,000 to $__________ based upon the information as of
December 31, 1997 set forth in "PRO FORMA COMBINED FINANCIAL INFORMATION."
However, the Board of Directors of the Bank may establish an in-house limit
that may be somewhat lower than the Bank's legal lending limit. The size of
the loans which the Bank will offer to its customers may be less than the size
of the loans that most of the Bank's competitors are able to offer. This
limit may affect to some degree the ability of the Bank to seek relationships
with the larger businesses in the Bank's market. The Bank expects to satisfy
loan requests in excess of its lending limit through the sale of
participations in such loans to other banks. However, there can be no
assurance that the Bank will be successful in attracting or maintaining
customers seeking larger loans or that the Bank will be able to engage in the
sale of participations in such loans on terms favorable to the Bank.
INTEREST RATE SENSITIVITY
The Bank's profitability will, in part, be a function of the spread
between the interest rates earned on investments and loans and the interest
rates paid on deposits and other interest-bearing liabilities. Like most
banking institutions, the Bank's net interest spread and margin will be
affected by general economic conditions and other factors that influence
market interest rates and the Bank's ability to respond to changes in such
rates. At any given time, the Bank's assets and liabilities will be such that
they are affected differently by a given change in interest rates, principally
due to the fact that the Bank does not match the maturities of its loans and
investments precisely with its deposits and other funding sources. As a
result, an increase or decrease in interest rates could have a material
adverse effect on the Bank's net income, capital and liquidity. While
management intends to take measures to mitigate interest rate risk, there can
be no assurance that such measures will be effective in minimizing the Bank's
exposure to interest rate risk. At ______________, 1998, the Bank had a
negative interest rate gap which means the Bank's earnings will be adversely
affected by periods of rising interest rates because during such such periods
the interest expense paid on deposits will generally increase more rapidly
than the interest income earned on loans and investments. See "SUPERVISION
AND REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF SHELBY COUNTY BANCORP -- Asset/Liability
Management" and "-- Lending Risks and Lending Limits, Origination, Purchase
and Sale of Loans."
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<PAGE>
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of a financial institution's interest-earnings
assets, which are comprised of fixed- and adjustable-rate instruments (such as
loans and investments). Generally, the value of fixed-rate instruments
fluctuates inversely with changes in interest rates. Changes in interest
rates also can affect the average life of, and demand for, loans and
mortgage-related securities. A financial institution is subject to
reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates which are comparable to the rates on the maturing loans
or securities.
Changes in market interest rates have resulted in significant changes in
the market value of the Bank's portfolio of investment securities. As of
December 31, 1997, the market value of the investment securities available
for sale and held to maturity portfolios was $8,960,495 which included a
unrealized gain of $1,330,059. Increases in market interest rates prior to
the consummation of the Merger could cause the market value of such portfolio
to decline significantly. See "BUSINESS OF SHELBY COUNTY BANCORP --
Investments."
IMPACT OF PURCHASE ACCOUNTING ON TANGIBLE BOOK VALUE AND FUTURE EARNINGS
The acquisition of SCB by the Company pursuant to the Merger Agreement
will be accounted for using the purchase method of accounting. Under the
purchase method of accounting, all of the assets and liabilities of SCB
acquired by the Company will be adjusted to their estimated fair market value
as of the acquisition date, and the resultant discounts and premiums will be
accredited into or amortized against income over the expected economic lives
of the related assets and liabilities. The purchase price for SCB will exceed
the net fair market value of the assets acquired and the liabilities assumed
in the acquisition of SCB by at least $3.0 million. The difference will be
recorded as goodwill on the Company's consolidated financial statements and
will be amortized against income over fifteen years using the straight-line
method. See "PRO FORMA COMBINED FINANCIAL STATEMENTS".
Significant increases in market interest rates prior to the consummation
of the Merger may result in declines in the fair market value of the Bank's
interest earning assets and liabilities. Such a decline in fair market value
would result in a corresponding increase in the amount of goodwill recorded on
the Company's consolidated financial statements as a result of the Merger.
Such additional goodwill would result in a lower tangible book value of the
Company and reduced reported earnings as such additional goodwill is
amortized.
IMPACT OF ECONOMIC CONDITIONS
The results of operations for financial institutions, including the Bank,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate market values, changes in
interest rates and the monetary and fiscal policies of the United States
government. See "SUPERVISION AND REGULATION." Although the Company believes
that economic conditions in the Bank's market area have been generally
favorable, there can be no assurance that such conditions will continue to
prevail. Substantially all of the Bank's loans are and will continue to be to
businesses and individuals in Shelby County and the counties surrounding
Shelby County and any decline in the economy of these areas could have an
adverse impact on the Bank.
DELAY IN COMMENCING OPERATIONS
Although the Company expects to receive all regulatory approvals and
complete the Merger during the second quarter of 1998, there can be no
assurance as to when, if at all, these events will occur. Any delay in
completing the Merger will increase pre-opening expenses and postpone
realization by the Company of potential revenues from the Bank. Absent the
receipt of revenues and commencement of profitable
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<PAGE>
operations, the Company's accumulated deficit and borrowings will continue to
increase (and book value per share decrease) as operating expenses such as
salaries and other administrative expenses continue to be incurred.
GOVERNMENT REGULATION AND MONETARY POLICY
The banking industry is heavily regulated by federal and state
governmental agencies. Many of these regulations are intended to protect
depositors, the public and the deposit insurance funds administered by the
Federal Deposit Insurance Corporation ("FDIC"), and not shareholders of
financial institutions. Applicable laws, regulations, interpretations and
enforcement policies have been subject to significant, and sometimes
retroactively applied, changes in recent years, and may be subject to
significant future changes. There can be no assurance that such future
changes will not adversely affect the business of the Company. In addition,
the burden imposed by federal and state regulations may place banks in
general, and the Bank and the Company specifically, at a competitive
disadvantage compared to less regulated competitors. See "SUPERVISION AND
REGULATION."
The Company and the Bank will be subject to extensive state and federal
government supervision, regulation and examination. Existing state and federal
banking laws will subject the Bank to substantial limitations with respect to
loans, purchases of securities, payment of dividends and many other aspects of
its banking business. Recently enacted and proposed legislation may
adversely affect the banking industry or the operations of the Bank and may
result in increased competition in the financial services industry. In June
1997, broad financial reform legislation was approved by the Banking Committee
of the U.S. House of Representatives. The legislation proposed by the Banking
Committee included provisions that would permit, subject to certain
restrictions, bank holding companies to acquire manufacturing and other
nonfinancial companies, permit nonfinancial companies to acquire banks and
require thrift institutions to convert to bank charters. In October 1997, the
House Commerce Committee release a revised version of the legislation that
differed markedly from the Banking Committee proposal in that it would have
increased the powers of banks, but generally would have maintained the current
separation between banking and commerce. In November 1997, the Banking
Committee released a new proposal, and in February 1998, the Commerce
Committee responded to the proposal by outlining some possible areas of
compromise on the two Committees' differences over financial services
modernization legislation. In general, both Committees' current versions of
the legislation, in varying degrees, would remove certain legal barriers
separating the banking, securities and insurance industries.
The February proposal by the Commerce Committee suggested that the thrift
charter provisions of the legislation be removed, and included provisions that
would permit national bank operating subsidiaries to engage in additional
activities, allow banks to underwrite municipal securities and adopted certain
consumer protection measures relating to insurance activities. During
February 1998, the Banking Committee also worked on a new proposal relating to
the thrift institution issues addressed by the proposed legislation. The
latest proposal by the Banking Committee would preserve the thrift charter,
eliminate the Office of Thrift Supervision ("OTS") and place thrift
institutions under the authority of the Office of the Comptroller of the
Currency. The Company cannot predict whether, or in what form, this
legislation may be enacted, and if enacted, what the effect would be on the
Company and the Bank.
Federal economic and monetary policy, as well as policy decisions of bank
regulatory authorities, may affect the Bank's ability to attract deposits,
make loans and achieve satisfactory interest spreads. See "SUPERVISION AND
REGULATION."
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<PAGE>
DEPENDENCE ON MANAGEMENT
For the foreseeable future, the Company and the Bank will be dependent
upon the services of Robert C. Reed, the President and Chief Executive Officer
of the Company. The Company and the Bank will also be dependent upon other
senior management to be employed by the Company and the Bank. The loss of
services of Mr. Reed may have a material adverse effect on the operations of
the Company and the Bank. In this respect, the Company has a key-man life
insurance policy covering Mr. Reed in the amount of $1.0 million which will be
maintained for a minimum of one year from ________________, 1998. In an
effort to maintain Mr. Reed's employment, the Company has entered into an
employment agreement with Mr. Reed. If the Company or the Bank is unable to
hire qualified and experienced personnel either to replace Mr. Reed or any
other key employee or to adequately staff the anticipated growth of the Bank,
the operating results of the Company and the Bank would be adversely affected.
See "BUSINESS OF BLUE RIVER BANCSHARES, INC. -- Employees," "BUSINESS OF
SHELBY COUNTY BANCORP -- EMPLOYEES" and "MANAGEMENT OF THE COMPANY AND THE
BANK."
COMPETITION
The Company and the Bank will face strong competition for deposits, loans
and other financial services from numerous Indiana and out-of-state banks,
thrifts, credit unions and other financial institutions as well as other
entities which provide financial services, including consumer finance
companies, securities brokerage firms, mortgage brokers, equipment leasing
companies, insurance companies, mutual funds, and other lending sources and
investment alternatives. Some of the financial institutions and financial
services providers with which the Bank competes are not subject to the same
degree of regulation as the Bank. Many of the financial institutions
aggressively compete for business in the Bank's market areas. Many of these
competitors have been in business for many years, have established customer
bases, have substantially higher lending limits than the Bank, are larger and
will be able to offer certain services that the Bank does not expect to
provide in the foreseeable future, including home electronic banking services
and international banking services. In addition, most of these entities have
greater capital resources than the Bank, which, among other things, may allow
them to price their services at levels more favorable to the customer and to
provide larger credit facilities than could the Bank. See "BUSINESS OF BLUE
RIVER BANCSHARES, INC. -- Market Area" and "BUSINESS OF SHELBY COUNTY BANCORP
- -- Competition." Additionally, recently passed federal legislation regarding
interstate branching and banking may act to increase competition in the future
from larger out-of-state banks and thrift institutions. See "SUPERVISION AND
REGULATION -- Regulatory Developments."
NO ASSURANCE OF DIVIDENDS
The Company will be largely dependent upon dividends paid by the Bank for
funds to pay dividends on its Common Stock, if and when such dividends are
declared. No assurance can be given that future earnings of the Bank, and
resulting dividends to the Company, will be sufficient to permit the legal
payment of dividends to Company shareholders at any time in the future. See
"SUPERVISION AND REGULATION." Even if the Company may legally declare
dividends, the amount and timing of such dividends will be at the discretion
of the Company's Board of Directors. The Board may in its sole discretion
decide not to declare dividends. For a more detailed discussion of other
limitations on the payment of cash dividends by the Company, see "DIVIDEND
POLICY."
DISCRETION IN USE OF PROCEEDS
The offering is intended to raise funds primarily to pay the Merger
Consideration and contribute additional capital to the Bank. While management
currently has no such plans, if opportunities arise, some
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of the proceeds of the offering may also be used by the Company or the Bank to
finance acquisitions of other financial institutions, or of branches of other
institutions, or to finance expansion into other lines of business closely
related to banking. Management will retain discretion in employing the
proceeds of the offering not used to pay the Merger Consideration. See "USE
OF PROCEEDS."
ENVIRONMENTAL MATTERS RELATING TO ST. PAUL PROPERTY
In August 1993, SCB discovered the presence of petroleum compounds in both
the soil and groundwater underlying the property at the St. Paul branch of the
Bank. A portion of the property was the site of a former gasoline station.
The Board of Directors of SCB decided to engage an environmental remediation
firm to remove the "free product" (i.e., gasoline) which was floating on top
of the water table at the St. Paul site. The estimated cost of this clean-up
work was approximately $10,000. On April 13, 1995, SCB sold a portion of the
St. Paul property to a resident of St. Paul, Indiana for nominal consideration.
SCB apprised the buyer of the environmental matters relating to the real
estate sold, and the buyer released and indemnified SCB from all future
liability connected with environmental conditions on this property. There can
be no assurance that a third party will not make a claim against the Bank with
respect to the contamination on or originating from this portion of the St.
Paul property or that if such a claim were made that the indemnification of
the Bank by the buyer of the property would be sufficient to reimburse the
Bank for any damages relating to such claim.
With respect to the portion of the St. Paul property still owned by the
Bank, in early 1996, the Bank discovered the presence of diesel or fuel oil
and gasoline constituents in the groundwater. In early 1997, a heating oil
storage tank was removed from the ground and the area was remediated by
excavating the soil surrounding the location of the tank and replacing it with
granular fill material. The tank removal and remediation was performed by an
environmental remediation firm engaged by the Bank. The Bank is in the
process of applying to the Indiana Department of Environmental Management
("IDEM") to enter the site in the IDEM Voluntary Remediation Program ("VRP").
Assuming successful completion of the VRP, as the program currently exists, is
interpreted and is applied, which may include further remediation of the site,
IDEM will issue a Certificate of Completion and the Governor of the State of
Indiana will issue a Covenant Not to Sue. Additionally, IDEM and the U.S.
Environmental Protection Agency ("EPA") have a Memorandum of Agreement that
provides in substance that once a Certificate of Completion has been issued by
IDEM, unless the site poses an immediate and substantial threat to human
health and the environment, EPA will not plan or anticipate any federal action
under the Superfund law. The Bank's environmental consultant estimates that
the total cost for completion of the VRP is $27,000. There can be no
assurance that the Bank will successfully complete the VRP or that the cost
relating to the VRP will not exceed $27,000. Even if the Bank successfully
completes the VRP, there can be no assurance that a non-governmental entity or
person will not make a claim against the Bank with respect to the
environmental matters relating to the St. Paul property.
DETERMINATION OF OFFERING PRICE; LIMITED TRADING MARKET EXPECTED
The initial public offering price of $12.00 per share of Common Stock was
determined by the Company in consultation with the Underwriter. This price is
not based upon earnings or any history of operations of the Company and should
not be construed as indicative of the present or anticipated future value of
the Common Stock. Prior to the offering, there has been no public trading
market for the Common Stock. The price at which these shares are being
offered to the public may be greater than the market price for the Common
Stock following the offering. The Underwriter has advised the Company that,
upon completion of the offering, it intends to use reasonable efforts to
initiate quotations of the Common Stock on the NASDAQ Small-Cap Market and to
act as a market maker in the Common Stock, subject to applicable laws and
regulatory requirements, although the Underwriter is not obligated to do so.
Making a market in securities involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends, however,
upon the existence of willing buyers and sellers, the presence of which is not
within the control of the Company, the Bank or any market maker. Even with
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a market maker, factors such as the limited size of the offering means that
there can be no assurance of an active and liquid market for the Common Stock
developing in the foreseeable future. Even if a market develops, there can be
no assurance that a market will continue or that shareholders will be able to
sell their shares at or above the price at which these shares are being
offered to the public. Purchasers of Common Stock should carefully consider
the limited liquidity of their investment in the shares being offered hereby.
NEED FOR TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. The
Company's future success will depend in part on its ability to address the
needs of its customers by using technology to provide products and services
that will satisfy customer demands for convenience as well as to create
additional efficiencies in the Bank's operations. Many of the Bank's
competitors have substantially greater resources to invest in technological
improvements. Such technology may permit competitors to perform certain
functions at a lower cost than the Bank. There can be no assurance that the
Bank will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to its
customers.
ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation of the Company contain provisions which the
Board of Directors of the Company believes will protect the interests of the
shareholders, although these provisions may also be deemed to have an
anti-takeover effect. These provisions include a staggered or classified
Board of Directors, residency requirements for Directors, specified removal
procedures for Directors, specified votes of Directors and shareholders in
certain business combinations and the consideration of non-financial factors
by Directors in connection with business combinations. Under the Indiana
Business Corporation Law ("IBCL"), the provisions of the Business Combinations
Chapter and the Control Share Acquisition Chapter could affect the acquisition
of shares of Common Stock or the acquisition of control of the Company. These
provisions of the Company's Articles of Incorporation and the IBCL could have
the effect of discouraging, delaying, preventing or rendering it more
difficult for a party to acquire the Company or a significant or controlling
block of shares of Common Stock and could have the effect of discouraging,
delaying, preventing or rendering more difficult other acquisition
transactions which might be viewed favorably by a significant number of
shareholders of the Company. These provisions may also adversely affect the
ability to develop an active trading market for the Common Stock after the
offering. See "DESCRIPTION OF CAPITAL STOCK -- Indiana Law, -- Articles of
Incorporation."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide for the indemnification of its officers and
directors, and thereby protect its officers and directors from liability for
certain actions. It is possible that the indemnification obligations imposed
under the Bylaws could result in a charge against the Company's earnings and
thereby affect the market value of the Common Stock and the availability of
funds for payment of dividends to the Company's shareholders. See "RELATED
PARTY TRANSACTIONS -- Director Liability; Indemnification."
COMMON STOCK AVAILABLE FOR FUTURE SALE
Following the offering, all of the Common Stock will be freely saleable
without legal restriction by shareholders who are not Directors, executive
officers or other "control persons" of the Company. The
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Company's Directors and executive officers, who are expected to purchase
shares in the offering, have agreed with the Underwriter not to sell
any of their shares for 150 days from the date of this Prospectus, and
thereafter such individuals, for so long as they remain "affiliates" of the
Company (as that term is defined by Rule 144 under the Securities Act, will be
subject to the volume, manner of sale and other restrictions of Rule 144 with
respect to any public sales of shares for their accounts unless they rely upon
another exemption from registration under the Securities Act. The sale, or
availability for sale, of substantial amounts of the Common Stock by its
Directors and executive officers in the public market, under Rule 144 or
otherwise, could, in the future, have an adverse effect on the market price of
the Common Stock. See "SHARES AVAILABLE FOR FUTURE SALE" and "UNDERWRITING."
YEAR 2000 COMPLIANCE
Because computer memory was so expensive on early mainframes, some
computer programs used only the final two digits for the year in the date
field while maintaining the first two digits of each year constant. As a
result, some computer applications may be unable to interpret the change from
the year 1999 to the year 2000. The Bank is actively monitoring its year 2000
computer compliance issues. The bulk of the Bank's computer processing is
provided by Intrieve Incorporated of Cincinnati, Ohio ("Intrieve").
Intrieve's schedule for compliance with year 2000 is for all data processing
to be in compliance by May, 1998. Intrieve will assist the Bank with other
phases of year 2000 compliance through 1998 and 1999. The Bank has also
appointed a year 2000 team to address all aspects of its year 2000 compliance.
There can be no assurance that the Bank's data processing system will be year
2000 compliant, and such failure may have a material adverse effect on the
Company's earnings, cash flows and overall financial condition as well as the
value of the Common Stock.
FORWARD-LOOKING STATEMENTS
Certain statements throughout this Prospectus regarding the Company's
financial position, business strategy and plans and objectives of management
of the Company for future operations are forward-looking statements rather
than historical or current facts. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. 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, such as those disclosed under "RISK 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 and substantial changes
in real estate values and the real estate market. Such statements reflect the
current views of the Company 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
Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this paragraph.
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PENDING TRANSACTION
TERMS OF THE MERGER
Under the terms of the Merger Agreement, SCB will merge with and into the
Company under the laws of the State of Indiana. The Company will be the
surviving corporation in the Merger and, at the closing of the Merger, SCB's
separate corporate existence will cease and shares of SCB Common Stock will no
longer be traded. Upon consummation of the Merger, the Bank will become a
wholly-owned subsidiary of the Company. Upon consummation of the Merger, all
of the outstanding shares of SCB Common Stock will be converted into the right
to receive from the Company a cash amount totaling $11,005,500, assuming that
all of the outstanding options for shares of SCB Common Stock have been
exercised prior to the closing of the Merger and that no SCB shareholder
asserts and perfects dissenters' rights under Indiana law. The cash payable
by the Company to the shareholders of SCB pursuant to the Merger Agreement is
planned to be funded using $11,005,500 of the net proceeds of the offering.
See "USE OF PROCEEDS" and "PRO FORMA COMBINED FINANCIAL INFORMATION." The
Merger Consideration was determined through arm's-length negotiations between
the Company and SCB. The Company consulted with its financial advisor, Roney
& Co., L.L.C., in negotiation of the Merger Consideration and the Board of
Directors of SCB received a fairness opinion from its financial advisor,
Trident Financial Corporation, that the Merger Consideration to be received by
the shareholders of SCB was fair from a financial point of view.
The information contained in this Prospectus with respect to the Merger
Agreement is a summary of the material provisions of the Merger Agreement, and
as such, is qualified in its entirety by reference to that agreement, which is
included as an exhibit to the Company's registration statement on Form SB-2
(of which this Prospectus is a part).
REASONS FOR AND ANTICIPATED BENEFITS OF THE MERGER
Management of the Company believes that the Merger provides a
cost-effective means for the Company to begin operation of a banking
subsidiary in Shelbyville, Indiana compared to acquiring another financial
institution or one or more of the branches of a financial institution or
forming a de novo Indiana state-chartered commercial bank. The Company's
management believes that the Bank can achieve revenue enhancements, operating
efficiencies and additional growth opportunities as a result of the Merger.
It is believed that the Merger will provide the Bank with an improved
financial and competitive position as a result of an increase in the capital
of the Bank and a management team that will operate the Bank as a commercial
bank as opposed to a savings bank.
The Bank, since its conversion from a mutual savings bank to a federal
stock savings bank in October, 1991, has increased assets by more than 91.4%
(with total assets growing to $97.2 million at December 31, 1997), and
increased net loans by more than 89.7% (with total net loans growing to
$79.1 million at December 31, 1997). As a result of the Bank's growth and
dividends paid by the Bank to SCB, the Bank's regulatory capital ratios
have decreased. However, the Bank is currently in compliance with applicable
regulatory capital requirements and is considered adequately capitalized.
See "SUPERVISION AND REGULATION -- Regulations Applicable to the Bank as a
Savings Bank or Commercial Bank, Prompt Corrective Action." At the closing of
the Merger, the Company intends to contribute additional capital to the Bank
in the amount of approximately $______ million. See "USE OF PROCEEDS." This
increase in the capital of the Bank will enable the Bank to continue to grow
by allowing it to increase its legal lending limit from $_________ to $______
million while maintaining compliance with applicable regulatory capital
requirements based upon information as of December 31, 1997 set forth in "PRO
FORMA COMBINED FINANCIAL INFORMATION."
-19-
<PAGE>
Revenue enhancements, primarily in the form of increased net interest
income, are anticipated from, among other things, the expansion of the Bank's
commercial and retail banking services. The Company believes that margin
gains can be achieved by converting a portion of the Bank's lower yielding
fixed-rate mortgages to higher yielding commercial and consumer loans.
Additional revenue enhancements are anticipated from improved service delivery
systems (including branch expansion) and the use of additional ATMs. The
Company also intends for the Bank to implement an aggressive "cross-selling"
program which will be designed to ensure that the Bank's single-family loan
customers are aware of the other products and services offered by the Bank.
The Company believes that an emphasis on providing more personalized and
comprehensive services should assist the Bank in developing and maintaining
long-term, multiple account relationships with customers.
Consummation of the Merger is subject to various conditions, including,
among others, obtaining requisite and satisfactory shareholder and regulatory
approvals and the receipt of certain opinions and certificates. The Company
currently expects the Merger to close during the second quarter of 1998 and
concurrently with, or immediately following, the closing of the offering.
The preceding statements in this "PENDING TRANSACTION -- Reasons for and
Anticipated Benefits of the Merger" section are forward- looking statements
that are based upon the Company's business strategy for the Bank and,
therefore, are inherently uncertain and subject to risk. There is no
assurance that the Bank will ever completely implement the Company's business
strategy and the risks identified in "RISK FACTORS" may affect the ability of
the Bank to completely implement such strategy.
For additional information regarding the Company and SCB, see "BUSINESS OF
BLUE RIVER BANCSHARES, INC.," "BUSINESS OF SHELBY COUNTY BANCORP," "PRO FORMA
COMBINED FINANCIAL INFORMATION," "FINANCIAL STATEMENTS - BLUE RIVER
BANCSHARES, INC." and "CONSOLIDATED FINANCIAL STATEMENTS - SHELBY COUNTY
BANCORP."
RIGHTS OF DISSENTING SHAREHOLDERS
The IBCL provides shareholders of merging corporations with certain
dissenters' rights. Shareholders of SCB will be entitled to dissenters'
rights with respect to the Merger only upon strict compliance with the
procedures of the IBCL. SCB shareholders who properly assert and perfect
their dissenters' rights are entitled to receive payment from the Company of
the "fair value" of their shares in cash, which may ultimately be determined
by a court of law.
REGULATORY APPROVAL
The Bank has filed an application with the OTS for approval of the Merger
and the Company being a unitary savings and loan holding company under the
Home Owners' Loan Act, as amended ("HOLA"). The closing of the Merger is
conditioned upon receiving the approval by the OTS of the Merger and the
Company being a unitary savings and loan holding company under the HOLA.
Approval of the Merger and the Company being a unitary savings and loan
holding company is not to be interpreted as an endorsement or recommendation
by the OTS of the Merger or the Company being a savings and loan holding
company under the HOLA.
ACCOUNTING TREATMENT FOR THE MERGER
It is anticipated that the Merger will be accounted for as a "purchase"
transaction. Under this method of accounting, the assets acquired and
liabilities assumed in the acquisition of SCB will be recorded at their
-20-
<PAGE>
estimated fair market values, with the excess of the purchase price over the
net fair market value recorded as goodwill. See "RISK FACTORS" and "PRO
FORMA COMBINED FINANCIAL INFORMATION."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered hereby are estimated to be at least $13,700,000
($ if the Underwriter's over-allotment option is exercised in
full), after deduction of the underwriting discounts and commissions and
payment of estimated offering expenses by the Company. Under certain
circumstances the underwriting discount may be reduced by up to $66,000, which
would correspondingly increase net proceeds to the Company by a like amount.
See "UNDERWRITING."
The principal uses of the net proceeds of the offering are (a) to pay the
Merger Consideration, (b) to contribute additional capital to the Bank, (c) to
pay in full the principal of and interest on the indebtedness (the
"Borrowings") that is owed to Steven R. Abel, Robert C. Reed and D. Warren
Robison (collectively, the "Founders"), all of who are directors and executive
officers of the Company, and that was used to finance the organization,
general operating and preopening expenses, certain indirect costs of the
acquisition of the Bank and certain prepayments of the offering costs, and (d)
for general corporate purposes, including possible branch expansion. The
Borrowings (which at _____________, 1998 were in the aggregate amount of
principal and interest of approximately $_____________) have funded the
payment of certain of the Company's preopening expenses, including, but not
limited to, professional and other fees and expenses in connection with
efforts to acquire or form a bank to be located in Shelbyville, Indiana, the
offering and the organization of the Company, including compensation and
benefit expense for Robert C. Reed, President and Chief Executive Officer of
the Company, and Bradley A. Long, Vice President and Chief Financial Officer
of the Company, and directors' fees paid prior to the closing of the offering.
See "RELATED PARTY TRANSACTIONS -- Redemption of Stock and Loans from
Founder." The aggregate amount of the Borrowings will be repaid at the
closing of the offering and will be greater than the amount owed to the
Founders at _____________, 1998 because of the accrual of additional interest
and the Company's anticipated additional Borrowings from the Founders prior to
the closing of the offering for the payment of expenses and costs of the
Company. In lieu of a cash payment to retire the Borrowings, the Founders
may elect to receive repayment in full or in part through their receipt in the
offering of shares of Common Stock valued at the initial public offering price
of $12.00 per share.
The Company expects to apply the net proceeds of this offering in the
following approximate amounts:
Payment of Merger Consideration $11,005,500 %
Contribution of additional capital to
the Bank $ %
Repayment of Borrowings $ %
Payment of Company's pre-closing
expenditures $ %
Working capital $ %
-----------
TOTAL $ %
===========
-21-
<PAGE>
The Company expects that the Bank will use the $_______________ of
offering proceeds received from the Company in connection with the
contribution of additional capital to the Bank as working capital.
The Company and the Bank retain discretion as to the use of working
capital, although at present there are no plans to use working capital for
purposes other than general corporate purposes, including, in the case of the
Bank, the funding of the additional loans by the Bank to its customers and the
acquisition of investment securities for the Bank's investment portfolio.
Although these funds would be available to finance possible acquisitions of
other financial institutions or branches thereof or expansion into other lines
of business closely related to banking, the Company has no present plans to do
so. The Company has not determined how to apply the proceeds of any sale of
Common Stock upon any exercise of the underwriter's over-allotment option, but
presently anticipates retaining those amounts as working capital of the
Company and not contributing those amounts to the capital of the Bank.
DIVIDEND POLICY
The Company has not paid any dividends to date. All shares of Common
Stock are entitled to share equally in such dividends as the Board of
Directors may declare. The Company will be largely dependent upon dividends
from the Bank for funds to pay dividends on the shares of Common Stock, and
dividends payable by the Bank are limited by law and by the need to maintain
adequate capital in the Bank. See "SUPERVISION AND REGULATION -- Regulation of
the Bank as a Savings Bank, Dividend Limitations" and "-- Regulation of the
Bank as a Commercial Bank, Dividends." There can be no assurance as to the
amount of future dividends, if any, that may be declared or paid on the shares
of Common Stock.
In the case of the Company, further restrictions on dividends may be
imposed by the Federal Reserve, if the Company is a bank holding company
under the BHC Act. See "SUPERVISION AND REGULATION -- Regulation of the
Company under the BHC Act, Dividends." The Company is also restricted by
Indiana general corporate law on the amount of dividends that it may pay.
Under Indiana law, the Company may not pay a dividend to its shareholders if,
after giving effect to the dividend, the Company would not be able to pay its
debts as they become due in the usual course of business, or the Company's
total assets would be less than the sum of its total liabilities plus, unless
the Company's Articles of Incorporation permitted otherwise, the amount that
would be needed to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
dividend if the Company were to be dissolved at the time of the dividend.
-22-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as it is
projected to be immediately after the sale of 1,250,000 shares of Common Stock
offered hereby, consummation of the Merger and the application of the
estimated net proceeds. See "USE OF PROCEEDS" and "PRO FORMA COMBINED
FINANCIAL INFORMATION."
Preferred Stock, no par value, 2,000,000 shares
authorized; no shares issued and outstanding ------
Common Stock, no par value, 10,000,000 shares
authorized; 1,250,000 shares issued and
outstanding $ 13,700,000
Retained earnings (deficit) (116,790)
-------------
Total shareholders' equity $ 13,583,210
=============
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<PAGE>
BUSINESS OF BLUE RIVER BANCSHARES, INC.
GENERAL
The Company was organized on March 18, 1997 for the purpose of acquiring
or forming a bank to be headquartered in Shelbyville, Indiana. Initially, the
sole activity of the Company was pursuing the acquisition or formation of a
bank. The Company pursued discussions with several financial institutions in
the central and southeastern portions of Indiana. These discussions included
the acquisition of the entire financial institution or one or more of the
branches of a financial institution. Additionally, the Company considered the
possibility of forming a de novo Indiana state-chartered commercial bank. On
February 5, 1998, the Board of Directors decided that it was in the best
interests of the Company to enter into the Merger Agreement pursuant to which
the Company would acquire the Bank.
All of the financial institutions in Shelby County, Indiana, except for
the Bank, are affiliated either with large out-of-state holding companies or
with medium-sized holding companies headquartered outside of Shelby County.
Accordingly, management of the Company believes that a locally-managed bank
headquartered in Shelbyville can attract those customers who prefer to conduct
business with a local institution that demonstrates an active interest in
their business and personal financial affairs and can provide timely responses
and personal attention by its executive officers. The Company intends for the
Bank to continue to maintain a strong commitment to community banking.
At the closing of the Merger, the Bank's name will change to "Shelby
County Bank." The Bank's offices are located in the Indiana cities of
Shelbyville, Morristown and St. Paul in Shelby County. The retail strategy of
the Bank will be to offer, primarily in Shelby County, a wide range of basic
banking products and services that will be reasonably priced and easily
understood by the customer. The Bank's commercial strategy will center on
small to medium-sized businesses. Completion of the offering will be
conditioned upon, among other things, the Company and the Bank having received
all necessary regulatory approvals with respect to the Merger and satisfying
certain conditions contained therein and the other conditions precedent to
closing of the Merger set forth in the Merger Agreement. If the Merger
Agreement is terminated for any reason, the offering will terminate.
Management anticipates that the Merger will be consummated in the second
quarter of 1998.
The Company intends to implement a business strategy aimed at making the
Bank's operations more like a commercial bank than a traditional thrift. In
this regard, the Company's business strategy for the Bank following the Merger
will include the following:
- Increase the volume of commercial lending. Commercial lending by the
Bank has been nominal to date. The Company intends to expand the
types of commercial products offered by the Bank to include
commercial loans secured by equipment, inventory, accounts
receivables and real estate and loans to individuals and
organizations in the agricultural industry in the Bank's primary
market area. The Shelby County Chamber of Commerce has indicated
that there are 1,100 businesses in Shelby County, and the Company
intends to focus on these businesses.
- Establish a mortgage secondary market operation. The Company
believes a secondary market operation will enhance fee income,
improve asset/liability management and increase liquidity. The
Company believes this will enable the Bank to improve net interest
income by converting a portion of the Bank's lower yielding
fixed-rate mortgages into adjustable rate and balloon mortgages and
higher yielding shorter-term commercial and consumer loans.
-24-
<PAGE>
- Increase the volume of consumer lending. The Bank intends to begin
purchasing indirect auto loans through a select group of dealers that
are located in the Bank's primary market area and that are well-known
to the management of the Company. The Bank also intends to
"cross-sell" the Bank's consumer loan products, including home equity
loans, to its existing mortgage and other customers.
- Increase deposits. The Bank intends to offer an expanded mix of
checking account products which are designed to meet the diverse
needs of businesses and individuals and lower the cost of funding the
loans made by the Bank.
The Company's business strategy is intended to combine the commercial
banking skills of the Company's management together with the existing
reputation and presence of the Bank as one of the leading single-family
mortgage lenders in Shelby County. Accordingly, as part of its business
strategy, and as soon as is practical after the Merger, the Company intends to
convert the Bank from a federally-chartered savings bank to an Indiana
state-chartered commercial Bank.
See also "PENDING TRANSACTION -- Reasons for and Anticipated Benefits of
the Merger" and "BUSINESS OF SHELBY COUNTY BANCORP."
MARKET AREA
Shelby County is in the top one-third out of 92 counties in the State of
Indiana in terms of personal income and population growth from 1990 through
1995 based on estimates of the Ball State University's Bureau of Business
Research. Following the Merger, the Bank's primary service area will
continue to be Shelby County which is located approximately 25 miles southeast
of Indianapolis, Indiana. Management of the Company believes that this
community has an expanding and diverse economic base, which includes a wide
range of small to medium-sized businesses engaged in manufacturing, services
and retail. There are approximately 1,100 businesses in Shelby County. As of
December 31, 1997, the unemployment rate for Shelby County was 2.8%, compared
with the statewide average of approximately 3.4%, according to Ball State
University's Bureau of Business Research.
The Company's address following completion of the Merger will be 29 East
Washington Street, P.O. Box 927, Shelbyville, Indiana 46176 and its telephone
number will be (317) 398-9721. The Company's current mailing address is P.O.
Box 927, Shelbyville, Indiana 46176 and its telephone number is (317)
392-7700.
PREMISES
The Company currently maintains its offices at 116 South Harrison Street,
in Shelbyville, Indiana. The Company leases this space on a month to month
basis. Either the Company or the landlord may terminate the lease at the end
of any month. Following the closing of the Merger, the Company will maintain
its offices in the main office of the Bank. See "BUSINESS OF SHELBY COUNTY
BANCORP -- Premises."
EMPLOYEES
The Company does not intend to have any employees other than its executive
officers. In addition to serving as directors of the Company, Steven R. Abel
will serve as Chairman of the Board of the Company, Robert C. Reed will serve
as President and Chief Executive Officer, D. Warren Robison will serve as
Secretary, and Bradley A. Long will serve as Vice President, Chief Financial
Officer and Treasurer. No officer, other than Mr. Reed and Mr. Long, will
receive compensation from the Company for serving as an
-25-
<PAGE>
officer of the Company. Following the closing of the Merger, the employees
and officers of the Bank are expected to continue as employees and officers of
the Bank. However, at the closing of the Merger, Mr. Rodney L. Meyerholtz will
resign as President and Chief Executive Officer and Mr. James M. Robison will
resign as Chairman, and Mr. Reed will be elected President and Chief Executive
Officer of the Bank and Mr. Abel will be elected Chairman of the Bank. See
"MANAGEMENT OF THE COMPANY AND THE BANK" and "BUSINESS OF SHELBY COUNTY
BANCORP -- Employees."
PENDING LITIGATION
There is no pending litigation in which the Company is a party or to which
any of its property is subject. Further, there is no legal proceeding in
which any director, executive officer, principal shareholder or affiliate of
the Company, or any associate of any such director, executive officer,
principal shareholder or affiliate, is a party or has a material interest
adverse to the Company. See "BUSINESS OF SHELBY COUNTY BANCORP -- Legal
Proceedings."
INCOME TAXATION OF THE COMPANY
Immediately prior to the closing of the Merger, the Subchapter S election
of the Company will terminate and the Company will become subject to all
federal, state and local corporate taxes on income. See "BUSINESS OF SHELBY
COUNTY BANCORP -- Taxation." The Company and the Founders intend to enter
into a tax indemnification agreement prior to the closing of the offering
relating to future adjustments that may be made to the Company's tax returns
for all periods during which it was an S corporation. See "RELATED PARTY
TRANSACTIONS --Tax Indemnification Agreement."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF SHELBY COUNTY BANCORP
All information contained in this section with respect to SCB and the Bank
has been supplied by SCB and the Bank. Certain statements throughout this
section regarding SCB'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 SCB and the Bank or their
respective managements, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the management of SCB
and the Bank as well as assumptions made by and information currently
available to the management of SCB 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, such as those disclosed under "RISK 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 SCB 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 SCB and the Bank.
-26-
<PAGE>
GENERAL
SCB was formed as part of the conversion of the Bank from a federal mutual
savings bank to a federal stock savings bank in October of 1991. In the stock
thrift conversion, 172,500 shares of common stock were sold at $10.00 per
share. Net proceeds of the stock thrift conversion were approximately
$1,324,000. Of this amount, $150,000 was retained by SCB and the remainder
was used to purchase all of the common shares of the Bank. The principal
business of savings associations, including the Bank, has historically
consisted of attracting deposits from the general public and making loans
secured by residential and other real estate. The Bank, like the entire
savings association industry, is significantly affected by prevailing economic
and market conditions as well as by government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on money market funds and other competing
investments, account maturities and level of personal income and savings. In
addition, deposit growth is also affected by how customers perceive the
stability of the financial services industry in general and the savings and
loan industry specifically. Various current events such as regulatory
changes, failures of other thrifts and financing of the deposit insurance fund
also have an impact on deposit growth. Lending activities are influenced by,
among other things, the demand for and supply of housing in the area as well
as prevailing interest rates. Sources of funds for lending activities include
deposits, borrowings, amortization and prepayments of loan principal, retained
earnings and funds provided by operations.
RESULTS OF OPERATIONS
Net earnings for the year ended September 30, 1997 were $513,000,
compared to $236,000 for the year ended September 30, 1996, an increase of
$277,000 or 117.4%. During the three month period ended December 31, 1997,
net earnings increased to $174,000 compared to net earnings of $129,000 during
the three month period ended December 31, 1996. SCB's earnings in recent
years have been affected by certain changes that have occurred in the
regulatory, economic, and competitive environments in which savings
associations operate. As is the case with most savings associations, the
Bank's earnings are primarily dependent upon its net interest income. Net
interest income is the difference between the interest income and interest
expense. Net interest income of the Bank increased from $2,498,000 for the
year ended September 30, 1996 to $2,816,000 for the year ended September 30,
1997, a 12.8% increase. Interest income is a function of the balances of
loans and investments outstanding during a given period of time and the yield
earned on such loans and investments. Interest expense is a function of the
amount of deposits and borrowings outstanding during the same period of time
and the rates paid on such deposits and borrowings.
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<PAGE>
Average Balances and Interest. The following table presents for the
periods indicated the monthly average balances of each category of
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
Management of the Bank believes that the use of month-end average balances
instead of daily average balances has not caused any material difference in
the information presented.
<TABLE>
<CAPTION>
Three Months Ended December 31, Year Ended September 30,
1997 1996 1997 1996
---------------------------------- -----------------------------------
Interest Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/ Average Earned/
(Dollars in Thousands) Balance Paid Balance Paid Balance Paid Balance Paid
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits
$6,240 $62 $2,811 $22 $ 2,781 $108 $ 5,055 $ 234
Investment securities 4,450 65 2,867 59 3,286 171 2,998 223
Loans (1) 78,953 1,673 69,224 1,439 72,195 6,066 58,485 5,036
Stocks in FHLB of Indianapolis 920 19 655 12 746 59 458 35
Mortgage-backed securities 3,295 48 5,227 71 4,622 304 5,261 311
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 93,858 1,867 80,784 1,603 83,630 6,708 72,257 5,839
- ----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts 9,168 68 10,040 72 10,027 283 10,175 313
NOW and money market accounts 18,049 123 13,696 73 14,468 314 13,062 302
Certificates of deposit 43,885 658 41,555 613 40,536 2,399 43,173 2,604
- ----------------------------------------------------------------------------------------------------------------
Total deposits 71,102 849 65,291 758 65,031 2,996 66,410 3,219
Borrowings 18,055 268 11,569 146 14,372 896 2,503 122
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 89,157 1,117 76,860 904 79,403 3,892 68,913 3,341
Net interest-earning assets $ 4,701 $3,924 $ 4,227 $ 3,344
- ----------------------------------------------------------------------------------------------------------------
Net interest income $750 $699 $ 2,816 $ 2,498
- ----------------------------------------------------------------------------------------------------------------
Average interest-earning assets
to average interest-bearing
liabilities 105.27% 105.11% 105.32% 104.85%
</TABLE>
(1) Average balances include non-accrual loans.
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<PAGE>
Interest Rate Spread. The following table sets forth the weighted
average effective interest rate earned by the Bank on its loan and investment
portfolios, the weighted average effective costs of the Bank's deposits and
borrowings, the interest rate spread of the Bank, and the net yield on
weighted average interest-earning assets for the periods and as of the date
shown. Average balances are based on month-end average balances.
<TABLE>
<CAPTION>
At At Three Months Ended Year Ended
December 31, September 30, December 31, September 30,
1997 1997 1997 1996 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest rate earned on:
Interest-earning deposits 5.52% 5.39% 3.97% 3.27% 3.88% 4.63%
Investment securities 6.84 7.00 7.10 6.98 5.20 7.44
Loans 8.49 8.51 8.42 8.29 8.40 8.61
Stock in FHLB of Indianapolis 8.00 8.25 8.26 7.33 7.91 7.64
Mortgage-backed securities 6.53 6.60 5.83 6.81 6.58 5.91
------------------------------------------------------------
Total interest-earning assets 8.15% 8.30% 7.97% 7.97% 8.02% 8.08%
Weighted average interest rate cost of:
Passbook accounts 2.84% 2.81% 2.97% 2.87% 2.82% 3.08%
NOW and money market accounts 2.97 2.74 2.73 2.13 2.16 2.31
Certificates of deposit 6.10 6.07 5.95 6.01 5.92 6.03
Borrowings 5.99 6.88 6.09 5.15 6.23 4.87
------------------------------------------------------------
Total interest-bearing liabilities 5.06% 5.24% 5.02% 4.78% 4.90% 4.58%
Interest rate spread (1) 3.09% 3.06% 2.95% 3.19% 3.12% 3.50%
============================================================
Net yield on weighted average interest-
earning assets (Net Interest Margin) (2) N/A N/A 3.20% 3.46% 3.37% 3.46%
============================================================
</TABLE>
(1) Interest rate spread is calculated by subtracting total weighted
average interest rate cost from total weighted average interest rate
earned for the period indicated. Interest rate spread figures must
be considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities. Since
SCB's interest-earning assets exceeded its interest-bearing
liabilities for the three years shown above, a positive interest rate
spread resulted in net interest income.
(2) The net yield of weighted average interest-earning assets is
calculated by dividing net interest income by weighted average
interest-earning assets for the period indicated. No net yield
figure is presented at September 30, 1997 and December 31, 1997,
because the computation of net yield is applicable only over a period
rather than at a specific date.
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<PAGE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate
(changes in rate multiplied by old volume) and (2) changes in volume (changes
in volume multiplied by old rate). Changes attributable to both rate and
volume that cannot be segregated have been allocated proportionally to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
(In Thousands) Total Net Due to
Change Due to Rate Volume
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended December 31, 1997 compared to three months
ended December 31, 1996
Interest-earning assets:
Interest-earning deposits $ 40 $ 7 $ 33
Investment securities 6 (88) 94
Loans 234 28 206
Stock in FHLB of Indianapolis 7 2 5
Mortgage-backed securities (23) 31 (54)
- -----------------------------------------------------------------------------------------------------------------
Total $ 264 $ (20) $ 284
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts (4) 13 (17)
NOW and money market accounts 50 24 26
Certificates of deposit 45 10 35
Borrowings 122 29 93
- -----------------------------------------------------------------------------------------------------------------
Total $ 213 $ 76 $ 137
- -----------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 51 $ (96) $ 147
- -----------------------------------------------------------------------------------------------------------------
Year ended September 30, 1997 compared to year
ended September 30, 1996
Interest-earning assets:
Interest-earning deposits $ (126) $ (33) $ (93)
Investment securities (52) (72) 20
Loans 1,030 (125) 1,155
Stock in FHLB of Indianapolis 24 2 22
Mortgage-backed securities (7) 33 (40)
- -----------------------------------------------------------------------------------------------------------------
Total $ 869 $(195) $1,064
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts $ (30) $ (26) $ (4)
NOW and money market accounts 12 (20) 32
Certificates of deposit (205) (46) (159)
Borrowings 774 43 731
- -----------------------------------------------------------------------------------------------------------------
Total $ 551 $ (49) $ 600
- -----------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 318 $(146) $ 464
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-30-
<PAGE>
Total deposits at September 30, 1997 of $64,633,000 increased to
$70,784,000 at December 31, 1997. This increase in deposits is primarily due
to an increase in certificates of deposit and checking accounts.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
General. During the three month period ended December 31, 1997, net
earnings increased to $174,000 compared to net earnings of $129,000 during the
three month period ended December 31, 1996. The increase in earnings is
primarily the result of an increase in interest income on loans receivable in
excess of the increase in interest expense. Net interest income was $720,000,
after provision for loan losses, for the three months ended December 31, 1997,
compared to $676,000 for the three months ended December 31, 1996. Net
interest margin for the three months ended December 31, 1997 was 3.20%,
compared to 3.46% for the same period one year ago.
Total assets at December 31, 1997, were $97,221,000, an increase of
$6,612,000 from total assets of $90,609,000 at September 30, 1997. The most
significant increases in assets were in net loans receivable and interest
bearing deposits. Total net loans receivable increased from $76,038,000 at
September 30, 1997 to $79,591,000 at December 31, 1997. This increase
reflects an increase in mortgage loans which is attributed to a very strong
local economy and loan demand. The two branches that were opened in 1995 have
contributed over $6,585,000 in mortgage and consumer lending.
Interest Income. Interest income increased from $1,603,000 for the
three months ended December 31, 1996 to $1,867,000 for the three months ended
December 31, 1997.
Interest Expense. Interest expense for the three month period ended
December 31, 1997 was $1,117,000 compared to $904,000 for the three months
ended December 31, 1996. This increase is primarily attributed to the
increase in deposit accounts. Interest bearing deposits increased from
$1,773,000 at September 30, 1997 to $4,821,000 at December 31, 1997.
Non-Interest Income. Total non-interest income was $101,000 for the
three months ended December 31, 1997, compared to $85,000 for the same period
in 1996.
Non-Interest Expense. Non-interest expense totaled $533,000 for the
quarter ended December 31, 1997 compared to $545,000 for the same period in
the prior year. The primary decrease in non-interest expense relates to cost
cutting measures in most expense categories.
Provision for Loan Losses. The Bank's provision for loan losses was
$30,000 for the three months ended December 31, 1997 compared to $23,000 for
the same period in the prior year. Non-performing assets increased from
$320,000 at December 31, 1996 to $613,000 at December 31, 1997.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
General. Net earnings for the year ended September 30, 1997 were
$513,000, compared to $236,000 for the year ended September 30, 1996, an
increase of $277,000 or 117.4%. Net interest income after provision for loan
losses increased by $314,000 or 13.1% from $2,398,000 to $2,712,000.
Total assets increased during the year ended September 30, 1997.
Total assets at September 30, 1997 were $90,609,000 compared to $82,676,000 at
September 30, 1996, an increase of $7,933,000, or 9.6%. This increase was
primarily due to an increase in loans receivable of $9,940,000 or 15.0%, from
$66,098,000 in 1996 to $76,038,000 in 1997.
-31-
<PAGE>
Interest Income. Total interest income for the year ended September
30, 1997 was $6,708,000 compared to $5,839,000 for the year ended September
30, 1996, an increase of $869,000 or 14.9%. This increase resulted primarily
from an increase of $1,030,000 or 20.5%, in interest earned on loans
receivable. Although the weighted average interest rate earned on loans in
1997 dropped slightly from 8.61% to 8.40%, the growth in the loan portfolio
accounted for the increase in interest income. The loan portfolio growth
reflects management's commitment to meet the needs of the growing economy in
Shelby County.
Interest Expense. Total interest expense for the period ended
September 30, 1997, totaled $3,892,000, an increase of $551,000, or 16.5%,
compared with $3,341,000 for the year ended September 30, 1996. This increase
was primarily a result of higher costs on additional advances from the Federal
Home Loan Bank of Indianapolis. The weighted average interest rate cost for
all deposits and borrowings in 1997 was 4.90% compared to 4.58% in 1996.
Non-interest Income. Total non-interest income for the year ended
September 30, 1996, totaled $349,000 compared to $518,000 for the year ended
September 30, 1997. The reason for the decline is because 1996 amounts
included non-recurring items.
Non-interest Expense. Non-interest expense decreased $293,000, or
11.5%, from $2,546,000 for the year ended September 30, 1996, to $2,253,000
for the year ended September 30, 1997. The decrease was primarily attributed
to a reduction in the Federal Deposit Insurance Fund expense due to the
one-time special assessment in 1996.
Provision for Loan Losses. The Bank's provision for loan losses was
$104,000 for the year ended September 30, 1997, compared to $100,000 for the
year ended September 30, 1996. The 1997 provision exceeded net charge-offs of
$38,000 during the year ended September 30, 1997. This provision reflects
management's intent to provide an increased general allowance for loan loss
and further provide for losses inherent in its consumer loan portfolio. Also,
the provision resulted in an allowance for loan losses of $392,000 (.52% of
total loans) at September 30, 1997. The allowance as a percentage of
non-performing loans was 94% at September 30, 1997, compared to 109% at
September 30, 1996. At September 30, 1997, non-performing loans as a percent
of total net loans were .55%.
LIQUIDITY AND CAPITAL RESOURCES
The standard measure of liquidity for the savings association
industry is the ratio of cash and eligible investments to a percentage of
savings deposits and borrowings due within one year. The minimum required
ratio is currently set by OTS regulation at 4%. At September 30, 1997, the
Bank's regulatory liquidity ratio was 8.3%, of which 100% were short-term
investments. This was an increase of .8% from its liquidity ratio at
September 30, 1996. Management believes that the Bank's liquidity level, both
on a short-term and a long-term basis, is sufficient for the Bank's liquidity
needs.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by OTS regulations and at a level believed by
management adequate to meet requirements of normal daily activities and
potential deposit withdrawals. Management monitors the cash flow position
periodically to assure that adequate liquidity is maintained. Cash for
liquidity purposes is generated through loan prepayments, repayments and
increases in deposits. Loan payments are a relatively stable source of funds,
while deposit flows are influenced significantly by the level of interest
rates and general market conditions. The Bank's liquidity, represented by
cash and cash equivalents, is a result of its operating, investing and
financing activities.
-32-
<PAGE>
During the year ended September 30, 1997, there was a net decrease of
$2,487,000 in cash and cash equivalents. The major reason for this decrease
was an increase in loans receivable.
As a member of the Federal Home Loan Bank System ("FHLB System"), the
Bank may borrow from the FHLB of Indianapolis. Borrowings outstanding at
September 30, 1997, were $17,746,000, and under OTS regulations, the Bank
could have borrowed up to an additional $10.2 million from the FHLB of
Indianapolis as of that date. As of that date, the Bank had commitments to
fund loan originations of approximately $2.1 million. In the opinion of
management, the Bank has sufficient cash flow and borrowing capacity to meet
current and anticipated funding commitments.
SCB is subject to regulations as a savings and loan holding company
by the OTS. The Bank, as a subsidiary of a savings and loan holding company,
is subject to certain restrictions in its dealing with SCB. The Bank is
subject to regulatory requirements applicable to a federal savings bank.
Capital regulations require savings institutions to have a minimum
regulatory tangible capital equal to 1.5% of total assets and a minimum core
capital ratio equal to 3% of total assets. Additionally, savings institutions
are required to meet a risk-based capital ratio of 8% of risk-weighted assets.
In connection with the Federal Deposit Insurance Corporation
Improvement Act of 1991, the OTS implemented additional minimal capital
standards that place savings institutions into one of five categories, from
"critically undercapitalized to "well capitalized," depending on levels of
three measures of capital. At each successively lower capital category, an
institution is subject to more restrictive and numerous mandatory or
discretionary regulatory actions and limits. A well capitalized institution,
as defined by the regulations, has a total risk-based capital ratio of at
least 10 percent, a Tier 1 (core) risk-based capital ratio of at least six
percent, and a leverage (core) risk-based capital of at least five percent.
At September 30, 1997, the Savings Bank was classified as adequately
capitalized.
The Bank's capital ratios are as follows at September 30, 1997:
<TABLE>
<CAPTION>
GAAP Tangible Core Risk-based
capital capital capital capital
------- -------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Corporation GAAP Capital $ 7,171
The Bank GAAP Capital $ 6,219
Regulatory Capital $ 5,593 $ 5,593 $ 5,985
Minimum capital requirement 1,342 2,684 5,048
------- ------- -------
Excess capital $ 4,251 $ 2,909 $ 937
------- ------- -------
Regulatory capital ratio 6.3% 6.3% 9.5%
Requirement 1.5% 3.0% 8.0%
</TABLE>
IMPACT OF INFLATION
The audited consolidated financial statements of SCB presented herein
have been prepared in accordance with generally accepted accounting
principles. These principles require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
SCB's primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not
-33-
<PAGE>
necessarily move in the same direction or with the same magnitude as the price
of goods and services, which is more directly affected by inflation
ASSET/LIABILITY MANAGEMENT
The Bank, like other banks, is subject to interest rate risk to the
degree that its interest-bearing liabilities, primarily deposits with short
and medium-term maturities, mature or reprice more rapidly than its
interest-earning assets. Although having liabilities that mature or reprice
more frequently on average than assets will be beneficial in times of
declining interest rates, such an asset/liability structure will result in
lower net income during periods of rising interest rates, unless offset by
other factors such as non-interest income. Therefore, a key element of the
Bank's asset/liability plan is to protect net earnings from changes in
interest rates by reducing the maturity or repricing mismatch between its
interest-earning assets and rate-sensitive liabilities.
Principal elements of the Bank's asset/liability management strategy
include the origination of residential and small commercial mortgage loans
with adjustable interest rates and increasing the origination of consumer
loans. For example, the Bank has increased its adjustable rate mortgages from
$107,000 at September 30, 1987, to $6,587,000 at September 30, 1997. Consumer
lending was initiated in March 1989 and had a balance of $7,512,000 at
September 30, 1997.
The difference between the Bank's assets and liabilities having
maturities and repricing periods of one year or less ("Interest Rate Gap") was
negative 26.16% at September 30, 1997. A negative Interest Rate Gap leaves
the Bank's earnings vulnerable to periods of rising interest rates because
during such periods the interest expense paid on liabilities will generally
increase more rapidly than the interest income earned on assets. Conversely,
in a falling interest rate environment, the total expense paid on liabilities
will generally decrease more rapidly than the interest income earned on
assist. A positive Interest Rate Gap will have the opposite effect. During
the years ended September 30, 1990, and 1989, the Bank's negative Interest
Rate Gap did not result in increased net interest income even though interest
rates were falling. During that period of time, the expected decrease in the
average rate paid on deposits due to falling interest rates was offset by
depositors reinvesting their time deposits from lower-rate short-term
certificates to higher-rate long-term certificates. Additionally, new deposit
customer accounts were attracted to the higher rate certificates. Net
interest income during that period was also reduced because a significant
portion of the increased funds derived from deposits was invested in
short-term interest-earning instruments with a lower yield than long-term
fixed-rate loans. During the years ended September 30, 1991 through and
including September 30, 1997 interest income was positively affected by
falling interest rates.
The Bank has used a portion of the proceeds from the conversion to
originate both consumer loans and adjustable rate mortgages, which have
assisted in the management of Interest Rate Gap. Recently, the demand for
adjustable-rate mortgage loans in the Bank's lending area has decreased and
customers have sought fixed-rate loans due to the relatively low long-term
interest rates. The Bank remains committed to originating adjustable rate
mortgage loans, although market conditions may require that it originate more
fixed rate mortgages in the future. The Bank will respond to a continued
stronger demand for fixed-rate loans by emphasizing longer-term deposits and
the purchase of adjustable-rate mortgages.
Management of the Bank believes that its Interest Rate Gap in recent
periods has generally been, and currently is, acceptable in view of the
prevailing interest rate environment. However, because of the Bank's
concentration of earning assets in fixed-rate mortgage loans, net interest
income will continue to be adversely affected by a significant rising interest
rate environment. The Bank will continue to seek to improve the matching of
its assets and liabilities as market conditions permit.
-34-
<PAGE>
The following table illustrates the projected maturities and the
repricing mechanisms of the major asset and liability categories of the Bank
as of September 30, 1997. Maturity and repricing dates have been projected by
applying the assumptions set forth below to contractual maturity and repricing
dates. The information presented in the following table is derived from data
that is provided to the OTS in "Schedule CMR: Consolidated Maturity/Rate"
filed as part of the Bank's September 30, 1997, quarterly report. That
information in Schedule CMR was reformulated by the FHLB of Indianapolis based
upon certain repricing and other assumptions determined by the FHLB of
Indianapolis. The repricing and other assumptions determined by the FHLB of
Indianapolis are based on a study done by the FHLB of Indianapolis of industry
interest rate and repricing trends and are not necessarily representative of
the Bank's actual results. Classifications of such items are different from
those presented in other schedules and financial statements included
herein.
-35-
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1997
Maturing or Repricing in
0 to (Dollars in Thousands) 5 to
3 months 3 to 6 months 6 Months to 1 Year 1 to 3 Years 3 to 5 Years 10 Years
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Adjustable rate mortgages ............. $ 749 $ 3,763 $ 174 $ 2,808 $ --- $ ---
Fixed-rate mortgages .................. 816 811 1,616 6,367 7,359 15,778
Non-mortgage loans .................... 834 854 1,770 6,541 1,758 ---
Non-mortgage investments .............. 3,566 --- --- --- 4,168 1,398
-------------------------------------------------------------------------------------
Total interest-earning assets ....... $ 5,965 $ 5,428 $ 3,560 $ 15,716 $ 13,285 $ 17,176
=====================================================================================
Interest-bearing liabilities:
Fixed maturity deposits ............... $ 8,359 $ --- $ 11,427 $ 15,927 $ 4,021 $ ---
Other deposits ........................ 2,640 2,191 3,444 6,937 2,941 3,827
Variable-rate fixed maturity .......... 17,746 --- --- --- --- ---
Other liabilities ..................... $ 625 $ --- $ --- $ --- $ --- $ ---
-------------------------------------------------------------------------------------
Total interest-bearing liabilities .... $ 29,370 $ 2,191 $ 14,871 $ 22,864 $ 6,962 $ 3,827
=====================================================================================
Excess (deficiency) of interest-bearing
assets over interest-bearing
liabilities ......................... $(23,405) $ 3,237 $ (11,311) $ (7,148) $ 6,323 $ 13,349
Cumulative excess (deficiency) of
interest-bearing assets over interest-
bearing liabilities ................. $(23,405) $ (20,168) $ (31,479) $ (38,627) $ (32,304) $ (18,955)
Cumulative interest sensitivity gap as
a percentage of total assets ........ (26.16)% (22.54)% (35.18)% (43.17)% (36.10)% (21.18)%
</TABLE>
<TABLE>
<CAPTION>
10 to 20 Over 20
Years Years Total
-----------------------------------
<S> <C> <C> <C>
Assets:
Adjustable rate mortgages . . . . . . . . . . . . . . $ --- $ --- $ 7,494
Fixed-rate mortgages . . . . . . . . . . . . . . . . 16,934 8,479 58,160
Non-mortgage loans . . . . . . . . . . . . . . . . . --- --- 11,757
Non-mortgage investments . . . . . . . . . . . . . . --- --- 9,132
-----------------------------------
Total interest-earning assets . . . . . . . . $ 16,934 $ 8,479 $ 86,543
-----------------------------------
Interest-bearing liabilities:
Fixed maturity deposits . . . . . . . . . . . . . . . $ --- $ --- $ 39,734
Other deposits . . . . . . . . . . . . . . . . . . . 2,462 688 25,130
Variable-rate fixed maturity . . . . . . . . . . . . --- --- 17,746
Other liabilities . . . . . . . . . . . . . . . . . . --- --- 625
-----------------------------------
Total interest-bearing liabilities $ 2,462 $ 688 $ 83,235
-----------------------------------
Excess (deficiency) of interest-bearing assets over
interest-bearing liabilities . . . . . . . . . . . . $ 14,472 $ 7,791 $ 3,308
-----------------------------------
Cumulative excess (deficiency) of interest-bearing
assets over interest-bearing liabilities . . . . . . $ (4,483) $ 3,308 $ 3,308
-----------------------------------
Cumulative interest sensitivity gap as a percentage
of total assets . . . . . . . . . . . . . . . . . . . (5.01)% 3.70% 3.70%
-----------------------------------
</TABLE>
-36-
<PAGE>
In preparing the table above, it has been assumed, consistent with
the assumptions used by the FHLB of Indianapolis at September 30, 1997, in
assessing the interest-rate sensitivity of savings institutions, that (i)
adjustable rate first mortgage loans on one-to four-family residences will
repay at the rate of 22.0% per year; (ii) first mortgage loans on residential
properties of five or more units and non-residential properties will prepay at
the rate of 15.0% per year; (iii) fixed-rate first mortgage loans on one-to
four-family residences with terms to maturity of 5 years or less will prepay
at a rate of 7.8% per maturity classification; (iv) second mortgage loans on
one-to four-family residences will prepay at a rate of 26.0% per maturity
classification; (v) non-mortgage loans and investments will not prepay; and
(vi) fixed-rate mortgage loans on one-to four-family residential properties
with remaining terms to maturity of more than 5 years will prepay annually as
follows:
Interest Rate Prepayment Assumption
----------------------------------------
Less than 8% 7.8%
8 to 8.99% 8.6%
9 to 9.99% 9.5%
10 to 10.99% 15.5%
11 and over 24.5%
In addition, it is assumed that fixed maturity deposits are not
withdrawn prior to maturity, and that other deposits are withdrawn or reprice
as follows:
<TABLE>
<CAPTION>
0 to 3 3 to 6 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Months Months to 1 Year Years Years Years Years Years
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook . . . . . . . . 4.55% 4.34% 8.11% 25.82% 16.83% 21.37% 14.78% 4.20%
Money market accounts . . 32.31% 21.87% 24.82% 11.00% 5.24% 4.01% .72% .03%
Transaction accounts . . 10.91% 9.72% 16.37% 33.87% 9.06% 12.16% 6.68% 1.22%
Non-interest bearing
accounts . . . . . 2.60% 2.53% 4.87% 17.10% 13.85% 24.18% 22.71% 12.16%
</TABLE>
In evaluating the Bank's exposure to interest rate movements, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgages, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Bank considers all of
these factors in monitoring its exposure to interest rate risk.
The principal effect of inflation, as distinct from levels of interest
rates, on SCB's earnings is in the area of other expenses. Such expense items
as salaries and employee benefits, occupancy expense and equipment costs may
be subject to increases as a result of inflation.
-37-
<PAGE>
SUMMARY CONDENSED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA OF BLUE RIVER BANCSHARES, INC.
AND SHELBY COUNTY BANCORP
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
Historical Data. The following table presents certain condensed consolidated
historical financial and operating data of SCB as of and for each of the years
in the two year period ended September 30, 1997 and as of and for each of the
three month periods ended December 31, 1997 and 1996. The following table
should be read in conjunction with the consolidated financial statements of
SCB, including the respective notes thereto, which appear elsewhere in this
Prospectus. See "CONSOLIDATED FINANCIAL STATEMENTS--Shelby County Bancorp".
In the opinion of management of SCB, the data presented for the three month
periods ended December 31, 1997 and 1996 reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
such data. Results for the three month periods ending December 31, 1997 and
1996 are not necessarily indicative of results that may be expected for any
other interim period or the year as a whole.
Pro Forma Data. The following table presents certain unaudited pro forma
condensed combined financial data for the Company giving effect to the Merger
as if it had occurred as of the beginning of the earliest period indicated
herein and after giving effect to the pro forma adjustments described in the
Notes to Blue River Bancshares, Inc. and Shelby County Bancorp Unaudited Pro
Forma Combined Financial Statements. The Merger will be accounted for as a
purchase, and the SCB assets acquired and liabilities assumed will be recorded
at their estimated fair values, with the excess of the purchase price over the
net fair market value recorded as goodwill. The purchase accounting
adjustments are based on preliminary estimates of fair values. Actual fair
values will be determined at the date of the Merger, and, accordingly the
adjustments that have been included in the pro forma financial information are
subject to change pending the final allocation of the total purchase cost of
the Merger. This information should be read in conjunction with (i) the pro
forma financial information, including the notes thereto, which appear
elsewhere in this Prospectus, and (ii) the historical consolidated financial
statements of the Company and SCB, including the respective notes thereto,
which appear elsewhere in the Prospectus. See "PRO FORMA COMBINED FINANCIAL
INFORMATION," and "CONSOLIDATED FINANCIAL STATEMENTS--Shelby County Bancorp"
and "FINANCIAL STATEMENTS--Blue River Bancshares, Inc." The pro forma
financial data does not give effect to any revenue enhancements or operating
efficiencies that the Company's management believes may result from the
transaction. The pro forma adjustments reflect (i) the aggregate amount of
cash to be paid to the shareholders of SCB by the Company as a result of the
Merger and the related purchase accounting adjustments, (ii) the consummation
of the offering, (iii) the termination of the Company's subchapter S election
under the Code. The pro forma financial data is not necessarily indicative of
the results that actually would have occurred had the Merger been consummated
on the dates indicated or that may occur in the future.
-38-
<PAGE>
<TABLE>
<CAPTION>
Blue River
Shelby County Bancorp Bancshares, Inc.
At or for the Three At or for the At or for the
Months Ended Year Ended Year Ended
December 31, September 30, December 31,
------------------- -------------- -------------
Historical Historical Pro Forma
------------------- -------------- -------------
1997 1996 1997 1996 1997
------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income $1,867 $1,603 $6,708 $5,839 $6,701
Interest expense 1,117 904 3,892 3,341 3,801
------------------ ---------------- ---------
Net interest income 750 699 2,816 2,498 2,900
Provision for loan losses 30 23 104 100 111
Non-interest income 101 85 349 518 365
Non-interest expense 534 545 2,253 2,546 2,731
------------------ ---------------- ---------
Income before income taxes 287 216 808 370 423
Provision for income taxes 113 87 295 134 223
------------------ ---------------- ---------
Net income $174 $129 $513 $236 $200
================== ================ =========
PER SHARE DATA: (6)
Basic earnings per share N/A N/A N/A N/A $0.16
Diluted earnings per share N/A N/A N/A N/A 0.16
Cash dividends per share N/A N/A N/A N/A 0.00
Book value per share N/A N/A N/A N/A 10.87
Tangible book value per share (4) N/A N/A N/A N/A 8.32
BALANCE SHEET DATA:
Total assets $97,221 $86,108 $90,609 $82,676 $104,500
Loans, net 79,591 69,579 76,038 66,098 80,533
Allowance for loan losses 422 335 392 326 422
Securities 8,948 8,624 8,695 8,511 8,960
Goodwill - - - - 3,177
Deposits 70,784 64,288 64,633 65,286 71,464
Shareholders' equity 7,488 6,614 6,546 6,103 13,583
Tangible shareholders' equity (5) 7,488 6,614 6,546 6,103 10,406
PERFORMANCE RATIOS: (1)
Return on average assets 0.72% 0.62% 0.60% 0.32% -
Return on average shareholders' equity 10.45 8.30 8.12 3.93 -
Net interest margin 3.09 3.36 3.29 3.25 -
Non-interest income to total average assets 0.42 0.41 0.41 0.69 -
Non-interest expense to total average assets 2.22 2.62 2.62 3.41 -
Efficiency ratio (2) 0.63 0.70 0.71 0.84 -
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.77% 0.46% 0.55% 0.37% -
Allowance for loan losses to total loans 0.53 0.48 0.52 0.49 -
Allowance for loan losses to non-performing loans 0.69 1.05 0.86 1.32 -
Net charge-off loans to average loans (1) 0.00 0.02 0.05 0.02 -
CAPITAL RATIOS: (3)
Shareholders' equity to assets 7.70% 7.68% 7.91% 7.78% -
Tangible capital ratio 6.02 6.33 6.32 6.40 -
Core capital ratio 6.02 6.33 6.32 6.40 -
Total risk-based capital ratio 9.46 10.13 9.50 10.30 -
</TABLE>
- -------------------
(1) Performance ratios for the three months ended December 31, 1997 and 1996
are stated on an annualized basis.
(2) Efficiency ratio is equal to non-interest expense divided by net interest
income plus non-interest income less gains or losses on security
transactions.
(3) For definitions and further information relating to the Bank's regulatory
capital requirements, see "REGULATION AND SUPERVISION -- Regulation of
the Bank as a Savings Bank, Savings Association Regulatory Capital"
and "-- Regulations Applicable to the Bank as a Savings Bank or
Commercial Bank, Prompt Corrective Action"
(4) Tangible book value per share is equal to total shareholders' equity less
goodwill divided by the weighted average common shares outstanding.
(5) Tangible shareholders' equity is equal to total shareholders' equity less
goodwill.
(6) Per share data for the historical periods of SCB have not been presented.
-39-
<PAGE>
BUSINESS OF SHELBY COUNTY BANCORP
All information contained in this section with respect to SCB and the
Bank has been supplied by SCB and the Bank. Certain statements throughout
this section regarding SCB'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 SCB and the Bank or their
respective managements, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the management of SCB
and the Bank as well as assumptions made by and information currently
available to the management of SCB 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, such as those disclosed under "RISK 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 SCB
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 SCB and the Bank.
SCB is an Indiana corporation organized in June, 1991 to become a
unitary savings and loan holding company. SCB became a unitary savings and
loan holding company upon the conversion of the Bank from a federal mutual
savings bank to a federal stock savings bank in October, 1991. The Bank was
established in 1937 as a federal savings and loan. SCB is the sole
shareholder of the Bank. SCB and the Bank conduct business from its main
office in Shelbyville, Indiana with branch offices for the Bank in
Shelbyville, St. Paul, and Morristown, Indiana. The Bank is and historically
has been among the top residential real estate lenders in Shelby County and is
the largest locally owned financial institution in Shelby County. The Bank
offers a variety of retail deposits and lending services to retail and
commercial customers in Shelby County.
-40-
<PAGE>
LENDING ACTIVITIES
Loan Portfolio Data. The following table sets forth the composition
of the Bank's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable and
mortgage-backed securities after consideration of the allowance for possible
loan losses and deferred net loan fees on loans.
<TABLE>
<CAPTION>
At December 31, At September 30,
1997 1997 1996
-------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family . . . . . . . . . . . . . $50,046 60.32% $46,870 58.64% $42,131 58.65%
Mortgage-backed securities . . . . . . . . . 3,272 3.94 3,309 4.14 5,216 7.26
Residential construction . . . . . . . . . . 1,035 1.25 1,054 1.32 1,003 1.39
Multi-family . . . . . . . . . . . . . . . . 4,472 5.39 4,512 5.65 3,406 4.74
Non-residential . . . . . . . . . . . . . . 12,268 14.79 11,746 14.70 10,418 14.50
Home equity loans . . . . . . . . . . . . . 1,025 1.24 977 1.21 740 1.03
Consumer loans:
Installment loans . . . . . . . . . . . . . 2,988 3.60 3,411 4.27 2,494 3.47
Auto Loans . . . . . . . . . . . . . . . . . 3,843 4.63 3,878 4.85 3,423 4.76
Home improvement loans . . . . . . . . . . . 84 .10 86 .11 -- --
Loans secured by deposits . . . . . . . . . 127 .15 137 .17 169 .25
Commercial loans . . . . . . . . . . . . . . 3,803 4.59 3,947 4.94 2,838 3.95
-------------------------------------------------------------------------
Gross loans receivable and mortgage-backed
securities $82,963 100.00% $79,927 100.00% $71,838 100.00%
=========================================================================
TYPE OF SECURITY
One-to-four family (1) . . . . . . . . . . . $55,462 66.85% $52,353 65.50% $49,090 68.33%
Non-residential real estate . . . . . . . . . 12,268 14.79 11,746 14.70 10,418 14.50
Multi-family . . . . . . . . . . . . . . . . 4,472 5.39 4,512 5.65 3,406 4.74
Autos . . . . . . . . . . . . . . . . . . . . 3,843 4.63 3,878 4.85 3,423 4.76
Deposits . . . . . . . . . . . . . . . . . . 127 .15 137 .17 169 .24
Other security . . . . . . . . . . . . . . . 3,848 4.64 3,970 4.97 3,010 4.19
Unsecured . . . . . . . . . . . . . . . . . . 2,943 3.55 3,331 4.16 2,322 3.24
-------------------------------------------------------------------------
Gross loans receivable and mortgage-backed
securities $82,963 100.00% $79,927 100.00% $71,838 100.00%
=========================================================================
Deduct:
Allowance for possible losses on loans . . 422 .51% 392 .49% 326 .45%
Deferred net loan fees . . . . . . . . . . 178 .22 188 .24 198 .28
-------------------------------------------------------------------------
Net loans receivable including mortgage-backed
securities $82,363 99.27% $79,347 99.27% $71,314 99.27%
=========================================================================
</TABLE>
(1) Includes mortgage-backed securities, home equity loans and home
improvement loans.
-41-
<PAGE>
The Bank's portfolio includes no highly leveraged transaction loans.
The Bank does not intend to make such loans in the future. The following
table sets forth certain information at December 31, 1997, regarding the
dollar amount of loans maturing in the Bank's loan portfolio based on the due
date of each payment. Demand loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less. This schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management of the Bank expects prepayments will cause
actual maturities to be shorter.
<TABLE>
<CAPTION>
Due during years ended December 31,
Balance
Outstanding 2000 2002 2007 2012
December 31, to to to and
1997 1998 1999 2001 2006 2011 following
------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential one-to-four family
mortgage loans . . . . . . $50,046 $3,335 $2,070 $ 2,145 $4,622 $12,096 $25,778
Mortgage-backed securities . 3,272 351 345 680 1,195 363 338
Residential construction . . 1,035 1.035 - - - - -
Multi-family loans . . . . . 4,472 230 659 150 358 959 2,116
Non-residential . . . . . . . 12,268 886 526 602 1,513 3,809 4,932
Home equity . . . . . . . . . 1,025 27 26 50 114 100 708
Consumer loans:
Home improvement loans . . . 84 16 17 19 32 - -
Auto . . . . . . . . . . . . 3,843 1,416 1,066 727 613 21 -
Installment loans . . . . . . 2,988 2,356 272 133 88 112 27
Loans secured by deposits . . 127 61 12 10 14 24 6
Commercial loans . . . . . . . . 3,803 2,155 477 305 428 438 -
------------------------------------------------------------------------
Gross loans receivable and
mortgage-backed securities $82,963 $ 11,868 $5,470 $4,821 $8,977 $17,922 $33,905
========================================================================
</TABLE>
-42-
<PAGE>
The following table sets forth, as of December 31 1997, the
dollar amount of all loans due after one year which have fixed interest rates
and floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1998
Fixed Rates Variable Rates Total
-----------------------------------------
(In thousands)
<S> <C> <C> <C>
Mortgages:
Residential one-to-four family
mortgage loans . . . . . . . . . . . . . $43,238 $3,473 $46,711
Mortgage-backed securities . . . . . . . . 2,203 718 2,921
Multi-family loans . . . . . . . . . . . . 2,762 1,480 4,242
Non-residential . . . . . . . . . . . . . 9,030 2,352 11,382
Home equity . . . . . . . . . . . . . . . - 998 998
Consumer loans:
Home improvement loans . . . . . . . . . . 68 - 68
Auto . . . . . . . . . . . . . . . . . . . 2,427 - 2,427
Installment loans . . . . . . . . . . . . 632 - 632
Loans secured by deposits . . . . . . . . 66 - 66
Commercial loans . . . . . . . . . . . . . . 1,648 - 1,648
-----------------------------------------
Total $62,074 $9,021 $71,095
=========================================
</TABLE>
Residential Loans. Approximately $53.3 million, or 64.3% of the
Bank's total loan and mortgage-backed securities portfolio at December 31,
1997, consisted of one-to-four family mortgage loans, of which 91.9% had
fixed-rates. Historically, such loans have generally not been written on
terms that are in conformity with the standard underwriting criteria of the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"), thereby making resale of such loans difficult.
See "BUSINESS OF SHELBY COUNTY BANCORP -- Lending Activities, Origination,
Purchase and Sale of Loans." The Bank's fixed-rate mortgages generally have
terms of 15, 20, 25 or 30 years.
The Bank began originating adjustable rate mortgages in April, 1988.
As of December 31, 1997, approximately 8.1% of the mortgage loans on
one-to-four family residences included in the Bank's loan and mortgage-backed
securities portfolio had adjustable rates. The adjustment for all of the
Bank's adjustable rate mortgage loans is indexed to U.S. Treasury securities.
Such loans have interest rates which adjust annually, with maximum rate
changes of 2.0% per adjustment. These loans have terms of 25 years.
The rates offered on the Bank's adjustable rate and fixed-rate
residential mortgage loans are competitive with the rates offered by other
mortgage lenders in the Bank's market area.
Although the Bank's residential mortgage loans are written for
amortization terms up to 30 years, due to prepayments and refinancings, its
residential mortgage loans generally have remained outstanding for a
substantially shorter period of time than the maturity terms of the loan
contracts.
Substantially all of the residential mortgage loans that the Bank has
originated since 1987 include "due on sale" clauses, which give the Bank the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. The Bank requires private
mortgage insurance on all conventional residential single-family mortgage
loans with loan-to-value ratios in excess of 89%. The Bank will not lend more
than 95% of the lower of current cost or appraised value of a residential
single family property. At
-43-
<PAGE>
December 31, 1997, residential mortgage loans amounting to $576,000, or 0.70%
of the Bank's total loan and mortgage-backed securities portfolio, were
included in non-performing assets.
The Bank offers residential construction loans only in conjunction
with residential mortgage loans. Interest is charged on the money disbursed
under the loan. After the construction phase (typically 3 to 12 months), the
Bank makes a mortgage loan, the proceeds of which are used to pay off the
construction loan. At December 31, 1997, the Bank had $1.0 million, or 1.3% of
its total loan and mortgage-backed securities portfolio, in residential
construction loans outstanding.
Mortgage-Backed Securities. As of December 31, 1997, $3.3 million,
or 4.0% of the Bank's total loan and mortgage-backed securities portfolio
consisted of mortgage-backed securities. These mortgage-backed securities had
an estimated market value of $3.0 million at December 31, 1997. Management has
classified these securities into held to maturity and available for sale
portfolios in accordance with Statement of Financial Accounting Standards No
115, "Accounting for Certain Investments in Debt and Equity Securities."
Non-Residential Real Estate Loans. At December 31, 1997, $12.3
million, or 14.8%, of the Bank's total loan and mortgage-backed securities
portfolio consisted of mortgage loans secured by non-residential real estate.
The non-residential mortgage loans, substantially all adjustable rate, are
written for terms not exceeding 25 years, and generally require a 70% or lower
loan-to-value ratio. The largest non-residential mortgage loan as of
December 31, 1997, had a balance of approximately $880,000. At that date, all
of the Bank's non-residential mortgage loans consisted of loans secured by
real estate located in Indiana.
Under the Financial Institutions Reform, Recovery, and Enforcement
Act ("FIRREA"), a savings association's portfolio of non-residential real
estate loans is limited to 400% of its capital. In addition, the application
of the Qualified Thrift Lender ("QTL") test has had the effect of limiting the
aggregate investment in non-residential real estate loans made by the Bank.
See "REGULATION AND SUPERVISION -- Regulation of the Bank as a Savings Bank,
Qualified Thrift Lender." The Bank currently complies with the non-residential
real estate loan limitations.
Generally, non-residential mortgage loans involve greater risk than
do residential loans. Non-residential mortgage loans typically involve larger
loan balances to single borrowers or groups of related borrowers. In addition,
the payment experience on loans received by income-producing properties is
typically dependent on the successful operation of the related project and
thus may be subject to adverse conditions in the real estate market or in the
economy in general.
Multi-Family Loans. At December 31, 1997, $4.5 million, or 5.4%, of
the Bank's total loan and mortgage-backed securities portfolio consisted of
mortgage loans secured by multi-family dwellings (those consisting of more
than four units). All of the Bank's multi-family loans are secured by
apartment complexes located in Shelby County. The largest such multi-family
mortgage loan as of December 31, 1997, had a balance of approximately
$639,000 and none of these loans was non-performing at that time. As with the
Bank's non-residential real estate loans, multi-family mortgage loans are
substantially all adjustable rate loans, are written for terms not exceeding
25 years, and require at least a 75% loan-to-value ratio.
Multi-family loans, like non-residential real estate loans, involve a
greater risk than do residential loans. See "BUSINESS OF SHELBY COUNTY
BANCORP -- Lending Activities, Non-Residential Real Estate Loans." Also, the
more stringent loans-to-one borrower limitation, described below in "BUSINESS
OF SHELBY COUNTY BANCORP -- Lending Activities, Origination, Purchase and Sale
of Loans," limits the ability of the Bank to make loans to developers of
apartment complexes and other multi-family units.
-44-
<PAGE>
Home Equity Loans. The Bank markets a home equity line of credit
loan. The maximum loan-to-value ratio for such loans is 80%, and the minimum
draw on a home equity line of credit is $250. As of December 31, 1997, the
Bank had approximately $1.0 million outstanding home equity loans, or 1.2% of
its total loan and mortgage-backed securities portfolio, with approximately
$645,000 of additional credit available to its borrowers under existing home
equity lines of credit. Home equity line of credit loans are adjustable rate
loans, indexed to the base rate on corporate loans at large U.S. money center
commercial banks that the Wall Street Journal publishes as the Prime Rate.
Consumer Loans. Federal laws and regulations permit federally
chartered savings associations to make secured and unsecured consumer loans in
an aggregate amount of up to 35% of the association's total assets. In
addition, a federally chartered savings association has lending authority
above the 35% limit for certain consumer loans, such as property improvement
loans and deposit account secured loans. However, the QTL test places
additional limitations on a savings association's ability to make consumer
loans. See "REGULATION AND SUPERVISION -- Regulation of the Bank as a Savings
Bank, Qualified Thrift Lender."
In the spring of 1989, the Bank, as part of its strategy of becoming
a community bank for Shelby County, hired a Vice President -- Consumer Loans
to guide the Bank's entry into the consumer loan area. By December 31, 1997,
approximately eight and one-half years after the Bank began making consumer
loans, these loans, consisting primarily of auto, installment, loans secured
by deposits and home improvement loans, were $7.0 million, or approximately
8.5% of the Bank's total loan and mortgage-backed securities portfolio.
Although consumer loans are currently only a small portion of its lending
business, the Bank consistently originates consumer loans to meet the needs of
its customers, and the Bank intends to originate more such loans to assist in
meeting its asset/liability management goals.
Although consumer loans generally involve a higher level of risk than
one-to-four family residential mortgage loans, their relatively higher yields
and shorter terms to maturity are believed to be helpful in reducing the
interest-rate risk of the Bank's portfolio. At December 31, 1997, no consumer
loans were included in non-performing assets.
The Bank's portfolio of automobile loans was $3.8 million, or 4.6% of
its total loan and mortgage-backed securities portfolio at December 31, 1997.
The maximum term of these loans is 66 months, and the borrower must provide
proof of insurance.
Installment loans, loans secured by deposits and home improvement
loans totaled $3.2 million, or 3.9% of the Bank's total loan and
mortgage-backed securities portfolio at December 31, 1997.
Commercial Loans. The Bank has historically made a limited number of
secured commercial loans. At December 31, 1997, these loans, which included
inventory financing for a lawn and garden equipment supplier, totaled $3.8
million, or 4.6% of the Bank's total loan and mortgage-backed securities
portfolio. All commercial loans are currently performing under their original
terms.
Origination, Purchase and Sale of Loans. The Bank has historically
not originated its residential mortgage loans in conformity with the standard
criteria of the FHLMC or FNMA. The Bank would therefore experience some
difficulty selling such loans in the secondary market, although most loans
could be brought into conformity. The Bank's mortgage loans vary from
secondary market criteria because the Bank capitalizes taxes rather than using
escrow accounts. This practice allows the Bank to keep its administrative
costs down and have thus provided the Bank with the competitive advantage of
being able to make mortgage loans without charging points. However, the
Bank's inability to quickly and easily sell its residential mortgage loans may
subject the Bank to increased interest rate risk (since most of the Bank's
residential mortgage loans
-45-
<PAGE>
have fixed rates) and could adversely affect the Bank's liquidity position
during periods of rising interest rates.
Although the Bank currently has authority to lend anywhere in the
United States, it has confined its loan origination activities primarily to
Shelby County, Indiana. The Bank's loan originations are generated from
referrals from builders, developers, real estate brokers and existing
customers, newspaper, radio and periodical advertising, and walk-in customers.
Loans are originated at either the main or branch office. All loan
applications have historically been processed and underwritten at the Bank's
main office.
FIRREA contains a generally more stringent loans-to-one-borrower
limitation than that applicable to savings associations before FIRREA's
enactment. Under FIRREA, a savings association generally may not make any
loan to a borrower or its related entities if the total of all such loans by
the savings association exceeds 15% of its capital (plus up to an additional
10% of capital in the case of loans fully collateralized by readily marketable
collateral); provided, however, that loans up to $500,000 regardless of the
percentage limitations may be made and certain housing development loans of up
to $30 million or 30% of capital, whichever is less, are permitted. The
maximum amount which the Bank could have loaned to one borrower and the
borrower's related entities under the 15% of capital limitation was
approximately $987,000 at December 31, 1997. At that date, the highest
outstanding balance of loans by the Bank to one borrower and related entities
was approximately $880,000, an amount within such loans-to-one-borrower
limitations. The Bank's portfolio of loans and mortgage-backed securities
currently contains no group of loans-to-one-borrower that in the aggregate
exceed the 15% of capital limitation.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. The Bank studies the
employment and credit history and information on the historical and projected
income and expenses of its individual and corporate mortgagors to assess their
ability to repay its mortgage loans. It uses an independent appraiser to
appraise the property securing its loans and requires title insurance and a
valid lien on its mortgaged real estate. Generally, appraisals on real estate
underlying most real estate loans in excess of $100,000 are required to be
performed by either state-licensed or state-certified appraisers, depending on
the type and size of the loan. The Bank requires fire and extended coverage
insurance in amounts at least equal to the principal amount of the loan. It
may also require flood insurance to protect the property securing its
interest. The Bank generally makes disbursements for taxes and insurance on
the borrower's behalf, adding the amount of such disbursements to the
principal of the loan.
The Bank's policy is to apply consistent underwriting standards to
the several types of consumer loans it makes to protect the Bank adequately
against the risks inherent in making such loans. Borrower character, paying
habits, net worth and underlying collateral are important considerations.
The Bank has historically not sold and has rarely purchased loans.
The Bank may enter into participations to diversify its portfolio, to
supplement local loan demand and to obtain more favorable yields. During the
year ended September 30, 1992, the Bank acquired a $114,000 participation in a
mobile home park in Shelby County. During the year ended September 30, 1993,
the Bank acquired additional $182,000 participation in the same mobile home
park. During the year ended September 30, 1996, the Bank acquired an
additional $366,000 in loan participations. During the year ended September
30, 1997, the Bank acquired an additional $1,908,000 in loan participation. As
of December 31, 1997, the Bank held in its loan and mortgage-backed securities
portfolio 15 participations. The Bank's portion of the outstanding balance of
such participations on that date was approximately $4,614,000.
-46-
<PAGE>
The following table shows loan origination, purchase, sale and
repayment activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
1997 1996 1997 1996
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Gross loans receivable and mortgage-backed
securities at beginning of period . . . . . . . . . $79,927 $71,838 $71,838 $55,576
Originations:
First mortgage loans:
Residential . . . . . . . . . . . . . . . . . . . . 4,711 3,687 12,150 17,084
Non-residential . . . . . . . . . . . . . . . . . . 222 95 3,559 3,087
Miscellaneous additions . . . . . . . . . . . . . . --- --- 744 271
------------------------------------------------
Total first mortgage loans . . . . . . . . . . . 4,933 3,782 16,453 20,442
------------------------------------------------
Consumer loans:
Installment loans . . . . . . . . . . . . . . . . . 2,910 2,268 13,327 10,302
Loans secured by deposits . . . . . . . . . . . . . 24 38 54 72
Miscellaneous additions . . . . . . . . . . . . . . --- --- --- ---
------------------------------------------------
Total consumer loans . . . . . . . . . . . . . . 2,934 2,306 13,381 10,374
------------------------------------------------
Commercial loans . . . . . . . . . . . . . . . . . . 397 246 1,103 3,920
------------------------------------------------
Total originations . . . . . . . . . . . . . . . 8,264 6,334 30,937 34,736
------------------------------------------------
Purchases:
Mortgage-backed securities . . . . . . . . . . . . --- --- 1,296 2,650
First mortgage loans . . . . . . . . . . . . . . . 163 1,689 536 1,636
------------------------------------------------
Total originations and purchases . . . . . . . . 8,427 8,023 32,769 39,022
------------------------------------------------
Sales:
First mortgage loans . . . . . . . . . . . . . . . --- --- --- ---
Mortgage-backed securities . . . . . . . . . . . . 226 --- 2,848 1,017
------------------------------------------------
Total sales . . . . . . . . . . . . . . . . . . . 226 --- 2,848 1,017
------------------------------------------------
Repayments and other deductions . . . . . . . . . . . 5,165 5,060 21,832 21,743
------------------------------------------------
Gross loans receivable and mortgage-backed
securities at end of period . . . . . . . . . . . . $82,963 $74,801 $79,927 $71,838
================================================
</TABLE>
Origination and Other Fees. The Bank realizes income from fees for
originating loans, late charges, checking account service charges, and fees
for other miscellaneous services, including cashier's checks. In order to
increase its competitive position with respect to other mortgage lenders, the
Bank currently does not charge points and charges a flat mortgage origination
fee of $300, not dependent on the size of the loan, payable at loan closing.
Late charges are assessed if payment is not received within a specified number
of days after it is due.
The Bank charges miscellaneous fees for appraisals, inspections
(including a 1% inspection fee for construction loans), obtaining credit
reports, certain loan applications, recording and similar services. The Bank
also collects fees for Visa and MasterCard applications which it refers to
another institution. The Bank does not make credit card loans directly.
-47-
<PAGE>
ASSET QUALITY
Non-Performing Assets. Mortgage loans are reviewed by the Bank on a
regular basis and are generally placed on a non-accrual status when the loans
become contractually past due 90 days or more. Once a mortgage loan is 15
days past due, a notice of delinquency is mailed to the borrower. Telephone
contact with the borrower is made, and another written notice follows at the
end of the month, with a demand to pay-in-full notice sent on the 32nd day.
The Bank attempts to arrange a personal interview after a loan has been
delinquent for two months. When the loan is 75 days delinquent, a title
search or abstract update is ordered. By the time a mortgage loan is 90 days
past due, management has decided whether to foreclose Further, the loan status
is reported to the Board of Directors. The Board of Directors normally confers
foreclosure authority at that time, but management may continue to work with
the borrower if circumstances warrant.
Consumer and commercial loans other than mortgage loans are treated
similarly. It is the Bank's policy to recognize losses on these loans as soon
as they become apparent. The Board will determine whether to charge off a
loan by the time it is four months past due.
At December 31, 1997, $613,000, or .64%, of the Bank's total assets
were non-performing.
At September 30, 1997, the Bank did have one real estate acquired as
a result of foreclosure, voluntary deed, or other means totaling $37,000. Such
real estate, is classified as "real estate owned" or "REO" until it is sold.
When property is so acquired, it is recorded at the lower of the unpaid
principal balance at the date of acquisition plus foreclosure and other
related costs or at fair value. Interest accrual ceases no later than the
date of acquisition and all costs incurred from that date in maintaining the
property are expensed.
The table below sets forth the amounts and categories of the Bank's
non-performing assets (non-accrual loans, real estate owned and troubled debt
restructurings) for the last three years. It is the policy of the Bank that
all earned but uncollected interest on all loans be reviewed monthly to
determine if any portion thereof should be classified as uncollectible for any
loan past due in excess of 90 days.
<TABLE>
<CAPTION>
At December 31, At September 30,
1997 1997 1996
---------------------------------------
(In thousands)
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans (1) . . . . . . . . . . $576 $417 $300
Real estate owned - net . . . . . . . . . 37 37 ---
Troubled debt restructurings . . . . . . . --- --- ---
----------------------------------
Total non-performing assets . . . . . . $613 $454 $300
----------------------------------
Non-performing assets to total assets . . . . .63% .50% .36%
==================================
</TABLE>
(1) The Bank generally places loans on a nonaccrual status when the
loans become contractually past due 90 days or more. At December
31, 1997, all $576,000 of nonaccrual loans were residential loans.
For the fiscal years ended September 30, 1997 and 1996, the income
that would have been recorded had the non-accrual loans not been
in a non-performing status was approximately $31,359 and $15,585,
respectively, compared to actual income recorded of $20,667 and
$8,696, respectively.
-48-
<PAGE>
As of December 31, 1997, the Bank held loans delinquent from 30 to 89
days aggregating approximately $1.6 million, or 1.6% of total assets. The
amount of past due payments on such loans aggregated approximately $29,000.
The Bank is not aware of any loans not classified as non-accrual or delinquent
of which the borrowers were experiencing financial difficulties.
Allowance for Loan Losses. The allowance for loan losses is
maintained through the provision for losses on loans, which is charged to
earnings. The provision is determined in conjunction with management's review
and evaluation of current economic conditions (including those of the Bank's
lending area), changes in the character and size of the loan portfolio, loan
delinquencies (current status as well as past and anticipated trends) and
adequacy of collateral securing loan delinquencies, historical and estimated
net charge-offs, and other pertinent information derived from a review of the
loan portfolio. Loans or portions thereof are charged to the allowance when
losses are considered probable. The following table analyzes changes in
the allowance during the two years ended September 30, 1997 and 1996 and the
three months ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
1997 1996 1997 1996
------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance of allowance at beginning
of period . . . . . . . . . . . . . . . $392 $326 $326 $241
Add:
Provision for loan losses . . . . . . . . 30 23 104 100
Recoveries of loans previously
charged off . . . . . . . . . . . --- --- 1 ---
Less gross charge-offs:
Residential real estate loans . . . . . --- 14 --- ---
Consumer loans . . . . . . . . . . . . . --- --- 39 15
---------------------------------------------------
Gross charge-offs . . . . . . . . . . . --- 14 39 15
---------------------------------------------------
Balance of allowance at end
of period . . . . . . . . . . . . . . . $422 $335 $392 $326
===================================================
Net charge-offs to total average loans
outstanding . . . . . . . . . . . . . . . --- % 0.02% 0.05% 0.02%
===================================================
Allowance at end of period to total
average loans outstanding . . . . . . . . 0.56 % 0.48% 0.54% 0.45%
===================================================
</TABLE>
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan categories at the dates
indicated.
-49-
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1997 1996 1997 1996
------------------------------------------- ------------------------------------------
Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------------------------------------------- ------------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $313 0.38% $211 0.28% $283 0.35% $202 0.29%
Consumer loans 109 0.13% 124 0.17% 109 0.14% 124 0.18%
Commercial loans --- --- --- --- --- --- --- ---
------------------------------------------- ------------------------------------------
Total $422 0.51% $335 0.45% $392 0.49% $326 0.47%
=========================================== ==========================================
</TABLE>
INVESTMENTS
The Bank's investment portfolio consists of corporate and municipal bonds
and investments in Federal Home Loan Bank ("FHLB") time and demand deposits.
At December 31, 1997, approximately $9.1 million, or 9.4%, of the Bank's total
assets consisted of such investments.
The following table sets forth the amortized cost and fair value of the
Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At December 31, At September 30, At September 30,
1997 1996 1997 1996
---------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
Mortgage-backed
securities $1,758 $1,751 $3,424 $3,388 $2,997 $2,973 $4,700 $4,583
Municipal bonds 1,530 1,542 444 440 1,339 1,353 445 435
Corporate bonds 2,359 2,360 1,777 1,741 2,253 2,227 1,517 1,446
Agencies 1,182 1,176 1,083 1,062 --- --- --- ---
Treasury notes --- --- --- --- 224 225 --- ---
FHLMC perferred stock 31 1,348 31 795 31 1,109 31 780
---------------------------------------------------------------------------------------
Total 6,860 8,177 6,759 7,426 6,844 7,887 6,693 7,244
---------------------------------------------------------------------------------------
Held to maturity:
Mortgage-backed
securities 298 302 423 418 336 325 633 637
Municipal bonds 222 227 226 226 223 227 227 224
Corporate bonds 250 254 406 415 250 255 408 414
Derivatives --- --- 161 162 --- --- --- ---
---------------------------------------------------------------------------------------
Total 770 783 1,216 1,221 809 807 1,268 1,275
---------------------------------------------------------------------------------------
Total investment
securities $7,630 $8,960 $7,975 $8,647 $7,653 $8,694 $7,961 $8,519
=======================================================================================
</TABLE>
-50-
<PAGE>
The following table sets forth the amount of investment securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1997.
<TABLE>
<CAPTION>
Amount at December 31, 1997 which matures in
One Year or Less, One Year to Five Years, Over Ten Years
----------------------------------------------------------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB time and demand accounts $4,820 5.52% $ --- ---% $ --- --- %
Municipal and corporate bonds --- ---% $4,374 6.84% --- --- %
</TABLE>
The OTS requires savings associations to maintain an average daily
balance of liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable savings deposits plus short-term
borrowings. Liquid assets include cash, certain time deposits, certain
bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain
mutual funds, certain mortgage-related securities, and certain first lien
residential mortgage loans. This liquidity requirement may be changed from
time to time by the OTS to any amount within the range of 4% to 10%, and is
currently 5%, although the OTS has proposed a reduction to 4%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. At
December 31, 1997, the Bank had liquid assets of $10.2 million, and a
regulatory liquidity ratio of 11.5%, of which 11.5% were short-term
investments.
SOURCES OF FUNDS
General. Deposits have traditionally been the Bank's primary source
of funds for use in lending and investment activities. In addition to
deposits, the Bank derives funds from loan amortization, prepayments, retained
earnings and income on earning assets. While loan amortization and income on
earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates,
market conditions and levels of competition.
Deposits. Deposits are attracted, principally from within Shelby
County, through the offering of a broad selection of deposit instruments
including NOW accounts, fixed-rate certificates of deposit, individual
retirement accounts, and savings accounts. The Bank does not actively
solicit or advertise for deposits outside of Shelby County, although deposits
at the St. Paul branch may come from neighboring Decatur County and certain
advertising media may extend into other nearby areas. Substantially all of
the Bank's depositors are residents of Shelby County. Deposit account terms
vary, with the principal differences being the minimum balance required, the
amount of time the funds remain on deposit and the interest rate. Although
the Bank has accepted a limited number of brokered deposits in the past (for
which it paid no commissions), the Bank does not solicit such deposits and
does not anticipate accepting such deposits in the future.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity
requirements, rates paid by competitors, growth goals, and federal
regulations.
-51-
<PAGE>
An analysis of the Bank deposit accounts by type, maturity, and rate
at December 31, 1997 and September 30, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted Balance at Weighted
Opening December % of Average September % of Average
Type of Account Balance 31, 1997 Deposits Rate 30, 1997 Deposits Rate
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts . . . . $ 25 $9,098 12.85% 2.84% $ 9,206 14.24% 2.81%
NOW . . . . . . . . . . 100 15,182 21.44 2.29 13,063 20.21 2.15
Money Market . . . . . . 10,000 4,201 5.94 5.34 2,732 4.23 5.60
------------------- ----------------
Total withdrawable . . . 28,481 40.23 25,001 38.68
------------------- ----------------
Certificates (original
terms):
31 days . . . . . . . . 2,500 66 .09 4.77% 67 .10 4.77%
3 months . . . . . . . . 1,000 502 .71 4.65 601 .93 4.60
6 months . . . . . . . . 1,000 5,148 7.27 5.24 5,854 9.06 5.11
12 months . . . . . . . 500 6,871 9.71 5.73 3,850 5.96 5.53
18 months . . . . . . . 500 1,496 2.12 5.61 1,529 2.37 5.59
30 months . . . . . . . 500 4,849 6.85 5.76 4,602 7.12 5.78
48 months . . . . . . . 500 934 1.32 6.17 1,039 1.61 6.13
60 months . . . . . . . 500 10,168 14.37 6.68 10,700 16.56 6.67
IRA's
31 days . . . . . . . . 2,500 --- -- --- --- --- ---
6 months . . . . . . . . 1,000 142 .20 5.25 140 .22 5.12
12 months . . . . . . . 500 159 .22 5.80 156 .24 5.75
18 months . . . . . . . 500 46 .07 5.70 49 .08 5.67
30 months . . . . . . . 500 604 .85 5.70 608 .94 5.73
48 months . . . . . . . 500 21 .03 5.88 17 .03 5.89
60 months . . . . . . . 500 2,788 3.94 6.57 2,779 4.30 6.57
96 months . . . . . . . 1,000 --- -- --- --- -- ---
Jumbo certificates . . . 100,000 8,509 12.02 6.48 7,641 11.80 6.49
------------------- ----------------
Total certificates . . . 42,303 59.77 39,632 61.32
------------------- ----------------
Total deposits . . . . . $70,784 100.00% $64,633 100.00%
=================== ================
</TABLE>
The following table sets forth by various interest rate categories
the composition of time deposits of the Bank at the dates indicated:
-52-
<PAGE>
<TABLE>
<CAPTION>
At December 31, At September 30,
1997 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Under 5% . . . . . . . . . . . . . . . . . (In thousands)
5.01 - 7.00% . . . . . . . . . . . . . . . $ 957 $ 4,066 $ 5,374
7.01 - 9.00% . . . . . . . . . . . . . . . 38,040 32,250 33,106
9.01 and over . . . . . . . . . . . . . . . 3,306 3,316 3,245
Total . . . . . . . . . . . . . . --- --- ---
------------------------------------------------------
$ 42,303 $ 39,632 $ 41,725
======================================================
</TABLE>
The following table represents, by various interest rate categories,
the amounts of time deposits maturing during each of the two years following
December 31, 1997. Matured certificates which have not been renewed as of
December 31, 1997, have been allocated based upon certain rollover
assumptions.
<TABLE>
<CAPTION>
Amounts At
December 31, 1997, Maturing in
One Year or Greater Than
Less Two Years Three Years Three Years
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Under 5% . . . . . . . . . . . . . . . . . $ 817 $ 140 $ --- $ ---
5.01 - 7.00% . . . . . . . . . . . . . . . 20,914 4,051 10,255 2,820
7.01 - 9.00% . . . . . . . . . . . . . . . 118 1,526 1,014 648
9.01 - and over . . . . . . . . . . . . . . --- --- --- ---
-----------------------------------------------------------
Total . . . . . . . . . . . . . . $21,849 $ 5,717 $11,269 $ 3,468
===========================================================
</TABLE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit of $100,000 or more by time remaining until maturity
as of December 31, 1997.
<TABLE>
<CAPTION>
Maturity (In thousands)
<S> <C>
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . $ 1,966
Greater than three months through six months . . . . . . . . . . . . 558
Greater than six months through twelve months . . . . . . . . . . . . 700
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . 5,285
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,509
=======
</TABLE>
-53-
<PAGE>
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank at the dates
indicated, and the amount of increase or decrease in such deposits as compared
to the previous period.
<TABLE>
<CAPTION>
Deposit Activity
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from Balance at
December % of September September % of September September % of
31, 1997 Deposits 30, 1997 30, 1997 Deposits 30, 1996 30, 1996 Deposits
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts . . $ 9,098 12.85% $ (108) $ 9,206 14.24% $ (822) $10,028 15.36%
NOW . . . . . . . . . 15,182 21.44 2,119 13,063 20.21 (470) 13,533 20.73
Money Market . . . . 4,201 5.94 1,469 2,732 4.23 2,732 --- ---
------------------------------------------------------------------------------------
Total withdrawable . 28,481 40.23 3,480 25,001 38.68 1,440 23,561 36.09
------------------------------------------------------------------------------------
Certificates (original
terms):
31 days . . . . . . . 66 .09 (1) 67 .10 (7) 74 .11
3 months . . . . . . 502 .71 (99) 601 .93 155 446 .68
6 months . . . . . . 5,148 7.27 (706) 5,854 9.06 (2,130) 7,984 12.23
12 months . . . . . . 6,871 9.71 3,021 3,850 5.96 716 3,134 4.80
18 months . . . . . . 1,496 2.12 (33) 1,529 2.37 382 1,147 1.76
30 months . . . . . . 4,849 6.85 247 4,602 7.12 (548) 5,150 7.89
48 months . . . . . . 934 1.32 (105) 1,039 1.61 (1,405) 2,444 3.75
60 months . . . . . . 10,168 14.37 (532) 10,700 16.56 (541) 11,241 17.22
72 months . . . . . . --- --- --- --- --- --- --- ---
96 months . . . . . . --- --- --- --- --- --- --- ---
IRA's
31 days . . . . . . . --- --- --- --- --- --- --- ---
6 months . . . . . . 142 .20 2 140 .22 7 133 .21
12 months . . . . . . 159 .22 3 156 .24 58 98 .15
18 months . . . . . . 46 .07 (3) 49 .08 (6) 55 .08
30 months . . . . . . 604 .85 (4) 608 .94 70 538 .82
48 months . . . . . . 21 .03 4 17 .03 (5) 22 .03
60 months . . . . . . 2,788 3.94 9 2,779 4.30 152 2,627 4.02
96 months . . . . . . --- --- --- --- --- --- --- ---
Jumbo certificates . . 8,509 12.02 868 7,641 11.80 1,009 6,632 10.16
------------------------------------------------------------------------------------
Total certificates . . 42,303 59.77 2,671 39,632 61.32 (2,093) 41,725 63.91
------------------------------------------------------------------------------------
Total deposits . . . $70,784 100.00% $ 6,151 $64,633 100.00% $ (653) $65,286 100.00%
====================================================================================
</TABLE>
Borrowings. Generally, the Bank focuses on generating high quality
loans and then funds such loans from deposits and investments. The Bank may
obtain advances from the FHLB of Indianapolis to supplement its supply of
lendable funds. See "REGULATION AND SUPERVISION -- Regulation of the Bank as
a Savings Bank, Federal Home Loan Bank System " and ", Qualified Thrift
Lender." These limitations are not expected to have any impact on the Bank's
ability to borrow from the FHLB of Indianapolis. At December 31, 1997, the
Bank had approximately $17.7 million in borrowings outstanding, of which
approximately $17.7 million were FHLB advances. The Bank does not anticipate
any problem obtaining additional advances appropriate to meet its requirements
in the future, if such advances should become necessary.
-54-
<PAGE>
The following table represents certain information relating to our
borrowings at or for the three months ended December 31, 1997 and 1996 and at
or for the years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended At or for the Year Ended
December 31, September 30,
----------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
FHLB Advances:
Outstanding at end of period $17,746 $14,246 $17,746 $ 9,746
Average balance outstanding for period 17,746 11,246 14,054 2,173
Maximum amount outstanding at any 17,746 14,246 17,746 9,746
month-end during the period
Weighted average interest rate
during the period 6.05% 5.07% 6.19% 4.41%
Weighted average interest rate
at end of the period 5.84% 5.62% 5.87% 5.70%
</TABLE>
SERVICE CORPORATION SUBSIDIARY
OTS regulations permit federal savings associations to invest in the
capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community
or inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the
association's regulatory capital if the association's regulatory capital is in
compliance with applicable regulations. FIRREA requires a savings association
that acquires a non-savings association subsidiary, or that elects to conduct
a new activity within a subsidiary, to give the FDIC and the OTS at least 30
days advance written notice. The FDIC may, after consultation with the OTS,
prohibit specific activities if it determines such activities pose a serious
threat to the Savings Association Insurance Fund (the "SAIF"). Moreover,
FIRREA requires savings associations to deduct from capital, for purposes of
meeting the core capital, tangible capital, and risk-based capital
requirements, their entire investment in and loans to a subsidiary engaged in
activities not permissible for a national bank (other than exclusively agency
activities for its customers or mortgage banking subsidiaries).
The Bank wholly owns two subsidiaries. First Tier One Corporation,
an Indiana corporation, holds common stock issued by Intrieve (formerly known
as Savings & Loan Data Corporation), the Bank's data processing provider.
Through March 1994, it offered tax-deferred annuity products. The Shelby
Group, Inc., an Indiana Corporation ("TSGI"), offered a full line of insurance
products, including health, life, auto and medical insurance. The Bank ceased
the operations of TSGI as of November 1, 1996.
-55-
<PAGE>
EMPLOYEES
As of December 31, 1997, SCB employed no persons on a full- or
part-time basis. As of December 31, 1997, the Bank employed 30 persons on a
full-time basis and four persons on a part-time basis. None of the Bank's
employees are represented by a collective bargaining group.
Management considers its employee relations to be good.
COMPETITION
The Bank originates most of its loans to, and accepts most of its
deposits from, residents of Shelby County, Indiana and surrounding counties.
The Bank is the only financial institution headquartered in Shelby County.
The Bank is subject to competition from various financial
institutions, including state and national banks, state and federal savings
associations, credit unions, certain nonbanking consumer lenders, and other
companies or firms, including brokerage houses and mortgage brokers, that
provide similar services in Shelby County with significantly larger resources
than the Bank. In particular, three commercial banks and one savings
association compete with the Bank in its market area. To some extent, the
Bank must also compete with banks and savings associations in Indianapolis,
since media advertising from Indianapolis reaches Shelbyville. The Bank also
competes with money market funds and with insurance companies with respect to
its individual retirement accounts.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law.
To date, several bank holding company acquisitions of healthy savings
associations in Indiana have been completed. Affiliations between banks and
healthy savings associations based in Indiana may also increase the
competition faced by the Bank and SCB.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
originations primarily through the efficiency and quality of services it
provides borrowers, builders and realtors and through interest rates and loan
fees it charges. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors that are not readily predictable.
In the current environment, with many savings associations
undercapitalized, the Bank will attempt to differentiate itself from other
providers of financial services by emphasizing its strong capital base.
TAXATION
Federal Taxation. SCB and the Bank file a consolidated federal
income tax return on the accrual basis for each fiscal year ending September
30. The consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of SCB generally would not be taken into
account in determining the bad debt deduction allowed to the Bank, regardless
of whether a consolidated tax return is filed. However, certain "functionally
related" losses of SCB would be required to be taken into account in
determining the permitted bad debt deduction which, depending upon the
particular circumstances, could reduce the bad debt deduction. The Bank's
federal income tax returns have not been audited in the last five years.
-56-
<PAGE>
Historically, savings associations, such as the Bank, have been
permitted to compute bad debt deductions using either the bank experience
method or the percentage of taxable income method. However, for years
beginning after December 31, 1995, the Bank will no longer be able to use the
percentage of taxable income method of computing its allocable tax bad debt
deduction. The Bank will be required to compute its allocable deduction using
the experience method. As a result of the repeal of the percentage of taxable
income method, reserves taken after 1987 using the percentage of taxable
income method generally must be included in future taxable income over a
six-year period, although a two-year delay may be permitted for institutions
meeting a residential mortgage loan origination test. In addition, the
pre-1988 reserve, in which no deferred taxes have been recorded, will not have
to be recaptured into income unless (i) the Bank no longer qualifies as a bank
under the Internal Revenue Code of 1986, as amended (the "Code"), or (ii)
excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any)
by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method
and 75% of the excess of adjusted current earnings over AMTI (before this
adjustment and before any alternative tax net operating loss). AMTI may be
reduced only up to 90% by net operating loss carryovers, but alternative
minimum tax paid that is attributable to most preferences (although not to
post-August 7, 1986 tax-exempt interest) can be credited against regular tax
due in later years.
On August 20, 1996, the "Small Business Job Protection Act of 1996"
was passed into law. One provision of this act repeals the special bad debt
reserve method for thrift institutions currently provided for in Section 593
of the Code. The provision requires thrifts to recapture any reserves
accumulated after 1987 but generally forgives taxes owed. Thrift institutions
have been given six years to account for the recaptured excess reserves,
beginning with the first taxable year after 1995, and are permitted to delay
the timing of this recapture for one or two years subject to whether they meet
certain residential loan test requirements.
Income of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to SCB without the payment of federal income taxes by the
Bank on the amount of such income deemed removed from the reserves at the
then-current income tax rate. At December 31, 1997, approximately $1.1
million of the Bank's retained income represented bad debt deductions for
which no federal income tax provision had been made.
State Taxation. The Bank is subject to Indiana's Financial
Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted
gross income." "Adjusted gross income," for purposes of FIT, begins with
taxable income as defined by Section 63 of the Code, and thus, incorporates
federal tax law to the extent that it affects the computation of taxable
income. Federal taxable income is then adjusted by several Indiana
modifications. Other applicable state taxes include generally applicable
sales and use taxes plus real and personal property taxes.
The Bank's state income tax returns have not been audited in the last
five years.
-57-
<PAGE>
CURRENT ACCOUNTING ISSUES
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Comprehensive Income", was issued in June 1997 and becomes effective for
fiscal periods beginning after December 15, 1997. SFAS 130 requires
reclassification of earlier financial statements for comparative purposes.
SFAS No. 130 requires that changes in the amounts of certain items, including
foreign currency translation adjustments and gain 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. Management of the Bank
has not yet quantified the effect of the new standard on the consolidated
financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in June 1997 and is effective for fiscal periods beginning after
December 15, 1997. This statement will change the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. Management of the Bank has not yet quantified the effect of this
new standard on the consolidated financial statements.
PROPERTIES
At December 31, 1997, the Bank conducted its business from its main
office at 29 East Washington Street, Shelbyville, Indiana, and three branch
offices. All four offices are full-service offices. The Main Office in
Shelbyville, the Rampart Office in Shelbyville and the office in St. Paul are
either owned by the Bank or SCB and the office in Morristown is leased.
The following table provides certain information with respect to the
Bank's offices as of December 31, 1997:
<TABLE>
<CAPTION>
Net Book Value
Year Opened or of Property, Furniture Approximate Square
Description and Address Acquired & Fixtures Footage
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shelbyville Main Office
29 East Washington Street . . . . . . 1975 $ 786,578 15,000
Shelbyville Rampart Office
34 Rampart Street . . . . . . . . . . 1995 $ 889,184 3,000
Morristown Office
127 East Main Street . . . . . . . . . 1995 $ 46,223 1,800
St. Paul Office
105 County Line Road . . . . . . . . . 1989 $ 38,078 1,476
</TABLE>
The Bank has two ATMs, one of which is located at its main office and
the other which is located at its Rampart office. The Bank's ATMs are on the
INTRIEVE INC. interchange system and participate in the nationwide CIRRUS ATM
network.
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<PAGE>
The Bank owns computer and data processing equipment which is used
for transaction processing, accounting, financial forecasting, and loan
document preparation. The net book value of electronic data processing
equipment owned by the Bank was $118,440 at December 31, 1997.
The Bank also has contracted for the data processing and reporting
services of Intrieve. The Bank's service corporation subsidiary owns common
stock of Intrieve having a book value of $15,000. See "BUSINESS OF SHELBY
COUNTY BANCORP -- Service Corporation Subsidiary." The cost of these data
processing services is approximately $18,000 per month.
LEGAL PROCEEDINGS
Neither SCB, the Bank, nor the Bank's service corporation
subsidiaries is a party to any material pending legal proceeding.
YEAR 2000 COMPLIANCE
Because computer memory was so expensive on early mainframes, some
computer programs used only the final two digits for the year in the date
field while maintaining the first two digits of each year constant. As a
result, some computer applications may be unable to interpret the change from
the year 1999 to the year 2000. SCB is actively monitoring its year 2000
computer compliance issues. The bulk of SCB's computer processing is
contracted with Intrieve. Intrieve's schedule for compliance with year 2000
is for all data processing to be in compliance by May, 1998. Intrieve will
assist SCB with other phases of year 2000 compliance through 1998 and 1999.
SCB has also appointed a year 2000 team to address all aspects of the year
2000 compliance.
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<PAGE>
MANAGEMENT OF THE COMPANY AND THE BANK
DIRECTORS AND OFFICERS
The contemplated directors and officers of the Company upon
completion of the Merger, and the contemplated directors and executive
officers of the Bank upon completion of the Merger, are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH DIRECTOR TERM POSITION(S) WITH
NAME AND AGE THE COMPANY EXPIRES THE BANK
- ------------ ----------------- ------------- ----------------
<S> <C> <C> <C>
Robert C. Reed, 32 President, Chief Executive 1999 President, Chief
Officer and Director Executive Officer, and
Director
Steven R. Abel, 48 Chairman of the Board, 2000 Chairman of the Board,
Director Director
D. Warren Robison, 32 (1) Secretary and Director 2001 Director
Ralph W. Van Natta, 68 Director 2001 Director
Leonard J. Fischer, 61 Director 2000 Director
James M. Robison, 70 (1) Director 1999 Director
Bradley A. Long, 34 Vice President, Chief ---- Senior Vice President
Financial Officer and and Treasurer
Treasurer
</TABLE>
(1) D. Warren Robison is the nephew of James M. Robison.
- --------------------
The current directors of the Company are Steven R. Abel, Robert C.
Reed, D. Warren Robison, and Ralph W. Van Natta. Upon completion of the
Merger, James M. Robison, currently the Chairman of SCB and the Bank, and
Leonard J. Fischer, director of SCB and the Bank, will be added to the Board
of Directors of the Company and will continue to serve as directors of the
Bank.
Under federal law and regulations and subject to certain exceptions,
the addition or replacement of any director, or the employment, dismissal or
reassignment of a senior executive officer, of the Bank occurring within two
years of the chartering of the Bank, its acquisition by the Company or any
change in control of the Bank or the Company (or at any time that the Bank is
not in compliance with applicable minimum capital requirements or is otherwise
in a troubled condition) is subject to prior notice to and disapproval by the
FDIC.
The Company's Bylaws provide that the number of directors is
presently fixed at seven, until changed by amendment to the Bylaws by the
Board of Directors. The Articles of Incorporation further provide that the
directors shall be divided into three classes, with each class serving a
staggered 3-year term and with the number of directors in each class being as
nearly equal as possible. The initial terms of the three classes of directors
have been established at one year, two years and three years, respectively.
The subsequent terms of each class of director will be for three years.
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<PAGE>
It is anticipated that the entire Board of Directors of the Bank will
be elected annually by its sole shareholder, the Company. Officers of the
Company and the Bank will be appointed annually by their respective Boards of
Directors and will perform such duties as are prescribed in the Bylaws or by
the Board of Directors.
None of the executive officers or staff is subject to any agreements
with former employers that restrict their right to fully perform their duties
with the Company or the Bank.
EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
The experience and backgrounds of the directors and executive
officers, and their present or proposed positions with the Company, are
summarized below.
Steven R. Abel (Chairman of the Board, Director). Mr. Abel is a
licensed real estate appraiser for Hoosier Appraisal Service, Inc., a real
estate appraisal and consulting firm located in Shelbyville, Indiana. He has
served in this position since 1992. Prior thereto, Mr. Abel was a banker for
eighteen years. He served as a Vice President of Fifth Third Bank of Central
Indiana and its predecessor, the New Palestine Bank, and served on their
respective senior management teams. His banking career began in 1974 with
Central Indiana Bank, Shelbyville, Indiana, where he was a Vice President and
Senior Lending Officer. Mr. Abel also owns and operates a farm in northern
Shelby County.
Robert C. Reed (President, Chief Executive Officer, Director). Mr.
Reed has over thirteen years of banking experience in Shelby County. From
April of 1996 to August of 1997, he was Vice President and Regional Director
for Citizens Bank. In this position, he headed Citizens Bank's operations for
the Shelby County market and served on the bank's management committee.
During Mr. Reed's banking career he has served in various lending and
administrative positions in Shelby County. His banking career began with
Farmers National Bank (now a part of National City Bank, Indiana) where he
served for over eight years with responsibilities for lending and branch
administration. Mr. Reed was then employed by Irwin Union Bank and Trust
Company as a branch officer and also had mortgage lending responsibilities.
Mr. Reed was subsequently employed by American Home Funding. Norwest
Mortgage, Inc. next hired Mr. Reed as a loan officer. He then went to work
for Citizens Bank. Mr. Reed also has served on the boards of various civic
and service organizations. Mr. Reed is currently a member of the Shelby
County Chamber of Commerce and the Morristown Chamber of Commerce. He is the
past President of the Town Council in Morristown, Indiana where he worked
extensively with economic development efforts.
D. Warren Robison (Secretary, Director). Mr. Robison is the
President and sole shareholder of Hoosier Appraisal Service, Inc. and has been
a licensed real estate appraiser since 1985. He is also Vice President of
Hale Abstract Company, Inc., which issues real estate title insurance and
conducts real estate closings. Mr. Robison serves on numerous boards of
community organizations. He is the past chairman and president of the Shelby
County Noon Sertoma Club and received the Sertomian of the Year Award for
1997. He also co- founded the Big Brother/Big Sister Program for Shelbyville.
Mr. Robison is the nephew of James M. Robison.
Ralph W. Van Natta (Director). Mr. Van Natta has been the owner of
Shelby Travel Center, a travel agency located in Shelbyville, Indiana, for the
past ten years. Prior to this time, he served as the Mayor of Shelbyville and
then as the Commissioner of the Indiana Bureau of Motor Vehicles. Mr. Van
Natta is a member of the Shelby County Chamber of Commerce.
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<PAGE>
Leonard J. Fischer (Director). Mr. Fischer has served as a Vice
President and director of SCB since its incorporation in June, 1991 and has
been a director of the Bank since 1975. He is also a self-employed metal
fabricator. Prior to 1986, Mr. Fischer was manager of plants and equipment
for Shelby Steel, Inc.
James M. Robison (Director). Mr. Robison became a director and
Chairman of the Board of Directors of SCB at its organization in 1991, and has
served as director of the Bank since 1991, and legal counsel to the Bank since
1957. He is an attorney-at-law, affiliated with the Shelbyville law firm of
Robison, Yeager, Good & Baldwin. Mr. Robison is the uncle of D. Warren
Robison.
Bradley A. Long (Vice President, Chief Financial Officer, Treasurer).
Mr. Long has over eleven years of banking experience. Prior to his employment
by the Company, Mr. Long was the Vice President of First of America's Bancard
Division in Kalamazoo, Michigan from March 1997 to February 1998 and in
Indianapolis, Indiana he served as Vice President-Financial Analysis Manager
from April 1994 to March 1997. Prior to Mr. Long's employment by First of
America, he served as the Assistant Vice President-Accounting/Special Projects
for STAR Financial Group, Marion, Indiana, the holding company of STAR
Financial Bank, from May 1986 to April 1994.
DIRECTORS AND OFFICERS OF THE COMPANY AFTER THE MERGER
The Company will be the surviving corporation in the Merger and, upon
consummation of the Merger, SCB's separate corporate existence will cease.
Consequently, the directors and officers of SCB will no longer serve in such
capacities after the closing of the Merger. The Board of Directors of the
Company serving at the closing of the Merger will be the Board of Directors of
the Company following consummation of the Merger, until new directors are
elected. The officers of the Company serving at the closing of the Merger
will continue to serve as the officers of the Company following consummation
of the Merger, until the Board of Directors of the Company elects new or
successor officers.
DIRECTORS AND OFFICERS OF THE BANK AFTER THE MERGER
The Board of Directors of the Bank following the closing of the
Merger, until such time as their respective successors have been elected and
qualified, will consist of those persons who are serving as directors of the
Company immediately prior to the closing of the Merger. The officers of the
Bank serving immediately prior to the closing of the Merger will be the
officers of the Bank following the closing of the Merger until the Board of
Directors of the Bank elects new or successor officers. However, at the
closing of the Merger, Rodney L. Meyerholtz will resign as President and Chief
Executive Officer of the Bank and James M. Robison will resign as Chairman of
the Bank. Robert C. Reed will be elected as President and Chief Executive
Officer of the Bank and Steven R. Abel will be elected as the Chairman of the
Bank. Messrs. Reed and Abel each will serve in their respective positions
until such time as their respective successors have been duly elected and
qualified.
DIRECTOR, EXECUTIVE OFFICER AND EMPLOYEE COMPENSATION
In the first year following the closing of the Merger, a cash
retainer of $1,200 per month is expected to be paid to non- employee directors
of the Company for their services, regardless of attendance at meetings. In
addition, directors will receive awards under the 1997 Directors' Stock Option
Plan ("Directors' Stock Option Plan"). See "MANAGEMENT OF THE COMPANY AND THE
BANK -- 1997 Directors' Stock Option Plan." The Company has paid a cash
retainer of $1,200 per month since April 1, 1997 to Messrs. Abel and Robison
for their services as directors.
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<PAGE>
The Company has paid a salary to Mr. Reed for his services through
_______________, 1998 in an amount of $__________. The Company has paid a
salary to Mr. Long for his services through _______________, 1998 in an amount
of $__________. The Bank's initial salary levels for its executive officers
and employees will be based on individual years of experience and the
compensation of officers and employees in comparable positions at similar
financial institutions. Executive officers' compensation in subsequent years
will be determined by the Compensation Committee, a committee of the Bank's
Board of Directors comprised of a majority of outside (non-employee)
directors. Officers of the Bank may also participate in any benefit plan
adopted for broad participation by Bank employees, such as a planned 401(k)
plan. The Company has an employment agreement with Mr. Reed.
The Company presently does not provide any employee benefits other
than the stock option plans described below. The Company anticipates that it
will adopt a tax-qualified defined contribution plan which will include a
qualified cash or deferred (i.e., 401(k)) arrangement for the benefit of all
employees of the Company or the Bank who satisfy the plan's eligibility
requirements. The Company may provide retirement benefits, other incentive
plans, various forms of non-cash compensation and group health insurance to
employees of the Company or the Bank, although the Company cannot at this time
predict what benefits will be provided or the costs of such benefits.
In general, employees of the Bank will receive benefits in accordance
with the policies and programs of the Company following the closing of the
Merger. Years of service of an officer or employee prior to the closing of
the Merger will be credited to each such officer or employee for purposes of
eligibility under the Company's employee welfare benefit plans and for
purposes of eligibility and vesting, but not for benefit accrual or
contributions, under any profit sharing plan of the Company. Until the
officers and employees of the Bank become covered by the welfare benefit plans
sponsored by the Company, such officers and employees will remain covered by
the welfare benefit plans currently sponsored by the Bank. The accrual of
participants' benefits under the Bank's Financial Institution's Retirement
Fund ("Bank Retirement Plan") will be frozen effective as of December 31,
1998, and all accrued benefits of participants in the Bank Retirement Plan
will thereupon become fully vested. To the extent permitted by the Bank
Retirement Plan and applicable law, the accrued benefit of each participant in
the Bank Retirement Plan will be held and remain under the Bank Retirement
Plan and will be payable at the time(s) and in the forms provided for under
that plan.
The Board of Directors of the Company has approved a three-year
employment contract with its President and Chief Executive Officer, Robert C.
Reed. Each year, the contract can be extended for additional one-year terms
to maintain a three-year term unless notice is properly given by either party
to the contract. Unless extended further, the contract will expire in 2000.
Mr. Reed receives his current salary under the contract, which salary is
subject to increases approved by the Board of Directors. The contract also
provides, among other things, for participation in other fringe benefits and
benefit plans available to the Company's employees. Mr. Reed may terminate his
employment upon 60 days' written notice to the Company. The Company may
discharge Mr. Reed for "cause" (as defined in the contract) at any time or
upon the occurrence of certain events specified by the FDI Act. Upon
termination of Mr. Reed's employment by the Company for other than cause or in
the event of termination by Mr. Reed "for cause" (as defined in the contract),
Mr. Reed will receive his base compensation under the contract (a) for an
additional three years (or the remaining term of the contract, if shorter) if
the termination follows a change of control (as defined in the contract), or
(b) for an additional two years (or the remaining term of the contract, if
shorter) if the termination does not follow a change of control. In addition,
during such period, Mr. Reed will continue to participate in the Company's
group insurance plans or receive comparable benefits. Further, within a
period of three months after such termination following a change of control,
Mr. Reed will have the right to cause the Company to purchase any stock
options he holds for a price equal to the fair market value (as defined in the
contract) of the shares subject to such options minus their option price.
Payments pursuant to the contract
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<PAGE>
will be adjusted, if necessary, in order to avoid any adverse tax consequences
to the Company and Mr. Reed under the so-called "golden parachute" provisions
of the Code.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
to Robert C. Reed and Bradley A. Long, its only executive officers who
received compensation for services rendered during the period from the
Company's organization (March 18, 1997) through _______________, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table (1)
- ---------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
- ---------------------------------------------------------------------------------------------------------------
Period from Securities
Name and Organization Underlying All Other
Principal Position Through Salary ($) (2) Bonus ($) Options/Sars (#) Compensation ($)
_____, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert C. Reed,
President and Chief
Executive Officer 1998 $_______ -- 27,000 --
Bradley A. Long,
Vice President and
Chief Financial 1998 $_______ -- 5,000 --
Officer
</TABLE>
(1) Messrs. Reed and Long received certain perquisites, but the
incremental cost of providing such perquisites did not exceed the
lesser of $50,000 or 10% of his salary and bonus.
(2) Mr. Reed's annual salary is $110,000 and Mr. Long's annual salary is
$67,500.
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<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the
stock options granted by the Company to employees through _______________,
1998:
<TABLE>
<CAPTION>
Option Grants
- --------------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options Exercise or
Underlying Options Granted To Employees Base
Name Granted (#) (1) in Fiscal Year Price ($/Sh) Expiration Date
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert C. Reed,
President and Chief
Executive Officer 27,000 ____% $12.00 ______, 20___
Bradley A. Long,
Vice President and
Chief Financial Officer 5,000 ____% $12.00 ______, 20___
</TABLE>
(1) Options are exercisable with respect to 20% of the shares granted by
the option within 60 days of the date of this Prospectus and will
vest with respect to an additional 20% of the shares on each of the
anniversaries of the date of this Prospectus (assuming continued
service). Includes options granted to Mr. Reed under the Directors'
Stock Option Plan to purchase 22,000 shares at $12.00 per share.
STOCK PLANS
The Company has adopted separate stock option plans for Directors of
the Company and the Bank and for officers and key employees of the Company and
the Bank. Under the option plans, options for an aggregate of 125,000 shares
of Common Stock may be granted. The Board of Directors of the Company
believes these plans provide an important incentive to those who will be
instrumental to the success of the Company and of the Bank and will encourage
such persons to continue their service with the Company and the Bank. A
description of each of the plans is set forth below but such descriptions are
qualified in their entirety by reference to the complete plans which are
included as exhibits to the Company's registration statement on Form SB-2 (of
which this Prospectus is a part).
For the life of the options, the individuals who hold such options
will be given the opportunity to benefit if the value of the shares of Common
Stock increases. In the event that the options are exercised, there may be
some resulting dilution in the per share book value of the Company at the time
of exercise or issuance and there will be a reduction in the percentage
ownership in the Company by the other shareholders.
1997 KEY EMPLOYEE STOCK OPTION PLAN. The Board of Directors of the
Company adopted a stock option plan which provides for the grant of "incentive
stock options" within the meaning of Section 422 of the Code and of
nonqualified stock options (the "Employee Stock Option Plan"). The Employee
Stock Option Plan provides for the award of stock options to elected officers
and key employees of the Company and its subsidiaries, including the Bank once
it is acquired. The exercise price per share for all options granted under
the Employee Stock Option Plan will not be less than the greater of $12.00 per
share or the fair
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<PAGE>
market value of a share on the date of grant. No option will be granted under
the Employee Stock Option Plan after August 27, 2007. The Employee Stock
Option Plan was approved by the Founders as the sole shareholders of the
Company prior to the offering.
Options may be granted under the Employee Stock Option Plan only to
officers and other key employees who are in positions to make significant
contributions to the success of the Company. A committee consisting of
outside directors of the Company who are ineligible under the Employee Stock
Option Plan to receive options themselves will administer the Employee Stock
Option Plan.
Options will be exercisable in whole or in part upon such terms and
conditions as may be determined by the committee, but in no event will any
incentive stock options be exercisable later than ten years after date of
grant.
A total of 35,000 shares of Common Stock have been reserved for
issuance under the Employee Stock Option Plan. Except for the options granted
to Messrs. Reed and Long, no options are outstanding under the Employee Stock
Option Plan.
1997 DIRECTORS' STOCK OPTION PLAN. The Board of Directors of the
Company adopted a nonqualified stock option plan which provides for the grant
of nonqualified stock options to those individuals who serve as Directors of
the Company or any of its subsidiaries, including the Bank once it is
acquired. The Directors' Stock Option Plan was also approved by the Founders
as the sole shareholders of the Company prior to the offering.
The Directors' Stock Option Plan provides for the grant of
nonqualified stock options with an exercise price per share of the greater of
the public offering price of $12.00 per share or the fair market value of a
share on the date of grant. A total of 90,000 shares of Common Stock have
been reserved for issuance under the Director's Stock Option Plan. Options
granted under the Director's Stock Option Plan become exercisable on the date
of grant to the extent of 20 percent of the shares covered by the option and
will vest with respect to an additional 20 percent of the shares on each
anniversary of the date of the grant. The unexercised portion of each option
automatically expires, and is no longer exercisable, on the earlier to occur
of the following: (i) 15 years after the option is granted, (ii) three months
after the person who was granted the option ceases to be a director, other
than due to permanent disability, death, or for cause, (iii) one year
following the death or permanent disability of the director, or (iv)
termination of the director's services, for cause. No option will be granted
under the Directors' Stock Option Plan after July 31, 2007. Pursuant to the
Amended and Restated Stock Option Agreements, dated as of September 12, 1997
between the Company and each of the Founders, the Company granted each Founder
the option to acquire 20,000 shares of Common Stock at an exercise price of
$12.00. At the time of this grant, the Founders were the only directors of
the Company. On ____________, 1998, each of the directors of the Company,
Messrs. Abel, Reed, Robison and Van Natta, received options under the
Directors' Stock Option Plan to acquire a total of 2,000 shares at an exercise
price of $12.00 per share. At the closing of the Merger, the Company intends
to grant to Leonard J. Fischer and James M. Robison under the Directors' Stock
Option Plan the option to acquire 2,000 shares at an exercise price of $12.00
per share. In the future, an individual will become eligible to receive
grants of options under the Directors' Stock Option Plan upon his election to
a qualifying board of directors but will not receive additional options
because he is a member of more than one such board.
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<PAGE>
RELATED PARTY TRANSACTIONS
REDEMPTION OF STOCK AND LOANS FROM FOUNDERS
The Founders are currently the sole shareholders of the Company, each
of whom currently owns 30,000 shares of Common Stock of the Company. Prior to
the closing of the Merger, the shares of Common Stock of the Company owned by
the Founders will be redeemed by the Company at their initial cost of $0.20
per share. The Founders will purchase shares of Common Stock in the offering
at the initial public offering price of $12.00 per share. The Borrowings
consist of the Company's lines of credit from the Founders in an aggregate
amount of $__________ to fund certain expenses of the Company. As of
____________, 1998, there was $__________ outstanding under such lines of
credit. All advances under the lines of credit are due and payable on demand.
The outstanding balances under the lines of credit bear interest at 8.5%,
which was the prime rate of interest charged by most of the Indianapolis banks
at the time such loans were made. The Founders may elect to receive repayment
of the loans at the closing of the offering in the form of cash or shares of
Common Stock sold in the offering, valued at the initial public offering price
of $12.00 per share.
BANKING TRANSACTIONS
It is anticipated that the directors and officers of the Company and
the Bank and the companies with which they are associated will have banking
and other transactions with the Company and the Bank in the ordinary course of
business. It is the Bank's policy that any loans and commitments to lend to
such affiliated persons or entities included in such transactions will be made
in accordance with all applicable laws and regulations and on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with unaffiliated parties of similar
creditworthiness, and will not involve more than the normal risk of
collectibility or present other unfavorable features to the Company and the
Bank. Applicable law and Bank policy generally require that transactions
between the Company or the Bank, and any officer, director, principal
shareholder or other affiliate of the Company or the Bank will be on terms no
less favorable to the Company or the Bank than could be obtained on an
arm's-length basis from unaffiliated independent third parties.
TAX INDEMNIFICATION AGREEMENT
The Company and the Founders intend to become parties to a tax
indemnification agreement prior to the closing of the offering relating to
their respective income tax liabilities. Subject to certain limitations, this
tax indemnification agreement will generally provide that the Founders, as the
sole shareholders of the Company prior to the offering, will be indemnified by
the Company, and the Company will be indemnified by the Founders, with respect
to certain federal and state income taxes (plus interest and penalties)
shifted between the Founders, on the one hand, and the Company, on the other
hand, for taxable years ending either before or after the closing of the
offering as a result of adjustments to tax returns of the Founders and the
Company.
OTHER TRANSACTIONS
D. Warren Robison is the sole shareholder and President of Hoosier
Appraisal Service, Inc. and Steven R. Abel is an appraiser for Hoosier
Appraisal Service, Inc. The Company intends that the Bank will continue to
utilize the services of Hoosier Appraisal Service, Inc. in connection with the
appraisal of real estate that serves as collateral for loans made by the Bank.
The fees charged by Hoosier Appraisal Service, Inc. generally will be paid by
the borrowers and not the Bank and will be at arm's-length. D. Warren
Robison is Vice President of Hale Abstract Co., Inc., which provides title
insurance and performs real estate closings. The Company intends that the
Bank will continue to utilize the services of Hale Abstract Co., Inc. in
connection with its real estate loans. The fees charged by Hale Abstract Co.,
Inc. are generally paid by the borrowers and not the Bank and will be at
arm's-length.
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<PAGE>
The Company intends for James M. Robison, to continue to serve as
counsel to the Bank in connection with loan closings and routine legal work
such as title searches and foreclosures. In connection with his legal
services, the Bank will pay the fees charged by Mr. Robison based upon his
legal services rendered to the Bank.
DIRECTOR LIABILITY; INDEMNIFICATION
Under Indiana law, a director of the Company will not be liable for
any action taken as a director, or any failure to take any action, unless (a)
the director has breached or failed to perform his duties as a director in
good faith with the care an ordinarily prudent person in a like position would
exercise under similar circumstances and in a manner the director reasonably
believes to be in the best interests of the Company, and (b) such breach or
failure to perform constitutes willful misconduct or recklessness. The Bylaws
of the Company provide for the indemnification by the Company of certain
liabilities of the directors and officers of the Company incurred while acting
for or on behalf of the Company or the Bank as a director or officer, subject
to certain limitations. It is possible that the indemnification obligations
imposed under the Company's Bylaws could result in a charge against the
Company's earnings and thereby affect the market value of the Common Stock of
the Company and the availability of funds for payment of dividends to the
Company's shareholders. The scope of such indemnification otherwise permitted
by Indiana law may be limited in certain circumstances by federal law and
regulations. See "SUPERVISION AND REGULATION -- Regulatory Developments."
The Company may purchase director's and officer's liability insurance for
directors and officers of the Company and the Bank.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions discussed above or otherwise, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
TERMINATION AGREEMENT
The Company, the Bank and Mr. Rodney L. Meyerholtz entered into a
certain Termination of Employment Agreement dated February 5, 1998
("Termination Agreement"). Pursuant to the Termination Agreement, at the
closing of the Merger, the employment agreement dated October 17, 1991
("Meyerholtz Employment Agreement") between Mr. Meyerholtz and the Bank will
terminate in its entirety and neither the Bank nor Mr. Meyerholtz will have
any obligation to the other under the Meyerholtz Employment Agreement. Under
the Termination Agreement, the Bank has agreed to pay Mr. Meyerholtz an amount
equal to $211,094 without any interest thereon, less any withholdings for
applicable taxes required by law, in thirty-six approximately equal monthly
installments. The Bank has also agreed under the Termination Agreement to pay
the costs associated with Mr. Meyerholtz's participation in the Company's
group health insurance plan for 3 years. However, if Mr. Meyerholtz chooses
to receive health insurance coverage through the exercise of his COBRA rights,
then for a period of 18 months the Company will reimburse Mr. Meyerholtz for
the COBRA cost of his individual coverage. Under the Termination Agreement,
Mr. Meyerholtz has agreed to certain non-disclosure, non-solicitation and
non-competition covenants.
Pursuant to the terms of the Merger Agreement, the Company has agreed
that the Bank may amend the employment agreements between the Bank and each of
Ronald L. Lanter, Vice President-Consumer
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<PAGE>
Loans, Joyce E. Ford, Vice President-Mortgage Loans, and Rita Sturgill, Vice
President and Treasurer, such that, among other things, the term of each such
employment agreement will end one-year from the closing of the Merger.
STOCK OPTION AGREEMENT
As a condition to the Company entering into the Merger Agreement, and
in consideration therefor, the Company and SCB entered into a Stock Option
Agreement dated February 5, 1998 ("Option Agreement"). The Option Agreement
is intended to increase the likelihood that the Merger will be consummated by
making it more difficult and more expensive for another party to obtain
control of or acquire SCB. The Option Agreement grants the Company the right
to purchase up to 24.8% of the issued and outstanding shares of SCB Common
Stock upon the occurrence of specific events at a price of $49.16 per share.
The Option Agreement will expire at the closing of the Merger. In no event
will the net proceeds of the offering be used to exercise the option granted
under the Option Agreement.
The information contained in this Prospectus with respect to the
Termination Agreement and Stock Option Agreement is a summary of the material
provisions of those agreements and, as such, is qualified in its entirety by
reference to those agreements, which are included as exhibits to the Company's
registration statement on Form SB-2 (of which this Prospectus is a part).
PRINCIPAL SHAREHOLDERS
The Company has 90,000 shares of Common Stock outstanding with such
shares being held equally by Messrs. Abel, Reed and Robison; such shares will
be redeemed by the Company at their original cost of $.20 per share prior to
the closing of the Merger. See "RELATED PARTY TRANSACTIONS - Redemption of
Stock and Loans from Founders." The following table sets forth certain
information with respect to the anticipated beneficial ownership of the Common
Stock after the sale of shares offered hereby, by each of the current
directors and executive officers of the Company and by all such directors and
executive officers of the Company as a group. No person is expected to
beneficially own more than five percent of the outstanding Common Stock
following the offering. Pursuant to the Underwriting Agreement, the Company
will direct the Underwriter to offer to sell the number of shares listed
below. All share numbers are provided based upon such directions from the
Company and non-binding expressions of interest supplied by the persons listed
below. Depending upon their individual circumstances at the time, each of such
persons may purchase a greater or fewer number of shares than indicated in the
following table and, in fact, may purchase no shares.
Number of shares Percentage of
beneficially owned outstanding shares
Name after offering (1) after offering (4)
---- ------------------ ------------------
Steven R. Abel _____(3) ______%
Robert C. Reed ______(2)(3) ______%
D. Warren Robinson _____(3)(4) ______%
Ralph W. Van Natta _____(3) ______%
James M. Robison _____(3)(4) ______%
Leonard J. Fischer _____(3) ______%
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Bradley A. Long _____(2) ______%
Directors and executive officers
as a group (8 persons) _____(3) ______%
- -----------------
(1) Some or all of the Common Stock listed may be held jointly
with, or for the benefit of, spouses and/or children of, or
various trusts established by, the person indicated.
(2) Does not include the shares that such person has the right to
acquire within 60 days of the date of this Prospectus
pursuant to the Employee Stock Option Plan (Mr. Reed: 1,000
shares; Mr. Long: 1,000 shares).
(3) Does not include the shares that such person has the right to
acquire within 60 days after the date of this Prospectus
pursuant to the Directors' Stock Option Plan (Mr. Abel: 4,400
shares; Mr. Craven: 400 shares; Mr. Reed: 4,400 shares;
Leonard J. Fischer: 400 shares; Mr. D. Warren Robison: 4,400
shares; Mr. James M. Robison: 400 shares; and Mr. Van Natta:
400 shares.
(4) D. Warren Robison is the nephew of James M. Robison.
(5) The percentages shown are based on the 1,250,000 shares
offered hereby and assume no exercise of the Underwriter's
over-allotment option.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental
regulatory authorities. Those authorities include, but are not limited to, the
Federal Reserve, the OTS, the FDIC, the Department, the Commission, the
Internal Revenue Service and state taxing authorities. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions and their holding companies regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, lending activities and practices, the nature
and amount of collateral for loans, the establishment of branches, mergers,
consolidations and dividends. The system of supervision and regulation
applicable to the Company and the Bank establishes a comprehensive framework
for their respective operations and is intended primarily for the protection
of the FDIC's deposit insurance funds, the depositors of the Bank and the
public, rather than shareholders of the Bank or the Company.
Federal law and regulations, including provisions added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
regulations promulgated thereunder, establish supervisory standards applicable
to the operation, management and lending activities of the Bank, including
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation and loan-to-value ratios for loans
secured by real property. The Bank will continue to comply with these
requirements, and in some cases may apply more restrictive standards.
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The following references to statutes and regulations are intended to
summarize material effects of certain government regulation on the business of
the Company and the Bank. Any change in government regulation may have a
material adverse effect on the Company, the Bank and their operations.
REGULATION OF THE COMPANY UNDER HOLA
As the holding company for the Bank, the Company will be regulated as
a "non-diversified savings and loan holding company" within the meaning of the
HOLA, and subject to regulatory oversight of the Director of the OTS. As
such, the Company will be registered with the OTS and thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank will be subject to
certain restrictions in its dealings with the Company and with other companies
affiliated with the Company.
In general, the HOLA prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from acquiring control of
another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another
holding company which is not a subsidiary. The HOLA will restrict the ability
of a director or officer of the Company, or any person who owns more than 25%
of the Company's common stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
OTS regulations generally do not restrict the permissible business
activities of a unitary savings and loan holding company. Notwithstanding
the above rules as to permissible business activities of unitary savings and
loan holding companies, if the savings association subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) At December 31,
1997, the Bank's asset composition was in excess of that required to qualify
as a Qualified Thrift Lender.
If the Company were to acquire control of another savings association
other than through a merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings associations) would
thereafter be subject to further restrictions. The HOLA provides that, among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the Federal Reserve as permissible for bank holding companies,
unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described
in (vii) above must also be approved by the Director of the OTS before a
multiple holding company may engage in such activities.
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The Director of the OTS may also approve acquisitions resulting in
the formation of a multiple savings and loan holding company which controls
savings associations in more than one state, if the multiple savings and loan
holding company involved controls a savings association which operated a home
or branch office in the state of the association to be acquired as of March 5,
1987, or if the laws of the state in which the association to be acquired is
located specifically permit associations to be acquired by state-chartered
associations or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings associations). Also, the Director of the OTS may
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case of
certain emergency thrift acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire
savings associations whose home offices are located in Indiana and savings
association holding companies with their principal place of business in
Indiana ("Indiana Savings Association Holding Companies") upon receipt of
approval by the Department. Moreover, Indiana Savings Association Holding
Companies may acquire savings associations with their home offices located
outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of
approval by the Department.
No subsidiary savings association of a savings and loan holding
company may declare or pay a dividend on its permanent or nonwithdrawable
stock unless it first gives the Director of the OTS 30 days advance notice of
such declaration and payment. Any dividend declared during such period or
without giving notice shall be invalid.
REGULATION OF THE BANK AS A SAVINGS BANK
As a federally chartered, SAIF-insured savings association, the Bank
is subject to extensive regulation by the OTS and the FDIC. For example, the
Bank must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial
condition. The OTS periodically examines the Bank's books and records and, in
conjunction with the FDIC in certain situations, has examination and
enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. The
Bank's semi-annual assessment owed to the OTS, which is based upon a specified
percentage of assets, is approximately $10,000.
The activities of the Bank are governed by the HOLA and, in certain
respects, the FDI Act. The Director of the OTS is authorized to promulgate
regulations to ensure the safe and sound operation of savings associations and
may impose various requirements and restrictions on the activities of savings
associations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis. The FHLB system consists of 12 regional FHLBs. Each FHLB
serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from funds deposited by savings associations
and proceeds derived from the sale of consolidated obligations of the FHLB
system. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
All FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB. The Federal Housing Finance Board, an independent agency,
controls the FHLB System, including the FHLB of Indianapolis.
As a member, the Bank is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At September 30, 1997, the Bank's
investment in stock of the FHLB of Indianapolis was $920,000. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate-related collateral to 30% of a member's capital and
limiting
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total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Indianapolis and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. For the fiscal year ended September 30, 1997, dividends
paid by the FHLB of Indianapolis to the Bank totaled approximately $59,000,
for an annual rate of 7.9%.
Savings Association Regulatory Capital. Currently, savings
associations are subject to three separate minimum capital-to-assets
requirements: (i) a leverage limit, (ii) a tangible capital requirement, and
(iii) a risk-based capital requirement. The leverage limit requires that
savings associations maintain "core capital" of at least 3% of total assets.
Core capital is generally defined as common shareholders' equity (including
retained income), noncumulative perpetual preferred stock and related surplus,
certain minority equity interests in subsidiaries, certain non-withdrawable
accounts, qualifying supervisory goodwill, purchased mortgage servicing rights
and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except purchased mortgage servicing rights which may be included after
making the above-noted adjustment in an amount up to 100% of tangible capital)
of at least 1.5% of total assets. Under the risk-based capital requirements,
a minimum amount of capital must be maintained by a savings association to
account for the relative risks inherent in the type and amount of assets held
by the savings association. The risk-based capital requirement requires a
savings association to maintain capital (defined generally for these purposes
as core capital plus general valuation allowances and permanent or maturing
capital instruments such as preferred stock and subordinated debt less assets
required to be deducted) equal to 8.0% of risk-weighted assets. Assets are
ranked as to risk in one of four categories (0-100%). A credit risk-free
asset, such as cash, requires no risk-based capital, while an asset with a
significant credit risk, such as a non-accrual loan, requires a risk factor of
100%. Moreover, a savings association must deduct from capital, for purposes
of meeting the core capital, tangible capital and risk-based capital
requirements, its entire investment in and loans to a subsidiary engaged in
activities not permissible for a national bank (other than exclusively agency
activities for its customers or mortgage banking subsidiaries). At December
31, 1997, the Bank was in compliance with all capital requirements imposed by
law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above
normal" interest rate risk (institutions whose portfolio equity would decline
in value by more than 2% of assets in the event of a hypothetical
200-basis-point move in interest rates) to maintain additional capital for
interest rate risk under the risk-based capital framework. If the OTS were to
implement this regulation, the Bank would not be required to maintain
additional capital at December 31, 1997 under the terms of the OTS proposed
interest rate risk rule.
The following is a summary of the Bank's regulatory capital and
capital requirements at December 31, 1997:
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<TABLE>
<CAPTION>
Tangible Core Risk-based
capital capital capital
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $5,790 $5,790 $6,212
Minimum capital requirement 1,422 2,843 5,255
Excess capital $4,368 $2,947 $ 957
--------------------------------------------------------------------------
Regulatory capital ratio 6.0% 6.0% 9.5%
--------------------------------------------------------------------------
Minimum capital ratio 1.5% 3.0% 8.0%
--------------------------------------------------------------------------
</TABLE>
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to
take enforcement actions against a savings association that fails to meet its
capital requirements. These actions may include restricting the operations
activities of the association, imposing a capital directive, cease and desist
order, or civil money penalties, or imposing harsher measures such as
appointing a receiver or conservator or forcing the association to merge into
another institution.
Dividend Limitations. An OTS regulation imposes limitations upon all
"capital distributions" by savings associations, including cash dividends,
payments by an association to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulation establishes a
three-tiered system of regulation, with the greatest flexibility being
afforded to well-capitalized associations. A savings association which has
total capital (immediately prior to and after giving effect to the capital
distribution) that is at least equal to its fully phased-in capital
requirements would be a Tier 1 institution ("Tier 1 Institution"). An
association that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements, would be
a Tier 2 institution ("Tier 2 Institution"). An institution having total
capital that is less than its minimum capital requirements would be a Tier 3
institution ("Tier 3 Institution"). However, an institution which otherwise
qualifies as a Tier 1 Institution may be designated by the OTS as a Tier 2
Institution or Tier 3 Institution if the OTS determines that the institution
is "in need of more than normal supervision." The Bank is currently a Tier 1
Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the
greater of (a) 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" at the
beginning of the calendar year (the smallest excess over its capital
requirements), or (b) 75% of its net income over the most recent four-quarter
period. Any additional amount of capital distributions would require prior
regulatory approval.
The OTS has proposed revisions to these regulations which would
permit savings associations to declare dividends in amounts which would assure
that they remain adequately capitalized following the dividend declaration.
Savings associations in a holding company system which are rated CAMELS 1 or 2
and which are not in troubled condition would need to file a prior notice with
the OTS concerning such dividend declaration.
Liquidity. For each calendar quarter, the Bank is required to
maintain an average daily balance of liquid assets (cash, certain time
deposits, bankers' acceptances, specified United States Government, state or
federal agency obligations, shares of certain mutual funds and certain
corporate debt securities and commercial paper) equal to an amount not less
than a specified percentage of its net withdrawable deposit
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accounts plus short-term borrowings. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and the savings flows of member
institutions. The OTS recently reduced the level of liquid assets that must
be held by a savings association from 5% to 4% of the associations net
withdrawable accounts plus short-term borrowings based upon the average daily
balance of such liquid assets for each quarter of the associations's fiscal
year. The OTS may impose monetary penalties upon savings associations that
fail to comply with those liquidity requirements. The OTS eliminated the
requirement that each savings association maintain an average daily balance of
short-term liquid assets of 1% of the total of its net withdrawable deposit
accounts and short-term borrowings during the preceding calendar month. The
daily average liquidity of the Bank for September, 1997 was 5.3% which
exceeded the then-applicable 5% liquidity requirement. Its average short-term
liquidity ratio for September, 1997, was 8.3%. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Real Estate Lending Standards. OTS regulations require savings
associations to establish and maintain written internal real estate lending
policies. Each association's lending policies must be consistent with safe
and sound banking practices and appropriate to the size of the association and
the nature and scope of its operations. The policies must establish loan
portfolio diversification standards; establish prudent underwriting standards,
including loan-to-value limits, that are clear and measurable; establish loan
administration procedures for the association's real estate portfolio; and
establish documentation, approval, and reporting requirements to monitor
compliance with the association's real estate lending policies. The
association's written real estate lending policies must be reviewed and
approved by the association's Board of Directors at least annually. Further,
each association is expected to monitor conditions in its real estate market
to ensure that its lending policies continue to be appropriate for current
market conditions.
Loans to One Borrower. The Bank may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities but not including real estate. In some cases, a savings
association may lend up to 30 percent of unimpaired capital and surplus to one
borrower for purposes of developing domestic residential housing, provided
that the association meets its regulatory capital requirements and the OTS
authorizes the association to use this expanded lending authority. At
December 31, 1997, the Bank did not have any loans or extensions of credit to
a single or related group of borrowers in excess of its lending limits.
Qualified Thrift Lender. Savings associations must meet a QTL test.
If the Bank maintains an appropriate level of qualified thrift investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualify as a QTL, the Bank
will continue to enjoy full borrowing privileges from the FHLB of
Indianapolis. The required percentage of QTIs is 65% of portfolio assets
(defined as all assets minus intangible assets, property used by the
association in conducting its business and liquid assets equal to 20% of total
assets). In addition, savings associations may include shares of stock of the
FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on
a monthly basis in nine out of every twelve months. As of December 31, 1997,
the Bank was in compliance with its QTL requirement, with approximately _____%
of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i)
it may not enter into any new activity except for those permissible for a
national bank and for a savings association; (ii) its branching activities
shall be limited to those of a national bank; (iii) it shall not be eligible
for any new FHLB advances; and (iv) it shall be bound by regulations
applicable to national banks respecting payment of dividends. Three years
after failing the QTL test the association must (i) dispose of
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any investment or activity not permissible for a national bank and a savings
association and (ii) repay all outstanding FHLB advances. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations
applicable to bank holding companies (including restrictions as to the scope
of permissible business activities).
Branching. The rules of the OTS on branching by federally-chartered
savings associations permit nationwide branching to the extent allowed by
federal statute. This permits federal savings associations with interstate
networks to diversify their loan portfolio and lines of business. The OTS
authority pre-empts any state law purporting to regulate branching by federal
savings associations.
Insurance of Deposits. The FDIC is an independent federal agency
that insures the deposits, up to prescribed statutory limits, of banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund (the "BIF") for commercial banks and state savings banks and
the SAIF for savings associations such as the Bank and banks that have
acquired deposits from savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. As of September 30, 1996, the
reserves of the SAIF were below the level required by law, primarily because a
significant portion of the assessments paid into the SAIF have been used to
pay the cost of prior thrift failures, while the reserves of the BIF met the
level required by law in May, 1995. However, on September 30, 1996,
provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time and may decrease these rates if the target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level
is determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new
law, the Bank was charged a one-time special assessment equal to $.657 per
$100 in assessable deposits at March 31, 1995. The Bank recognized this
one-time assessment as a non-recurring operating expense of $332,000 ($200,000
after tax) during the three-month period ending September 30, 1996, and the
Bank paid this assessment in November 1996. The assessment was fully
deductible for both federal and state income tax purposes. Beginning January
1, 1997, the Bank's annual deposit insurance premium was reduced from .23% to
.0644% of total assessable deposits. BIF institutions pay lower assessments
than comparable SAIF institutions because BIF institutions pay only 20% of the
rate being paid by SAIF institutions on their deposits with respect to
obligations issued by the federally-chartered corporation which provided some
of the financing to resolve the thrift crisis in the 1980's ("FICO"). The
1996 law also provides for the merger of the SAIF and the BIF by 1999, but not
until such time as bank and thrift charters are combined. Until the charters
are combined, savings associations with SAIF deposits may not transfer
deposits into the BIF system without paying various exit and entrance fees,
and SAIF institutions will continue to pay higher FICO assessments. Such exit
and entrance fees need not be paid if a SAIF institution converts to a bank
charter or merges with a bank, as long as the resulting bank continues to pay
applicable insurance assessments to the SAIF, and as long as certain other
conditions are met.
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REGULATION OF THE COMPANY UNDER THE BHC ACT
General. The Company intends to file at some time following the
completion of the Merger, in connection with the Conversion, an application
with the Federal Reserve to serve as the holding company for the Bank under
the BHC Act.
When the Conversion is consummated and with the prior approval of the
Federal Reserve, the Company will be a bank holding company and, as such,
will be subject to the supervision of and regulation by, the Federal Reserve
under the BHC Act. Under the BHC Act, the Company will be subject to periodic
examination by the Federal Reserve and will be required to file periodic
reports of its operations and such additional information as the Federal
Reserve may require. The Company also will be required to file periodic
reports with, and otherwise comply with the rules and regulations of, the
Commission under the federal securities laws.
In accordance with Federal Reserve policy, the Company will be
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Company might not do
so absent such policy. In addition, in certain circumstances an Indiana state
bank having impaired capital may be required by the Department to initiate the
liquidation of the bank.
Investments and Activities. Under the BHC Act, bank holding
companies are prohibited, with certain limited exceptions, from engaging in,
or acquiring, directly or indirectly, control of voting securities or assets
of a company engaged in, any activity other than banking or managing or
controlling banks or an activity that the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Under current Federal Reserve regulations, such permissible
non-bank activities include such things as mortgage banking, equipment
leasing, securities brokerage and consumer and commercial finance company
operations. Any such acquisition will require, except in certain cases, prior
written notice to the Federal Reserve.
In evaluating a written notice of such an acquisition, the Federal
Reserve will consider various factors, including among others the financial
and managerial resources of the notifying bank holding company and its
subsidiaries, and the relative public benefits and adverse effects which may
be expected to result from the performance of the activity by an affiliate of
such company. The Federal Reserve may apply different standards to activities
proposed to be commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern. The required notice period may be
extended by the Federal Reserve under certain circumstances, including a
notice for acquisition of a company engaged in activities not previously
approved by regulation of the Federal Reserve. If such a proposed acquisition
is not disapproved or subjected to conditions by the Federal Reserve within
the applicable notice period, it is deemed approved by the Federal Reserve.
In general, any direct or indirect acquisition by the Company of any
voting shares of any bank which would result in the Company's direct or
indirect ownership or control of more than 5% of any class of voting shares of
such bank, and any merger or consolidation of the Company with another bank
holding company, will require the prior written approval of the Federal
Reserve under the BHC Act. In acting on such applications, the Federal
Reserve must consider various statutory factors, including among others, the
effect of the proposed transaction on competition in the relevant geographic
and product markets, each party's financial condition and managerial resources
and record of performance under the Community Reinvestment Act. Since
September 29, 1995, the BHC Act has permitted the Federal Reserve under
specified circumstances to approve the acquisition, by a bank holding company
located in one state, of a bank located in another state, without regard to
any prohibition contained in state law. See "SUPERVISION AND REGULATION --
Regulatory Developments."
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The merger or consolidation of an existing bank subsidiary of the
Company with another bank, or the acquisition by such a subsidiary of assets
of another bank, or the assumption of liability by such a subsidiary to pay
any deposits in another bank, will require the prior written approval of the
responsible Federal depository institution regulatory agency under the Bank
Merger Act, based upon a consideration of statutory factors similar to those
outlined above with respect to the BHC Act. In addition, in certain such
cases an application to, and the prior approval of, the Federal Reserve under
the BHC Act and/or the Department, may be required.
Capital Requirements. The Federal Reserve uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among
other things, be denied approval to acquire or establish additional banks or
non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total assets, (ii) a
risk-based requirement expressed as a percentage of total risk-weighted
assets, and (iii) a Tier 1 leverage requirement expressed as a percentage of
total assets. The leverage capital requirement consists of a minimum ratio of
total capital to total assets of 6%, with an expressed expectation that
banking organizations generally should operate above such minimum level. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital
(which consists principally of shareholders' equity). The Tier 1 leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of
3% for the most highly rated companies, with minimum requirements of 4% to 5%
for all others. The risk-based and leverage standards presently used by the
Federal Reserve are minimum requirements, and higher capital levels will be
required if warranted by the particular circumstances or risk profiles of
individual banking organizations. Further, any banking organization
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (i.e., Tier 1 capital
less all intangible assets), well above the minimum levels.
The Federal Reserve's regulations provide that the foregoing capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets unless: (i) the bank holding company is
engaged directly or indirectly in any nonbank activity involving significant
leverage or (ii) the holding company has a significant amount of debt
outstanding held by the general public. Nonetheless, on a pro forma basis,
assuming the issuance and sale by the Company of the 1,250,000 shares of
Common Stock offered hereby at $12.00 per share, the Company's leverage
capital ratio, risk-based capital ratio and Tier 1 leverage ratio, in each
case as calculated on a consolidated basis under the Federal Reserve's capital
guidelines, would exceed the minimum requirements.
Dividends. The Company is a corporation separate and distinct from
the Bank. Most of the Company's revenues will be received by it in the form
of dividends or interest paid by the Bank. The Bank is subject to statutory
restrictions on its ability to pay dividends. See "REGULATION AND SUPERVISION
- -- Regulation of the Bank as a Savings Bank, Dividends" and "-- Regulation of
the Bank as a Commercial Bank, Dividends." The Federal Reserve has issued a
policy statement on the payment of cash dividends by bank holding companies.
In the policy statement, the Federal Reserve expressed its view that a bank
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income or which could only be funded in ways that weakened
the bank holding company's financial health, such as by borrowing.
Additionally, the Federal Reserve possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment
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of dividends by banks and bank holding companies. Similar enforcement powers
over the Bank are possessed by the FDIC. The "prompt corrective action"
provisions of FDICIA impose further restrictions on the payment of dividends
by insured banks which fail to meet specified capital levels and, in some
cases, their parent bank holding companies.
In addition to the restrictions on dividends imposed by the Federal
Reserve, the laws of the State of Indiana impose certain restrictions on the
declaration and payment of dividends by Indiana corporations such as the
Company. See "DESCRIPTION OF CAPITAL STOCK -- Common Stock, Dividend Rights."
REGULATION OF THE BANK AS A COMMERCIAL BANK
General. Upon completion of the Conversion, the Bank will be an
Indiana state-charted commercial bank, and its deposit accounts opened
following the Conversion of the Bank will be insured up to applicable limits
by the FDIC under the BIF. Those deposit accounts in existence at the time of
the Conversion will continue to be insured up to applicable limits by the FDIC
under the SAIF. As an FDIC-insured, Indiana-chartered bank, the Bank will be
subject to the examination, supervision, reporting and enforcement
requirements of the Department, as the chartering authority for Indiana banks,
and the FDIC, as administrator of the SAIF and BIF. These agencies and federal
and state law extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates
on loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts and the safety and soundness of banking practices.
Insurance of Deposits. Following the Conversion, the Bank, as an
FDIC-insured institution, will continue to pay deposit insurance premium
assessments to the FDIC.
Those deposits insured by the SAIF at the date of the Conversion will
continue to be insured by the SAIF and will be subject to assessments payable
to the SAIF and those deposits received by the Bank following the Conversion
will be insured by the BIF and subject to assessments payable to the BIF.
See"REGULATION AND SUPERVISION -- Regulation of the Bank as a Savings Bank,
Insurance of Deposits."
FDICIA required the FDIC to establish assessment rates at levels
which would restore the BIF to a mandated reserve ratio of 1.25% of insured
deposits over a period not to exceed 15 years. In November 1995, the FDIC
determined that the BIF had reached the required ratio. Accordingly, the FDIC
has established the schedule of BIF insurance assessments for the first
semi-annual assessment period of 1997 and thereafter, ranging from 0% of
deposits for institutions in the highest category to .27% of deposits for
institutions in the lowest category.
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing, that the
institution or its directors have engaged or are engaging in unsafe or unsound
practices, or have violated any applicable law, regulation, rule, order or any
condition imposed in writing by, or written agreement with, the FDIC, or if
the institution is in an unsafe or unsound condition to continue operations.
The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital.
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks and a minimum
ratio of Tier I capital to total assets of 4% to 5% for all others, and (ii) a
risk-based capital requirement consisting
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of a minimum ratio of total capital to total risk-weighted assets of 8%, of
which at least one-half of that total capital amount must consist of Tier 1
capital. Tier 1 capital consists principally of shareholders' equity.
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions.
Dividends. As a state-chartered commercial bank organized under
Indiana law, the Bank may declare and pay dividends to the proposed sole
shareholder (the Company) of so much undivided profits as its Board of
Directors deems expedient, subject to prior approval of the Department if the
proposed dividend (when added to all prior dividends declared during the
current calendar year) would exceed current year "net profits" and retained
"net profits" for the previous two calendar years.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. The FDIC may prevent an insured bank from
paying dividends if the bank is in default of payment of any assessment due to
the FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by
reason of the financial condition of such bank, to be an unsafe and unsound
banking practice.
Certain Investments. Under FDICIA, as implemented by final
regulations adopted by the FDIC, FDIC-insured state banks are prohibited,
subject to certain exceptions, from directly or indirectly acquiring or
retaining any equity investments of a type, or in an amount, that are not
permissible for a national bank. FDICIA, as implemented by FDIC regulations,
also prohibits FDIC-insured state banks and their subsidiaries, subject to
certain exceptions, from engaging as principal in any activity that is not
permitted for a national bank or its subsidiary, respectively, unless the bank
meets, and continues to meet, its minimum regulatory capital requirements and
the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible
investments and activities must be divested or discontinued within certain
time frames set by the FDIC in accordance with FDICIA. These restrictions are
not currently expected to have a material impact on the operations of the
Bank.
REGULATIONS APPLICABLE TO THE BANK AS A SAVINGS BANK OR COMMERCIAL BANK
Prompt Corrective Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, federal depository institution regulators are required to
take certain mandatory supervisory actions, and may take certain discretionary
supervisory actions against undercapitalized institutions, the severity of
which depends upon the institution's degree of capitalization. In addition,
subject to a narrow exception, FDICIA generally requires the federal
depository institution regulators to appoint a receiver or conservator for an
institution that is critically undercapitalized.
As mandated by FDICIA, the federal banking regulators have specified
by regulation the relevant capital measures at which an insured depository
institution is deemed well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Pursuant to the FDIC's regulations implementing the prompt
corrective action provisions of FDICIA, a bank will be deemed to be: (i) well
capitalized if the bank has a total risk-based capital ratio of 10% or
greater, Tier 1 risk-based capital ratio of 6% or greater and leverage ratio
of 5% or greater; (ii) adequately capitalized if the bank has a total
risk-based capital ratio of 8% or greater, Tier 1 risk-based capital ratio of
4% or greater and leverage ratio of 4% or greater (3% for the most highly
rated banks); (iii) undercapitalized if the bank has a total risk-based
capital ratio of less than 8%, or Tier 1 risk-based capital ratio of 4% or
greater and leverage ratio of less than 4% (less than 3% for the most highly
rated banks); (iv) significantly undercapitalized if the bank has a total
risk-based capital ratio of less than 6%, Tier 1 risk-based capital ratio of
less than 3% or leverage ratio of less
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than 3%; and (v) critically undercapitalized if the bank has a ratio of
tangible equity to total assets of 2% or less. At December 31, 1997, the Bank
was categorized as "adequately capitalized," and it was not subject to
regulatory order, agreement or directive to meet and maintain a specific level
for any capital measure.
Subject to certain exceptions, these capital ratios are generally
determined on the basis of Call Reports submitted by each depository
institution and the reports of examination by each institution's appropriate
federal depository institution regulatory agency.
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission
of a capital restoration plan (which must include a holding company guarantee
of performance); placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting
transactions with affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the holding company to divest certain subsidiaries including the
institution; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver or conservator for the institution. In
general, a depository institution may be reclassified to a lower category than
is indicated by its capital position if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a
less-than-satisfactory rating on its most recent examination report, to
correct the deficiency.
Insider Transactions. The Bank is subject to certain restrictions
imposed by the Federal Reserve Act ("FRA") on any extensions of credit to the
Company or its subsidiaries, on investments in the stock or other securities
of the Company or its subsidiaries, and the acceptance of the stock or other
securities of the Company or its subsidiaries as collateral for loans. These
restrictions limit the aggregate amount of transactions with any individual
affiliate to 10% of the Bank's capital and surplus, limit the aggregate amount
of transactions with all affiliates to 20% of the Bank's capital and surplus,
require that loans and certain other extensions of credit be secured by
collateral in certain specified amounts and types, generally prohibit the
purchase of low quality assets from affiliates and generally require that
certain transactions with affiliates, including loans and asset purchases, be
on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the Bank as those
prevailing at the time for comparable transactions with nonaffiliated
individuals or entities.
Also, the FRA prescribes certain limitations and reporting
requirements on extensions of credit by the Bank to its directors and
executive officers, to directors and executive officers of the Company and its
subsidiaries, to principal shareholders of the Company and its subsidiaries,
to principal shareholders of the Company and to "related interests" of such
directors, officers and principal shareholders. Among other things, the FRA,
and the regulations thereunder, require such loans to be made on substantially
the same terms as those offered to unaffiliated individuals, place limits on
the amount of loans the Bank may extend to such individuals and require
certain approval procedures to be followed. In addition, such legislation and
regulations may affect the terms upon which any person becoming a director or
officer of the Company or one of its subsidiaries or a principal shareholder
of the Company may obtain credit from banks with which the Bank maintains a
correspondent relationship.
Limitations on Rates Paid for Deposits. Regulations promulgated by
the FDIC pursuant to FDICIA limit the ability of insured depository
institutions to accept, renew or roll over deposits by offering rates of
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interest which are significantly higher than the prevailing rates of interest
on deposits offered by other insured depository institutions having the same
type of charter in the institution's normal market area. Under these
regulations, "well-capitalized" depository institutions may accept, renew or
roll such deposits over without restriction, "adequately capitalized"
depository institutions may accept, renew or roll such deposits over with a
waiver from the FDIC (subject to certain restrictions on payments of rates)
and "undercapitalized" depository institutions may not accept, renew or roll
such deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FDICIA. The Bank does not believe that these regulations will
have a materially adverse effect on its current operations.
Community Reinvestment Act Matters. Federal law requires that
ratings of depository institutions under the Community Reinvestment Act of
1977 ("CRA") be disclosed. The disclosure includes both a four-unit
descriptive rating -- outstanding, satisfactory, needs to improve, and
substantial noncompliance -- and a written evaluation of an institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the CRA and its record of lending to first-time home buyers.
The OTS has designated the Bank's record of meeting community credit needs as
satisfactory.
Safety and Soundness Standards. On July 10, 1995, the FDIC, the OTS,
the Federal Reserve and the Office of the Comptroller of the Currency
published final guidelines implementing the FDICIA requirement that the
federal banking agencies establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines, which took effect on August 9, 1995, establish standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits, and specifically prohibit, as an unsafe and
unsound practice, excessive compensation that could lead to a material loss to
an institution. The federal banking agencies also adopted asset quality and
earnings standards that were added to the safety and soundness guidelines
effective October 1, 1996. If an institution fails to comply with any of the
standards set forth in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. Failure to submit an acceptable compliance plan, or
failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement
action.
Consumer Banking. The Bank's business will include making a variety
of types of loans to individuals. In making these loans, the Bank will be
subject to state usury and regulatory laws and to various federal statutes,
such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in
Lending Act, Real Estate Settlement Procedures Act and Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit
and settlement costs and regulate the mortgage loan servicing activities of
the Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. The Riegle Act imposed new escrow
requirements on depository and non-depository mortgage lenders and services
under the National Flood Insurance Program. See "SUPERVISION AND REGULATION -
Regulatory Developments." In receiving deposits, the Bank will be subject to
extensive regulation under state and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank
Secrecy Act, the Electronic Funds Transfer Act and the FDI Act. Violation of
these laws could result in the imposition of significant damages and fines
upon the Bank, its directors and officers.
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REGULATORY DEVELOPMENTS
In 1994, the Congress enacted two major pieces of banking
legislation, the Riegle Community Direction Act (the "Riegle Act") and the
Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle-Neal
Act"). The Riegle Act addressed such varied issues as the promotion of
economic revitalization of defined urban and rural "qualified distressed
communities" through special purpose "Community Development Financial
Institutions," the expansion of consumer protection with respect to certain
loans secured by a consumer's home and reverse mortgages and reductions in
compliance burdens regarding Currency Transaction Reports, in addition to
reform of the National Flood Insurance Program, the promotion of a secondary
market for small business loans and leases and mandating specific changes to
reduce regulatory impositions on depository institutions and holding
companies.
The Riegle-Neal Act substantially changed the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
Riegle-Neal Act allows bank holding companies to acquire banks located in any
state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates. Effective June 1, 1997 (or earlier if expressly
authorized by applicable state law), the Riegle-Neal Act allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of de novo
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized by
state law. The legislation allowed individual states to "opt-out" of certain
provisions of the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997.
Effective March 14, 1996, Indiana "opted in" to the interstate
branching provisions of the Riegle-Neal Act. The Indiana legislation
authorizes, subject to certain approval and other requirements,
Indiana-chartered banks to establish branches in states other than Indiana and
out-of-state banks to establish branches in Indiana. Indiana and out-of-state
banks are authorized to establish branches either by acquisition or de novo.
FDIC regulations, which became effective April 1, 1996, impose
certain limitations (and in certain cases, prohibitions) on (i) "golden
parachute" severance payments by troubled depository institutions, their
subsidiaries and affiliated holding companies to institution-affiliated
parties (primarily directors, officers, employees or principal shareholders of
the institution), and (ii) indemnification payments by a depository
institution, their subsidiaries and affiliated holding companies, regardless
of financial condition, to institution-affiliated parties. The FDIC
regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to
their respective directors or officers otherwise permitted under Indiana state
law. See "RELATED PARTY TRANSACTIONS -- Director Liability;
Indemnification."
In June 1997, broad financial reform legislation was approved by the
Banking Committee of the U.S. House of Representatives. The legislation
proposed by the Banking Committee included provisions that would permit,
subject to certain restrictions, bank holding companies to acquire
manufacturing and other nonfinancial companies, permit nonfinancial companies
to acquire banks, and require thrift institutions to convert to bank charters.
In October 1997, the House Commerce Committee release a revised version of the
legislation that differed markedly from the Banking Committee proposal in that
it would have increased the powers of banks, but generally would have
maintained the current separation between banking and commerce. In November
1997, the Banking Committee released a new proposal, and in February 1998, the
Commerce Committee responded to the proposal by outlining some possible areas
of compromise on the two committees'
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differences over financial services modernization legislation. In general,
both Committees' versions of the legislation, in varying, degrees, would
remove the legal barriers separating the banking, securities and insurance
industries.
The February proposal by the Commerce Committee suggested that the
thrift charter provisions of the legislation be removed, and included
provisions that would permit national bank operating subsidiaries to engage in
additional activities, allow banks to underwrite municipal securities and
adopted certain consumer protection measures relating to insurance activities.
During February 1998, the Banking Committee also worked on a new proposal
relating to the thrift institution issues addressed by the proposed
legislation. The latest proposal by the Banking Committee would preserve the
thrift charter, eliminate the OTS and place thrift institutions under the
authority of the Office of the Comptroller of the Currency. The Company
cannot predict whether, or in what form, this legislation may be enacted, and
if enacted, what the effect would be on the Company and the Bank.
The FDIC includes, in its evaluations of a bank's capital adequacy,
an assessment of the bank's exposure to declines in the economic value of the
bank's capital due to changes in interest rates. On June 26, 1996, the FDIC,
along with the Office of the Comptroller of the Currency and the Federal
Reserve, issued a joint policy statement to provide guidance on sound
practices for managing interest rate risk. The statement sets forth the
factors the federal regulatory examiners will use to determine the adequacy of
a bank's capital for interest rate risk. These qualitative factors include
the adequacy and effectiveness of the bank's internal interest rate risk
management process and the level of interest rate exposure. Other qualitative
factors that will be considered include the size of the bank, the nature and
complexity of its activities, the adequacy of its capital and earnings in
relation to the bank's overall risk profile, and its earning exposure to
interest rate movements. The interagency supervisory policy statement
describes the responsibilities of a bank's board of directors in implementing
a risk management process and the requirements of the bank's senior management
in ensuring the effective management of interest rate risk. Further, the
statement specifies the elements that a risk management process must contain.
In August, 1996, the Federal Reserve and the FDIC issued final
regulations further revising their risk-based capital standards to include a
supervisory framework for measuring market risk. The effect of the new
regulations is that any bank holding company or bank which has significant
exposure to market risk must measure such risk using its own internal model,
subject to the requirements contained in the regulations, and must maintain
adequate capital to support that exposure.
The new regulations apply to any bank holding company or bank whose
trading activity equals 10% or more of its total assets, or whose trading
activity equals $1 billion or more. Examiners may require a bank holding
company or bank that does not meet the applicability criteria to comply with
the capital requirements if necessary for safety and soundness purposes.
The new regulations contain supplemental rules to determine
qualifying and excess capital, calculate risk-weighted assets, calculate
market risk equivalent assets and calculate risk-based capital ratios adjusted
for market risk.
Safety and soundness guidance on the risks posed to financial
institutions by the Year 2000 problem has been issued by the Federal
Institutions Examination Council, whose members include the OTS, the FDIC and
the Federal Reserve Board. The guidance underscores that Year 2000
preparation is not only an information systems issue, but also an
enterprise-wide challenge that must be addressed at the highest level of a
financial institution. The guidance sets out the responsibilities of senior
management and boards of
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directors in managing their Year 2000 projects. Among the responsibilities of
institution managers and directors is that of managing the internal and
external risks presented by providers of data-processing products and
services, business partners, counterparties and major loan customers. Under
the guidance, senior management must provide the board of directors with
status reports, at least quarterly, on efforts to reach Year 2000 goals both
internally and by the institution's major vendors. Senior managers and
directors must allocate sufficient resources to ensure that high priority is
given to seeing that remediation plans are fulfilled, and that the project
receives the quality personnel and timely support it requires. The guidance
does not require financial institutions to obtain Year 2000 certification from
their vendors. Rather, an institution must implement its own internal testing
or verification processes for vendor products and services to ensure that its
different computer systems function properly together.
Additional legislation and administrative actions affecting the
banking industry are being considered and in the future may be considered by
the United States Congress, state legislatures and various regulatory
agencies, including those referred to above. It cannot be predicted with
certainty whether such legislation or administrative action will be enacted or
the extent to which the banking industry in general or the Company and the
Bank in particular would be affected thereby.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 10,000,000 shares
of Common Stock, no par value, of which 90,000 shares were issued and
outstanding as of the date of this Prospectus and 2,000,000 shares of
Preferred Stock, no par value, of which no shares are issued and outstanding.
Immediately prior to the conclusion of the offering, the Company will redeem
the 90,000 shares of Common Stock issued and outstanding at their initial
cost. At the conclusion of the offering, 1,250,000 shares of Common Stock
will be issued and outstanding, assuming no exercise by the Underwriter of its
over-allotment option. The Board of Directors has the power to determine the
relative rights of and restrictions on any series of Preferred Stock that it
may authorize in the future and may provide terms upon which preferred stock
may be converted into shares of any other class of stock, and may issue and
sell such Preferred Stock without prior shareholder approval. The Company has
reserved 125,000 shares of Common Stock that may be issued under the Company's
stock option plans. The remaining authorized but unissued shares of Common
Stock may be issued upon authorization by the Board of Directors without prior
shareholder approval. The issuance of additional shares of Common Stock other
than on a pro-rata basis to existing shareholders at the time of such issuance
will reduce the proportionate interests of the Company held by existing
shareholders.
COMMON STOCK
The following is a summary of certain of the rights and privileges
pertaining to the shares of Common Stock.
Voting Rights. The holders of the Common Stock are entitled to one
vote per share on all matters submitted to a vote of the shareholders. Except
for (a) supermajority votes required for approval of certain business
combinations, removal of Directors and certain other matters, and (b) certain
corporate actions that must be approved by a majority of the outstanding votes
of the relevant voting group under the IBCL, the affirmative vote of the
holders of a majority of the votes cast at a meeting of shareholders at which
a quorum is present is sufficient to approve matters submitted for shareholder
approval, except that Directors are elected by a plurality of the votes cast.
There is no provision for cumulative voting with respect to the election of
directors. Accordingly, the holders of more than 50% of the outstanding
shares of Common Stock, if they choose to do so, can elect all of the
Directors.
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Dividend Rights. All shares of Common Stock are entitled to share
equally in such dividends as the Board of Directors may declare, in its
discretion. The Company will be largely dependent upon dividends from the
Bank for funds to pay dividends on the Common Stock, and dividends payable by
the Bank are limited by law and by the need to maintain adequate capital in
the Bank. See "DIVIDEND POLICY."
Liquidation Rights. Upon liquidation, dissolution or winding up of
the affairs of the Company, whether voluntary or involuntary, all shares of
Common Stock are entitled to share equally in the assets legally available for
distribution to the holders of Common Stock after payment of all prior
obligations of the Company which may include the satisfaction in full of any
liquidation preference to which holders of Preferred Stock, if any, may then
be entitled.
Other Matters. The holders of the shares of Common Stock have no
preemptive or redemption rights or any preferred right to purchase or
subscribe for any authorized but unissued capital stock, or any securities
convertible into Common Stock, of the Company. The shares of Common Stock
offered hereby will be when issued, fully paid and non-assessable. The shares
of Common Stock are not redeemable at the option of the Company or holders
thereof.
The Company may be required to provide additional capital to the Bank
in the future in the event that the regulating body for the Bank determines
such capital infusion is necessary. In such event, in order to obtain such
capital, the Company may seek additional funds from existing shareholders,
borrow additional funds from a bank or other lender or have an equity offering
of additional shares of Common Stock or other securities of the Company.
The Company serves as the registrar and transfer agent for its own
Common Stock.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the Board of
Directors, without further shareholder approval, to establish the relative
rights, designations, preferences, and limitations or restrictions on the
shares of Preferred Stock prior to the issuance thereof, including, without
limitation, dividend rights, conversion rights, voting rights, liquidation
preferences, redemption rights, division into series, sinking fund provisions,
and similar matters. Thus, the Board of Directors may authorize and issue a
series of Preferred Stock with rights and preferences that are superior to
those of the Common Stock, the issuance of which could adversely affect the
voting power of the holders of Common Stock.
The availability of Preferred Stock with unspecified voting rights
and possibly other rights, such as a required approval of mergers or other
extraordinary corporate transactions, could be used by management to create
voting impediments or to deter persons seeking to effect a merger or otherwise
to gain control of the Company. Preferred Stock may also be issued at
sometime in the future in connection with acquisitions by the Company of
additional companies or businesses. The Company has no present plans to issue
any series of Preferred Stock.
INDIANA LAW
Under the IBCL, several provisions could affect the acquisition of
the shares of Common Stock or of control of the Company after completion of
the offering. The Business Combinations Chapter of the IBCL prohibits certain
business combinations, including mergers, sales of assets, recapitalizations
and reverse stock splits, between certain Indiana corporations and a 10% or
greater shareholder for five years following the date on which the shareholder
obtained a 10% or greater ownership interest, unless the acquisition was
approved in advance of that date by the Board of Directors. In addition, if
prior approval is not obtained, the Company
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and such shareholder may not consummate a business combination unless a
majority of disinterested shareholders approve the transaction or all
shareholders receive a price per share determined in accordance with the
Business Combinations Chapter. The Articles of Incorporation of the Company
provide that the Business Combinations Chapter shall apply to the Company.
However, the Company may subsequently elect to remove itself from the
protection provided by the Business Combinations Chapter, but such an election
remains ineffective for 18 months and does not apply to a combination with a
shareholder who acquired a 10% or greater ownership position prior to the
effective date of the election.
In addition to the Business Combinations Chapter, the IBCL also
contains a Control Share Acquisition Chapter which, although different in
structure from the Business Combinations Chapter, may have a similar effect of
discouraging or making more difficult a hostile takeover of an Indiana
corporation. This provision, however, may also have the effect of
discouraging premium bids for outstanding shares. The Control Share
Acquisition Chapter provides that, unless otherwise provided in a
corporation's articles of incorporation or by-laws, shares acquired in certain
acquisitions of the corporation's stock will be accorded voting rights only if
a majority of the disinterested shareholders approves a resolution granting
the potential acquiror the ability to vote such shares. An Indiana
corporation is subject to the Control Share Acquisition Chapter if it has 100
or more shareholders and its principal place of business is in Indiana. An
Indiana corporation otherwise subject to the Control Share Acquisition Chapter
may elect not to be governed by the statute by so providing in its articles of
incorporation or by-laws. The Company has not made an election and therefore
will be subject to the statute (assuming that it has 100 or more
shareholders).
The IBCL specifically authorizes directors, in considering the best
interests of a corporation, to consider the effects of any action on
shareholders, employees, suppliers and customers of the corporation on the
communities in which offices or other facilities of the corporation are
located and any other factors the directors consider pertinent. As described
below, the Company's Articles of Incorporation contain a provision having a
similar effect. Under the IBCL, directors are not required to approve a
proposed business combination or other corporate action if the directors
determine in good faith, after considering and weighing as they deem
appropriate the effects of such action on the corporation's constituents, that
such approval is not in the best interest of the corporation. The IBCL
specifies that, in making these determinations, directors are not required to
consider the effects of a proposed corporation action on any particular
corporate constituent group or interest (including the amounts that might be
paid to shareholders) as a dominant or controlling factor. The IBCL
explicitly provides that the different or higher degree of scrutiny imposed in
Delaware and certain other jurisdictions upon director actions taken in
response to potential changes in control will not apply.
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the IBCL to consider both the short-term and
long-term interests of the corporation as well as interests of other
constituencies and other relevant factors. Any determination made with
respect to the foregoing by a majority of disinterested directors shall
conclusively be presumed to be valid unless it can be demonstrated that such
determination was not made in good faith.
Because of the foregoing provisions of the IBCL, the Board will have
flexibility in responding to unsolicited proposals to acquire the Company,
and, accordingly, it may be more difficult for an acquiror to gain control of
the Company in a transaction not approved by the Board.
The IBCL also imposes restrictions in connection with shareholder
derivative proceedings. The IBCL provides that if a shareholder of a
corporation files a derivative complaint, the corporation's board of directors
may establish a committee of disinterested directors or other disinterested
persons to investigate the complaint. The IBCL authorizes a stay of any court
proceedings on the complaint until the investigation of
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such committee is completed. If the committee determines that pursuit of the
claim through the derivative proceeding would not be in the best interests of
the corporation, then the committee can terminate the derivative proceeding.
The conclusion of the committee is determinative unless the shareholder who
filed the complaint can demonstrate that the committee was not disinterested
or did not act in good faith.
ARTICLES OF INCORPORATION
Staggered Board of Directors. The Board of Directors is divided into
three classes, designated as Class 1, Class 2 and Class 3, with each class
being comprised of as nearly an equal number of Directors as possible. The
Directors in Class 1 hold office initially for a term of one year; the
Directors in Class 2 hold office initially for a term of two years; and the
Directors in Class 3 hold office initially for a term of three years. Upon
expiration of the respective initial terms and thereafter, the Directors in
each of the classes shall be elected to serve for terms of three years and
until their successors have been elected and qualified. Following completion
of the Merger, the Directors in Class 1 will be Robert C. Reed and James M.
Robison, the Directors in Class 2 will be Steven R. Abel and Leonard J.
Fischer, and the Directors in Class 3 will be Ralph W. Van Natta and D. Warren
Robison.
Staggered terms of Directors tend to promote continuity of management
of the Company because only one-third of the Directors will be elected at
annual meetings. In addition, the staggered terms will ensure that two-thirds
of the Directors have at least one year of experience on the Board of
Directors, which helps assure that the Board of Directors consists of persons
with experience.
Staggered terms may tend to perpetuate present management by making
it more difficult for a shareholder to make immediate changes in the
composition of a majority of the Board of Directors. Because the terms of
only one-third of the Directors expire each year, it would require at least
two annual meetings of shareholders in order to effect a change in a majority
of the Directors of the Company.
Shareholders may find the provision for staggered terms
disadvantageous to the extent that it may tend to discourage or render it more
difficult for a person to acquire control of the Company because a person who
acquires control of a company may desire to remove and replace directors
immediately.
This provision may not be altered, amended or repealed without the
prior approval of the holders of outstanding shares of stock of the Company
representing at least two-thirds of the votes entitled to be cast. Residency
Requirements for Directors. The Articles of Incorporation provide that a
Director must be a resident of the State of Indiana. This provision is
consistent with the philosophy of the Company that the Bank should be
responsive to and aware of the needs of the communities which the Bank serves.
This provision may discourage a person from seeking to acquire control of the
Company if such person did not reside within the State of Indiana.
This provision may not be altered, amended or repealed without the
prior approval of the holders of outstanding shares of stock of the Company
representing at least two-thirds of the votes entitled to be cast.
Removal of Directors. The Articles of Incorporation provide that a
Director may be removed from office without cause prior to the expiration of
his term only upon the affirmative vote of the holders of at least two-thirds
of the outstanding shares of stock of the Company entitled to vote for the
election of Directors at any meeting called for that purpose. The Articles do
provide for the removal of a Director by the remaining Directors if a Director
fails to attend at least three consecutive Board of Directors meetings and a
majority of the remaining Directors vote to remove such Director. Directors
may be removed from office with cause
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upon the affirmative vote of the holders of at least a majority of the
outstanding shares of stock of the Company entitled to vote for the election
of Directors.
The Articles define two types of cause for removal. The first type
of cause would occur if the Director is convicted of a felony or if he
accepted immunity from prosecution in exchange for his testimony when another
person has been so convicted. The second type of cause would occur if the
Director is found, by a court of competent authority, to have acted willfully
or recklessly in the performance of his duties as a Director of the Company.
This provision may tend to moderate the pace at which changes in the
composition of the Board of Directors of the Company may occur. This
provision may prevent shareholders from removing Directors (as opposed to
defeating their re-election) because of dissatisfaction with their performance
unless the holders of outstanding shares of stock of the Company representing
at least two-thirds of the votes entitled to be cast approved the removal.
This provision may not be altered, amended or repealed without the
approval of the holders of outstanding shares of stock of the Company
representing at least two-thirds of the votes entitled to be cast.
Certain Business Combinations. The Articles of Incorporation
provide for certain voting requirements for the approval by the Board of
Directors or the shareholders of certain business combinations affecting
the Company. A "Business Combination" as defined in the Articles
includes any merger, consolidation or share exchange of the Company with
or into any other corporation; any sale, lease, exchange, pledge,
transfer or other disposition, in one transaction or a series of
transactions, of a material portion of the assets of the Company; and
any liquidation or dissolution of the Company or any material subsidiary
of the Company.
The Articles provide that the affirmative vote of the holders
of at least two-thirds of the outstanding shares of stock of the Company
entitled to vote is required to approve a Business Combination affecting
the Company if the Business Combination is not first approved by the
affirmative vote of at least two-thirds of the members of the Board of
Directors. If, however, at least two-thirds of the members of the Board
of Directors approves, and recommends approval to shareholders of, the
proposed Business Combination, then only the affirmative vote of a
majority of the outstanding shares of stock of the Company entitled to
vote is required to approve the Business Combination.
The Board of Directors of the Company believes that it is in
the best interests of shareholders of the Company to encourage persons
seeking to complete a Business Combination with the Company to enter
into negotiations with the Board of Directors relating to such a
transaction. The Board of Directors further believes that attempts to
gain control of the Company, in certain instances, may not be beneficial
to the interests of the Company and to its shareholders because such
attempts may be structured in such a manner so as not to provide the
Board with adequate time and information necessary to evaluate a
proposal, to study alternative proposals and to seek to obtain the best
possible terms of any such Business Combination. The Board of Directors
also believes this provision will permit the Board of Directors to have
adequate time to consider appropriate financial and non-financial
factors permitted by law in determining whether to approve a Business
Combination.
This provision may tend to discourage or render it more
difficult for a person to acquire control of the Company, even if such a
transaction might generally be favorable to the interests of
shareholders. This provision may also tend to perpetuate present
management in that if a certain number of Directors do not approve a
proposed Business Combination it may be more difficult to obtain the
two-thirds shareholder
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approval requirement. In addition, this provision may give Directors
and minority shareholders veto power over a Business Combination which a
majority of the shareholders may believe is desirable.
This provision may not be altered, amended or repealed without
the approval of the holders of outstanding shares of stock of the
Company representing at least two-thirds of the votes entitled to be
cast.
Non-Financial Considerations. In deciding whether to approve a
Business Combination or a tender or exchange offer, the Articles of
Incorporation require the Board of Directors to consider a number of factors
in addition to the adequacy of the consideration to be paid. These factors may
include the social and economic effects of the transaction on the Company, on
its subsidiaries, employees, depositors and customers and on the communities
in which the Company or its subsidiaries may conduct business or be located.
The Directors will be charged with the responsibility of inquiring into the
business and financial condition, results of operation and earnings potential
of the interested party and to include an examination of the debt service or
other financial obligations entered into by the interested or acquiring party,
and the effect such conditions will have on the Company, its subsidiaries and
the community. Furthermore the competence, experience and integrity of the
management of the acquiring party will be thoroughly analyzed. These factors
may also include the adequacy of the consideration offered in relation to the
current market price of the outstanding securities of the Company, the current
value of the Company in a freely negotiated transaction and the Board's
estimate of the future value of the Company as an independent going concern,
including the unrealized value of its properties and assets. This provision
may discourage or make more difficult an attempt by a potential acquiring
party to effect a Business Combination without giving the Board an opportunity
to consider and approve the full consequences of the proposed transaction. The
Board also believes that its obligation to evaluate a Business Combination
with an interested party extends beyond merely comparing the consideration
offered to the market price of the Company's stock at the time of the offer.
While such a comparison is important, it is the Board's view that this one
factor alone should not be determinative when evaluating either the financial
benefits or overall desirability of a particular Business Combination. This
provision recognizes the Board's obligations to evaluate a Business
Combination in light of all relevant financial, as well as non-financial,
criteria, including the legal and economic effect on the depositors and
customers of the Company and the Bank, on the communities which the Company
and the Bank serve and on the Company's business and properties.
The Board of Directors believes that corporations in general,
and banks in particular, occupy positions of special trust in the
communities in which they are located and operate. It is a concern of
the Board that the Company be managed in the interests of the community
which is served by the Bank and that the Bank maintain its integrity as
a locally-owned institution in the community. The Board also believes
that this is in the best interests of the Company and its shareholders.
This provision may not be altered, amended or repealed without
the approval of the holders of outstanding shares of stock of the
Company representing at least two-thirds of the votes entitled to be
cast.
Notice for Nominations and Proposals. The Articles of
Incorporation provide that nominations for the election of directors and
proposals for any new business to be taken up at any annual or special
meeting of shareholders may be made by the Board of Directors of the
Company or by any shareholder of the Company entitled to vote generally
in the election of directors. Any shareholder making a nomination or
proposal must provide the Secretary of the Company with written notice
relating to the nominations and/or proposals not less than one hundred
twenty (120) days prior to the date of any such meeting. The notice
provided by the shareholder must contain certain information as set
forth in the Articles of Incorporation. The Chairman of the annual or
special meeting may determine that such nomination or proposal was not
made
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in accordance with the Articles of Incorporation and declare such nomination
defective or proposal disregarded and held over for action at the next annual
or special meeting of the shareholders taking place thirty (30) days or more
thereafter. A shareholder is limited to making one proposal for business to
be considered at each annual or special meeting of shareholders.
This provision may not be altered, amended or repealed without the
approval of the holders of outstanding shares of stock of the Company
representing at least two-thirds of the votes entitled to be cast.
SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has 90,000 shares of Common Stock outstanding.
Those shares are held equally by the Founders and will be redeemed at their
original cost immediately prior to completion of the offering. See "RELATED
TRANSACTIONS - Redemption of Stock and Loans from Founders." Upon completion
of the offering, the Company expects to have 1,250,000 shares of Common Stock
outstanding (plus any shares issued and sold upon exercise by the Underwriter
of the over-allotment option). The 1,250,000 shares of Common Stock sold in
the offering (plus any additional shares sold upon the Underwriter's exercise
of its over-allotment option) have been registered with the Commission under
the Securities Act and may generally be resold without registration under the
Securities Act unless they were acquired by directors, executive officers or
other affiliates of the Company (collectively, "Affiliates"). Affiliates of
the Company may generally only sell shares of Common Stock pursuant to Rule
144 under the Securities Act without registration.
In general, under Rule 144 as currently in effect, an affiliate (as
defined in Rule 144) of the Company may sell shares of Common Stock within any
three-month period in an amount limited to the greater of 1% of the
outstanding shares of Common Stock or the average weekly trading volume in
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, holding
periods for restricted shares, notice requirements and the availability of
current public information about the Company.
The Company and the directors and officers of the Company and
the Bank (who are expected to hold an aggregate of approximately
shares after the offering), have agreed, or will agree, that they will not
issue, offer for sale, sell, transfer, grant options to purchase or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Underwriter for a period of 150 days from the date of this Prospectus, except
that (i) they may sell shares to the Company in payment of part or all of the
purchase price of shares purchased under the Stock Option Plans, and (ii) the
directors and officers may give Common Stock owned by them to others who have
agreed in writing to be bound by the same agreement.
Prior to the offering, there has been no public trading market for
the Common Stock, and no predictions can be made as to the effect, if any,
that sales of shares or the availability of shares for sale will have on the
prevailing market price of the Common Stock after completion of the offering.
Nevertheless, sales of substantial amounts of Common Stock in the public
market could have an adverse effect on prevailing market prices.
UNDERWRITING
Roney & Co., L.L.C. (the "Underwriter") has agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company 1,250,000 shares of Common Stock. The Underwriting Agreement provides
that the obligations of the Underwriter thereunder are subject to certain
conditions and provides for the Company's payment of certain expenses incurred
in connection with the review of the underwriting arrangements for the
offering by the National Association of Securities Dealers,
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Inc. (the "NASD"). The Underwriter is obligated to purchase all 1,250,000 of
the shares of Common Stock offered hereby, excluding shares covered by the
over-allotment option granted to the Underwriter, if any are purchased.
If the Underwriting Agreement is terminated, except in certain
limited cases, the Underwriting Agreement provides that the Company will
reimburse the Underwriter for all accountable out-of-pocket expenses,
including Underwriter's counsel's fees and any Blue Sky costs, incurred by it
in connection with the proposed purchase and sale of Common Stock, up to
$50,000. Such expenses will be credited by the Underwriter against the
underwriting discount otherwise payable to the Underwriter upon any purchase
by it of Common Stock.
The Company and the Underwriter have agreed that the Underwriter will
purchase the 1,250,000 shares of Common Stock offered hereunder at a price to
the public of $12.00 per share less underwriting discounts and commissions of
$ per share. However, underwriting discounts or commissions will be
incurred by the Company in the amount of $ per share with respect to
the first shares of Common Stock sold to officers and directors of the
Company, their immediate families or certain other designated individuals. The
Underwriter proposes to offer the Common Stock to selected dealers who are
members of the NASD, at a price of $12.00 per share less a concession not in
excess of $ per share. The Underwriter may allow, and such dealers
may re-allow, concessions not in excess of $ per share to certain
other brokers and dealers.
The Underwriter has informed the Company that the Underwriter does
not intend to make sales to any accounts over which it exercises discretionary
authority.
The Company has granted the Underwriter an option, exercisable within
30 days after the date of this offering, to purchase up to an additional
shares of Common Stock from the Company to cover over-allotments, if any, at
the same price per share as is to be paid by the Underwriter for the other
shares offered hereby. If the over-allotment option is exercised in full, the
Underwriter has agreed to credit $10,000 of its accountable expenses in
connection with the offering that are otherwise reimbursable to the
Underwriter by the Company against the aggregate discount on the
over-allotment shares. The Underwriter may purchase such shares only to cover
over-allotments, if any, in connection with the offering.
The Underwriter has rendered financial advisory services to the
Company in connection with the Merger. The Company has paid the Underwriter a
fee of $25,000 for providing such services. In addition, the Company will be
paid a contingent fee in the amount of $25,000 by the Company for general
advisory services rendered in connection with the Merger which amount will be
payable at the closing of the Merger. Further, the Company will indemnify the
Underwriter and the controlling persons thereof against certain liabilities
arising out of the Underwriter's financial advisory services rended to the
Company.
In connection with the offering of the Common Stock, the Underwriter
and any selling group members and their respective affiliates may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids effected in accordance with Rule 104 of the Commission's
Regulation M. Over-allotment is a transaction in which the Underwriter
creates a short position for its own account by selling more Common Stock than
it is committed to purchase from the Company. To cover all or part of a short
position, the Underwriter may exercise the over-allotment option described
above or may purchase Common Stock in the open market following completion of
the initial offering of the Common Stock. In stabilizing transactions, the
Underwriter may bid for, and purchase, shares of the Common Stock at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Common Stock.
Syndicate covering transactions involve purchases of Common Stock in the open
market after the distribution has been completed in order to cover syndicate
short
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positions. Penalty bids permit the Underwriter to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by
such syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. Such over-allotment, stabilizing
transactions, syndicate covering transactions, and penalty bids may cause the
price of the Common Stock to be higher than it would otherwise be in the
absence of such a transaction. The Underwriter is not required to engage in
any of the foregoing transactions, and, if commenced, can be discontinued at
any time.
The Underwriting Agreement contains indemnity provisions between the
Underwriter and the Company against certain liabilities, including liabilities
arising under the Securities Act. The Company is generally obligated to
indemnify the Underwriter and its controlling persons in connection with
losses or claims arising out of any untrue statement of a material fact
contained in this Prospectus or in related documents filed with the Commission
or with any state securities administrator, or any omission of certain
material facts from such documents.
There has been no public trading market for the Common Stock. The
price at which the shares are being offered to the public was determined by
negotiations between the Company and the Underwriter. This price is not based
upon earnings or any history of operations and should not be construed as
indicative of the present or anticipated future value of the Common Stock.
Several factors were considered in determining the initial offering price of
the Common Stock, among them the size of the offering, the desire that the
security being offered be attractive to individuals and the Underwriter's
experience in dealing with initial public offerings for financial
institutions.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon
for the Company by Krieg DeVault Alexander & Capehart, Indianapolis, Indiana.
Leagre Chandler & Millard, Indianapolis, Indiana, is acting as counsel for the
Underwriter in connection with certain legal matters relating to the shares of
Common Stock offered hereby.
EXPERTS
The financial statements of the Company included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to the development stage of
the Company described in Note 1 to the financial statements), and are included
in reliance upon the report of such firm given upon their authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of SCB included in this
Prospectus have been audited by KPMG Peat Marwick LLP, independent public
accountants, as indicated in their report with respect thereto. Such
consolidated financial statements and their report have been included herein
in reliance upon the authority of said firm as experts in accounting and
auditing.
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BLUE RIVER BANCSHARES, INC.
AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined consolidated statement of operations for the
year ended December 31, 1997 and the unaudited pro forma combined consolidated
statement of financial condition as of December 31, 1997, give effect to the
following pro forma adjustments: (i) the aggregate amount of cash to be paid
to the shareholders of SCB by the Company as a result of the Merger and the
related purchase accounting adjustments, (ii) the consummation of the Offering
and (iii) the termination of the Company's subchapter S election under the
Code. The pro forma combined consolidated financial statements assume that
these transactions occurred January 1, 1997 for the pro forma combined
consolidated statement of operations for the year ended December 31, 1997. The
pro forma combined consolidated statement of financial condition assumes that
these transactions occurred on December 31, 1997. The Merger will be
accounted for as a purchase, and the assets acquired and liabilities assumed
in the acquisition of SCB will be recorded at their estimated fair values,
with the excess of the purchase price over the net fair value recorded as
goodwill. The purchase accounting adjustments are based on preliminary
esimates of fair values. Actual fair values will be determined at the date of
the Merger, and, accordingly the adjustments that have been included in the
pro forma financial information are subject to change pending the final
allocation of the total purchase cost of the Merger. This information should
be read in conjunction with the historical financial statements of the
Company, including the notes thereto, which appear elsewhere in this
Prospectus, and with the historical consolidated financial statements of SCB,
including the notes thereto, which also appear elsewhere in this Prospectus.
See "FINANCIAL STATEMENTS--BLUE RIVER BANCSHARES, INC." and "CONSOLIDATED
FINANCIAL STATEMENTS--SHELBY COUNTY BANCORP."
The pro forma financial data do not give effect to any revenue enhancements or
operating efficiencies that the Company's management believes may result from
the transaction. The pro forma financial data are not necessarily indicative
of the results that actually would have occurred had the Merger been
consummated on the dates indicated or that may occur in the future.
Unaudited pro forma earnings per share data, as adjusted, is calculated using
1,250,000 shares of Common Stock outstanding subsequent to the sale of the
Common Stock offered hereby.
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BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
BLUE RIVER SHELBY COUNTY (7) ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Loans $6,299,344 $(268,624) (1) $6,030,720
Interest-bearing deposits 148,762 148,762
Investment securities 459,033 (3,231) (2) 455,802
Dividends from FHLB 65,368 65,368
--------- ---------- --------- ----------
Total interest income 6,972,507 (271,855) 6,700,652
--------- ---------- --------- ----------
Interest expense:
Interest expense on deposits 3,119,364 (304,312) (3) 2,815,052
Interest expense on FHLB advances and
other borrowings 986,452 986,452
--------- ---------- --------- ----------
Total interest expense 4,105,816 (304,312) 3,801,504
--------- ---------- --------- ----------
Net interest income 2,866,691 32,457 2,899,148
Provision for loan losses 111,000 111,000
--------- ---------- --------- ----------
Net interest income after provision for losses 2,755,691 32,457 2,788,148
--------- ---------- --------- ----------
Non-interest income:
Service charges 252,717 252,717
Other 112,512 112,512
--------- ---------- --------- ----------
Total non-interest income 365,229 365,229
--------- ---------- --------- ----------
Non-interest expense:
Salaries and employee benefits $ 45,545 957,343 160,991 (4) 1,163,879
Premises and equipment 266,720 266,720
Federal deposit insurance 70,470 70,470
Data processing 269,539 269,539
Advertising 150,677 150,677
Bank fees and charges 74,856 74,856
Amortization of goodwill 211,778 (5) 211,778
Other 71,245 451,770 523,015
--------- ---------- --------- ----------
Total non-interest expense 116,790 2,241,375 372,769 2,730,934
--------- ---------- --------- ----------
Income (loss) before income taxes (116,790) 879,545 (340,312) 422,443
Income taxes 320,980 (98,130) (6) 222,850
--------- ---------- --------- ----------
Net income (loss) $(116,790) $558,565 $(242,182) $ 199,593
========= ========== ========= ==========
Basic earnings (loss) per share $ (1.30) $ 3.17 $ 0.16
========= ========== ==========
</TABLE>
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BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
AT DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
HISTORICAL HISTORICAL ACQUISITION OFFERING PRO FORMA
ASSETS BLUE RIVER SHELBY COUNTY ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents:
Cash $ 1,001 $ 846,268 $(10,996,363) (8) $13,700,000 (12) $ 3,494,211
(18,000) (13)
(69,400) (14)
30,705 (15)
Interest-bearing deposits 4,821,320 4,821,320
-------- ----------- ------------ ----------- ------------
1,001 5,667,588 (10,996,363) 13,643,305 8,315,531
-------- ----------- ------------ ----------- ------------
Investment securities available for sale 8,177,547 8,177,547
Investment securities held to maturity 770,023 12,925 (9) 782,948
Loans receivable, net 79,090,635 1,441,870 (9) 80,532,505
Accrued interest receivable 650,934 650,934
Stock in FHLB of Indpls 920,200 920,200
Premises and equipment 1,760,063 1,760,063
Prepaid expenses and other assets 183,992 183,992
Deferred acquisition costs 64,663 (64,663) (11)
Deferred offering costs 37,533 (37,533) (15)
Goodwill 3,176,663 (9) 3,176,663
-------- ----------- ------------ ----------- ------------
$103,197 $97,220,982 $ (6,429,568) $13,605,772 $104,500,383
======== =========== ============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $70,783,787 $ 680,618 (9) $ 71,464,405
Advances from FHLB and other borrowings 18,054,180 18,054,180
Accrued interest payable 129,408 129,408
Income taxes payable 184,217 184,217
Deferred income taxes 443,653 217,529 (9) 661,182
Notes payable to shareholders $ 69,400 $ (69,400) (14)
Accrued expenses and other liabilities 132,587 137,685 225,000 (9) (6,828) (15) 423,781
(64,663) (11)
-------- ----------- ------------ ----------- ------------
201,987 89,732,930 1,058,484 (76,228) 90,917,173
-------- ----------- ------------ ----------- ------------
SHAREHOLDERS' EQUITY:
Common stock 18,000 1,358,123 (1,358,123) 13,700,000 (12) 13,700,000
(18,000) (13)
S Corporation accumulated deficit (116,790) 116,790 (16)
Retained earnings (deficit) 5,339,650 (5,339,650) (116,790) (16) (116,790)
Net unrealized appreciation on
investment securities available for sale 790,279 (790,279)
-------- ----------- ------------ ----------- ------------
(98,790) 7,488,052 (7,488,052) (9) 13,682,000 13,583,210
-------- ----------- ------------ ----------- ------------
$103,197 $97,220,982 $ (6,429,568) $13,605,772 $104,500,383
======== =========== ============ =========== ============
PER SHARE DATA:
Shares outstanding 90,000 175,550 1,250,000
Book value per share $ (1.10) $ 42.56 $ 10.87
Tangible book value per share $ (1.10) $ 42.56 $ 8.32
</TABLE>
-96-
<PAGE>
NOTES TO BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects amortization of premium on loans of $1,441,870 over projected
weighted average life 7 years of the portfolio using the level yield
method.
(2) Reflects amortization of premium on investment securities of $12,925 over
the average remaining life of the portfolio (4 years) using the level
yield method.
(3) Reflects amortization of premium on deposits of $680,618 over the
weighted average remaining life (1.25 years) of the deposits using the
level yield method.
(4) Reflects net increase in salaries and related benefits resulting from the
employment of three additional officers of the Company offset by the
termination of the president of SCB.
(5) Reflects amortization of goodwill arising from the Merger (estimated to
be $3,176,663) on a straight- line basis over a 15-year period. Also see
Note 9 below.
(6) Reflects income tax expense attributable to purchase accounting
adjustments and revocation of the Company's S Corporation election
associated with the Merger at the combined statutory federal and state
rate of 40%.
(7) Reflects SCB's fiscal year results consisting of results for the three
months in the period ended December 31, 1997 and the nine months in the
period ended September 30, 1997.
(8) Reflects net costs of acquisition as follows:
Purchase price $11,005,500
Acquisition costs 177,163
-----------
Subtotal 11,182,663
Less proceeds from exercise of SCB options (186,300)
-----------
Net cost of acquisition $10,996,363
===========
-97-
<PAGE>
NOTES TO BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(9) Reflects excess of estimated net fair value of assets acquired and
liabilities assumed in the Merger as follows:
<TABLE>
<S> <C> <C>
Net cost of acquisition $10,996,363
Less SCB shareholders' equity at December 31, 1997 (7,488,052)
-----------
Excess consideration over book value 3,508,311
-----------
Adjustments to reflect fair value:
Investment securities held to maturity 12,925
Loans 1,441,870
Deposits (680,618)
Other liabilities (225,000)
Tax effect of above adjustments (217,529) (10)
-----------
Less total fair value adjustments 331,648
-----------
Total goodwill $ 3,176,663
===========
</TABLE>
The purchase accounting adjustments are based on preliminary estimates of
fair values. Actual fair values will be determined at the date of the
Merger and, accordingly, the adjustments that have been included in the
pro forma financial information are subject to change pending the final
allocation of the total purchase cost of the Merger.
(10) Reflects net deferred tax liability attributable to purchase accounting
adjustments associated with the Merger at the combined statutory federal
and state rate of 40%.
(11) To eliminate $64,663 of previously recorded deferred acquisition costs.
(12) Reflects issuance and sale of 1,250,000 shares of Common Stock at $12 per
share in this offering, net of estimated underwriting costs of $1.3
million.
(13) Reflects the Company's redemption and cancellation of 90,000 shares of
Founders Common Stock at their initial cost of $.20 per share.
(14) Reflects payment of notes payable to shareholders.
(15) To eliminate $37,533 of previously recorded deferred offering costs.
(16) Reflects the reclassification of the Company's S Corporation accumulated
deficit to retained earnings (deficit) upon termination of the S
Corporation election.
-98-
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Form SB-2 Registration
Statement under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an Exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such reference. For further information
pertaining to the shares of Common Stock offered hereby and to the Company,
reference is made to the Registration Statement, including the Exhibits filed
as a part thereof, copies of which can be inspected (without cost) at and
copied (at prescribed rates) at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York,
New York, 10048, and 500 West Madison Street, Chicago, Illinois 60661. Copies
of such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The information is also available on the World Wide Web site
maintained by the Commission at http://www.sec.gov.
-99-
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
-----
PAGE
Independent Auditors' Report F-2
Financial Statements:
Statement of Financial Condition as of December 31, 1997 F-3
Statement of Operations for the Period March 18, 1997 (date of
incorporation) Through December 31, 1997 F-4
Statement of Shareholders' Deficiency for the Period March 18,
1997 (date of incorporation) Through December 31, 1997 F-5
Statement of Cash Flows for the Period March 18, 1997 (date of
incorporation) Through December 31, 1997 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders
Blue River Bancshares, Inc.
Shelbyville, Indiana
We have audited the accompanying statement of financial condition of Blue
River Bancshares, Inc. (a development stage company) as of December 31, 1997,
and the related statements of operations, changes in shareholders' deficiency
and cash flows for the period March 18, 1997 (date of incorporation) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the period March 18, 1997
(date of incorporation) through December 31, 1997 in conformity with generally
accepted accounting principles.
The Company is in the development stage at December 31, 1997. As discussed in
Note 1 to the financial statements, the Company has not yet completed its
public offering of common stock or obtained the required regulatory approvals
with respect to the acquisition of Shelby County Bancorp.
/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 17, 1998
F-2
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash $ 1,001
Deferred acquisition costs 64,663
Deferred offering costs 37,533
---------
TOTAL $ 103,197
=========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Accrued liabilities $ 132,587
Notes payable to shareholders 69,400
---------
Total liabilities 201,987
---------
COMMITMENTS AND CONTINGENCIES (Note 1)
SHAREHOLDERS' DEFICIENCY:
Common stock, no par value; authorized 15,000,000 shares,
issued and outstanding 90,000 shares 18,000
Accumulated deficit (116,790)
---------
Total shareholders' deficiency (98,790)
---------
TOTAL $ 103,197
=========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 18, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<S> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits $ 45,545
Legal and professional expenses 33,591
Director fees 12,000
Other expenses 25,654
---------
Total general and administrative expenses 116,790
---------
NET LOSS $(116,790)
=========
BASIC LOSS PER SHARE $ (1.30)
=========
DILUTED LOSS PER SHARE $ (1.30)
=========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
FOR THE PERIOD MARCH 18, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------
DEFICIENCY
ACCUMULATED
DURING THE
SHARES COMMON DEVELOPMENT
OUTSTANDING STOCK STAGE TOTAL
----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at inception (March 18, 1997) - - - -
Issuance of common stock 90,000 $18,000 $ 18,000
Net loss - - $(116,790) (116,790)
------ ------- --------- ---------
Balance at December 31, 1997 90,000 $18,000 $(116,790) $ 98,790
====== ======= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 18, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(116,790)
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in accrued liabilities 61,096
---------
Net cash used in operating activities (55,694)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from shareholders 18,000
Deferred offering costs (30,705)
Proceeds from notes payable to shareholders 69,400
---------
Net cash provided by financing activities 56,695
---------
NET INCREASE IN CASH 1,001
CASH, BEGINNING OF THE PERIOD 0
---------
CASH, END OF THE PERIOD $ 1,001
=========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Accrued liabilities at December 31, 1997 includes $6,828 of deferred
offering costs and $64,663 of deferred acquisition costs.
See notes to financial statements.
F-6
<PAGE>
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND THE PERIOD MARCH 18, 1997
(DATE OF INCORPORATION) THROUGH DECEMBER 31, 1997
- ------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Blue River Bancshares, Inc. (the "Company") was
incorporated under the laws of the state of Indiana on March 18, 1997
with an initial capitalization of $18,000. The Company currently does
not have any operations but intends to either (i) acquire control of an
existing bank or savings association located in central or southeastern
Indiana, (ii) acquire one or more branches of a financial institution
located in central or southeastern Indiana and operate such branches as a
wholly-owned subsidiary of the Company, or (iii) form a de novo
Indiana-chartered bank.
MERGER AGREEMENT WITH SHELBY COUNTY BANCORP - On February 5, 1998, the
Company entered into a definitive merger agreement, as amended and
restated on March 12, 1998, ( the "Merger" or "Merger Agreement") with
Shelby County Bancorp ("SCB"). Pursuant to the Merger Agreement, the
Company will acquire Shelby County Savings Bank, FSB (the "Bank"), a
wholly owned subsidiary of SCB, through the merger of the Company with
SCB. Under the terms of the Merger Agreement, each outstanding share of
common stock of SCB ("SCB Common Stock") will be converted into the right
to receive $58 from the Company. SCB shareholders will be entitled to
receive in exchange for all the shares of SCB Common Stock, cash in the
amount of $11,005,500, assuming all the outstanding options for shares of
SCB Common Stock have been exercised prior to the closing of the Merger
and no SCB shareholder asserts and perfects dissenters' rights in
accordance with Indiana law. In connection with the Merger, the Company
will rename Shelby County Savings Bank, FSB to Shelby County Bank.
The Merger will be accounted for as a purchase. Under this method of
accounting, the assets acquired and liabilities assumed in the
acquisition of SCB will be recorded at their estimated fair values, with
the excess of the purchase price over the net fair value recorded as
goodwill which is expected to be amortized over a 15 year period using
the straight-line method. The purchase accounting adjustments are based
on preliminary estimates of fair values. Actual fair values will be
determined at the date of the Merger, and, accordingly the adjustments
that have been included in the pro forma financial information are
subject to change pending the final allocation of the total purchase cost
of the Merger.
The Company's results of operations as shown in the following table are
as if the proposed 1998 acquisition of SCB and the Bank had occurred as
of January 1, 1997. The unaudited pro forma results for the year ended
December 31, 1997 are not necessarily indicative of the actual results of
operations that would have occurred had the acquisition actually been
made at the beginning of 1997:
(UNAUDITED)
Net interest income $2,900,000
Income before income taxes 423,000
Net income 200,000
Basic earnings per share 0.16
Diluted earnings per share 0.16
The acquisition of SCB and the Bank is contingent upon successful
completion of the Offering (see below) and receiving the approval of
various banking regulatory authorities.
F-7
<PAGE>
INITIAL PUBLIC OFFERING - In connection with the Merger Agreement, the
Company intends to effect an initial public offering (the "Offering") of
its common stock through a Registration Statement on Form SB-2 to be
filed with the Securities and Exchange Commission. The Company intends
to raise a minimum of $15,000,000 in equity capital through the sale of
1,250,000 shares of the Company's Common Stock at $12 per share.
Underwriting discounts and offering costs are estimated to be
approximately $1.3 million. Proceeds from the Offering will be used as
payment of the Merger consideration, additional capitalization for the
Bank, repayment of the notes payable to shareholders redemption of the
Company's 90,000 shares of Common Stock and general corporate purposes.
The transaction is expected to occur in the second quarter of 1998.
STOCK OPTION PLANS - The Company has adopted separate stock option plans
for Directors of the Company and the Bank (the "1997 Directors' Stock
Option Plan") and for officers and key employees of the Company and the
Bank (the "1997 Key Employee Stock Option Plan"). The Company has
reserved 35,000 and 90,000 shares of Common Stock that may be issued
pursuant to the 1997 Employee Stock Option Plan and the 1997 Directors'
Stock Option Plan, respectively. In 1997, the Company granted a total of
60,000 shares of Common Stock at $12 per share to shareholders of the
Company. In addition, the Company intends to grant stock options to
certain directors and officers of the Company in connection with the
Offering with an exercise price equal to the Offering price per share or
the fair value of a share on the date of the grant.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
during 1997. The standard provides for the adoption, at the option of
the Company, of a fair value method of accounting for stock options and
similar equity instruments. The Company has elected to account for such
transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company estimated the
SFAS 123 fair value by utilizing the binomial options pricing model based
upon estimated values for the risk-free rate, volatility rate and life
ranges. The pro forma compensation effects of this calculation were
insignificant.
DEFERRED OFFERING COSTS - Deferred offering costs include legal,
consulting and accounting costs incurred in connection with the
registration of the Company's common stock. These costs will be charged
against the proceeds or, if the offering is not successful, charged to
expense at that time.
DEFERRED ACQUISITION COSTS - Deferred acquisition costs include legal,
consulting and accounting costs incurred in connection with the proposed
acquisition of Shelby County Bancorp. These costs will be considered as
an increase to the purchase price for Shelby County Bancorp or, if the
Merger Agreement is not successful, charged to expense at that time.
NOTES PAYABLE TO SHAREHOLDERS - Shareholders of the Company have made
loans to the Company aggregating $69,400 at December 31, 1997 for use in
connection with the funding of certain acquisition costs, offering costs,
and operational expenses. The loans bear interest at an annual rate of
8.5% and are due and payable on demand. The Company intends to repay the
loans from the proceeds of the Offering.
EMPLOYMENT AGREEMENT - The Company has entered into an employment
agreement with an executive officer. Under certain circumstances
provided in the agreement, the Company may be obligated to continue the
officer's salary for a period of up to three years.
F-8
<PAGE>
LEASE COMMITMENTS - The Company leases office space pursuant to an
operating lease agreement on a month to month basis for $1 per month.
The difference between the monthly lease payment and the fair value of
the leased space was not material. Following the Merger, the Company
will maintain its offices in the main office of the Bank.
INCOME TAXES - The shareholders have elected to be taxed as an S
Corporation under the provisions of the Internal Revenue Code. Under
these provisions, the stockholders are taxed on their proportionate share
of the net income or loss of the Company. Consequently, the accompanying
financial statements do not reflect any provision or liability for
federal or state income taxes. Prior to the Offering, the Subchapter S
election of the Company will terminate and the Company will become
subject to all federal, state, and local corporate taxes on income.
ACCOUNTING ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER SHARE - The Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", effective
December 31, 1997. Basic and diluted loss per share of common stock are
based upon the weighted average number of common shares outstanding
during the year. The weighted average number of common shares
outstanding was 90,000 shares for the period March 18, 1997 (date of
incorporation) through December 31, 1997.
* * * * * *
F-9
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS - SHELBY COUNTY BANCORP
INDEX
-----
Page
Number
------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . G-2
Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1997 (Unaudited) and as of September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . G-3
Consolidated Statements of Earnings for the Three Months
Ended December 31, 1997 and 1996 (Unaudited) and for
the Years Ended September 30, 1997 and 1996 . . . . . . . . . . . G-4
Consolidated Statements of Shareholders' Equity for the Three
Months Ended December 31, 1997 and 1996 (Unaudited) and
for the Years Ended September 30, 1997 and 1996 . . . . . . . . . G-5
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1997 and 1996 (Unaudited) and for the
Years Ended September 30, 1997 and 1996 . . . . . . . . . . . . . G-6
Notes to Consolidated Financial Statements . . . . . . . . . . . G-7
G-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of financial
condition of Shelby County Bancorp and Subsidiary: as of September 30, 1997
and 1996, and the related consolidated statements of earnings, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Shelby County Bancorp and subsidiary as of September 30, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
November 21, 1997
G-2
<PAGE>
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, September 30,
1997
Assets (unaudited) 1997 1996
<S> <C> <C> <C>
Cash and cash equivalents:
Cash $846,268 $ 663,335 $1,043,977
Interest-bearing deposits 4,821,320 1,772,848 3,879,299
------------------------------------------
5,667,588 2,436,183 4,923,276
Investment securities available for sale (note 2) 8,177,547 7,886,663 7,243,756
Investment securities held to maturity (market value:
$782,948, $806,995 and $1,275,717) (note 3) 770,023 808,817 1,267,448
Loans receivable, net (note 4) 79,090,635 76,037,920 66,098,422
Accrued interest receivable on investment securities 150,959 133,053 104,504
Accrued interest receivable on loans 499,975 486,247 424,054
Stock in FHLB of Indianapolis, at cost 920,200 920,200 620,100
Premises and equipment (note 5) 1,760,063 1,774,961 1,874,702
Real estate owned 36,727 36,727 ---
Prepaid expenses and other assets 147,265 88,607 119,353
------------------------------------------
$97,220,982 $90,609,378 $82,675,615
==========================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 6) $70,783,787 $64,633,384 $65,286,137
Advances from FHLB and other borrowings (note 7) 18,054,180 18,057,629 10,071,360
Accrued interest on deposits and FHLB advances 129,408 126,484 133,492
Income taxes payable 184,217 70,789 225,237
Deferred income taxes (note 8) 443,653 333,912 4,954
Accrued expenses and other liabilities (note 6) 137,685 215,858 521,557
------------------------------------------
89,732,930 83,438,056 76,242,737
------------------------------------------
Shareholders' equity (note 10):
Common stock no par value; shares authorized of 5,000,000,
shares issued and outstanding of 175,950 1,358,123 1,358,123 1,358,123
Retained earnings - substantially restricted 5,339,650 5,187,531 4,744,525
Net unrealized appreciation on investment securities
available for sale (notes 2 and 8) 790,279 625,668 330,230
------------------------------------------
7,488,052 7,171,322 6,432,878
------------------------------------------
Commitments and contingencies (notes 4 and 7)
$97,220,982 $ 90,609,378 $82,675,615
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended For the Years Ended
December 31, September 30,
1997 1996
(unaudited) 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $1,672,604 $1,439,242 $6,065,982 $5,036,470
Mortgage-backed securities 48,129 70,479 303,587 311,135
Interest-bearing deposits 62,288 21,687 108,161 234,009
Investment securities 65,442 58,876 171,230 222,910
Dividends from FHLB 18,555 12,236 59,049 35,008
---------------------------------------------------------
Total interest income 1,867,018 1,602,520 6,708,009 5,839,532
---------------------------------------------------------
Interest expense on deposits (note 6) 848,616 758,008 2,996,545 3,219,473
Interest expense on FHLB advances and other
borrowings (note 7) 268,421 145,602 895,844 122,018
---------------------------------------------------------
Total interest expense 1,117,037 903,610 3,892,389 3,341,491
---------------------------------------------------------
Net interest income 749,981 698,910 2,815,620 2,498,041
Provision for loan losses (note 4) 30,000 23,000 104,000 100,000
---------------------------------------------------------
Net interest income after provision for
loan losses 719,981 675,910 2,711,620 2,398,041
---------------------------------------------------------
Non-interest income:
Service charges and fees 63,074 59,740 249,383 235,991
Annuity commissions --- --- 268 41,304
Other (note 2) 37,675 25,114 99,683 240,478
---------------------------------------------------------
Total non-interest income 100,749 84,854 349,334 517,773
---------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 240,757 243,789 960,375 939,740
Premises and equipment 62,985 65,217 268,952 271,121
Federal deposit insurance (note 6) 22,019 26,270 74,721 484,823
Data processing 74,641 60,504 255,402 236,452
Advertising 24,350 35,298 161,625 140,476
Bank fees and charges 13,324 22,764 84,296 72,403
Other 95,279 90,992 447,483 400,518
---------------------------------------------------------
Total non-interest expense 533,355 544,834 2,252,854 2,545,533
---------------------------------------------------------
Earnings before income taxes 287,375 215,930 808,100 370,281
Income taxes (note 8) 113,262 87,002 294,720 134,100
---------------------------------------------------------
Net earnings $174,113 $128,928 $513,380 $236,181
=========================================================
Basic earnings per share $.99 $.73 $2.92 $1.34
=========================================================
Dilutive earnings per share $.96 $.72 $2.83 $1.32
=========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
appreciation on
investment
securities Total
Retained available for shareholders
Common stock earnings sale equity
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 $ 1,340,873 $ 4,578,724 $ 290,881 $ 6,210,478
Exercise of options for 1,725 shares of
common stock at $10 per share (note 10) 17,250 --- --- 17,250
Net change in unrealized appreciation on
investment securities available for
sale (note 2) --- --- 39,349 39,349
Dividends ($.40 per share) --- (70,380) --- (70,380)
Net earnings for 1996 --- 236,181 --- 236,181
----------------------------------------------------------
Balance at September 30, 1996 1,358,123 4,744,525 330,230 6,432,878
Net change in unrealized appreciation on
investment securities available for
sale (note 2) --- --- 295,438 295,438
Dividends ($.40 per share) --- (70,374) --- (70,374)
Net earnings for 1997 --- 513,380 --- 513,380
----------------------------------------------------------
Balance at September 30, 1997 $1,358,123 5,187,531 625,668 7,171,322
Net change in unrealized appreciation on
investment securities available for sale
(unaudited) --- --- 164,611 164,611
Dividends ($.125 per share) (unaudited) --- (21,994) --- (21,994)
Net earnings (unaudited) --- 174,113 --- 174,113
----------------------------------------------------------
Balance at December 31, 1997 (unaudited) $1,358,123 $5,339,650 $790,279 $7,488,052
==========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended For the Years Ended
December 31, September 30,
1997 1996
(unaudited) 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $174,113 $128,928 $ 513,380 $ 236,181
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 42,443 37,904 157,211 110,761
Net deferred loan origination fees 12,967 6,446 (9,979) (8,117)
Deferred income taxes 132,000 (155,846)
Provision for loan losses 30,000 23,000 104,000 100,000
Loss on disposal of premises and equipment --- --- --- ---
(Increase) decrease in accrued interest
receivable on investment securities (17,906) 14,333 (28,549) (36,223)
(Increase) decrease in other assets (58,658) 251 30,746 26,733
Increase (decrease) in other liabilities 38,179 (293,448) (467,155) 540,661
Gain on sale of securities available for sale 10,240 (258) (5,807) (28,445)
---------------------------------------------------
Net cash provided (used) by operating
activities 231,378 (82,844) 425,847 785,705
---------------------------------------------------
Cash flows from investing activities:
Loans funded net of collections (3,109,410) (3,085,872) (10,132,439) (15,838,914)
Purchase of securities available for sale (1,199,570) (451,267) (5,201,233) (7,916,623)
Purchase of securities held to maturity --- --- --- (116,446)
Proceeds from sales of securities available for
sale 1,108,916 187,136 4,533,477 3,575,098
Maturities of securities available for sale 92,741 242,115 488,863 3,190,824
Maturities of securities held to maturity 448,255 148,102
Purchase of FHLB stock (104,900) (300,100) (210,800)
Purchase of premises and equipment (17,610) (31,981) (47,758) (37,645)
Disposals of premises and equipment 16,154 34,853 ---
---------------------------------------------------
Net cash used in investing activities (3,124,933) (3,228,615) (10,176,082) (17,206,404)
---------------------------------------------------
Cash flows from financing activities:
Dividends paid on common stock (21,994) (17,595) (70,374) (70,380)
Net increase (decrease) in deposits 6,150,403 (998,249) (652,753) 4,084,063
Proceeds from FHLB advances and other borrowings --- 4,500,000 8,000,000 10,081,000
Repayments of FHLB advances and other borrowings (3,449) (3,359) (13,731) (9,640)
Proceeds from issuance of common stock through
stock option plan --- --- --- 17,250
---------------------------------------------------
Net cash provided by financing activities 6,124,960 3,480,797 7,263,142 14,102,293
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,231,405 169,338 (2,487,093) (2,318,406)
Cash and cash equivalents at beginning of year 2,436,183 4,923,276 4,923,276 7,241,682
---------------------------------------------------
Cash and cash equivalents at end of year $5,667,588 $5,092,614 $ 2,436,183 4,923,276
===================================================
Supplemental cash flow information:
Interest paid $843,165 $881,822 $ 3,899,397 $3,320,806
===================================================
Income taxes paid $111,156 $100,000 $ 312,000 $ 80,000
===================================================
Loans transferred to real estate owned $ --- $ --- $ 36,727 $ ---
===================================================
</TABLE>
See accompanying notes to consolidated financial statements.
G-6
<PAGE>
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Shelby
County Bancorp (the "Corporation") and its wholly-owned subsidiary, Shelby
County Savings Bank, FSB and subsidiaries (the "Savings Bank"). All
significant intercompany balances and transactions are eliminated in
consolidation.
The Savings Bank offers retail deposit and lending services through
its office and banking center in Shelbyville, Indiana and branches in
Shelbyville, Morristown and St. Paul, Indiana. The Savings Bank is subject to
competition from other financial institutions and is regulated by certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates.
The consolidated statement of financial condition as of December 31,
1997 and the related consolidated statements of earnings, changes in
sharehholders' equity and cash flows for the three months ended December 31,
1997 and 1996 are unaudited. However, in the opinion of management, the
interim consolidated financial statements include all adjustments, which
consist of only normal recurring adjustments, necessary for fair presentation
of the Corporation's financial statements. The results of operations for the
unaudited three month period ended December 31, 1997, are not necessarily
indicative of the results which may be expected for the entire fiscal year
1998.
Securities Held to Maturity and Available for Sale
Securities classified as available for sale are securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily until maturity, and include securities that management might use
as part of its asset-liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors, and which are carried at market
value. Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Securities classified as held to maturity are securities that the
Corporation has both the ability and positive intent to hold to maturity and
are carried at cost adjusted for amortization of premium or accretion of
discount. Gains and losses are computed on a specific identification basis.
Loans Receivable and Real Estate Owned
Loans receivable are considered long-term investments and,
accordingly, are carried at historical cost. The Savings Bank has a mortgage
lien on all real estate on which mortgage, participation or purchased loans
are made. Substantially all loan originations are secured by mortgages on
property in Shelby County, Indiana.
G-7
<PAGE>
An allowance for interest accrued but uncollected is established once
a loan is 90 days delinquent, in process of foreclosure or is otherwise
considered to be uncollectible as determined by management.
The Bank provides specific valuation allowances for estimated losses
on loans and real estate owned when a significant and permanent decline in
value occurs. Loans considered to be impaired are reduced to the present
value of expected future cash flows or to fair value of collateral by
allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require an increase,
allocations are considered in relation to the overall adequacy of the
allowance for loan losses and subsequent adjustment to the loss provision. In
providing valuation allowances, through a charge to operations, the estimated
net realizable value of the underlying collateral and the costs of holding
real estate are considered. Non-specific valuation allowances for estimated
losses are established based on management's judgment of current economic
conditions and the credit risk of the loan portfolio and real estate owned.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and borrower circumstances. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Loan Fees
Loan origination fees and certain direct costs are deferred and
recognized over the lives of the related loans as an adjustment of the loan's
yield.
FHLB Stock
Federal law requires a member institution of the Federal Home Loan
Bank system to hold common stock of its district FHLB according to a
predetermined formula. This investment is stated at cost, which represents
redemption value, and may be pledged to secure FHLB advances.
Premises and Equipment
Purchases of premises and equipment and expenditures which materially
extend useful lives are capitalized at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets as
follows: 2 to 50 years for buildings and improvement and 2 to 20 years for
furniture and equipment.
Federal Income Taxes
The Corporation and the Savings Bank file consolidated tax returns.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the years in which those temporary
G-8
<PAGE>
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash
on hand and at banks and liquid money market investments of less than three
months maturity to be cash equivalents.
Earnings Per Share
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 provides computation, presentation and disclosure
requirements for earnings per share and supersedes Accounting Principles Board
Opinion 15. Basic earnings per share for 1997 and 1996 were computed by
dividing net earnings by the weighted average shares of common stock
outstanding (175,950 in 1997 and 1996). Diluted earnings per share for 1997
and 1996 were computed by dividing net earnings by the weighted average shares
of common stock and common stock that would have been outstanding assuming the
issuance of all dilutive potential common shares outstanding (181,282 and
179,605 in 1997 and 1996, respectively). Dilution of the per share calculation
relates to stock options. Diluted earnings for 1997 and 1996 are the same as
primary earnings per share calculated and reported under superseded APB 15.
Reclassifications
Certain amounts in the 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation.
G-9
<PAGE>
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale at September 30, consist of
the following:
<TABLE>
<CAPTION>
September 30, 1997
Amortized Unrealized Unrealized
cost gains losses Market value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Treasury notes:
Due after one year through five years $ 223,917 $1,434 $ --- $225,351
Mortgage-backed securities:
FNMA 1,083,541 --- (9,125) 1,074,416
FHLMC 1,562,472 --- (14,308) 1,548,164
FHLB 351,213 --- (650) 350,563
-------------------------------------------------------
2,997,226 --- (24,083) 2,973,143
-------------------------------------------------------
FHLMC preferred stock 30,691 1,078,103 --- 1,108,794
-------------------------------------------------------
Corporate bonds:
Due after one year through five years 617,180 --- (6,369) 610,811
Due after five years through ten years 1,636,055 --- (20,407) 1,615,648
-------------------------------------------------------
2,253,235 --- (26,776) 2,226,459
-------------------------------------------------------
Municipal bonds:
Due after five years through ten years 443,575 241 --- 443,816
Due after ten years 895,239 13,861 --- 909,100
-------------------------------------------------------
1,338,814 14,102 --- 1,352,916
-------------------------------------------------------
$6,843,883 $1,093,639 $ (50,859) $7,886,663
=======================================================
</TABLE>
G-10
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
Amortized Unrealized Unrealized
cost gains losses Market value
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA $ 2,907,950 $ 2,986 $ (72,473) $ 2,838,463
FHLMC 1,792,181 2,735 (50,242) 1,744,674
-----------------------------------------------------
4,700,131 5,721 (122,715) 4,583,137
-----------------------------------------------------
FHLMC preferred stock 30,691 748,991 --- 779,682
-----------------------------------------------------
Corporate bonds:
Due after one year through five years 508,235 --- (20,120) 488,115
Due after five years through ten years 1,009,184 --- (50,837) 958,347
-----------------------------------------------------
1,517,419 --- (70,957) 1,446,462
-----------------------------------------------------
Municipal bonds:
Due after five years through ten years 445,131 --- (10,656) 434,475
-----------------------------------------------------
$ 6,693,372 $ 754,712 $ (204,328) $ 7,243,756
=====================================================
</TABLE>
A reclassification of investment securities from the held to maturity
portfolio to the available for sale portfolio occurred during the quarter
ended December 31, 1995, in accordance with the FASB Special Report, A Guide
to Implementation of Statement 115 on Accounting for Certain Investment in
Debt and Equity Securities, which was issued November 15, 1995. The
investment securities that were reclassified had a carrying value of
$1,521,922 and a market value of $1,550,360 at the time of transfer.
For the year ended September 30, 1997, gross realized gains and gross
realized losses on sales of securities available for sale were $8,603 and
$2,796, respectively, and are included in other non-interest income. For the
year ended September 30, 1996, gross realized gains on sales of investment
securities available for sale were $28,445 and are included in other
non-interest income.
G-11
<PAGE>
(3) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity at September 30, consist of:
<TABLE>
<CAPTION>
September 30, 1997
Amortized Unrealized Unrealized
cost gains losses Market value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 310,135 $ 3,310 $ (17,543) $ 295,902
GNMA 26,144 2,607 --- 28,751
---------------------------------------------------
336,279 5,917 (17,543) 324,653
---------------------------------------------------
Municipal bonds:
Due after five years through ten years 222,525 4,924 (547) 226,902
---------------------------------------------------
Corporate bonds:
Due after one year through five years 250,013 5,427 --- 255,440
---------------------------------------------------
$ 808,817 $ 16,268 $ (18,090) $ 806,995
===================================================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
Amortized Unrealized Unrealized
cost gains losses Market value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA $ 199,678 $ 2,380 --- $ 202,058
FHLMC 400,373 2,851 $ (3,672) 399,552
GNMA 33,039 2,834 --- 35,873
-----------------------------------------------------
633,090 8,065 (3,672) 637,483
-----------------------------------------------------
Municipal bonds:
Due after five years through ten years 226,672 1,703 (4,345) 224,030
-----------------------------------------------------
Corporate bonds:
Due after one year through five years 407,686 6,518 --- 414,204
-----------------------------------------------------
$ 1,267,448 $ 16,286 $ (8,017) $ 1,275,717
=====================================================
</TABLE>
G-12
<PAGE>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996, respectively,
consist of:
1997 1996
---------------------------------------------------------------------
Real estate mortgage loans:
One-to-four family $45,137,304 $40,697,356
Commercial 11,317,800 9,828,050
Home equity loans 977,216 740,433
Residential construction 1,053,769 1,002,262
Participations purchased:
One-to-four family 3,300 5,430
Commercial 4,485,388 2,770,483
Consumer loans 9,696,072 8,257,929
Commercial loans 3,946,964 3,320,574
----------------------------
76,617,813 66,622,517
Less:
Deferred loan fees 188,216 198,195
Allowance for loan losses 391,677 325,900
----------------------------
$76,037,920 $66,098,422
============================
Activity in the allowance for loan losses for the years ended
September 30, consist of:
1997 1996
---------------------------------------------------------------------
Balance at beginning of year $ 325,900 $ 241,094
Provision charged to earnings 104,000 100,000
Charge-offs (39,369) (15,523)
Recoveries 1,146 329
---------------------------
Balance at end of year $ 391,677 $ 325,900
===========================
At September 30, 1997 and 1996, non-accrual loans totaled $416,601
and $299,649, respectively.
The Savings Bank makes loans to certain directors and officers in the
normal course of business. These loans are made on substantially the same
terms, including interest rate and collateral, as those prevailing at the time
for comparable transactions with other customers and do not involve more than
the normal risk of collectibility. A summary of activity in these loans for
the year ended September 30, 1997 follows:
Balance at beginning of year $996,255
New loans 218,822
Repayments (388,035)
--------
Balance at end of year $827,042
========
G-13
<PAGE>
At September 30, 1997, the Savings Bank and the Corporation had
commitments to originate $1,958,000 of fixed and variable-rate loans. The
interest rates on these loans commitments range from 6.50% to 12.0%. The
Savings Bank also had commitments to fund $587,284 of variable-rate home
equity loans.
(5) Premises and Equipment
Premises and equipment at September 30, consist of:
1997 1996
-------------------------------------------------------------------------
Land $ 251,766 $ 251,766
Buildings and improvements 1,326,961 1,315,069
Furniture and equipment 972,890 971,877
-------------------------------
2,551,617 2,538,712
Less accumulated depreciation 776,656 664,010
-------------------------------
$1,774,961 $1,874,702
===============================
(6) Deposits
Deposits at September 30, consist of:
<TABLE>
<CAPTION>
1997 1996
Amount % Amount %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (2.85% at Sept. 30,
1997 and 1996) $ 9,206,489 14% $10,027,894 15%
NOW and Super NOW (2.00% and 2.50% at
Sept. 30, 1997 and 2.00% at Sept.
30, 1996) 13,062,895 21 13,532,702 21
Money Market (2.85% to 5.60% at Sept. 30,
1997) 2,731,690 4 --- ---
-----------------------------------------------------
25,001,074 39 23,560,596 36
-----------------------------------------------------
Certificate accounts:
Up to 3% 109,407 --- 58,945 ---
3.01%-4% 203,144 --- 431,614 1
4.01%-5% 3,753,973 6 4,884,518 7
5.01%-6% 20,917,804 32 21,169,641 33
6.01%-7% 11,331,750 18 11,936,295 18
7.01%-8% 2,023,232 3 1,951,528 3
8.01%-9% 1,293,000 2 1,293,000 2
-----------------------------------------------------
39,632,310 61 41,725,541 64
-----------------------------------------------------
$64,633,384 100% $65,286,541 100%
=====================================================
Weighted average cost of all deposits 4.78% 4.75%
==== ====
</TABLE>
G-14
<PAGE>
Included in certificates at September 30, 1997 and 1996 are
$7,641,000 and $4,737,000, respectively, in certificates of $100,000 or more.
Eligible deposit accounts are insured by the full faith and credit of
the government up to $100,000 under the Federal Deposit Insurance
Corporation's Savings Association Insurance Fund (SAIF) at September 30, 1997.
The contractual maturities of certificates at September 30, 1997
consist of:
Amount %
------------------------------------------------
Under 12 months $19,446,737 49%
12 to 24 months 4,528,213 11
24 to 36 months 11,356,770 29
36 to 48 months 2,709,640 7
48 to 60 months 1,347,170 3
Over 60 months 243,780 1
-------------------------
$39,632,310 100%
=========================
Interest expense by type of deposit for the years ended September 30,
consist of:
Account Type 1997 1996
---------------------------------------------------------------
Passbook $ 283,217 $ 313,341
NOW and Super NOW 313,997 301,579
Certificates 2,399,331 2,604,553
------------------------------
$2,996,545 $3,219,473
==============================
The deposits of the Savings Bank are insured by the Savings
Association Insurance Fund (SAIF), which together with the Bank Insurance Fund
(BIF), which insures the deposits of commercial banks, are the two deposit
insurance funds administered by the Federal Deposit Insurance Corporation
(FDIC). The Deposit Insurance Funds Act, enacted on September 30, 1996,
required the FDIC to assess a special one-time premium on deposits insured by
SAIF to raise the ratio of SAIF insurance funds to insured deposits to 1.25%.
The Savings Bank was assessed an additional premium of $332,077 in 1996 which
was paid in November 1996.
G-15
<PAGE>
(7) Advances From FHLB and Other Borrowings
Advances from FHLB and other borrowings at September 30, 1997 and
1996 consist of:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Advances from FHLB with interest at variable rates (6.85% and
6.48% at September 30, 1997 and 1996) collateralized by
qualifying mortgage loans and investments (as defined) equal to
160% of FHLB advances $ 17,746,000 $ 9,746,000
Mortgage borrowing secured by bank branch with monthly payments
of principal and interest at 8.75% through October 2010 311,629 325,360
-------------------------------
$ 18,057,629 $ 10,071,360
===============================
</TABLE>
The weighted average interest rate of all borrowings was 6.88% and
6.55% at September 30, 1997 and 1996, respectively.
Advances from FHLB and other borrowings at September 30, 1997 are
scheduled to mature as follows:
FHLB Other
Advances Borrowings Total
- ----------------------------------------------------------------------
1998 $ 17,746,000 $13,382 $17,759,382
1999 --- 14,601 14,601
2000 --- 15,931 15,931
2001 --- 17,382 17,382
2002 --- 18,965 18,965
Thereafter --- 231,368 231,368
-------------------------------------------------
$ 17,746,000 $311,629 $18,057,629
=================================================
(8) Income Taxes
The composition of income taxes for the years ended September 30,
consist of:
1997 1996
--------------------------------------------------------------
Current:
Federal $ 86,196 $228,946
State 76,524 61,000
-------------------------------
162,720 289,946
Deferred 132,000 (155,846)
-------------------------------
$ 294,720 $134,100
===============================
G-16
<PAGE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
at September 30 follow:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 75,300 $ 79,300
Allowance for delinquent interest 1,400 9,800
Allowance for possible loan losses for financial
reporting purposes 133,200 110,800
SAIF special assessment --- 132,800
Allowance for environmental contingency --- 18,300
--------------------------
$ 209,900 $351,000
==========================
Deferred tax liabilities:
FHLB stock dividend (29,200) (29,200)
Depreciation (43,200) (29,200)
Tax bad debt reserve (35,900) (51,600)
Deductible prepaid expense (18,400) (25,800)
Investment securities available for sale (417,112) (220,154)
--------------------------
(543,812) (355,954)
--------------------------
Net temporary differences (333,912) (4,954)
Less valuation allowance --- ---
--------------------------
Net deferred tax liability $(333,912) $(4,954)
==========================
</TABLE>
The effective income tax rate differs from the statutory federal
corporate rate as follows:
1997 1996
---- ----
Statutory tax rate 34.0% 34.0%
State income taxes 5.6 5.6
Tax exempt interest income (.7) (3.5)
Other (2.4) .1
----------------------
Effective tax rate 36.5% 36.2%
======================
Under the Internal Revenue Code, through 1996, the Savings Bank was
allowed a special bad debt deduction for additions to tax bad debt reserves
established for the purpose of absorbing losses. Subject to certain
limitations, the allowable bad debt deduction was computed based on one of two
alternative methods: (1) a percent of taxable income before such deduction or
(2) loss experience method. The Savings Bank generally computed its annual
addition to its tax bad debt reserves using the percentage of taxable income
method through 1996.
Under Legislation enacted in 1996, beginning in fiscal 1997, the
Savings Bank is no longer allowed a special bad debt deduction using the
percentage of taxable income method. Beginning in 1997, the Savings Bank is
required to recapture its excess tax bad debt reserve over its 1987 base year
reserve over a six-year period. This amount has been provided for in the
Savings Bank's deferred tax liability.
G-17
<PAGE>
Retained earnings at September 30, 1997 include approximately
$1,100,000 for which no provision for Federal income taxes has been made. This
amount represents allocations of earnings to tax bad debt deductions prior to
1987. Reduction of amounts so allocated for purposes other than tax bad debt
losses will create taxable income, which will be subject to the then current
corporate income tax rate. It is not contemplated that amounts allocated to
bad debt deductions will be used in any manner to create taxable income.
(9) Retirement Plan
The Savings Bank maintains a noncontributory defined benefit
retirement plan which covers substantially all employees. Pension expense
amounted to $18,173 and $39,521 for the years ended September 30, 1997 and
1996. The Plan in which the Savings Bank participates is a multi-employer
plan for which separate actuarial valuations are not made with respect to each
employer.
(10) Stockholders' Equity
The Corporation is subject to regulation as a savings and loan
holding company by the Office of Thrift Supervision ("OTS"). The Savings Bank,
as a subsidiary of a savings and loan holding company, is subject to certain
restrictions in its dealings with the Corporation. The Savings Bank is
further subject to the regulatory requirements applicable to a federal savings
bank.
Savings institutions are required to maintain risk-based capital of
8.0% of risk-weighted assets. At September 30, 1997, the Savings Bank's
risk-based capital exceeded the required amount. Risk-based capital is
defined as the Savings Bank's core capital adjusted by certain items. Risk
weighting of assets is derived from assigning one of four risk-weighted
categories to an institution's assets, based on the degree of credit risk
associated with the asset. The categories range from zero percent for
low-risk assets (such as United States Treasury securities) to 100% for
high-risk assets (such as real estate owned). The book value of each asset is
then multiplied by the risk weighting applicable to the asset category. The
sum of the products of the calculation equals total risk-weighted assets.
Savings institutions are also required to maintain a minimum leverage
ratio under which core capital must equal at least 3% of total assets, but no
less than the minimum required by the Office of the Comptroller of the
Currency ("OCC") for national banks, which minimum currently stands between 4%
and 5% for other than the highest rated institutions. The Savings Bank's
primary regulator, the Office of Thrift Supervision, is expected to adopt the
OCC minimum. The components of core capital are the same as those set by the
OCC for national banks, and consist of common equity plus non-cumulative
preferred stock and minority interests in consolidated subsidiaries, minus
certain intangible assets. At September 30, 1997, the Savings Bank's core
capital and leverage ratio were in excess of the required amount.
Savings institutions must also maintain minimum tangible capital of
1.5% of total assets. The Savings Bank's tangible capital and tangible
capital ratio at September 30, 1997 exceeded the required amount.
The OTS has minimum capital standards that place savings institutions
into one of five categories, from "critically undercapitalized" to
"well-capitalized," depending on levels of three measures of capital. A well
capitalized institution as defined by the regulations has a total risk-based
capital ratio of at least 10 percent, a Tier 1 (core) risk-based capital ratio
of at least six percent, and a leverage (core) risk-based capital ratio of at
least five percent. At September 30, 1997, the Savings Bank was classified as
adequately capitalized.
G-18
<PAGE>
The following is a summary of the Savings Bank's regulatory capital
and capital requirements at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
To be well capitalized
under prompt
For capital corrective action
Actual adequacy purposes provisions
----------------- ----------------- -----------------------
As of September 30, 1997: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $5,593,000 6.3% 1,342,000 1.5% N/A N/A
Core (Tier One) Capital 5,593,000 6.3 2,684,000 3.0 4,473,000 5.0%
Tier One Risk-Based Capital 5,593,000 8.9 N/A N/A 3,786,000 6.0
Total Risk-Based Capital 5,985,000 9.5 5,048,000 8.0 6,310,000 10.0
Savings Bank Capital 6,219,000 N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
To be well capitalized
under prompt
For capital corrective action
Actual adequacy purposes provisions
----------------- ----------------- -----------------------
As of September 30, 1996: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $5,256,000 6.4% 1,232,000 1.5% N/A N/A
Core (Tier One) Capital 5,256,000 6.4 2,464,000 3.0 4,107,000 5.0%
Tier One Risk-Based Capital 5,582,000 10.2 N/A N/A 3,264,000 6.0
Total Risk-Based Capital 5,256,000 9.7 4,352,000 8.0 5,400,000 10.0
Savings Bank Capital 5,586,000 N/A N/A N/A N/A N/A
</TABLE>
The OTS has regulations governing dividend payments, stock
redemptions, and other capital distributions, including upstreaming of
dividends by a savings institution to a holding company. Under these
regulations, the Savings Bank may, without prior OTS approval, make capital
distributions to the Corporation of up to 100% of its net income during the
calendar year, plus an amount that would reduce by half its excess capital
over its fully phased-in capital requirement at the beginning of the calendar
year. The Corporation is not subject to any regulatory restrictions on the
payments of dividends to its stockholders, other than restrictions under
Indiana law.
At the time of conversion, October 17, 1991, the Savings Bank
established a liquidation account of $3,348,000 which equaled the Savings
Bank's retained earnings as of the date of the latest statement of financial
condition, June 30, 1991, contained in the final offering circular. The
liquidation account will be maintained for the benefit of depositors, as of
the eligibility record date, who continue to maintain their deposits in the
Savings Bank after conversion. In the event of a complete liquidation (and
only in such event), each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount to the then current adjusted balance for deposits then held, before any
liquidation distribution may be made with respect to the shareholders. Except
for the repurchase of stock and
G-19
<PAGE>
payment of dividends by the Savings Bank, the existence of the liquidation
account does not restrict the use or application of such retained earnings.
The Corporation has a stock option plan whereby 17,250 shares of
authorized but unissued common stock are reserved for future issuance upon the
exercise of stock options. Stock options for the purchase of 12,075 shares
have been granted to certain officers and directors at $10 per share, the
market value at the date of approval of the plan. The options can be
exercised at any time until expiration in October 2001. Stock options for the
purchase of 1,725 shares were granted to a new director in 1995 at $18 per
share, the market value the date the options were granted. The options can be
exercised at any time until expiration in January 2005. Additionally, stock
options for the purchase of 3,450 shares were granted in 1996 to certain
officers and directors at $20 per share, the market value at the date the
options were granted. The options can be exercised at any time until
expiration in August 2006. During 1994, options for 1,725 shares were
exercised. No options were exercised in 1995. During 1996, options for 1,725
shares were exercised leaving 13,800 unexercised options at September 30,
1996. No options were exercised in 1997.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), effective for transactions entered into
after December 15, 1995. This statement defines a fair value method of
accounting for employee stock options and encourages entities to adopt that
method of accounting for its stock compensation plans. SFAS 123 allows an
entity to continue to measure compensation costs for these plans using the
intrinsic value based method of accounting prescribed by the Accounting
Principles Board Option No. 25, Accounting for Stock Issued to Employees ("APB
25"). The Corporation has elected to continue to account for its employee
stock compensation plan as prescribed under APB 25 and make the pro forma
disclosures of net income and earnings per share required by SFAS 123. As
only 1,725 options were issued in 1996 and no stock options were awarded in
1997, the adoption of SFAS 123 had no impact on the Corporation's financial
position or results of operations.
In April 1995, the Corporation issued to its shareholders one Common
Share Purchase Rights (the Rights) for each share of common stock owned. The
Rights entitle the shareholders to purchase one share of common stock for $70.
G-20
<PAGE>
(11) Parent Company Financial Information
Following is condensed parent company financial information of the
Corporation:
Condensed Statement of Financial Condition
------------------------------------------
<TABLE>
<CAPTION>
Assets 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash, including interest-bearing deposit of $100,000 $ 156,228 $ 378,342
Investment in Savings Bank 6,218,520 5,585,782
Due from Savings Bank for income taxes and proceeds from
issuance of common stock 8,426 61,300
Premises and equipment, net 817,735 830,859
Loans receivable 350,155 ---
-------------------------------
$ 7,551,064 $ 6,856,283
===============================
Liabilities
Due to Savings Bank for compensation expense 44,994 80,448
Long-term debt 311,629 325,360
Other Liabilities 23,119 17,597
-------------------------------
379,742 423,405
-------------------------------
Shareholder's Equity
Common stock 1,358,123 1,358,123
Retained earnings 5,187,531 4,744,525
Unrealized appreciation on investment securities available
for sale held by Savings Bank 625,668 330,230
-------------------------------
7,171,322 6,432,878
-------------------------------
$ 7,551,064 $ 6,856,283
===============================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Earnings
-------------------------------
1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividend from Savings Bank $ 200,000 $ ---
Lease income 42,135 49,500
Interest income on deposits 11,926 10,646
Interest income on loans 21,664 ---
Interest expense on loans (26,457) (26,212)
Operating expenses (119,631) (108,393)
---------------------------
129,637 (74,459)
Income tax benefit 46,443 25,300
---------------------------
Income (loss) before equity in undistributed earnings
of Savings Bank 176,080 (49,159)
Equity in undistributed earnings of Savings Bank 337,300 285,340
---------------------------
Net earnings $ 513,380 $ 236,181
===========================
</TABLE>
G-21
<PAGE>
Condensed Statement of Cash Flows
---------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net earnings $ 513,380 $ 236,181
Adjustments to reconcile net cash provided by operating
activities:
Equity in undistributed earnings of Savings Bank (337,300) (285,340)
Depreciation and amortization 23,697 22,817
(Increase) decrease in due from Savings Bank 52,874 73,925
Increase in due to Savings Bank (29,932) ---
Decrease in other receivables --- 25
Increase in other liabilities --- 22,503
------------------------------
Net cash provided by operating activities 222,719 70,111
Cash flows from investing activities:
Loans funded net of collections (350,155) ---
Purchase of premises and equipment (10,573) ---
------------------------------
Net cash used by investing activities (360,728)
------------------------------
Cash flows from financing activities:
Proceeds from borrowings --- 335,000
Repayment of borrowings (13,731) (9,640)
Net proceeds from issuance of common stock --- 17,250
Dividends paid to shareholders (70,374) (70,380)
------------------------------
Net cash provided (used) by financing activities (84,105) 272,230
------------------------------
Net increase (decrease) in cash (222,114) 342,341
Cash and cash equivalents at beginning of year 378,342 36,001
------------------------------
Cash and cash equivalents at end of year $ 156,228 $ 378,342
==============================
Supplemental cash flow information - Interest paid $ 26,457 $ 26,212
==============================
</TABLE>
(12) Fair Value of Financial Instruments
The following disclosure of fair value information is made in
accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments."
SFAS No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate value. The estimated fair value amounts have been
determined by the Corporation using available market information and other
appropriate valuation techniques. These techniques are significantly affected
by the assumptions used, such as the discount rate and estimates of future
cash flows. Accordingly, the estimates made herein are not necessarily
indicative of the amounts Shelby County Bancorp could realize in a current
market exchange and the use of different market assumptions and/or estimation
methods may have a material effect on the estimated fair value amount.
G-22
<PAGE>
The following schedule includes the book value and estimated fair
value of all financial assets and liabilities, as well as certain off balance
sheet items, at September 30.
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In Thousands) amount fair value amount fair value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 2,436 $ 2,436 $ 4,923 $ 4,923
Securities including securities available for sale 8,695 8,695 8,511 8,520
Loans receivable, net 76,038 76,443 66,098 65,563
Accrued interest receivable 619 619 529 529
Stock in FHLB of Indianapolis 920 920 620 620
Liabilities
- --------------------------------------------------------------------------------------------------------------
Deposits 64,633 65,374 65,286 66,150
Borrowings:
FHLB advances 17,746 17,746 9,746 9,746
Long-term borrowing 312 312 325 325
Accrued interest payable 126 126 133 133
</TABLE>
The following valuation methods and assumptions were used by the
Corporation in estimating the fair value of its financial instruments.
Cash and Cash Equivalents. The fair value of cash and cash
equivalents approximates carrying value.
Securities. Fair values are based on quoted market prices.
Loans Receivable, Net. The fair value of loans is estimated by
discounting the estimated future cash flows using market rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. Contractual cash flows were adjusted for
prepayment estimates consistent with those used by the Office of Thrift
Supervision at September 30, 1997 and 1996.
Accrued Interest Receivable. The fair value of these financial
instruments approximates carrying value.
Stock in FHLB of Indianapolis. Fair value of FHLB stock is based on
the price at which it may be resold to the FHLB.
Deposits. The fair values for demand deposits (i.e., interest
bearing and non-interest bearing checking, passbooks savings and money market
accounts) are equal to the amount payable on demand at the reporting date.
Fair values for fixed-maturity certificates of deposit are calculated using a
discounted cash flow analysis that applies interest rates currently offered on
certificates.
FHLB Advances. The fair values of the FHLB advances approximate
carrying values as the interest rates are variable and adjust to market rates.
G-23
<PAGE>
Long-term Borrowing. The fair value of long-term borrowing
approximates carrying value as the interest rate approximates current market
rates.
Accrued Interest Payable. The fair value of these financial
instruments approximates carrying value.
G-24
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
---------------------
TABLE OF CONTENTS
PAGE
----
Available Information . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . 11
Pending Transaction . . . . . . . . . . . . . . . . . . . 19
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 21
Dividend Policy . . . . . . . . . . . . . . . . . . . . . 22
Capitalization . . . . . . . . . . . . . . . . . . . . . 23
Business of Blue River Bancshares, Inc. . . . . . . . . . 24
Management Discussions and Analysis of Financial
Condition and Results of Operations of
Shelby County Bancorp . . . . . . . . . . . . . . . 26
Summary Condensed Consolidated Historical and Pro Forma
Financial and Operating Data of Blue River
Bancshares, Inc. and Shelby County Bancorp . . . . . 38
Business of Shelby County Bancorp . . . . . . . . . . . . 40
Management of the Company and the Bank . . . . . . . . . 60
Related Party Transactions . . . . . . . . . . . . . . . 67
Principal Shareholders . . . . . . . . . . . . . . . 69
Supervision and Regulation . . . . . . . . . . . . . . . 70
Description of Capital Stock . . . . . . . . . . . . . . 85
Shares Eligible for Future Sale . . . . . . . . . . . . . 91
Underwriting . . . . . . . . . . . . . . . . . . . . . . 91
Legal Matters . . . . . . . . . . . . . . . . . . . . . . 93
Experts . . . . . . . . . . . . . . . . . . . . . . . . . 93
Blue River Bancshares, Inc. and Shelby County Bancorp
Unaudited Pro Forma Combined Financial
Statements . . . . . . . . . . . . . . . . . . . . . 94
Additional Information . . . . . . . . . . . . . . . . . 99
Index to Financial Statements of Blue River
Bancshares, Inc. . . . . . . . . . . . . . . . . . . F-1
Index to Financial Statements of Shelby
County Bancorp . . . . . . . . . . . . . . . . . . . G-1
---------------------
UNTIL _______________, 1998 (25 DAYS AFTER THE EFFECTIVE DATE OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 SHARES
BLUE RIVER BANCSHARES, INC.
(LOGO)
COMMON STOCK
------------
PROSPECTUS
------------
RONEY & CO.
_________________, 1998
-----------------------
-----------------------
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Indiana Business Corporation Law and the Company's Articles of
Incorporation and Bylaws, the Company's officers and directors are entitled
to indemnification against all liability and expense with respect to any civil
or criminal claim, action, suit or proceeding in which they are wholly
successful. If they are not wholly successful and even if they are adjudged
liable or guilty, they are entitled to indemnification if it is determined,
with respect to a civil action, by disinterested directors, a special legal
counsel, or a majority vote of the shares of the Company's voting stock held
by disinterested shareholders, that they acted in good faith in what they
reasonably believed to be the best interests of the Company. With respect to
any criminal action, it must also be determined that they had no reasonable
cause to believe their conduct unlawful.
Under the Indiana Business Corporation Law, a director of the Company
cannot be held liable for actions that do not constitute wilful misconduct or
recklessness. In addition, the Articles of Incorporation of the Company
provide that directors of the Company shall be immune from personal liability
for any action taken as a director, or any failure to take any action, to the
fullest extent permitted by the applicable provisions of the Indiana Business
Corporation Law from time to time in effect and by general principles of
corporate law. In addition, a director of the Company against whom a
shareholders' derivative suit has been filed cannot be held liable if a
committee of disinterested directors of the Company, after a good faith
investigation, determines either that the shareholder has no right or remedy
or that pursuit of that right or remedy will not serve the best interests of
the Company.
At present, there are no claims, actions, suits or proceedings pending
where indemnification would be required under the above, and the Company does
not know of any threatened claims, actions, suits or proceedings which may
result in a request for such indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the Common Stock being registered, other than
underwriting discounts and commissions. All amounts shown are estimates,
except the Commission registration fee and the NASD filing fee, and assume
sale of 1,250,000 shares in the offering.
Commission registration fee .......................... $ 5,089
NASD filing fee .......................................
Printing and mailing expenses .........................
Fees and expenses of counsel ..........................
Accounting and related expenses .......................
Blue Sky fees and expenses (including counsel fees) ...
Underwriter's Expenses* ...............................
Miscellaneous .........................................
--------
Total ......................................... $
========
* If the over-allotment option is exercised by the Underwriter, the
Underwriter will reduce these expenses by $10,000.
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has borrowed funds from Steven R. Abel, Robert C. Reed, and
D. Warren Robison, directors and officers of the Company, to pay expenses of
the Company as disclosed in the Prospectus. To the extent that such
transactions would be deemed to involve the offer or sale of a security, the
registrant would claim exemption including, without limitation, the exemption
provided by Section 4(2) of the Securities Act of 1933, for such transactions.
In addition, the registrant, sold 45,000 shares of its Common Stock to each of
Messrs. Abel and Robison for $.20 per share. The registrant also claims an
exemption for such sale pursuant to Section 4(2).
ITEM 27. EXHIBITS.
Exhibit No. Description
1 *Form of Underwriting Agreement
2 Amended and Restated Agreement of Affiliation and Merger
dated March 12, 1998, among registrant, Shelby County Bancorp
and Shelby County Savings Bank, FSB
3.1 *Amended and Restated Articles of Incorporation of Blue River
Bancshares, Inc.
3.2 *Bylaws of Blue River Bancshares, Inc.
5 Opinion of Krieg DeVault Alexander & Capehart
10.1 *1997 Directors' Stock Option Plan
10.2 *1997 Key Employee Stock Option Plan
10.3 Promissory Notes under which "Borrowings" were incurred
10.4 *Amended and Restated Employment Agreement dated August 11,
1998, between registrant and Robert C. Reed
10.5 Stock Option Agreement dated February 5, 1998, between
registrant and Shelby County Bancorp
10.6 Termination Agreement dated February 5, 1998, among
registrant, Shelby County Savings Bank, FSB and Rodney L.
Meyerholtz
23.1 Consent of Krieg DeVault Alexander & Capehart (included in
Opinion filed as Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of KPMG Peat Marwick LLP
<PAGE>
24 Power of Attorney
27 Financial Data Schedule (EDGAR filing only)
- ------------------
* To be filed by pre-effective amendment.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) The registrant will provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) The registrant will:
(i) For determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective; and
(ii) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Shelbyville, State of Indiana, on March 19, 1998.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
----------------------------
Robert C. Reed, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated on March 19, 1998.
Signatures Title
/s/ ROBERT C. REED President (Chief Executive Officer)
- ------------------------------- and Director
Robert C. Reed
/s/ BRADLEY A. LONG Vice President and Chief Financial
- ------------------------------- Officer (principal financial and
Bradley A. Long accounting officer)
/s/ STEVEN R. ABEL* Director
- -------------------------------
Steven R. Abel
/s/ D. WARREN ROBISON* Director
- -------------------------------
D. Warren Robison
*By: /s/ ROBERT C. REED
---------------------------------
Robert C. Reed, Attorney-in-fact
EXHIBIT 2
AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
THIS AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
("Agreement"), dated as of this 12th day of March, 1998, by and among BLUE
RIVER BANCSHARES, INC. ("Blue River"), SHELBY COUNTY BANCORP ("Shelby County")
and SHELBY COUNTY SAVINGS BANK, FSB ("SCSB"), being parties to a certain
Agreement of Affiliation and Merger dated as of February 5, 1998 (the "Prior
Agreement"), agree to amend and restate the Prior Agreement in its entirety to
read as follows:
W I T N E S S E T H:
--------------------
WHEREAS, Blue River is an Indiana corporation with its principal office
located in Shelbyville, Shelby County, Indiana; and
WHEREAS, Shelby County is an Indiana corporation registered as a savings
and loan holding company under the Home Owners' Loan Act, as amended ("HOLA"),
with its principal office located in Shelbyville, Shelby County, Indiana; and
WHEREAS, SCSB is a federally chartered savings bank and a wholly-owned
subsidiary of Shelby County with its principal office located in Shelbyville,
Shelby County, Indiana; and
WHEREAS, a majority of the Board of Directors of Blue River and a
majority of the Board of Directors of Shelby County have approved this
Agreement, have authorized its execution and delivery, and have designated
this Agreement as a plan of merger.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and mutual obligations herein contained
and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Blue River, Shelby County and SCSB hereby agree
as follows:
SECTION 1
THE MERGER
----------
1.01. General Description. Upon the terms and subject to the
conditions of this Agreement, Shelby County shall be merged into Blue River
("Merger"). Blue River shall survive the Merger ("Surviving Corporation") and
shall continue its corporate existence under the laws of the State of Indiana
and pursuant to the provisions of and with the effect provided in the Indiana
Business Corporation Law, as amended. Upon consummation of the Merger, SCSB
shall be a wholly-owned subsidiary of Blue River.
1.02 Name and Offices. The name of the Surviving Corporation shall
be "Blue River Bancshares, Inc." Its principal office shall be located at 29
East Washington Street, Shelbyville, Indiana 46176.
<PAGE>
1.03 Directors and Officers. (a) Surviving Corporation. The Board
of Directors of the Surviving Corporation, until such time as their respective
successors have been elected and have qualified, shall consist of the
directors of Blue River serving immediately prior to the Effective Time (as
hereinafter defined). The officers of the Surviving Corporation shall consist
of the officers of Blue River serving immediately prior to the Effective Time
until the Board of Directors of the Surviving Corporation shall elect new or
successor officers.
(b) SCSB. The Board of Directors of SCSB following the Effective
Time, until such time as their respective successors have been elected and
qualified, shall consist of those persons who are serving as directors of Blue
River immediately prior to the Effective Time. The officers of SCSB serving
immediately prior to the Effective Time shall be the officers of SCSB
following the Effective Time until the Board of Directors of SCSB shall elect
new or successor officers. In addition, as of the Effective Time, Rodney L.
Meyerholtz shall resign as President and Chief Executive Office of SCSB, and
Robert C. Reed shall be elected as the President and Chief Executive Officer
of SCSB and shall serve in such positions until such time as his successor has
been duly elected and qualified.
(c) Term of Office. All directors and officers of the Surviving
Corporation and SCSB shall serve for a term and otherwise be subject to the
qualification and other requirements for directors and officers of the
Surviving Corporation and SCSB, respectively, as set forth in their respective
Articles of Incorporation, Charter or By-Laws in effect from time to time.
1.04 Capital Structure. The capital of the Surviving Corporation
shall not be less than the capital of Blue River immediately prior to the
Effective Time. The issued and outstanding shares of common stock of Blue
River immediately prior to the Effective Time shall remain issued and
outstanding following the Effective Time.
1.05 Articles of Incorporation; Charter and By-Laws. The Articles of
Incorporation and By-Laws of Blue River in existence at the Effective Time
shall be the Articles of Incorporation and By-Laws of the Surviving
Corporation following the Effective Time until such Articles of Incorporation
and By-Laws shall be amended as provided by applicable law. The Charter and
By-Laws of SCSB in existence at the Effective Time shall be the Charter and
By-Laws of SCSB following the Effective Time until such time as such Charter
and By-Laws shall be amended as provided by applicable law.
1.06 Effect of Merger. The effect of the Merger upon consummation
thereof shall be as set forth in Indiana Code Section 23-1-40-6, as amended.
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SECTION 2
MANNER AND BASIS
OF CONVERSION OF STOCK
----------------------
2.01. Conversion of Shelby County Common Stock. Upon and by virtue
of the Merger becoming effective at the Effective Time, each issued and
outstanding share of Shelby County Common Stock shall be converted into the
right to receive a cash amount equal to Fifty-Eight Dollars ($58.00)
("Conversion Price").
2.02. Distribution of Cash. (a) Promptly but not more than fifteen
(15) days following the Effective Time, the conversion agent designated by
Blue River with the prior approval of Shelby County which approval shall not
be unreasonably withheld ("Conversion Agent") shall mail to each Shelby County
shareholder a letter of transmittal providing instructions as to the
transmittal to Blue River of certificates formerly representing shares of
Shelby County Common Stock and the payment of cash in exchange therefor
pursuant to the terms of this Agreement.
(b) Following the Effective Time, the Conversion Agent, on behalf of
Blue River, shall distribute the cash payment, without interest, required by
Section 2.01 hereof to each holder of Shelby County Common Stock of record at
the Effective Time within twenty (20) business days following receipt by the
Conversion Agent of the shareholder's certificate(s) formerly representing
such shareholder's shares of Shelby County Common Stock together with a
properly completed and executed letter of transmittal, all in form and
substance reasonably satisfactory to the Surviving Corporation.
(c) Following the Effective Time, stock certificates formerly
representing Shelby County Common Stock held by shareholders of Shelby County
shall be deemed to evidence only the right to receive cash, without interest
thereon, pursuant to Section 2.01 hereof.
(d) Blue River shall be entitled to rely upon the stock transfer
books and records of Shelby County to establish the persons entitled to
receive the cash payment pursuant to this Agreement, which books, in the
absence of actual knowledge by Blue River of any adverse claim thereto, shall
be conclusive with respect to the ownership of shares of Shelby County Common
Stock.
(e) With respect to any certificate for shares of Shelby County
Common Stock which has been lost, stolen or destroyed, Blue River shall be
authorized to pay the cash amount required by Section 2.01 hereof to the
registered owner of such certificate upon Blue River's receipt of an agreement
to indemnify Blue River against loss from such lost, stolen or destroyed
certificate, an affidavit of lost, stolen or destroyed stock certificate and,
if necessary in Blue River's reasonable discretion, a bond, all in form and
substance reasonably satisfactory to Blue River, and upon compliance by the
shareholder of Shelby County with all other reasonable requirements of Blue
River in connection with lost, stolen or destroyed stock certificates.
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SECTION 3
DISSENTING SHAREHOLDERS
-----------------------
Shareholders of Shelby County who properly exercise and perfect statutory
dissenters' rights shall have the rights accorded to dissenting shareholders
under Chapter 23-1-44 of the Indiana Code, as amended.
SECTION 4
REPRESENTATIONS AND WARRANTIES
------------------------------
OF SHELBY COUNTY AND SCSB
-------------------------
Each of Shelby County and SCSB hereby represents and warrants to Blue
River with respect to itself, the other, The Shelby Group, Inc. ("Shelby
Group") and First Tier One Corporation ("First Tier") as follows as of
February 5, 1998:
4.01. Organization and Authority. (a) Shelby County is a corporation
duly organized and validly existing under the laws of the State of Indiana and
is a savings and loan holding company under the HOLA. Shelby County has full
power and authority (corporate and otherwise) to own and lease its properties
as presently owned and leased and to conduct its business in the manner and by
the means utilized as of the date hereof. Shelby County has no direct
subsidiaries and owns directly no voting stock or equity securities of any
corporation, partnership, association or other entity, other than all of the
issued and outstanding common stock of SCSB. The Shelby County Common Stock
is the only class of Shelby County stock and is registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended ("1934 Act").
(b) SCSB is a federally chartered savings bank duly organized and
validly existing under the laws of the United States of America. SCSB has
full power and authority (corporate and otherwise) to own and lease its
properties as presently owned and leased and to conduct its business in the
manner and by the means utilized as of the date hereof. Except for shares of
common stock of the Federal Home Loan Bank of Indianapolis, Shelby Group and
First Tier and except as provided in the Disclosure Schedule, SCSB has no
subsidiaries and owns no voting stock or equity securities of, or any interest
in, any corporation, partnership, association or other entity. SCSB is
subject to primary federal regulatory supervision and examination by the
Office of Thrift Supervision ("OTS").
(c) Shelby Group is an Indiana corporation duly organized and validly
existing under the laws of the State of Indiana. Shelby Group has full power
and authority (corporate and otherwise) to own and lease its properties as
presently owned and leased and to conduct its business in the manner and by
the means utilized as of the date hereof. SCSB owns all of the issued and
outstanding shares of capital stock of Shelby Group. Shelby Group has no
subsidiaries and owns no voting stock or equity securities of or any interest
in, any corporation, partnership, association or other entity.
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(d) First Tier is an Indiana corporation duly organized and validly
existing under the laws of the State of Indiana. First Tier has full power
and authority (corporate and otherwise) to own and lease its properties as
presently owned and leased and to conduct its business in the manner and by
the means utilized as of the date hereof. SCSB owns all of the issued and
outstanding shares of capital stock of First Tier. First Tier has no
subsidiaries and owns no voting stock or equity securities of or any interest
in, any corporation, partnership, association or other entity. Shelby Group
and First Tier are sometimes hereinafter referred to collectively as the
"Subsidiaries."
4.02. Authorization. (a) Each of Shelby County and SCSB has the
requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder, subject to the fulfillment of the
conditions precedent set forth in Section 8.02 hereof. This Agreement and its
execution and delivery by Shelby County and SCSB have been duly authorized and
approved by the Board of Directors of Shelby County and SCSB, respectively.
This Agreement constitutes a valid and binding obligation of Shelby County and
SCSB and is enforceable in accordance with its terms, except to the extent
limited by general principles of equity and public policy and by bankruptcy,
insolvency, fraudulent transfer, reorganization, liquidation, moratorium,
readjustment of debt or other laws of general application relating to or
affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement nor consummation of the
Merger (i) conflicts with or violates Shelby County's Articles of
Incorporation or By-Laws or SCSB's Charter or By-Laws; (ii) conflicts with or
violates any local, state, federal or foreign law, statute, ordinance, rule or
regulation (provided that the approvals of or filings with applicable
government regulatory agencies or authorities required for consummation of the
Merger are obtained) or any court or administrative judgment, order,
injunction, writ or decree; (iii) conflicts with, results in a breach of or
constitutes a default under any note, bond, indenture, mortgage, deed of
trust, license, lease, contract, agreement, arrangement, commitment or other
instrument to which Shelby County, SCSB or either of the Subsidiaries is a
party or by which SCSB, Shelby County or either of the Subsidiaries is
subject or bound and which is material to Shelby County or SCSB, whether
individually or on a consolidated basis, or Shelby Group or First Tier on a
consolidated basis with Shelby County; (iv) results in the creation of or
gives any person, corporation or entity the right to create any material lien,
charge, claim, encumbrance or security interest, or results in the creation of
any other material rights or claims of any other party or any other material
adverse interest, upon any right, property or asset of Shelby County, SCSB or
either of the Subsidiaries; or (v) terminates or gives any person, corporation
or entity the right to terminate, accelerate, amend, modify or refuse to
perform under any note, bond, indenture, mortgage, deed of trust, license,
lease, contract, agreement, arrangement, commitment or other instrument to
which Shelby County, SCSB or either of the Subsidiaries is bound or with
respect to which Shelby County, SCSB or either of the Subsidiaries is to
perform any duties or obligations or receive any rights or benefits.
(c) Other than in connection or in compliance with the provisions of
the applicable federal and state banking, thrift, securities and corporation
statutes, all as amended, and the rules and regulations promulgated
thereunder, no notice to, filing with, exemption by or consent, authorization
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or approval of any governmental agency or body is necessary for the
consummation of the Merger by Shelby County and SCSB, respectively.
4.03. Capitalization. (a) The authorized capital stock of Shelby
County consists, and at the Effective Time will consist, of (i) 5,000,000
shares of common stock, no par value per share, 175,950 of which shares are
validly issued and outstanding, which number of issued and outstanding shares
of Shelby County Common Stock is subject to increase to a total of 189,750
shares pursuant to the exercise of options (collectively, the "Stock Options")
granted under the Shelby County Bancorp Stock Option Plan ("Stock Option
Plan") to purchase an aggregate of 13,800 shares of Shelby County Common Stock
(the shares of common stock outstanding on the date of this Agreement and the
shares of common stock to be issued pursuant to the exercise of the Stock
Options are referred to in this Agreement as the "Shelby County Common Stock")
and (ii) 2,000,000 shares of "blank check" preferred stock, none of which
shares are issued or outstanding. The shares of Shelby County Common Stock
presently issued and outstanding have been (and with respect to the shares of
common stock of Shelby County to be issued upon exercise of the Stock Options
shall be) duly and validly authorized by all necessary corporate action of
Shelby County, are (and with respect to the shares of common stock of Shelby
County to be issued upon exercise of the Stock Options shall be) validly
issued, fully paid and nonassessable and have not been (and with respect to
the shares of common stock of Shelby County to be issued upon exercise of the
Stock Options shall not be) issued in violation of any pre-emptive rights of
any present or former Shelby County shareholders. Shelby County has no
capital stock authorized, issued or outstanding other than as described in
this Section 4.03(a) and has no intention or obligation to authorize or issue
any other capital stock, or any additional shares of Shelby County Common
Stock, except for 13,800 shares of Shelby County Common Stock pursuant to the
exercise of the Stock Options. As of September 30, 1997, Shelby County had
total shareholders' equity of $7,171,322, which consisted of common stock of
$1,358,123, retained earnings of $5,187,531, and unrealized appreciation on
investment securities available for sale of $625,668. A description of the
terms, relative rights, preferences and limitations of the Shelby County
Common Stock is contained in the Articles of Incorporation of Shelby County, a
copy of which is set forth in the Disclosure Schedule pursuant to Section 4.04
hereof (for purposes of this Agreement, "Disclosure Schedule" shall mean the
schedules referencing the applicable provisions of this Section 4 which are
signed by the Chairman and the President of Shelby County and SCSB solely in
their respective officer capacities and are attached hereto and made a part of
this Agreement).
(b) The authorized capital stock of SCSB consists, and at the
Effective Time will consist, of 1,000 shares of common stock, $.01 par value
per share, all of which shares are validly outstanding and issued to Shelby
County (such issued and outstanding shares of common stock are referred to in
this Agreement as the "SCSB Common Stock"). Such issued and outstanding
shares of SCSB Common Stock have been duly and validly authorized by all
necessary corporate action of SCSB, are validly issued, fully paid and
non-assessable and have not been issued in violation of any pre-emptive rights
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of any present or former SCSB shareholders. All of the issued and outstanding
shares of SCSB Common Stock are owned by Shelby County free and clear of all
liens, pledges, charges, claims, encumbrances, restrictions, security
interests, options and pre-emptive rights and of all other rights or claims of
any other person, corporation or entity with respect thereto. SCSB has no
capital stock authorized, issued or outstanding other than as described in
this Section 4.03(b) and has no intention or obligation to authorize or issue
any other capital stock or any additional shares of SCSB Common Stock. As of
September 30, 1997, SCSB had total assets of $89,544,152, total liabilities of
$83,325,632 and total capital of $6,218,520, which capital consisted of common
stock of $10, capital surplus of $1,154,295, undivided profits of $4,438,547,
and unrealized appreciation on investment securities available for sale of
$625,668.
(c) The authorized capital stock of Shelby Group consists, and at the
Effective Time will consist, of 1,000 shares of common stock, no par value per
share, 1,000 of which shares are outstanding and validly issued to SCSB (such
issued and outstanding shares of common stock are referred to in this
Agreement as the "Shelby Group Common Stock"). The shares of Shelby Group
Common Stock have been duly and validly authorized by all necessary corporate
action of Shelby Group, are validly issued, fully paid and non-assessable and
have not been issued in violation of any pre-emptive rights of any present or
former shareholders of Shelby Group. All of the shares of Shelby Group Common
Stock are owned by SCSB free and clear of all liens, pledges, charges, claims,
encumbrances, restrictions, security interests, options and pre-emptive rights
and of all other rights or claims of any other person, corporation or entity
with respect thereto. Shelby Group has no capital stock authorized, issued or
outstanding other than as described in this Section 4.03(c) and has no
intention or obligation to authorize or issue any other capital stock or any
additional shares of Shelby Group Common Stock. As of September 30, 1997,
Shelby Group had total assets of $10,001, total liabilities of $-0- and total
capital of $10,001, which capital consisted of common stock of $100,000,
capital surplus of $-0-, and undivided profits of ($89,999).
(d) The authorized capital stock of First Tier consists, and at the
Effective Time will consist, of 1,000 shares of common stock, no par value per
share, 1,000 of which shares are outstanding and validly issued to Shelby
County (such issued and outstanding shares of common stock are referred to in
this Agreement as the "First Tier Common Stock"). The shares of First Tier
Common Stock have been duly and validly authorized by all necessary corporate
action of First Tier, are validly issued, fully paid and non-assessable and
have not been issued in violation of any pre-emptive rights of any present or
former shareholders of First Tier. All of the shares of First Tier Common
Stock are owned by Shelby County free and clear of all liens, pledges,
charges, claims, encumbrances, restrictions, security interests, options and
pre-emptive rights and of all other rights or claims of any other person,
corporation or entity with respect thereto. First Tier has no capital stock
authorized, issued or outstanding other than as described in this Section
4.03(d) and has no intention or obligation to authorize or issue any other
capital stock or any additional shares of First Tier Common Stock. As of
September 30, 1997, First Tier had total assets of $63,384, total liabilities
of $35 and total capital of $63,349, which capital consisted of common stock
of $15,000, capital surplus of $-0-, and undivided profits of $48,349.
(e) Except for options to purchase 13,800 shares of Shelby County
Common Stock under the Stock Option Plan, there are no options, warrants,
commitments, calls, puts, agreements, understandings, arrangements or
subscription rights relating to any capital stock, or any securities
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convertible into or representing the right to purchase or otherwise acquire
any capital stock or debt securities of Shelby County by which Shelby County
is or may become bound. Shelby County does not have any contractual or other
obligation to repurchase, redeem or otherwise acquire any of its issued and
outstanding shares of Shelby County Common Stock. Set forth in the Disclosure
Schedule is a true, accurate and complete (i) copy of an incentive stock
option agreement and a non-qualified stock option agreement that are identical
in all material respects to the presently outstanding stock option agreements
(except as to the number of shares subject to the option, the purchase price
per share and the duration of the option), (ii) copy of the Stock Option Plan
and (iii) a list of all optionees, including the number of shares subject to
each Stock Option.
(f) There are no options, warrants, commitments, calls, puts,
agreements, understandings, arrangements or subscription rights relating to
the capital stock, or any securities convertible into or representing the
right to purchase or otherwise acquire the capital stock or any debt
securities, of the Subsidiaries by which either of the Subsidiaries are or may
become bound. The Subsidiaries do not have any contractual or other
obligation to repurchase, redeem or otherwise acquire any of their respective
outstanding shares of capital stock.
(g) Except as set forth in the Disclosure Schedule, Shelby County has
no knowledge of any person who beneficially owns 5% or more of the issued and
outstanding shares of Shelby County Common Stock.
4.04. Organizational Documents. The Articles of Incorporation and
By-Laws of Shelby County, Shelby Group and First Tier and the Charter and
By-Laws of SCSB, representing true, accurate and complete copies of such
corporate documents of Shelby County, SCSB, Shelby Group and First Tier,
respectively, in effect as of the date of this Agreement, have been delivered
to Blue River and are included in the Disclosure Schedule.
4.05. Compliance with Law. (a) Neither Shelby County, SCSB nor
either of the Subsidiaries has engaged in any activity or has taken or omitted
to take any action which has resulted in the violation of any local, state,
federal or foreign law, statute, regulation, rule, ordinance, order,
restriction or requirement nor is it in violation of any order, injunction,
judgment, writ or decree of any court or government agency or body, the
violation of which could have a material adverse effect on the financial
condition, results of operations, business, assets or capital of Shelby County
and SCSB, whether individually or on a consolidated basis, or Shelby Group or
First Tier on a consolidated basis with Shelby County. Shelby County, SCSB
and each of the Subsidiaries possess and hold all licenses, franchises,
permits, certificates and other authorizations necessary for the continued
conduct of their respective businesses without interference or interruption,
and such licenses, franchises, permits, certificates and authorizations held
by Shelby County are transferable to the Surviving Corporation at the
Effective Time without any restrictions or limitations thereon or the need to
obtain any consents of government agencies or other third parties other than
as set forth in this Agreement.
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(b) All agreements, understandings and commitments with, and all
orders and directives of, all government regulatory agencies or authorities
with respect to the financial condition, results of operations, business,
assets or capital of Shelby County, SCSB or either of the Subsidiaries which
presently are binding upon or require action by, or at any time during the
last five (5) years have been binding upon or have required action by, Shelby
County, SCSB or either of the Subsidiaries, including, without limitation, all
correspondence, communications and commitments related thereto, are set forth
in the Disclosure Schedule. There are no uncured violations, or violations
with respect to which refunds or restitutions may be required, cited in any
examination report provided to Shelby County, SCSB or either of the
Subsidiaries as a result of an examination by any regulatory agency or body or
set forth in any accountant's, auditor's or other report to Shelby County,
SCSB or either of the Subsidiaries.
(c) All of the existing offices and branches of SCSB have been
legally authorized and established in accordance with all applicable federal,
state and local laws, statutes, rules, regulations, ordinances, orders,
restrictions and requirements. SCSB does not have any approved but unopened
offices or branches.
(d) Shelby County and SCSB and their respective properties (including
those held by either of them in a fiduciary capacity) are in compliance in all
material respects with all applicable provisions of the Americans With
Disabilities Act ("ADA"), and no action under the ADA against Shelby County,
SCSB or any of their respective properties has been initiated or, to Shelby
County's and SCSB's best knowledge, threatened. Neither Shelby County nor
SCSB are required to comply with the Family and Medical Leave Act.
4.06. Accuracy of Statements Made and Materials Provided to Blue
River. (a) No representation, warranty or other statement made, or any
information provided, by Shelby County, SCSB or either of the Subsidiaries in
this Agreement or in the Disclosure Schedule (and any update thereto) and no
written report, statement, list, materials or other written information which
has previously been or which shall be provided subsequent to the date hereof
by Shelby County, SCSB or either of the Subsidiaries or any of their
attorneys, accountants or agents to Blue River or any of its attorneys,
accountants or agents in connection with this Agreement, the Merger, Blue
River's due diligence investigation or confidential review of Shelby County,
SCSB and the Subsidiaries or otherwise, including, without limitation, any
written information with respect to Shelby County's, SCSB's and the
Subsidiaries' business, capital, assets, financial condition, results of
operations, and directors and officers for inclusion in the Registration
Statement (as defined in Section 7.02 hereof), the Prospectus (as defined in
Section 7.02 hereof) and the Proxy Statement (as defined in Section 6.01
hereof), contains or shall contain (with respect to information relating to
the Registration Statement at the time it is declared effective, with respect
to information relating to the Prospectus at the time it is first delivered to
prospective investors and with respect to information relating to the Proxy
Statement at the time it is mailed to Shelby County shareholders) any untrue
or misleading statement of material fact or omits or shall omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not false or misleading.
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(b) All materials or information provided by Shelby County, SCSB or
either of the Subsidiaries to Blue River for use by Blue River in any filing
with any state or federal bank or thrift regulatory agency or authority shall
not, at the time such filings are made, contain any untrue or misleading
statement of material fact or shall omit to state a material fact necessary to
make the statements contained therein, in light of the circumstances in which
they are made, not false or misleading.
4.07. Litigation and Pending Proceedings. (a) Except as set forth in
the Disclosure Schedule, there are no claims, actions, suits, proceedings,
arbitrations, mediations or investigations pending or, to the best knowledge
of Shelby County, SCSB and the Subsidiaries after due inquiry, threatened in
any court or before any government agency or authority, arbitration panel,
mediator or otherwise (nor does Shelby County, SCSB or either of the
Subsidiaries have any knowledge of a basis for any claim, action, suit,
proceeding, litigation, arbitration, mediation or investigation) against, by
or affecting Shelby County, SCSB or either of the Subsidiaries which could
have a material adverse effect on the financial condition, results of
operations, business, assets or capital of Shelby County or SCSB, whether
individually or on a consolidated basis, or Shelby Group or First Tier on a
consolidated basis with Shelby County, or which would prevent the performance
of this Agreement, declare the same unlawful or cause the rescission hereof.
(b) Neither Shelby County, SCSB nor either of the Subsidiaries is (i)
subject to any outstanding judgment, order, writ, injunction or decree of any
court, arbitration panel or governmental agency or authority, (ii) presently
charged with or under governmental investigation with respect to any actual or
alleged violations of any law, statute, rule, regulation or ordinance, or
(iii) the subject of any pending or, to the best knowledge of Shelby County,
SCSB and the Subsidiaries, threatened proceeding by any government regulatory
agency or authority having jurisdiction over their respective businesses,
properties or operations.
4.08. Financial Statements and Reports. Shelby County previously has
delivered to Blue River copies of the following financial statements and
reports, including the notes thereto, of Shelby County, SCSB and the
Subsidiaries (collectively, the "Shelby County Financial Statements"):
(a) Consolidated statements of financial condition as of September
30, 1996 and 1997 and the related statements of earnings and statements of
changes in shareholders' equity of Shelby County as of and for the fiscal
years ended September 30, 1995, 1996 and 1997; and
(b) Consolidated statements of cash flows of Shelby County for the
fiscal years ended September 30, 1995, 1996 and 1997.
The Shelby County Financial Statements are true, accurate and complete in
all material respects and present fairly the consolidated financial positions
of Shelby County, SCSB and the Subsidiaries as of and at the dates shown and
the consolidated results of operations for the periods covered thereby. The
Shelby County Financial Statements described in clauses (a) and (b) above have
been audited by KPMG Peat Marwick and have been prepared in conformance with
generally
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accepted accounting principles applied on a consistent basis. The Shelby
County Financial Statements do not include any assets, liabilities or
obligations or omit to state any assets, liabilities or obligations, absolute
or contingent, or any other facts, which inclusion or omission would render
any of the Shelby County Financial Statements false, misleading or inaccurate
in any material respect as of the respective dates thereof.
4.09. Properties, Contracts, Employees and Other Agreements. (a)
Set forth in the Disclosure Schedule is a true, accurate and complete copy
and, when applicable, a list or description of the following:
(i) A brief description and the location of all real property owned
by Shelby County, SCSB and each of the Subsidiaries and the
principal buildings and structures located thereon, together with
a legal description of such real property, and each lease of real
property to which Shelby County, SCSB or either of the
Subsidiaries is a party (excluding any exhibits thereto which are
not material), identifying the parties thereto, the annual rental
payable, the expiration date of the lease and a brief description
of the property covered;
(ii) All loan or credit agreements and promissory notes relating to
money borrowed by Shelby County, SCSB and the Subsidiaries, all
land, conditional sales or installment sales contracts or other
title retention agreements and all agreements for the purchase of
federal funds to which Shelby County, SCSB or either of the
Subsidiaries is a party;
(iii) All agreements, contracts, leases, licenses, lines of credit,
understandings, commitments or obligations of Shelby County, SCSB
or either of the Subsidiaries which individually or in the
aggregate:
(A) involve payment or receipt by Shelby County, SCSB or
either of the Subsidiaries (other than as disbursements
of loan proceeds to customers or loan payments by
customers) of more than $10,000 during any twelve (12)
month period;
(B) involve payments based on profits of Shelby County,
SCSB or either of the Subsidiaries;
(C) relate to the purchase of goods, products, supplies or
services in excess of $5,000;
(D) were not made in the ordinary course of business; or
(E) may not be terminated without penalty within one (1)
year from the date of this Agreement; and
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(iv) The name and current annual salary of each director, officer and
employee of Shelby County, SCSB or either of the Subsidiaries
whose current annual salary and bonus or incentive compensation
from Shelby County, SCSB or either of the Subsidiaries is in
excess of $25,000, and the profit sharing and other form of
compensation (other than salary) paid or payable by Shelby
County, SCSB or either of the Subsidiaries to or for the benefit
of each such person for the fiscal years ended September 30, 1996
and 1997.
(b) SCSB has, prior to the date of this Agreement, provided or given
access to Blue River to the files and documentation of all of its borrowers,
or persons or entities that are or may become obligated to SCSB under a letter
of credit, line of credit, loan transaction, loan agreement, promissory note
or other commitment of SCSB, in excess of $10,000 individually or in the
aggregate, whether in principal, interest or otherwise, and including all
guarantors of such indebtedness.
(c) To the best knowledge of Shelby County, SCSB and the
Subsidiaries, each of the agreements, contracts, commitments, leases,
instruments and documents set forth in the Disclosure Schedule relating to
this Section 4.09 is valid and enforceable in accordance with its terms.
Shelby County, SCSB and the Subsidiaries are and, to their best knowledge, all
other parties thereto are in compliance with the provisions thereof, and
Shelby County, SCSB and the Subsidiaries are not and, to their best knowledge,
no other party thereto is in default in the performance, observance or
fulfillment of any material obligation, covenant or provision contained
therein. None of the foregoing requires the consent of any party to its
assignment in connection with the Merger.
4.10. Absence of Undisclosed Liabilities. Except as provided in the
Shelby County Financial Statements, except for accounts payable incurred and
unfunded loan commitments made to customers in the ordinary course of
business, except for additional borrowings from the Federal Home Loan Bank of
Indianapolis not to exceed $22.5 Million incurred in the ordinary course of
business between the date hereof and the Effective Time, neither Shelby
County, SCSB nor either of the Subsidiaries has any obligation, agreement,
contract, commitment, liability, lease or license which exceeds $5,000
individually or in the aggregate, or any obligation, agreement, contract,
commitment, liability, lease or license made outside of the ordinary course of
business.
4.11. Title to and Condition of Assets. (a) Shelby County, SCSB or
either of the Subsidiaries, as the case may be, has good and marketable title
in fee simple absolute to all real property (including, without limitation,
all real property used as bank premises and all other real estate owned) which
is reflected in the Shelby County Financial Statements as of September 30,
1997; good and marketable title to all personal property reflected in the
Shelby County Financial Statements as of September 30, 1997, other than
personal property disposed of in the ordinary course of business since
September 30, 1997; good and marketable title to or right to use by valid and
enforceable lease or contract all other properties and assets (whether real or
personal, tangible or intangible) which Shelby County, SCSB or either of the
Subsidiaries purports to own or which Shelby County, SCSB or either of the
Subsidiaries uses in their respective businesses; and good and
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marketable title to, or right to use by the terms of a valid and enforceable
lease or commitment all other property and assets acquired and not disposed of
or leased, as the case may be, since September 30, 1997. All of such
properties and assets owned by Shelby County, SCSB and the Subsidiaries are
owned free and clear of all land or conditional sales contracts, mortgages,
encumbrances, liens, pledges, restrictions, security interests, charges,
claims or rights of third parties of any nature except (i) as set forth in the
Disclosure Schedule; (ii) as specifically noted in reasonable detail in the
Shelby County Financial Statements; (iii) statutory liens for taxes not yet
delinquent or being contested in good faith by appropriate proceedings; (iv)
pledges or liens required to be granted in connection with the acceptance of
government deposits or granted in connection with repurchase or reverse
repurchase agreements; and (v) easements, encumbrances and liens of record,
minor imperfections of title, building or use restrictions, variations and
other limitations which are not substantial in amounts, do not materially
detract from the value or materially interfere with the present or
contemplated use of any of the properties subject thereto or otherwise
materially impair the use thereof for the purposes for which they are held or
used. All real property owned or leased by Shelby County, SCSB and the
Subsidiaries is in material compliance with all applicable zoning and land use
laws.
(b) To the best of their respective knowledge, Shelby County, SCSB
and each of the Subsidiaries have conducted their respective businesses in
compliance with all federal, state, county and municipal laws, statutes,
regulations, rules, ordinances, orders, directives, restrictions and
requirements relating to, without limitation, responsible property transfer,
underground storage tanks, petroleum products, air pollutants, water
pollutants, storm water or process waste water or otherwise relating to the
environment or toxic or hazardous substances or to the manufacturing,
recycling, handling, processing, distribution, use, generation, treatment,
storage, disposal or transport of any hazardous or toxic substances or
petroleum products (including polychlorinated biphenyls, whether contained or
uncontained, and asbestos-containing materials, whether friable or not),
including, without limitation, the Federal Solid Waste Disposal Act, the
Hazardous and Solid Waste Amendments, the Federal Clean Air Act, the Federal
Clean Water Act, the Occupational Health and Safety Act, the Federal Resource
Conservation and Recovery Act, the Toxic Substances Control Act, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
and the Superfund Amendments and Reauthorization Act of 1986, all as amended,
and all regulations of the Environmental Protection Agency, the Nuclear
Regulatory Agency, the Army Corp of Engineers, the Department of Interior, the
United States Fish and Wildlife Service and any state department of natural
resources or state environmental protection agency now or at any time
hereafter in effect (collectively, "Environmental Laws"). There are no
pending or, to the best knowledge of Shelby County, SCSB and the Subsidiaries
threatened claims, actions or proceedings by any local municipality, sewage
district or other federal, state or local governmental agency or authority or
any other party against Shelby County, SCSB or either of the Subsidiaries with
respect to any of the Environmental Laws and, except as set forth in the
Disclosure Schedule, to the best of Shelby County's, SCSB's and the
Subsidiaries' knowledge, there is no basis or grounds for any such claim,
action or proceeding. Except as set forth in the Disclosure Schedule, to the
best of Shelby County's, SCSB's and the Subsidiaries' knowledge, no
environmental clearances or other governmental environmental approvals are
required for the conduct of Shelby County's, SCSB's or
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either of the Subsidiaries' business or consummation of the Merger. Except as
set forth in the Disclosure Schedule, to the best of Shelby County's, SCSB's
and the Subsidiaries' knowledge, neither Shelby County, SCSB nor either of the
Subsidiaries is the owner, and has not been in the chain of title or the
operator or lessee, of any property on which any substances have been used,
stored, deposited, treated, recycled or disposed of, which substances if known
to be present on, at or under such property would require clean-up, removal or
any other remedial action under any of the Environmental Laws.
(c) Neither Shelby County, SCSB nor either of the Subsidiaries (i) is
in default in any respect under any agreements pursuant to which it leases
real or personal property, (ii) has knowledge of any default under such
agreements by any party thereto and (iii) has knowledge of any event which,
with notice or lapse of time or both, would constitute a default or a breach
thereof.
4.12. Loans and Investments. (a) Except as set forth in the
Disclosure Schedule, SCSB has no loan in excess of $5,000 that has been
classified by regulatory examiners or management of SCSB as "Substandard,"
"Doubtful" or "Loss" or in excess of $5,000 that has been identified by
accountants or auditors (internal or external) as having a significant risk of
uncollectability. The most recent loan watch list of SCSB and a list of all
loans in excess of $5,000 that SCSB has determined to be ninety (90) days or
more past due with respect to principal or interest payments or has placed on
nonaccrual status are set forth in the Disclosure Schedule.
(b) All loans reflected in the Shelby County Financial Statements as
of September 30, 1997 and which have been made, extended, renewed,
restructured, approved, amended or acquired since September 30, 1997 (i) have
been made for good, valuable and adequate consideration in the ordinary course
of business; (ii) to the best of SCSB's knowledge, constitute the legal, valid
and binding obligation of the obligor and any guarantor named therein, except
to the extent limited by general principles of equity and public policy or by
bankruptcy, insolvency, fraudulent transfer, reorganization, liquidation,
moratorium, readjustment of debt or other laws of general application relative
to or affecting the enforcement of creditors' rights; (iii) are evidenced by
notes, instruments or other evidences of indebtedness which are true, genuine
and what they purport to be; and (iv) are secured, to the extent that SCSB has
a security interest in collateral or a mortgage securing such loans, by
perfected security interests or recorded mortgages naming SCSB as the secured
party or mortgagee.
(c) The reserves, the allowance for possible loan and lease losses
and the carrying value for real estate owned which are shown on the Shelby
County Financial Statements are adequate in all respects under the
requirements of generally accepted accounting principles applied on a
consistent basis to provide for possible losses on items for which reserves
were made, on loans and leases outstanding and real estate owned as of the
respective dates. To the best knowledge of SCSB, the aggregate loan balances
outstanding as of September 30, 1997, in excess of the reserve for loan losses
as of such date, are collectible in accordance with their respective terms.
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(d) Shelby County and SCSB have complied in all material respects
with all laws, statutes, rules, regulations and other legal requirements
relating to its loans such that any failure to so comply will not interfere
with the collection of any loan or provide to any borrower any right, claim or
action against Shelby County or SCSB. Except as set forth in the Disclosure
Schedule, to the best of Shelby County's and SCSB's knowledge, no property in
which SCSB has an interest as collateral to secure a loan or that is held as
an asset of any trust violates any of the Environmental Laws or obligates
Shelby County or SCSB, or the owner or operator of such property, to remediate,
treat or otherwise alter the environmental condition of such property.
(e) None of the investments reflected in the Shelby County Financial
Statements as of and for the year ended September 30, 1997 and none of the
investments made by Shelby County, SCSB or either of the Subsidiaries since
September 30, 1997 are subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Shelby County, SCSB or
either of the Subsidiaries to dispose freely of such investment at any time.
Neither Shelby County, SCSB nor either of the Subsidiaries is a party to any
repurchase agreements with respect to securities. All investment securities
and other investments of SCSB are carried on its books in accordance with
generally accepted accounting principals applied on a consistent basis.
(f) Set forth in the Disclosure Schedule is a true, accurate and
complete list of all loans in which SCSB has any participation interest or
which have been made with or through another financial institution on a
recourse basis against SCSB.
(g) The aggregate amount of SCSB's indebtedness to the Federal Home
Loan Bank of Indianapolis does not exceed $22.5 Million.
4.13. Anti-takeover Provisions. Neither Shelby County, SCSB nor
either of the Subsidiaries has a shareholder rights plan or any other plan,
program, agreement or arrangement involving, restricting, prohibiting or
discouraging a change in control, merger or other combination of Shelby
County, SCSB or either of the Subsidiaries or which may be considered an
anti-takeover mechanism, except for (i) the Rights Plan Agreement, dated April
17, 1995 ("Rights Agreement"), between Shelby County and Bank One,
Indianapolis, NA, as Rights Agent, (ii) the provisions in the Articles of
Incorporation and By-Laws of Shelby County, (iii) the Stock Option Plan, (iv)
the Employment Agreements (as hereinafter defined), and (v) the employment
agreement between Rodney L. Meyerholtz and SCSB dated October 17, 1991
("Meyerholtz Agreement").
4.14. Employee Benefit Plans. (a) With respect to the employee
benefit plans, as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether written or oral, sponsored
or otherwise maintained by Shelby County or SCSB; in which Shelby County, SCSB
or either of the Subsidiaries participates as a participating employer; to
which Shelby County, SCSB or either of the Subsidiaries contributes; with
respect to which Shelby County, SCSB or either of the Subsidiaries acts as
administrator, trustee or fiduciary, whether written or oral; and including
any such plans which have been terminated, merged into another plan, frozen or
discontinued (collectively, the "Shelby County Plans"): (i) all such Shelby
County Plans have, on
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a continuous basis since their adoption, been maintained in compliance in all
materials respects with the requirements prescribed by all applicable
statutes, orders and governmental rules or regulations, including, without
limitation, ERISA, the Code, and the Department of Labor ("Department") and
the Treasury Regulations promulgated thereunder; (ii) all Shelby County Plans
intended to constitute tax-qualified plans under the Code have complied, in
form and in operation, since their adoption, or, with respect to form, have
been timely amended to comply, in all material respects, with all applicable
requirements of the Code and the Treasury Regulations promulgated thereunder,
and favorable determination letters with respect to the Tax Reform Act of 1986
have been timely received from the Internal Revenue Service ("Service") with
respect to each such Shelby County Plan stating that each, in its current form
(or at the time of its disposition if it has been terminated, merged or
discontinued), is qualified under and satisfies all applicable provisions of
the Code and Treasury Regulations; (iii) no Shelby County Plan (or its related
trust) holds any Shelby County Common Stock or any stock of a related or
affiliated person or entity, except as provided in the Disclosure Schedule;
(iv) neither Shelby County, SCSB nor either of the Subsidiaries has liability
to the Department or the Service with respect to any Shelby County Plan; (v)
neither Shelby County, SCSB nor either of the Subsidiaries has engaged in any
transaction that may subject Shelby County, SCSB, either of the Subsidiaries
or any Shelby County Plan to a civil penalty imposed by Section 502 of ERISA;
(vi) no prohibited transaction (as defined in Section 406 of ERISA and as
defined in Section 4975(c) of the Code) has occurred with respect to any
Shelby County Plan; (vii) each Shelby County Plan subject to ERISA or intended
to be qualified under Section 401(a) of the Code has been and, if applicable,
is being operated in accordance with the applicable provisions of ERISA and
the Code and the Department and Treasury Regulations promulgated thereunder;
(viii) to the best of Shelby County's, SCSB's and the Subsidiaries' knowledge,
no participant or beneficiary or non-participating employee has been denied
any benefit due or to become due under any Shelby County Plan or has been
misled as to his or her rights under any Shelby County Plan; (ix) all
obligations required to be performed by Shelby County, SCSB or either of the
Subsidiaries under any provision of a Shelby County Plan have been performed
by it and it is not in default under or in violation of any provision of a
Shelby County Plan; (x) no event has occurred which would constitute grounds
for an enforcement action by any party under Part 5 of Title I of ERISA under
any Shelby County Plan; (xi) there are no actions, suits, proceedings or
claims pending (other than routine claims for benefits) or, to the best
knowledge of Shelby County, SCSB and the Subsidiaries, threatened against
Shelby County, SCSB, either of the Subsidiaries, any Shelby County Plan or the
assets of any Shelby County Plan; and (xii) with respect to any Shelby County
Plan sponsored, participated in or contributed to by Shelby County, SCSB or
either of the Subsidiaries or with respect to which Shelby County, SCSB or
either of the Subsidiaries is responsible for complying with the reporting and
disclosure requirements of ERISA or the Code, there has been no violation of
the reporting and disclosure requirements imposed either under ERISA or the
Code for which a penalty has been or may be imposed.
(b) With regard to any Shelby County Plan intended to be a
tax-qualified plan under Section 401(a) of the Code, to the best knowledge of
Shelby County, SCSB and the Subsidiaries, no director, officer, employee or
agent of Shelby County, SCSB or either of the Subsidiaries has engaged in any
action or failed to act in such a manner that, as a result of such action or
failure to
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act, the Service could revoke or deny that plan's qualification under the Code
or the exemption under Section 501(a) of the Code for any trust or annuity
contract related to such Plan.
(c) Shelby County, SCSB and the Subsidiaries have provided to Blue
River in the Disclosure Schedule true, accurate and complete copies and, in
the case of any plan or program which has not been reduced to writing, a
complete summary, of all of the following: (i) pension, retirement,
profit-sharing, savings, stock purchase, stock bonus, stock ownership, stock
option and stock appreciation or depreciation right plans and agreements and
all amendments thereto (except that, with respect to the stock option
agreements between Shelby County and certain employees and directors of Shelby
County, SCSB and the Subsidiaries with respect to the Stock Options, only a
true, accurate and complete copy of an incentive stock option agreement and a
non-qualified stock option agreement that are identical in all material
respects to the remaining outstanding stock option agreements have been
included in the Disclosure Schedule); (ii) all employment, deferred
compensation (whether funded or unfunded), salary continuation, consulting,
bonus, severance and collective bargaining agreements, arrangements or
understandings; (iii) all executive and other incentive compensation plans and
programs; (iv) all group insurance and health contracts, policies or plans;
and (v) all other incentive, welfare or employee benefit plans,
understandings, arrangements or agreements, maintained or sponsored,
participated in, or contributed to by Shelby County, SCSB or either of the
Subsidiaries for their current or former directors, officers or employees.
All of the foregoing have been, since their inception, drafted, implemented,
administered and, where applicable, amended or terminated in accordance with
their terms and with applicable law.
(d) No current or former director, officer or employee of Shelby
County, SCSB or either of the Subsidiaries is entitled to any benefit under
any welfare benefit plans (as defined in Section 3(1) of ERISA) after
termination of employment with Shelby County, SCSB or either of the
Subsidiaries, except that such individuals may be entitled to continue their
group health care coverage pursuant to Section 4980B of the Code if they pay
the cost of such coverage pursuant to the applicable requirements of the Code
with respect thereto.
(e) With respect to any group health plan (as defined in Section
607(1) of ERISA) sponsored or maintained by Shelby County, SCSB or either of
the Subsidiaries, in which Shelby County, SCSB or either of the Subsidiaries
participates as a participating employer or to which Shelby County, SCSB or
either of the Subsidiaries contributes, to the best knowledge of Shelby County,
SCSB and the Subsidiaries, no director, officer, employee or agent of Shelby
County, SCSB or either of the Subsidiaries has engaged in any action or failed
to act in such a manner that, as a result of such action or failure to act,
would cause a tax to be imposed upon Shelby County, SCSB or either of the
Subsidiaries under Section 4980B(a) of the Code. With respect to all such
plans, all applicable provisions of Section 4980B of the Code and Section 601
of ERISA have been complied with in all material respects by Shelby County,
SCSB and the Subsidiaries.
(f) Except as otherwise provided in the Disclosure Schedule, there
are no collective bargaining, employment, management, consulting, deferred
compensation, reimbursement, indemnity, retirement, early retirement,
severance or similar plans or agreements, commitments or
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understandings, or any employee welfare, benefit or retirement plan or
agreement, binding upon Shelby County, SCSB or either of the Subsidiaries and
no such agreement, commitment, understanding or plan is under discussion or
negotiation by management with any employee or group of employees, any member
of management or any other person.
4.15. Obligations to Employees. Except as otherwise provided in the
Disclosure Schedule, all accrued obligations and liabilities of Shelby County,
SCSB, the Subsidiaries and the Shelby County Plans, whether arising by
operation of law, by contract or by past custom, for payments to trusts or
other funds, to any government agency or authority or to any present or former
director, officer, employee or agent of Shelby County, SCSB or either of the
Subsidiaries (or his heirs, legatees or legal representatives) have been and
are being paid to the extent required by applicable law or by the plan, trust,
contract or past custom or practice, and adequate accruals and reserves for
such payments have been and are being made by Shelby County, SCSB and the
Subsidiaries in accordance with generally accepted accounting principles and
applicable law applied on a consistent basis and actuarial methods with
respect to the following: (a) withholding taxes, unemployment compensation or
social security benefits; (b) all pension, profit-sharing, savings, stock
purchase, stock bonus, stock ownership, stock option and stock appreciation
rights plans and agreements; (c) all employment, deferred compensation
(whether funded or unfunded), salary continuation, consulting, retirement,
early retirement, severance, reimbursement or bonus plans or agreements; (d)
all executive and other incentive compensation plans, programs or agreements;
(e) all group insurance and health contracts and policies; and (f) all other
incentive, welfare, retirement or employee benefit plans or agreements
maintained, sponsored, participated in, or contributed to by Shelby County,
SCSB or either of the Subsidiaries for their current or former directors,
officers, employees and agents, including, without limitation, all liabilities
and obligations to the Shelby County Plans. All obligations and liabilities
of Shelby County, SCSB and the Subsidiaries, whether arising by operation of
law, by contract or by past custom or practice, for all other forms of
compensation which are or may be payable to their current or former directors,
officers, employees or agents have been and are being paid to the extent
required by applicable law or by the plan or contract, and adequate accruals
and reserves for payment therefor have been and are being made by Shelby
County, SCSB and the Subsidiaries in accordance with generally accepted
accounting and principles applied on a consistent basis. Except as otherwise
provided in the Disclosure Schedule, all accruals and reserves referred to in
this Section 4.15 are correctly and accurately reflected and accounted for in
all material respects in the Shelby County Financial Statements and the books,
statements and records of Shelby County, SCSB and the Subsidiaries.
SCSB is not and has not engaged in any unfair labor practice within the
meaning of the National Labor Relations Act, as amended, and there is no
proceeding or investigation pending or threatened against it with respect
thereto. There are no, and during the last five (5) years have not been any,
formal, informal or internal charges or complaints of, or any proceedings or
lawsuits pending or threatened involving, discrimination or harassment, nor is
there any investigation pending or threatened before the Equal Employment
Opportunity Commission or any other federal, state or local agency or
authority involving SCSB or any of its present or former directors, employees
or agents.
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Except to set forth in the Disclosure Schedule, neither the execution and
delivery of this Agreement nor the consummation of any of the transactions
contemplated hereby, will (a) result in any payment (including, without
limitation, severance, unemployment compensation or golden parachute payment)
becoming due to any director or employee of Shelby County or SCSB from either
of such entities; (b) increase any benefit otherwise payable under any of the
Shelby County Plans or any other plan of program relating to directors or
employees of Shelby County or SCSB; or (c) result in the acceleration in the
time of payment of any benefit or amount owed to any present or former
director or employee of Shelby County or SCSB.
4.16. Taxes, Returns and Reports. Shelby County, SCSB and the
Subsidiaries have (a) duly filed all federal, state, local and foreign tax
returns of every type and kind required to be filed, and each such return is
true, accurate and complete in all material respects; (b) paid all taxes,
assessments and other governmental charges due or claimed to be due upon each
of them or any of their income, properties or assets; and (c) not requested an
extension of time for any such payments (which extension is still in force).
Except for taxes not yet due and payable, the reserve for taxes in the Shelby
County Financial Statements as of September 30, 1997 is adequate to cover all
of Shelby County's, SCSB's and the Subsidiaries' tax liabilities (including,
without limitation, income taxes and franchise fees) that may become payable
in future periods with respect to any transactions consummated prior to
September 30, 1997. Neither Shelby County, SCSB nor either of the
Subsidiaries has, or will have, any liability for taxes of any nature for or
with respect to the operation of their respective businesses, including the
business of any subsidiary, or ownership of their assets, including the assets
of any subsidiary, from the date hereof up to and including the Effective
Time, except to the extent set forth in the Subsequent Shelby County Financial
Statements (as hereinafter defined). Neither Shelby County, SCSB nor either
of the Subsidiaries is currently under audit by any state or federal taxing
authority. No federal, state or local tax returns of Shelby County, SCSB or
either of the Subsidiaries have been audited by any taxing authority during
the past five (5) years.
4.17. Deposit Insurance. The deposits of SCSB are insured by the
Federal Deposit Insurance Corporation in accordance with the Federal Deposit
Insurance Corporation Act, as amended, and SCSB has paid or properly reserved
or accrued for all current premiums and assessments with respect to such
deposit insurance.
4.18. Insurance. Set forth in the Disclosure Schedule is a list and
brief description of all policies of insurance (including, without limitation,
blanket bond, directors' and officers' liability insurance, property and
casualty insurance, group health or hospitalization insurance and insurance
providing benefits for employees) owned or held by Shelby County, SCSB or
either of the Subsidiaries on the date hereof or with respect to which Shelby
County, SCSB or either of the Subsidiaries pays any premiums. Each such
policy is in full force and effect, all premiums due thereon have been paid
when due, and a true, accurate and complete copy thereof has been made
available to Blue River prior to the date hereof.
4.19. Books and Records. The books and records of Shelby County,
SCSB and the Subsidiaries are in all material respects complete and correct
and accurately reflect the basis for the
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respective financial condition, results of operations, business, assets and
capital of Shelby County, SCSB and the Subsidiaries set forth in the Shelby
County Financial Statements.
4.20. Broker's, Finder's or Other Fees. Except for the reasonable
fees of Shelby County's attorneys, accountants and investment bankers and the
printing and mailing costs relating to the proxy statement pertaining to the
Merger, all of which will be paid by Shelby County prior to the Effective
Time, no agent, broker or other person acting on behalf of Shelby County, SCSB
or either of the Subsidiaries or acting under any authority of Shelby County,
SCSB or either of the Subsidiaries is or shall be entitled to any commission,
broker's or finder's fee or any other form of compensation or payment from any
of the parties hereto relating to this Agreement or the Merger. A true,
accurate and complete copy of Shelby County's agreements with its attorneys,
accountants, investment banker or other advisors relative to their respective
fees in connection with the Merger is set forth in the Disclosure Schedule.
4.21. Interim Events. Except as otherwise permitted hereunder, since
September 30, 1997, neither Shelby County, SCSB nor either of the Subsidiaries
has:
(a) Suffered any changes having a material adverse effect on its
financial condition, results of operations, assets, capital or business;
(b) Suffered any material damage, destruction or loss to any of its
properties not fully- covered by insurance;
(c) Declared, distributed or paid any dividend or other distribution
to its shareholders, except for payment of dividends as permitted by Section
6.03(a)(iii) hereof and except for 13,800 shares of Shelby County Common Stock
issued pursuant to the exercise of the Stock Options;
(d) Repurchased, redeemed or otherwise acquired shares of its capital
stock, issued any shares of its capital stock or stock appreciation rights or
sold or agreed to issue or sell (except for 13,800 shares of Shelby County
Common Stock issued pursuant to the exercise of the Stock Options) any shares
of its capital stock or any right or option to purchase or acquire any such
stock or any security convertible into such stock or taken any action to
reclassify, recapitalize or split up its stock;
(e) Granted or agreed to grant any increase in benefits payable or to
become payable under any pension, retirement, profit-sharing, savings, bonus,
deferred compensation, stock or option plan or agreement; any employee welfare
or benefit plan or arrangement; or any other agreement, commitment or
understanding, to present or former employees, officers or directors of Shelby
County, SCSB or either of the Subsidiaries;
(f) Increased the salary, compensation or fees of any director,
officer or employee, except for normal increases in the ordinary course of
business and in accordance with past practices, entered
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into any employment contract, indemnity agreement or any other agreement or
understanding with any officer or employee or installed any employee benefit
plan;
(g) Leased, sold or otherwise disposed of any of its assets except in
the ordinary course of business or leased, purchased or otherwise acquired
from third parties any assets except in the ordinary course of business;
(h) Merged, consolidated or sold shares of capital stock of SCSB;
except for the Merger, agreed or committed to merge, consolidate, combine or
affiliate with or into any third party; agreed or committed to sell the
substantial assets or any shares of capital stock of Shelby County, SCSB or
either of the Subsidiaries; or except pursuant to foreclosure actions and
mortgages, liens or security interests securing loans, acquired or agreed to
acquire any securities, equity interest, assets or business of any third
party;
(i) Incurred, assumed or guaranteed any obligation or liability
(fixed or contingent) (including borrowings in the ordinary course of business
from the Federal Home Loan Bank of Indianapolis not exceeding $22.5 Million)
other than obligations and liabilities incurred in the ordinary course of
business;
(j) Mortgaged, pledged or subjected to a lien, security interest,
option or other encumbrance any of its assets, except for tax and other liens
which arise by operation of law and with respect to which payment is not past
due and except for pledges or lien: (i) required to be granted in connection
with acceptance by SCSB of government deposits; or (ii) granted in connection
with repurchase or reverse repurchase agreements; or (iii) otherwise incurred
in the ordinary course of the conduct of its business;
(k) Canceled, released or compromised any loan, debt, obligation,
claim or receivable other than in the ordinary course of business;
(l) Entered into or made any loan or other transaction, contract or
commitment other than in the ordinary course of business;
(m) Agreed to enter into any transaction for the borrowing or lending
of monies, funds or securities, other than in the ordinary course of its
lending business; or
(n) Conducted its business in any manner other than substantially as
it was being conducted on September 30, 1997.
4.22. Regulatory Filings. Shelby County, SCSB and the Subsidiaries
have filed and will continue to file in a timely manner all filings and
reports with all federal and state regulatory agencies and authorities as
required by applicable law. All such filings with federal and state
regulatory agencies were true, accurate and complete in all respects as of the
dates of the filings and were prepared in conformity with generally accepted
accounting principles applied on a consistent
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basis and applicable law, and no such filing contained any untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements, at the time and in light of the circumstances under which they
were made, not false or misleading.
4.23. Contracts. Neither Shelby County, SCSB nor either of the
Subsidiaries is in default under or in breach of or, to the best knowledge of
Shelby County, SCSB and the Subsidiaries, alleged to be in default under or in
breach of, any loan or credit agreement, security agreement, bond, indenture,
mortgage, license, contract, lease, commitment or any other instrument or
obligation, which breach or default could have a material adverse effect on
the financial condition, results of operation, business, assets or capital of
Shelby County or SCSB, whether individually or on a consolidated basis, or
Shelby Group or First Tier on a consolidated basis with Shelby County.
4.24. No Third Party Options. Except as provided in the Disclosure
Schedule with respect to the options to purchase 13,800 shares of Shelby
County Common Stock under the Stock Option Plan, there are no agreements,
options, commitments or rights with, of or to any third party to acquire any
shares of capital stock or assets of Shelby County, SCSB or either of the
Subsidiaries which are binding upon Shelby County, SCSB or either of the
Subsidiaries.
4.25. Disclosure Schedule and Documents. All written data,
documents, materials and information referred to in this Agreement and
delivered by Shelby County, SCSB or either of the Subsidiaries pursuant to or
in connection with the Disclosure Schedule are true, accurate and complete in
all material respects as of the date hereof and, with respect to such items
delivered subsequent to the date hereof or with any update to the Disclosure
Schedule, will be true, accurate and complete in all material respects on the
date of delivery thereof.
4.26. Indemnification Agreements. (a) Neither Shelby County, SCSB
nor either of the Subsidiaries is a party to any indemnification, indemnity or
reimbursement agreement, contract, commitment or understanding to indemnify
any present or former director, officer, employee, shareholder or agent
against liability or hold the same harmless from liability, other than as
expressly provided in the Articles of Incorporation or By-Laws of Shelby
County, Shelby Group or First Tier or the Charter or By-Laws of SCSB.
(b) No claims have been made against or filed with Shelby County,
SCSB or either of the Subsidiaries nor has, to the best knowledge of Shelby
County, SCSB and the Subsidiaries after due inquiry, any claims been
threatened against Shelby County, SCSB or either of the Subsidiaries, for
indemnification against liability or for reimbursement of any costs or
expenses incurred in connection with any legal or regulatory proceeding by any
present or former director, officer, shareholder, employee or agent of either
Shelby County, SCSB or either of the Subsidiaries.
4.27. Representations and Warranties at the Effective Time. All
representations and warranties of Shelby County and SCSB contained herein
shall be true, accurate and complete in all material respects on and as of the
Effective Time as though made or given at such time, except as otherwise
expressly contemplated by this Agreement.
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4.28. Nonsurvival of Representations and Warranties. The
representations and warranties of Shelby County and SCSB contained in this
Agreement shall expire upon the earlier of the Effective Time or the
termination of this Agreement pursuant to Section 9 hereof (except that any
claim of misrepresentation or breach of a warranty may be brought following
any such termination), and thereafter Shelby County, SCSB and the Subsidiaries
and all directors, officers and employees thereof shall have no further
liability with respect thereto, except for fraud or intentional and knowing
participation in the making of untrue, inaccurate or misleading statements in
such representations and warranties. Nothing in the foregoing shall result in
the termination of any of the covenants provided for in this Agreement that
shall by their terms survive the Effective Time.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF BLUE RIVER
--------------------------------------------
Blue River represents and warrants to Shelby County and SCSB as follows
as of the date hereof and at all times that this Agreement shall be in effect:
5.01. Organization and Authority. Blue River is a corporation duly
organized and validly existing under the laws of the State of Indiana and has
full power and authority (corporate and otherwise) to own and lease its
properties as presently owned and leased and to conduct its business in the
manner and by the means utilized as of the date hereof.
5.02. Authorization. (a) Blue River has the requisite corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder subject to the fulfillment of the conditions precedent
set forth in Section 8.01 hereof. This Agreement and its execution and
delivery by Blue River have been duly authorized and approved by the Board of
Directors of Blue River. This Agreement constitutes a valid and binding
obligation of Blue River and is enforceable in accordance with its terms,
except to the extent limited by general principles of equity and public policy
and by bankruptcy, insolvency, fraudulent transfer, reorganization,
liquidation, moratorium, readjustment of debt or other laws of general
application relating to or affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement nor consummation of the
Merger (i) conflicts with or violates Blue River's Articles of Incorporation
or By-Laws; (ii) conflicts with or violates any local, state, federal or
foreign law, statute, ordinance, rule or regulation (provided that the
approvals of or filings with applicable government regulatory agencies or
authorities required for consummation of the Merger are obtained) or any court
or administrative judgment, order, injunction, writ or decree; (iii) conflicts
with, results in a breach of or constitutes a default under any note, bond,
indenture, mortgage, deed of trust, license, contract, lease, agreement,
arrangement, commitment or other instrument to which Blue River is a party or
by which Blue River is subject or bound; (iv) results in the creation of or
gives any person, corporation or entity the right to create any lien, charge,
claim, encumbrance or security interest, or results in the creation of any
other rights or claims of any other party or any other adverse interest, upon
any right, property or asset of Blue
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River; or (v) terminates or gives any person, corporation or entity the right
to terminate, accelerate, amend, modify or refuse to perform under any note,
bond, indenture, mortgage, deed of trust, license, lease, contract, agreement,
arrangement, commitment or other instrument to which Blue River is bound or
with respect to which Blue River is to perform any duties or obligations or
receive any rights or benefits.
(c) Other than in connection or in compliance with the provisions of
applicable federal and state banking, thrift, securities and corporation
statutes, all as amended, and the rules and regulations promulgated
thereunder, no notice to, filing with, exemption by or consent, authorization
or approval of any governmental agency or body is necessary for consummation
by Blue River of the Merger.
5.03. Organizational Documents. The Articles of Incorporation and
By-Laws of Blue River in effect as of the date of this Agreement have been
delivered to Shelby County and represent true, accurate and complete copies of
such corporate documents of Blue River in effect as of the date of this
Agreement.
5.04. Compliance With Law. Blue River has not engaged in any
activity or has taken or omitted to take any action which has resulted or
could result in the violation of any local, state, federal or foreign law,
statute, rule, regulation, ordinance, order, restriction or requirement or of
any order, injunction, judgment, writ or decree of any court or government
agency or body, the violation of which could have a material adverse effect on
the financial condition, results of operations, business, assets or
capitalization of Blue River.
5.05. Litigation and Pending Proceedings. (a) There are no claims,
actions, suits, proceedings, investigations, arbitrations or mediations
pending or, to the best knowledge of Blue River after due inquiry, threatened
in any court or before any government agency or authority, arbitration panel
or otherwise (nor does Blue River have any knowledge of a basis for any claim,
action, suit, proceeding, litigation, investigation, arbitration or mediation)
against, by or affecting Blue River which could have a material adverse effect
on the financial condition, results of operations, business, assets or
capitalization of Blue River, or which would prevent the performance of this
Agreement, declare the same unlawful or cause the rescission hereof.
(b) Blue River is not (i) subject to any outstanding judgment, order,
writ, injunction or decree of any court, arbitration panel or governmental
agency or authority having a material adverse effect on its business, assets,
capitalization, financial condition or results of operations on a consolidated
basis, (ii) presently charged with or under governmental investigation with
respect to any actual or alleged violations of any law, statute, rule,
regulation or ordinance, or (iii) the subject of any pending or, to the best
knowledge of Blue River, threatened proceeding by any government regulatory
agency or authority having jurisdiction over its business, properties or
operations.
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5.06. Representations and Warranties at the Effective Time. All
representations and warranties of Blue River contained herein shall be true,
accurate and complete in all material respects on and as of the Effective Time
as though made or given at such time.
5.07. Nonsurvival of Representations and Warranties. The
representations and warranties of Blue River contained in this Agreement shall
expire upon the earlier of the Effective Time or the termination of this
Agreement pursuant to Section 9 hereof (except that any claim of
misrepresentation or breach of warranty may be brought following any such
termination), and thereafter, Blue River and all directors, officers and
employees of Blue River shall have no further liability with respect thereto,
except for fraud or intentional and knowing participation in the making of
untrue, inaccurate or misleading statements in such representations and
warranties. Nothing in the foregoing shall result in the termination of any
covenants provided for herein that shall by their terms survive the Effective
Time.
SECTION 6
COVENANTS OF SHELBY COUNTY AND SCSB
-----------------------------------
Shelby County and SCSB covenant and agree with Blue River, and SCSB
covenants and agrees with Blue River to cause Shelby Group and First Tier to
act, as follows:
6.01. Shareholder Approval. Shelby County shall submit this
Agreement and the Merger to its shareholders for approval at a meeting to be
called and held in accordance with applicable law and the Articles of
Incorporation and By-Laws of Shelby County on a date mutually acceptable to
Shelby County and Blue River. Shelby County shall use its reasonable efforts
to hold such meeting of shareholders no later than sixty (60) days following
the date of this Agreement. In connection with such meeting of shareholders
of Shelby County, (a) Shelby County shall deliver to its shareholders a proxy
statement relating to the Merger ("Proxy Statement") which shall include a
copy of this Agreement and all other information required to be provided to
shareholders of Shelby County in accordance with applicable law; and (b) the
Board of Directors of Shelby County shall recommend, by at least a majority
vote, to Shelby County's shareholders that such shareholders approve this
Agreement and the Merger and shall solicit proxies in favor of this Agreement
from such shareholders (unless, in the written opinion of counsel for Shelby
County, the fiduciary duties of such Board might reasonably be found to
prohibit such a recommendation, in which event the individual members of the
Board of Directors shall nevertheless remain personally obligated to vote in
favor of this Agreement and the Merger pursuant to their personal undertakings
set forth elsewhere in this Agreement).
Shelby County shall use its reasonable efforts to cause Trident Financial
Corporation ("Trident") to issue, no later than the date of the Proxy
Statement, Trident's written opinion ("Fairness Opinion") stating that the
Conversion Price is fair to the shareholders of Shelby County from a financial
point of view. Shelby County shall attach a copy of Trident's fairness
opinion to
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the proxy statement to be delivered to Shelby County's shareholders in
connection with the meeting of shareholders referenced in this Section 6.01.
6.02. Other Approvals and Actions. (a) Shelby County and SCSB shall
proceed expeditiously, cooperate fully and use their reasonable efforts to
assist Blue River in procuring, upon terms and conditions reasonably
acceptable to Blue River, all consents, authorizations, approvals,
registrations and certificates, in completing all filings and applications and
in satisfying all other requirements prescribed by law which are necessary for
the IPO (as defined in Section 7.02 hereof) and the consummation of the Merger
on the terms and conditions provided in this Agreement.
(b) Shelby County and SCSB shall take all necessary steps to (i)
terminate the Stock Option Plan as of the Effective Time such that, among
other things, the Stock Options will terminate or lapse if not exercised prior
to the Effective Time and (ii) assist Blue River in the disposition of the
SCSB Retirement Plan (as hereinafter defined), in accordance with Section 7.03
hereof. Shelby County shall pay all costs and expenses associated with the
disposition of such plans, to the extent incurred prior to the Effective Time.
(c) Shelby County shall take all necessary steps to redeem the rights
granted pursuant to the Rights Agreement at or prior to the Effective Time at
an aggregate cost not to exceed Twenty Thousand Dollars ($20,000).
(d) In advance of filing the Proxy Statement with the Securities and
Exchange Commission ("SEC"), Shelby County shall provide to Blue River and its
counsel with a copy of the Proxy Statement and provide them an opportunity to
comment thereon.
6.03. Conduct of Business. (a) On and after the date of this
Agreement and until the Effective Time or until this Agreement shall be
terminated as herein provided, neither Shelby County, SCSB nor either of the
Subsidiaries shall, without the prior written consent of Blue River:
(i) make any changes in its capital stock accounts (including,
without limitation, any stock split, stock dividend,
recapitalization or reclassification);
(ii) authorize a class of securities, issue or grant, or
authorize the issuance or grant of, securities or options
other than or in addition to the presently issued and
outstanding shares of Shelby County Common Stock, SCSB
Common Stock, Shelby Group Common Stock or First Tier Common
Stock set forth in Section 4.03 hereof and other than the
presently outstanding options to purchase an aggregate of
13,800 shares of Shelby County Common Stock;
(iii) distribute or pay any dividends on its shares of common
stock, or make any other distribution to its shareholders,
except that Shelby County may pay to its shareholders its
normal and customary quarterly cash dividend in an
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amount not to exceed twelve and one-half cents ($0.125) per
share of Shelby County Common Stock for each such dividend
until the Effective Time and except that SCSB may pay cash
dividends to Shelby County in the ordinary course of
business in accordance with past practices for payment of
reasonable and necessary business and operating expenses of
Shelby County;
(iv) redeem any of its outstanding shares of common stock;
(v) merge, combine or consolidate or effect a share exchange
with or sell substantially all of its assets or any of its
securities to any other person, corporation or entity or
enter into any similar transaction not in the ordinary
course of business;
(vi) assume any liabilities of any bank or savings and loan
holding company, bank, savings association, corporation or
other entity, except in the ordinary course of business;
(vii) except in the ordinary course of business in accordance with
sound banking practices (and, with respect to loan
transactions or commitments, letters of credit and deposit
accounts, only on terms and conditions which are not
materially more favorable than those available to the
borrower or customer from competitive sources in
transactions in the ordinary course of business) make any
loan, payment or disbursement; issue any loan commitment,
letter of credit or line of credit; accept any deposit;
enter into any lease, contract, agreement understanding or
arrangement; amend, modify or terminate, or forgive or grant
any waiver or concession under, any loan, debt or obligation
owed to Shelby County or SCSB; or guaranty any debt or
obligation of any third party;
(viii) except for acquisitions or dispositions in the ordinary
course of business, acquire or dispose of any property or
asset in excess of $5,000 individually or $10,000 in the
aggregate;
(ix) except for the pledge of securities to secure public funds
deposits or except for additional borrowings in the ordinary
course of business from the Federal Home Loan Bank of
Indianapolis not to exceed $22.5 Million in the aggregate,
subject any of its properties or assets to a mortgage, lien,
claim, charge, option, restriction, security interest or
encumbrance;
(x) promote to a new position or increase the rate of
compensation (except for promotions and compensation
increases in the ordinary course of business and in
accordance with past practices and established employment
policies), or enter into any agreement to promote to a new
position or increase the rate
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of compensation, of any director, officer or employee of
Shelby County, SCSB or either of the Subsidiaries;
(xi) execute, create, institute, modify, amend or terminate
(except with respect to any amendments to the Shelby County
Plans required by law, rule or regulation, except with
respect to the amendments to the Stock Option Plan as
described in Section 6.02(b)(i) hereof, except with respect
to the termination of the SCSB Retirement Plan as described
in Section 6.02(b)(ii) hereof and as contemplated by Section
7.03 hereof, except with respect to the amendments to the
Employment Agreements and the Meyerholtz Agreement as
contemplated by Section 6.11 hereof and except with respect
to the Termination Agreement (as hereinafter defined)) any
pension, retirement, savings, stock purchase, stock bonus,
stock ownership, stock option, stock appreciation or
depreciation right or profit sharing plans of Shelby County
or SCSB; any employment, deferred compensation, consulting,
bonus or collective bargaining agreement; any group
insurance or health contract or policy; or any other
incentive, retirement or employee welfare or pension benefit
plan, agreement or understanding for current or former
directors, officers or employees of Shelby County, SCSB or
either of the Subsidiaries; or change the level of benefits
or payments under any of the foregoing or increase or
decrease any severance or termination of pay benefits or any
other fringe or employee benefits other than as required by
law or regulatory authorities;
(xii) make any filing concerning the amendments to or disposition
of the Shelby County Plans as provided in Section 7.03
hereof to any employee of Shelby County, SCSB or either of
the Subsidiaries or any third party, including any
regulatory authority;
(xiii) modify, amend or institute new employment policies or
practices (other than in the ordinary course of business
consistent with past practices) or enter into, renew or
extend any employment, indemnity, reimbursement, consulting,
compensation or severance agreements with respect to any
present or former directors, officers or employees of Shelby
County, SCSB or either of the Subsidiaries;
(xiv) hire or employ any new or additional employees of Shelby
County, SCSB or either of the Subsidiaries, except those
which are reasonably necessary for the proper operation of
Shelby County's, SCSB's or either of the Subsidiaries'
business;
(xv) amend, modify or restate Shelby County's, Shelby Group's or
First Tier's Articles of Incorporation or By-Laws or SCSB's
Charter or By-Laws from
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those in effect on the date of this Agreement and as
delivered to Blue River hereunder;
(xvi) give, dispose of, sell, convey or transfer; assign,
hypothecate, pledge or encumber; or grant a security
interest in or option or right to acquire any shares of
capital stock of Shelby County, SCSB, Shelby Group or First
Tier or substantially all of the assets of Shelby County,
SCSB, Shelby Group or First Tier, or enter into any
agreement or commitment relative to the foregoing;
(xvii) fail to continue to make additions to in accordance with
past practices and to otherwise maintain in all respects
SCSB's reserve for loan and lease losses, or any other
reserve account, in accordance with safe, sound and prudent
banking practices and in accordance with generally accepted
accounting principles applied on a consistent basis;
(xviii) fail to accrue, pay, discharge and satisfy all accounts
payable, debts, liabilities, obligations and expenses
incurred in the regular and ordinary course of business as
such payables, debts, liabilities, obligations and expenses
become due;
(xix) issue, or authorize the issuance of, any securities
convertible into or exchangeable for Shelby County Common
Stock, SCSB Common Stock, Shelby Group Common Stock or First
Tier Common Stock;
(xx) except for accounts payable and similar liabilities and
obligations incurred in the ordinary course of business, for
the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected in the Shelby
County Financial Statements or the Subsequent Shelby County
Financial Statements and for additional borrowings in the
ordinary course of business from the Federal Home Loan Bank
of Indianapolis not to exceed $22.5 Million, borrow any
money or incur any indebtedness, including, without
limitation, through the issuance of debentures, or incur any
liability or obligation (whether absolute, accrued,
contingent or otherwise), in an aggregate amount exceeding
$5,000, other than legal, accounting, and investment banker
fees and proxy printing and mailing costs relating to the
Merger or the operation of Shelby County's and SCSB's
business;
(xxi) open, close, move or, in any material respect, expand,
renovate, alter or change any of its offices or branches;
(xxii) pay or commit to pay any management, consulting,
professional or other similar type of fees, except for the
reasonable fees paid to Shelby County's
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and SCSB's existing attorneys and accountants for work done
in the ordinary course of Shelby County's and SCSB's
business and the reasonable fees paid to Shelby County's
attorneys, accountants, investment banker and other advisors
with respect to the Merger which shall not exceed in the
aggregate the amount of fees set forth in the agreements or
other arrangements disclosed in the Disclosure Schedule;
(xxiii) enter into any contract, agreement, lease, commitment,
understanding, arrangement or transaction or incur any
liability or obligation (other than as contemplated by
Section 6.03(a)(vii) hereof) requiring payments by Shelby
County, SCSB or either of the Subsidiaries which exceed
$5,000, whether individually or in the aggregate, or that is
not in the ordinary course of business;
(xxiv) elect or appoint any director or officer of Shelby County,
SCSB or either of the Subsidiaries in addition to or other
than Jack Disser and those persons who were directors or
officers of Shelby County, SCSB or either of the
Subsidiaries on the date of the Agreement;
(xxv) execute, create, institute, modify, amend or terminate any
shareholders rights plan (including the Rights Agreement),
poison pill or any other anti-takeover plan, device,
mechanism or arrangement involving, restricting, prohibiting
or discouraging a change in control, merger, sale or other
combination of Shelby County, SCSB or either of the
Subsidiaries or which may be considered an anti-takeover
mechanism (except with respect to the amendments to the
Stock Option Plan as contemplated by Section 6.02(b)(i)
hereof and except with respect to the amendments to the
Employment Agreements and the Meyerholtz Agreement as
contemplated by Section 6.11 hereof and except with respect
to the Termination Agreement);
(xxvi) redeem the rights granted pursuant to the Rights Agreement
(except as provided by Section 6.02(c) hereof and Section
5(d) of the Stock Option Agreement ("Lock-up Agreement")
dated of even date herewith by and between Blue River and
Shelby County);
(xxvii) make or modify, or commit to make or modify, any 30-year
fixed rate mortgage loan that will have an annual interest
rate which is less than the Federal National Mortgage
Association (Fannie Mae) posted yields on 30-year mortgage
commitments (priced at par) for delivery within 30 days, as
published in the "Money Rates" section of The Wall Street
Journal (Midwest Edition) on the most recent date (which The
Wall Street Journal (Midwest Edition) is published)
preceding the date which SCSB makes or commits to make any
such 30-year fixed rate mortgage loan;
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(xxviii) violate any law, statute, rule, regulation, directive or
other legal requirement in any material respect; or
(xxviv) enter into any contract, agreement, commitment or
understanding with respect to any of the foregoing specified
in this Section 6.03(a).
(b) Shelby County, SCSB and each of the Subsidiaries shall maintain,
or cause to be maintained, in full force and effect, insurance on its assets,
properties and operations, fidelity coverage and directors' and officers'
liability insurance on its directors, officers and employees in such amounts
and with regard to such liabilities and hazards as are currently insured by
Shelby County, SCSB and the Subsidiaries as of the date of this Agreement.
(c) Shelby County, SCSB and each of the Subsidiaries shall cause its
attorneys, accountants and other professionals and advisors and all other
parties doing business with Shelby County, SCSB or any of the Subsidiaries to
bill or invoice for goods or services provided no less frequently than
monthly.
6.04. Preservation of Business. On and after the date of this
Agreement and until the Effective Time or until this Agreement is terminated
as herein provided, each of Shelby County, SCSB and each of the Subsidiaries
shall (a) carry on its business diligently, substantially in the manner as is
presently being conducted and in the ordinary course of business; (b) use its
reasonable efforts to preserve its business organization intact, keep
available the services of the present officers and employees and preserve its
present relationships with customers and persons having business dealings with
it; (c) maintain all of the properties and assets that it owns or utilizes in
good operating condition and repair, reasonable wear and tear excepted, and
maintain insurance upon such properties and assets in amounts and kinds
comparable to that in effect on the date of this Agreement; (d) maintain its
books, records and accounts in the usual, regular and ordinary manner, on a
basis consistent with prior years and in compliance with all material respects
with all statutes, laws, rules and regulations applicable to it and to the
conduct of its business; and (e) not do or fail to do anything which will
cause a material breach of, or material default in, any contract, agreement,
commitment, obligation, understanding, arrangement, lease or license to which
it is a party or by which it is or may be subject or bound.
6.05. Other Negotiations. (a) Subject to Section 6.05(b) hereof, on
and after the date of this Agreement and until the Effective Time or until
this Agreement is terminated as herein provided, Shelby County, SCSB and each
of the Subsidiaries (except with the prior written approval of Blue River)
shall not, nor shall they permit or authorize their respective directors,
officers, employees, agents or representatives to, directly or indirectly,
initiate, solicit, facilitate, encourage or engage in discussions or
negotiations with, or provide information to, any corporation, association,
partnership, limited liability company, person or other entity or group
concerning any merger, consolidation, share exchange, combination,
affiliation, purchase or sale of substantial assets, sale of shares of common
stock (or securities convertible or exchangeable into or otherwise evidencing,
or any agreement or instrument evidencing, the right to acquire capital stock)
or similar transaction relating
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to Shelby County, SCSB or either of the Subsidiaries or to which Shelby
County, SCSB or either of the Subsidiaries may become a party (all such
transactions are hereinafter referred to as "Acquisition Transactions").
Shelby County, SCSB and the Subsidiaries shall promptly communicate to Blue
River the terms of any proposal or offer which either of them may receive with
respect to an Acquisition Transaction and any request by or indication of
interest on the part of any third party with respect to the initiation of any
Acquisition Transaction or discussions with respect thereto.
(b) On and after the date of this Agreement and until the Effective
Time or until this Agreement is terminated as herein provided, Shelby County
may engage, and may permit and authorize its directors, officers, employees,
agents or representatives to engage in discussions or negotiations with or
provide information to any corporation, association, partnership, limited
liability company, person or other entity or group concerning an unsolicited
offer by such third party with respect to an Acquisition Transaction only with
the prior written approval of Blue River, which approval shall be provided to
Shelby County promptly upon receipt by Blue River of a letter from Shelby
County signed by at least a majority of its Board of Directors then in office
indicating that Shelby County has received an unsolicited offer regarding an
Acquisition Transaction which the Board of Directors of Shelby County (i)
considers, in the exercise of its fiduciary duties as a Board, to be
substantially superior, taking into account all relevant factors, to the then
current offer of Blue River pursuant to this Agreement and (ii) concludes,
after consultation with its counsel, that its fiduciary duties as a Board
require it to consider (based upon a written opinion of Shelby County's legal
counsel advising the Board to consider) and, in light of such duties, take
such other actions with respect to such unsolicited offer as may be necessary
or appropriate; and such approval may, in all other instances, be provided to
Shelby County when and if Blue River shall, in its sole discretion,
determine. This Section 6.05 shall not authorize Shelby County, SCSB or
either of the Subsidiaries or any of their directors, officers, employees,
agents or representatives to solicit or initiate any discussions or
negotiations relative to an Acquisition Transaction with a third party.
6.06. Press Releases. Except as required by law, neither Shelby
County, SCSB nor either of the Subsidiaries shall issue any press releases or
make any other public announcements or disclosures relating to the Merger
without the prior consent of Blue River, which consent shall not be
unreasonably withheld.
6.07. Disclosure Schedule Update. Shelby County shall promptly
supplement, amend and update, upon the occurrence of any change prior to the
Effective Time, and as of the Effective Time, the Disclosure Schedule with
respect to any agreements, documents, matters or events hereafter arising
which, if in existence or having occurred as of the date of this Agreement,
would have been required to be set forth or described in the Disclosure
Schedule or this Agreement and including, without limitation, any fact which,
if existing or known as of the date hereof, would have made any of the
representations or warranties of Shelby County or SCSB contained herein
materially incorrect, untrue or misleading.
6.08. Information, Access Thereto, Confidentiality. Blue River and
its attorneys, accountants, representatives, advisors and agents shall, at all
times during normal business hours
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prior to the Effective Time, have full and continuing access to the
properties, facilities, operations, books and records of Shelby County, SCSB
and the Subsidiaries. Blue River and its attorneys, accountants,
representatives, advisors and agents may, prior to the Effective Time, make or
cause to be made such reasonable investigation (including, without limitation,
any environmental review study, survey or assessment of Shelby County's,
SCSB's or any Subsidiary's real properties) of the operations, books, records
and properties of Shelby County, SCSB and the Subsidiaries and of their
financial and legal condition as deemed necessary or advisable to familiarize
themselves with such operations, books, records, properties and other matters;
provided, however, that such access or investigation shall not interfere
unnecessarily with the normal operations of Shelby County, SCSB or either of
the Subsidiaries; and provided further, that if Blue River elects to conduct
or have conducted on its behalf an environmental review, study, survey or
assessment to verify the representations and warranties given by Shelby
County, SCSB and the Subsidiaries with respect to the environmental matters
specified in Section 4.11(b) hereof, all reports and findings related to such
environmental review, study, survey or assessment shall be shall be disclosed
to Shelby County, SCSB and the Subsidiaries within fifteen (15) days of the
date of such report or finding. Upon request, Shelby County, SCSB and the
Subsidiaries shall furnish Blue River, or its attorneys, accountants,
representatives, advisors or agents, Shelby County's attorneys' responses to
external auditors requests for information, management letters received from
its external auditors and such financial, loan and operating data and other
information reasonably requested by Blue River which has been or is developed
by Shelby County, SCSB or either of the Subsidiaries or their auditors,
accountants or attorneys (provided with respect to attorneys, such disclosure
would not result in the waiver by Shelby County, SCSB or either of the
Subsidiaries of any claim of attorney-client privilege), and will permit Blue
River and its respective representatives or agents to discuss such information
directly with any individual or firm performing auditing or accounting
functions for Shelby County, SCSB or either of the Subsidiaries, and such
auditors and accountants shall be directed to furnish copies of any reports or
financial information as developed to Blue River or its auditors or
accountants. No investigation or review by Blue River (whether conducted
before or after the date hereof) shall affect the representations and
warranties made by Shelby County or SCSB herein or the information contained
in any document provided hereunder, and Blue River shall be entitled to rely
on such representations, warranties and documents notwithstanding any such
investigation or review. Any confidential information or trade secrets
received by Blue River or its representatives or agents in the course of such
examination shall be treated confidentially, and any correspondence,
memoranda, records, copies, documents and electronic or other media of any
kind containing such confidential information or trade secrets or both shall
be destroyed by Blue River or, at Shelby County's request, returned to Shelby
County in the event this Agreement is terminated as provided in Section 9
hereof. This Section 6.08 shall not require the disclosure of any information
to Blue River which would be prohibited by law.
6.09. Subsequent Shelby County Financial Statements. As soon as
available after the date of this Agreement, Shelby County shall deliver to
Blue River the monthly unaudited consolidated balance sheets and income
statements of Shelby County prepared for its internal use, Shelby County's
Forms 10-Q for each quarterly period and Form 10-K for each fiscal year
completed prior to the Effective Time and all other financial reports or
statements, including the notes thereto,
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submitted to regulatory authorities after the date hereof, to the extent
permitted by law (collectively, "Subsequent Shelby County Financial
Statements"). The Subsequent Shelby County Financial Statements shall be
prepared on a basis consistent with past accounting practices and generally
accepted accounting principles applied on a consistent basis and shall present
fairly the financial condition and results of operations as of the dates and
for the periods presented. The Subsequent Shelby County Financial Statements
will not include any assets, liabilities or obligations or omit to state any
assets, liabilities or obligations, absolute or contingent, or any other
facts, which inclusion or omission would render such financial statements
inaccurate, incomplete or misleading in any material respect.
6.10. Employee Benefits. Neither the terms of Section 7.03 hereof
(except as otherwise expressly provided therein) nor the provision of any
employee benefits by Blue River or any of its subsidiaries to employees of
Shelby County, SCSB and the Subsidiaries shall (i) create any employment
contract, agreement or understanding with or employment rights for, or
constitute a commitment or obligation of employment to, any of the officers or
employees of Shelby County, SCSB and the Subsidiaries or (ii) except as
expressly provided in this Agreement, prohibit or restrict Blue River or its
subsidiaries, whether before or after the Effective Time, from changing,
amending or terminating any employee benefits provided to its employees from
time to time.
6.11. Employment Agreements. Prior to the Effective Time, SCSB shall
use all reasonable efforts to cause the employment agreements between SCSB and
each of Ronald L. Lanter, Joyce E. Ford and Rita Sturgill (each in the form
set forth in the Disclosure Schedule) (collectively referred to herein as the
"Employment Agreements") to be amended, all in form and substance reasonably
satisfactory to Blue River, such that (i) the requirement that each
participate in a stock option plan shall be deleted and all references as to
title other than the title of Vice President shall be deleted, (ii) each will
receive employee benefits in accordance with Blue River's employee benefit
plans instead of SCSB's plans and (iii) the term of each of the Employment
Agreements shall end one (1) year from the Effective Time. Other than the
foregoing amendments, the Employment Agreements shall not be amended or
modified in any respect, and none of the respective terms of the Employment
Agreements shall be extended or renewed. On the date hereof, SCSB and Rodney
L. Meyerholtz shall enter into an agreement relating to the Meyerholtz
Agreement ("Termination Agreement") to the effect that the Meyerholtz
Agreement shall be terminated as of the Effective Time upon the terms and
conditions specified in the Termination Agreement. Other than as set forth in
the Termination Agreement, the Meyerholtz Agreement shall not be changed,
amended or modified in any respect and the term thereof shall not be extended
or renewed without the prior written consent of Blue River, SCSB and Mr.
Meyerholtz.
6.12. Certain Actions. Neither Shelby County, SCSB nor either of the
Subsidiaries shall intentionally or knowingly take, cause to be taken or fail
to take any action which will cause or result in a misrepresentation or a
breach of a covenant or warranty of this Agreement that will give Blue River
the right to terminate this Agreement pursuant to Section 9.01(b) hereof or
which will result in a condition precedent to consummation of the Merger not
to be satisfied or fulfilled.
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6.13. Restructure. Shelby County and SCSB understand, acknowledge
and agree that Blue River, in its sole discretion, may change the structure of
the transactions contemplated by this Agreement; provided, however, that any
such change in structure shall not affect the Conversion Price or the
consideration to be paid hereunder to the shareholders of Shelby County or
cause the consummation of the Merger to be delayed. Shelby County and SCSB
shall execute and deliver such amendments, agreements and instruments and take
such further actions as Blue River may reasonably request in connection with
any such restructure of the transactions contemplated by this Agreement.
SECTION 7
COVENANTS OF BLUE RIVER
-----------------------
Blue River covenants and agrees with Shelby County as follows:
7.01. Approvals. (a) Blue River shall have primary responsibility
for the preparation, filing and cost of all filings and applications required
for consummation of the Merger, except for the Proxy Statement. Blue River
shall file all such applications as soon as practicable after the execution of
this Agreement. Blue River shall provide to Shelby County's counsel copies of
all applications filed and copies of all material written communications with
all state and federal bank regulatory agencies relating to such applications.
Blue River shall proceed expeditiously, cooperate fully and use its best
efforts to procure, upon terms and conditions reasonably acceptable to Blue
River, all consents, authorizations, approvals, registrations and
certificates, to complete all filings and applications and to satisfy all
other requirements prescribed by law which are necessary for consummation of
the Merger on the terms and conditions provided in this Agreement at the
earliest possible reasonable date, except as set forth in Section 6.01 hereof.
(b) Blue River shall submit this Agreement to its shareholders for
approval at a meeting to be called and held in accordance with applicable law
and the Articles of Incorporation and By-Laws of Blue River at a date
reasonably in advance of the Effective Time and the Board of Directors of Blue
River shall recommend, by at least a majority vote, to Blue River's
shareholders that such shareholders approve this Agreement and the Merger.
7.02. SEC Registration. Blue River shall file with the SEC as soon
as practicable after the execution of this Agreement a Registration Statement
on an appropriate form under the 1933 Act covering the shares of Blue River
common stock to be sold in its initial public offering ("IPO"). Such
Registration Statement and any amendments and supplements thereto are referred
to in this Agreement as the "Registration Statement." The Registration
Statement shall include a prospectus ("Prospectus") relating to the shares of
Blue River common stock to be sold in the IPO. In advance of filing the
Registration Statement and all other filings described in Section 7.01 hereof,
Blue River shall provide Shelby County and its counsel with a copy of the
Registration Statement and each such other filing and provide an opportunity
to comment thereon.
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7.03. Blue River Benefit Plans. (a) General. Blue River will make
available to the employees of SCSB who continue as employees of SCSB after the
Effective Time such employee benefits as the Board of Directors of Blue River
may determine to provide to employees from time to time. Until such time as
the employees of SCSB become eligible to participate in or eligible to be
covered by Blue River's employee pension benefit plans or employee welfare
benefit plans, employees of SCSB who would otherwise be eligible to
participate in or be covered by the employee pension benefit and employee
welfare benefit plans of Blue River under the terms thereof shall remain
participants in or covered by the employee pension benefit plans and employees
welfare benefit plans of Shelby County in existence at the Effective Time,
subject to the terms of such plans, to the extent provided by such plans of
Shelby County. Notwithstanding the foregoing or anything herein to the
contrary, Blue River shall not be obligated to provide any employee benefit
plans to employees of SCSB following the Merger who meet the applicable
eligible requirements except for the Blue River Profit Sharing Plan (as
hereinafter defined) and group health and hospitalization insurance.
(b) Eligibility and Vesting. Years of service, as defined in the
applicable Blue River employee welfare or pension benefit plan, with SCSB
prior to the Effective Time shall be credited to each employee of SCSB
eligible for coverage under Section 7.03(a) hereof for purposes of (i)
eligibility under Blue River's employee welfare benefit plans; and (ii)
eligibility and vesting, but not for purposes of benefit accrual or
contributions, under the Blue River Employees' Savings and Profit Sharing Plan
("Blue River Profit Sharing Plan"). The employees of SCSB shall become
covered by Blue River's employee pension and welfare benefit plans at such
time(s) as shall be specified by Blue River in its sole discretion, subject to
Section 7.03(a) hereof. The service credit provided by this Section 7.03(b)
will become effective for a plan on the date Blue River specifies pursuant to
the preceding sentence. Those officers and employees of SCSB who otherwise
meet the eligibility requirements of the designated plan, based upon their age
and years of service for SCSB and Blue River, shall become participants
thereunder on the entry date which coincides with or next follows the
specified date. Those officers and employees of SCSB who do not meet the
eligibility requirements of the designated plan on such date shall become
participants thereunder on the first plan entry date which coincides with or
next follows the date on which such eligibility requirements are satisfied.
(c) Financial Institutions Retirement Fund. The accrual of
participants' benefits under SCSB's Financial Institutions Retirement Fund
("SCSB Retirement Plan") shall be frozen effective as of December 31st of the
year in which the Effective Time occurs, and all accrued benefits of
participants in the SCSB Retirement Plan shall thereupon become fully vested.
To the extent permitted by the SCSB Retirement Plan and applicable law, the
accrued benefit of each participant in the SCSB Retirement Plan shall be held
and remain under the SCSB Retirement Plan and shall be payable at the time(s)
and in the forms provided for under that plan. Blue River shall be
responsible for the withdrawal of SCSB from the SCSB Retirement Plan and for
making any required or appropriate application to the Service for a
determination letter to the effect that such withdrawal does not adversely
affect the tax-qualified status of such plan and for providing any notices to
the Pension Benefit Guaranty Corporation or other governmental entity
regarding the
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withdrawal. SCSB shall make contributions to the SCSB Retirement Plan through
the date of such withdrawal only to the extent required to maintain the plan's
tax-qualified status and avoid any federal income taxes or penalties
attributable to the plan's funding status.
7.04. Press Releases. Except as required by law, Blue River shall
not issue any press releases or make any other public announcements or
disclosures relating primarily to Shelby County, SCSB or either of the
Subsidiaries with respect to the Merger without the prior consent of Shelby
County, which consent shall not be unreasonably withheld.
7.05. Information, Access Thereto, Confidentiality. Shelby County
and its attorneys, accountants, representatives, advisors and agents shall, at
all times during normal business hours prior to the Effective Time, have full
and continuing access to the facilities, operations, books, records and
properties of Blue River. Shelby County and its attorneys, accountants,
representatives, advisors and agents may, prior to the Effective Time, make or
cause to be made such reasonable investigation of the operations, books,
records and properties of Blue River and of its financial and legal condition
as Shelby County shall deem reasonable necessary or advisable to familiarize
itself with such books, records, properties and other matters; provided,
however, that such access or investigation shall not interfere unnecessarily
with the normal operations of Blue River. No investigation or review by
Shelby County (whether conducted before or after the date hereof) shall affect
the representations and warranties made by Blue River or the information
contained in any document provided herein, and Shelby County shall be entitled
to rely on such representations, warranties and documents notwithstanding any
such investigation or review. Any confidential information or trade secrets
received by Shelby County or its respective employees or agents in the course
of such examination shall be treated confidentially, and any correspondence,
memoranda, records, copies, documents and electronic or other media of any
kind containing such confidential information or trade secrets or both shall
be destroyed by Shelby County or, at Blue River's request, returned to Blue
River in the event this Agreement is terminated as provided in Section 9
hereof. This Section 7.05 shall not require the disclosure of any information
to Shelby County which would be prohibited by law.
7.06. Employment Agreements. Following the Effective Time, Blue
River agrees to cause SCSB to assume all obligations under the Employment
Agreements, as amended pursuant to Section 6.11 hereof, except as may be
otherwise required by law or any government agency or authority.
7.07. Indemnification. Blue River shall cause SCSB to keep the
indemnification provisions in SCSB's Charter in effect on the date hereof in
full force and effect for a period of not less than two (2) years following
the Effective Time.
7.08. Termination Fee. (a) Blue River hereby acknowledges and
agrees that Shelby County and SCSB have committed and will commit substantial
time, effort, resources and expenses in pursuing the Merger. Blue River
further agrees that it shall pay to Shelby County a termination fee in the
amount the amount of One Hundred Thousand Dollars ($100,000) in immediately
available
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funds ("Termination Fee"), in the event that Shelby County terminates this
Agreement pursuant to Section 9.01(c)(i), 9.01(c)(ii), 9.01(c)(iii) or
9.01(c)(iv) hereof.
(b) The Termination Fee shall be immediately paid to Shelby County
upon the termination of this Agreement by Shelby County pursuant to Section
9.01(c) hereof. If the Termination Fee is not immediately paid as provided,
then Shelby County shall be entitled to recover interest at the highest prime
rate set forth in The Wall Street Journal (Midwest Edition) under the section
entitled "Money Rates" on the unpaid amount of the Termination Fee from the
time the Termination Fee is due until paid-in-full, together with all costs of
collection thereof, including reasonable attorneys' fees and expenses.
(c) Blue River, Shelby County and SCSB hereby acknowledge and agree
that the Termination Fee shall compensate Shelby County and SCSB for (i)
certain expenses incurred for attorneys, accountants, financial advisors and
consultants of Shelby County and SCSB in developing the Merger and drafting
this Agreement, (ii) Shelby County and SCSB's management time and expense in
investigating, analyzing, developing and pursuing the Merger, and (iii)
expenses relating to Shelby County and SCSB's due diligence efforts. Blue
River further acknowledges and agrees that the amount of the Termination Fee
is fair, reasonable and not a penalty and that its obligation to pay the
Termination Fee shall survive any termination of this Agreement by Shelby
County or SCSB.
SECTION 8
CONDITIONS PRECEDENT TO THE TRANSACTION
---------------------------------------
8.01. Blue River. The obligation of Blue River to consummate the
Merger is subject to the satisfaction and fulfillment of each of the following
conditions on or prior to the Effective Time, unless waived in writing by Blue
River:
(a) Representations and Warranties at Effective Time. Each of the
representations and warranties of Shelby County and SCSB contained in this
Agreement shall be true, accurate and correct in all material respects at and
as of the Effective Time as though such representations and warranties had
been made or given on and as of the Effective Time.
(b) Covenants. Each of the covenants and agreements of Shelby County
and SCSB shall have been fulfilled or complied with from the date of this
Agreement through and as of the Effective Time.
(c) Deliveries at Closing. Blue River shall have received from
Shelby County and SCSB at the Closing (as hereinafter defined) the items and
documents, in form and content reasonably satisfactory to Blue River, set
forth in Section 11.02(b) hereof.
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(d) Stock Offering. Blue River shall have (i) registered under the
1933 Act its shares of common stock to be sold in the IPO; (ii) caused each
registration statement with respect to the shares to be issued in the IPO to
have been declared effective by the SEC, and the SEC shall not have issued or
threatened to issue a stop order with respect to each such registration
statement; (iii) received all state securities or Blue Sky approvals,
authorizations and/or exemptions with respect to the shares to be sold in the
IPO; (iv) executed with Roney & Co. or any other investment banking firm, an
underwriting agreement with respect to the shares to be sold in the IPO; and
(v) sold at least 1 million shares of common stock of Blue River in the IPO.
(e) Regulatory Approvals. All appropriate orders, consents,
approvals and clearances from all regulatory agencies and governmental
authorities whose orders, consents, approvals or clearances are required by
law for consummation of the Merger shall have been obtained on terms and
conditions reasonably satisfactory to Blue River.
(f) Shareholder Approvals. The shareholders of Blue River and Shelby
County shall have approved and adopted this Agreement as required by
applicable law and their respective Articles of Incorporation.
(g) Officers' Certificate. Shelby County shall have delivered to
Blue River a certificate signed by its Chairman or President and its
Secretary, dated as of the Effective Time, certifying that (i) all the
representations and warranties of Shelby County and SCSB are true, accurate
and correct in all material respects on and as of the Effective Time; (ii) all
the covenants of Shelby County and SCSB have been complied with from the date
of this Agreement through and as of the Effective Time; and (iii) Shelby
County and SCSB has satisfied and fully complied with all conditions necessary
to make this Agreement effective as to it.
(h) Shareholders' Equity. As of the last day of the month
immediately preceding the Effective Time, the shareholders' equity of Shelby
County on a consolidated basis shall be at least Six Million Nine Hundred
Thousand Dollars ($6,900,000) as reflected on Shelby County's financial
statements as of such date and as determined in accordance with generally
accepted accounting principles applied in a consistent basis. Such amount of
shareholders' equity shall be calculated after all liability accruals and
payments have been made for all legal, accounting, investment banking,
environmental and other professional or advisors' fees of Shelby County and
SCSB and all expenses of Shelby County and SCSB relating to the Merger
incurred as of and through the date of such financial statements.
8.02. Shelby County. The obligations of Shelby County and SCSB to
consummate the Merger is subject to the satisfaction and fulfillment of each
of the following conditions on or prior to the Effective Time, unless waived
in writing by Shelby County:
(a) Representations and Warranties at Effective Time. Each of the
representations and warranties of Blue River contained in this Agreement shall
be true, accurate and correct in all
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material respects on and as of the Effective Time as though such
representations and warranties had been made or given at and as of the
Effective Time.
(b) Covenants. Each of the covenants and agreements of Blue River
shall have been fulfilled or complied with from the date of this Agreement
through and as of the Effective Time.
(c) Deliveries at Closing. Shelby County and SCSB shall have
received from Blue River at the Closing the items and documents, in form and
content reasonably satisfactory to Shelby County, listed in Section 11.02(a)
hereof.
(d) Regulatory Approvals. All appropriate orders, consents,
approvals and clearances from all regulatory agencies and governmental
authorities whose orders, consents, approvals or clearances are required by
law for consummation of the Merger shall have been obtained.
(e) Shareholder Approvals. The shareholders of Blue River and Shelby
County shall have approved and adopted this Agreement as required by
applicable law and their respective Articles of Incorporation.
(f) Fairness Opinion. Shelby County shall have received the Fairness
Opinion by the date of the Proxy Statement. The obligations of Shelby County
and SCSB to consummate the Merger are not subject to or conditioned upon any
update to, supplement to or bring-down of the Fairness Opinion or the issuance
of another opinion stating that the Conversion Price is fair to the
shareholders of Shelby County from a financial point of view.
(g) Officers' Certificate. Blue River shall have delivered to Shelby
County and SCSB a certificate signed by its Chairman or President and its
Secretary, dated as of the Effective Time, certifying that (i) all the
representations and warranties of Blue River are true, accurate and correct in
all material respects on and as of the Effective Time; (ii) all the covenants
of Blue River have been complied with from the date of this Agreement through
and as of the Effective Time; and (iii) Blue River has satisfied and fully
complied with all conditions necessary to make this Agreement effective as to
it.
SECTION 9
TERMINATION OF MERGER
---------------------
9.01. Manner of Termination. This Agreement and the Merger may be
terminated at any time prior to the Effective Time by written notice delivered
by Blue River to Shelby County, or by Shelby County to Blue River, as follows:
(a) By Blue River or Shelby County, if:
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(i) the Merger contemplated by this Agreement has not been
consummated by August 31, 1998; provided, however, that Blue
River may extend such date for up to sixty (60) days, solely
for the purpose of obtaining regulatory approvals
contemplated by Section 8.01(e) hereof and Section 8.02(d)
hereof; or
(ii) the respective Boards of Directors of Blue River, Shelby
County and SCSB mutually agree to terminate this Agreement.
(b) By Blue River, if:
(i) any item, event or information set forth in any supplement,
amendment or update to the Disclosure Schedule has had or
would be expected to have, in the reasonable discretion of
Blue River, a material adverse effect on the business,
prospects, assets, capitalization, financial condition or
results of operations of Shelby County or SCSB, whether
individually or on a consolidated basis, or Shelby Group or
First Tier on a consolidated basis with Shelby County; or
(ii) there has been a misrepresentation or a breach of any
warranty by or on the part of Shelby County or SCSB in their
representations and warranties set forth in this Agreement
which has had or would be expected to have, in the
reasonable discretion of Blue River, a material adverse
effect on the business, prospects, assets, capitalization,
financial condition or results of operations of Shelby
County or SCSB, whether individually or on a consolidated
basis, or Shelby Group or First Tier on a consolidated basis
with Shelby County; provided, however, that in the event of
any inaccuracy in the representations and warranties
contained in Section 4.03 hereof relative to the number of
issued and outstanding shares of Shelby County Common Stock,
SCSB Common Stock, Shelby Group Common Stock or First Tier
Common Stock, then Blue River shall have the absolute right
in its discretion to terminate this Agreement without regard
to the materiality of any such inaccuracy; or
(iii) there has been a material breach of or a failure to comply
in all material respects with any covenant set forth in this
Agreement by or on the part of Shelby County or SCSB;
provided, however, that the covenants set forth in Sections
6.01, 6.02, 6.03(a)(i), (ii), (iii), (iv), (v), (vi), (vii),
(ix), (xi), (xv), (xvi), (xix), (xxi), (xxii), (xxiv),
(xxv), (xxvi) and (xvii), 6.05, 6.07 and 6.11 shall be fully
complied with by Shelby County and SCSB without regard to
materiality, except for any materiality qualification set
forth in such Sections; or
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(iv) Blue River shall reasonably determine that the Merger has
become inadvisable or impracticable by reason of
commencement or threat of any claim, litigation or
proceeding against Blue River, Shelby County, SCSB, Shelby
Group, or First Tier or any director or officer of any of
such entities (A) relating to this Agreement or the Merger
or (B) which is likely to have a material adverse effect on
the business, prospects, assets, capitalization, financial
condition or results of operations of Shelby County or SCSB,
whether individually or on a consolidated basis, or Shelby
Group or First Tier on a consolidated basis with Shelby
County, or of Blue River; or
(v) there has been a material adverse change in the business,
prospects, assets, capitalization, financial condition or
results of operations of Shelby County or SCSB, whether
individually or on a consolidated basis, or Shelby Group or
First Tier on a consolidated basis with Shelby County, at
any time as compared to that in existence as of September
30, 1997; or
(vi) Trident has not issued, by the date of the Proxy Statement,
its written opinion stating that the Conversion Price is
fair to the shareholders of Shelby County from a financial
point of view.
(c) By Shelby County, if:
(i) there has been a misrepresentation or a breach of any
warranty by or on the part of Blue River in its
representations and warranties set forth in this Agreement
which has had or would be expected to have, in the
reasonable discretion of Shelby County, a material adverse
effect on the business, assets, capitalization, financial
condition or results of operation of Blue River; or
(ii) there has been a breach of or failure to comply with any
covenant set forth in this Agreement by or on the part of
Blue River; or
(iii) Blue River does not receive, by February 20, 1998, a letter
of intent or other similar document from Roney & Co.
regarding its intent to act as the principal underwriter in
the IPO; or
(iv) Roney & Co. withdraws or terminates its letter of intent or
other similar document relating to the IPO (except in
connection with the execution of an underwriting agreement);
provided, however, that before Shelby County may exercise
its right to terminate this Agreement pursuant to this
Section 9.01(c)(iv), Blue River shall have thirty (30) days
from the date of such withdrawal to obtain a letter of
intent or similar document from another investment banker
with respect to the intent of such other investment banker
to act as the principal underwriter in the IPO.
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9.02. Effect of Termination. Upon termination by written notice,
this Agreement shall be of no further force or effect, and there shall be no
further obligations or restrictions on future activities on the part of Blue
River, Shelby County, SCSB and their respective directors, officers,
employees, agents and shareholders, except as provided in compliance with the
confidentiality provisions of this Agreement set forth in Section 6.08 and
Section 7.05 hereof, for the payment of the Termination Fee as provided by
Section 7.08 hereof and for the payment of expenses set forth in Section 12.09
hereof; provided, however, the damages of Shelby County and SCSB relating to
this Agreement and the Merger shall be limited solely to the Termination Fee;
provided, further, if such termination was the result of an intentional breach
by Shelby County or SCSB of any representation, warranty, covenant or other
provision in this Agreement, or an intentional act or omission by Shelby
County or SCSB which resulted in any representation, warranty, covenant or
other provision in this Agreement to be breached, Shelby County and SCSB shall
be liable to Blue River for damages and all costs and expenses incurred in
connection with the preparation, negotiation and execution of this Agreement,
including, but not limited to, reasonable attorneys' fees and disbursements,
reasonable fees and disbursements of accountants and tax advisors, and
reasonable fees and costs of environmental consultants. In the event that
this Agreement is terminated pursuant to this Section 9, the parties hereto
each agree that Roney & Co. and any other investment banking firm engaged by
Blue River shall have no liability relating to the failure of Blue River to
fulfill the conditions contemplated by Section 8.01(d) hereof.
SECTION 10
EFFECTIVE TIME OF THE MERGER
----------------------------
Upon the terms and subject to the conditions specified in this Agreement,
the Merger shall become effective at the time specified in the Articles of
Merger of Shelby County with and into Blue River as filed with the Indiana
Secretary of State ("Effective Time"). The Effective Time shall occur not
later than the last business day of the month following (a) the fulfillment of
all conditions precedent to the Merger set forth in Section 8 hereof, and (b)
the expiration of all waiting periods in connection with the regulatory
applications filed for the approval of the Merger.
SECTION 11
CLOSING
-------
11.01. Closing Date and Place. So long as all conditions precedent
set forth in Section 8 have been satisfied and fulfilled, the closing of the
Merger ("Closing") shall take place on the Effective Time at the offices of
Krieg DeVault Alexander & Capehart in Indianapolis, Indiana.
11.02. Deliveries. (a) At the Closing, Blue River shall deliver to
Shelby County the following:
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(i) an opinion of its counsel dated as of the Effective Time and
substantially in the form set forth in Exhibit A attached
hereto;
(ii) the officers' certificate contemplated by Section 8.02(g)
hereof;
(iii) copies of all approvals by government regulatory agencies
necessary to consummate the Merger;
(iv) copies of the resolutions of the Board of Directors of Blue
River and the shareholders of Blue River, if necessary,
certified by the President or Secretary of Blue River,
relative to the approval of this Agreement and the Merger;
and
(v) such other documents as Shelby County or its legal counsel
may reasonably request.
(b) At the Closing, Shelby County shall deliver to Blue River the
following:
(i) an opinion of its counsel dated as of the Effective Time and
substantially in the form set forth in Exhibit B attached
hereto;
(ii) the officers' certificate contemplated by Section 8.01(g)
hereof;
(iii) a list of Shelby County's shareholders as of the Effective
Time certified by the President and Secretary of Shelby
County;
(iv) copies of the resolutions adopted by the Board of Directors
and shareholders of Shelby County, certified by its Chairman
or President and Secretary, relative to the approval of this
Agreement and the Merger;
(v) copies of resolutions adopted by the Board of Directors and
sole shareholder of SCSB, certified by its Chairman or
President and Secretary, relative to the approval of this
Agreement; and
(vi) such other documents as Blue River or its legal counsel may
reasonably request.
SECTION 12
MISCELLANEOUS
-------------
12.01. Effective Agreement. This Agreement shall be binding upon and
inure to the benefit of the respective parties hereto and their respective
successors and assigns; provided, however, that
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this Agreement may not be assigned by any party hereto without the prior
written consent of the other parties hereto. The representations, warranties,
covenants and agreements contained in this Agreement are for the sole benefit
of the parties hereto and their successors and assigns, and they shall not be
construed as conferring any rights on any other persons.
12.02. Waiver; Amendment. (a) Blue River or Shelby County may by an
instrument in writing: (i) extend the time for the performance of or otherwise
amend any of the covenants, conditions or agreements of the other parties to
this Agreement (other than SCSB with respect to Shelby County); (ii) waive any
inaccuracies in the representations or warranties of the other parties
contained in this Agreement or in any document delivered pursuant hereto or
thereto (other than SCSB with respect to Shelby County); (iii) waive the
performance by the other parties (other than SCSB with respect to Shelby
County) of any of the covenants or agreements to be performed by it or them
under this Agreement; or (iv) waive the satisfaction or fulfillment of any
condition, the nonsatisfaction or nonfulfillment of which is a condition to
the right of the party so waiving to consummate the Merger. The waiver by any
party hereto of a breach of or noncompliance with any provision of this
Agreement shall not operate or be construed as a continuing waiver or a waiver
of any other or subsequent breach or noncompliance hereunder.
(b) This Agreement may be amended, modified or supplemented only by a
written agreement executed by the parties hereto and, if such amendment,
modification or supplement occurs after the approval of the Agreement by the
shareholders of Shelby County, only in a manner that will not materially and
adversely affect the rights of Shelby County's shareholders hereunder without
obtaining their approval thereof.
12.03. Notices. All notices, requests and other communications
hereunder shall be in writing (which shall include telecopier communication)
and shall be deemed to have been duly given if delivered by hand and receipted
for, sent by certified United States Mail, return receipt requested, first
class postage pre-paid, delivered by overnight express receipted delivery
service or telecopied if confirmed immediately thereafter by also mailing a
copy of such notice, request or other communication by certified United States
Mail, return receipt requested, with First Class postage prepaid as follows:
If to Blue River: with a copy to (which shall not
constitute notice):
Blue River Bancshares, Inc. Krieg DeVault Alexander & Capehart
ATTN: Robert C. Reed, President ATTN: Nicholas J. Chulos, Esq.
113 South Harrison Street One Indiana Square, Suite 2800
Shelbyville, Indiana 46176 Indianapolis, Indiana 46204-2017
Telephone: (317) 392-7700 Telephone: (317) 238-6224
Telecopier: (317) 398-7004 Telecopier: (317) 636-1507
-45-
<PAGE>
If to Shelby County or SCSB: with a copy to (which shall not
constitute notice):
Shelby County Bancorp Bose McKinney & Evans
ATTN: James M. Robison, Chairman ATTN: David A. Butcher, Esq.
29 East Washington Street 2700 First Indiana Building
P. O. Box 438 135 South Pennsylvania Street
Shelbyville, Indiana 46176 Indianapolis, Indiana 46204
Telephone: (317) 398-9721 Telephone: (317) 684-5000
Telecopier: (317) 835-0306 Telecopier: (317) 684-5173
or such substituted address or person as any of them given to the other in
writing. All such notices, requests or other communications shall be
effective: (a) if delivered by hand, when delivered; (b) if mailed in the
manner provided herein, three (3) business days after deposit with the United
States Postal Service; (c) if delivered by overnight express delivery service,
on the next business day after deposit with such service; and (d) if by
telecopier, on the next business day if also confirmed by mail in the manner
provided herein.
12.04. Headings. The headings in this Agreement have been inserted
solely for ease of reference and should not be considered in the
interpretation or construction of this Agreement.
12.05. Severability. In case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein.
12.06. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
12.07. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana and applicable
federal laws.
12.08. Entire Agreement. This Agreement supersedes all other prior
or contemporaneous understandings, commitments, representations, negotiations
or agreements, whether oral or written, between or among the parties hereto
relating to the Merger and the matters contemplated herein (including, but not
limited to, the Prior Agreement and the Memorandum dated December 5, 1997 from
Blue River to the Board of Directors of Shelby County and SCSB) and
constitutes the entire agreement among the parties hereto relating to the
subject matter hereof, except with respect to the Confidentiality Agreement
dated December 9, 1997 by and between Blue River and Shelby County, the
Lock-up Agreement, the Termination Agreement and the Disclosure Schedule
delivered with the Prior Agreement, each of which shall remain in full force
and effect. The parties hereto agree that
-46-
<PAGE>
each party and its counsel reviewed and revised this Agreement and that the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments or exhibits hereto.
12.09. Expenses. The parties hereto shall each pay their respective
expenses incidental to the Merger.
12.10. Certain References. Whenever in this Agreement a singular
word is used, it also shall include the plural wherever required by the
context and vice-versa. Except expressly stated otherwise, all references in
this Agreement to periods of days shall be construed to refer to calendar, not
business, days. The term "business day" shall mean any day except Saturday
and Sunday when SCSB, is open for the transaction of business.
12.11. Disclosure Schedule. The Disclosure Schedule attached hereto
is intended to be and hereby is specifically made a part of this Agreement,
and the information contained in the Disclosure Schedule shall be deemed to be
representations and warranties of Shelby County and SCSB.
* * *
-47-
<PAGE>
IN WITNESS WHEREOF, Blue River, Shelby County and SCSB have entered into,
executed and delivered this Agreement as of the day and year first above
written.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
----------------------------
Robert C. Reed, President
ATTEST:
By: /s/ D. WARREN ROBINSON
-----------------------------------
D. Warren Robison, Secretary
SHELBY COUNTY BANCORP
By: /s/ JAMES M. ROBISON
----------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ DAVID A. CARMONY
-----------------------------------
David A. Carmony, Secretary
SHELBY COUNTY SAVINGS BANK, FSB
By: /s/ JAMES M. ROBISON
----------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ BETTY J. BAKER
-----------------------------------
Betty J. Baker, Secretary
-48-
<PAGE>
Each of the undersigned directors of Shelby County hereby (a) agrees in
his capacity as a director to recommend to Shelby County's shareholders the
approval of this Agreement and the Merger in accordance with Section 6.01
hereof, and (b) agrees in his individual capacity to vote his shares of Shelby
County Common Stock that are registered in his personal name (and agrees to
use his reasonable efforts to cause all additional shares of Shelby County
Common Stock owned jointly with any other person or by his spouse or over
which he has voting influence or control to be voted) in favor of this
Agreement and the Merger. In addition, each of the undersigned directors
hereby agrees not to make any transfers of shares of Shelby County Common
Stock with the purpose of avoiding his agreements set forth in the preceding
sentence.
Dated this 12th day of March, 1998.
/s/ JAMES M. ROBISON
---------------------------
James M. Robison
/s/ RODNEY L. MEYERHOLTZ
---------------------------
Rodney L. Meyerholtz
/s/ DAVID A. CARMONY
---------------------------
David A. Carmony
/s/ LEONARD J. FISCHER
---------------------------
Leonard J. Fischer
/s/ JACK D. DISSER
---------------------------
Jack D. Disser
-49-
EXHIBIT 5
March 19, 1998
Board of Directors
Blue River Bancshares, Inc.
P.O. Box 927
Shelbyville, IN 46176
RE: Issuance of Shares of Common Stock of Blue River Bancshares, Inc.
Ladies and Gentlemen:
We have represented Blue River Bancshares, Inc. (the "Company") as special
counsel in connection with the preparation and filing of a Registration
Statement on Form SB-2 (the "Registration Statement") with the Securities and
Exchange Commission for the purpose of registering, under the Securities Act
of 1933, as amended, up to 1,437,500 shares of the Company's common stock, no
par value (the "Shares").
The Shares will be sold and issued in accordance with the Registration
Statement.
In connection with this opinion, we have reviewed (i) the Registration
Statement, (ii) the form of Underwriting Agreement which is filed as an
exhibit to the Registration Statement, (iii) the Company's Articles of
Incorporation and By-Laws, and (iv) such other records, documents, instruments
and information as we have in our judgment deemed relevant. In our review, we
have assumed the following: (i) the authenticity of original documents and the
genuineness of all signatures, (ii) the conformity to the originals of all
documents submitted to us as copies, and (iii) the truth, accuracy and
completeness of the records, documents, instruments, certificates and
information which we have reviewed. We have also assumed that the
Registration Statement, and any applicable amendments thereto (including
post-effective amendments), will have become effective under the Securities
Act of 1933, as amended.
Based upon the foregoing, and subject to the exceptions, qualifications
and limitations stated herein, we are of the opinion that the Shares are duly
authorized and, if and when the Shares are sold and issued in accordance with
the Registration Statement and when the full consideration specified in the
Registration Statement has been received, will be validly issued, fully paid
and nonassessable.
This opinion is limited to the matters stated herein, and no opinion is to
be implied or may be inferred beyond the matters expressly stated. This
opinion is addressed to you and is solely for your use in connection with the
Registration Statement, and we assume no professional responsibility to any
other party whatsoever. Accordingly, the opinion expressed herein is not to
be relied upon, utilized or quoted by or delivered or disclosed to, in whole
or in part, any other person, corporation, entity or governmental authority
without, in each instance, the prior written consent of this firm.
<PAGE>
Board of Directors
Blue River Bancshares, Inc.
March 19, 1998
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference made to us in the Registration
Statement and in the Prospectus under the caption "Legal Matters." In giving
this consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ KRIEG DeVAULT ALEXANDER & CAPEHART
--------------------------------------
KRIEG DeVAULT ALEXANDER & CAPEHART
EXHIBIT 10.3
PROMISSORY NOTE
Shelbyville, Indiana
$150,000.00 Effective Date: March 18, 1997
Maturity: On Demand
For Value Received, Blue River Bancshares, Inc., an Indiana corporation
(hereinafter referred to as "Maker"), hereby promises to pay to the order of
Steven R. Abel, an Indiana resident (hereinafter referred to as "Lender"), ON
DEMAND, in lawful money of the United States of America the principal sum of
One Hundred and Fifty Thousand and no/100 Dollars ($150,000.00) or as much
thereof as may then be outstanding, and to pay interest on the unpaid
principal balance outstanding from time to time as provided below.
This Note evidences indebtedness incurred by the Maker. The principal
amount of this Note outstanding from time to time shall be determined by
reference to the books and records of the Maker on which all advances and any
payments under this Note shall be recorded. Such books and records shall be
deemed prima facie to be correct.
Until demand, interest on the unpaid principal balance of this Note
outstanding from time to time shall accrue at the rate of eight and one-half
percent (8.50%) per annum. Interest shall be calculated on the basis of a
365-day year. Interest shall accrue from and including the Effective Date of
this Note (as set forth above) to and including the date of payment hereof.
Notices, demands or payments, as appropriate, under this Note shall
(unless otherwise expressly provided) be in writing and shall be delivered, by
hand, courier, or the United States Mail (registered or certified mail), with
all expenses of delivery being prepaid, and shall be addressed as follows:
If to the Maker: Blue River Banchshares, Inc.
116 South Harrison Street
Shelbyville, Indiana 46176
If to the Lender: Steven R. Abel
8532 N. 600 W.
Fountaintown, Indiana 46 130
or at such other address as the Maker or Lender shall have furnished to the
other in writing. Any notice or demand so addressed and mailed by registered
or certified mail shall be deemed to be given three (3) days after the date so
mailed. Any notice or demand so addressed and otherwise delivered shall be
deemed to be given when actually received by the addressee. Any payment so
Page 1 of 2 Pages
<PAGE>
addressed and mailed or otherwise delivered shall be deemed to be given when
actually received by the Lender.
The Maker, together with any endorser, co-signor, guarantor or surety of
this Note, if any, agree to pay, and save the Lender or any holder of this
Note harmless against, any liability for the payment of any costs and
expenses, including reasonable attorneys fees, arising or incurred in
connection with the enforcement by the Lender or any holder of the Note of any
rights under this Note.
All amounts payable under the terms of this Note shall be payable with
attorneys' fees and other legal expenses and costs of collection, and without
relief from valuation and appraisement laws. The Maker and any endorsers
severally waive demand, presentment for payment and notice of nonpayment of
this Note, and each of them consents to all extensions of the time of payment
hereof without notice. This Note is made under and will be governed by the
internal laws of the State of Indiana.
Dated as of: March 18, 1997 BLUE RIVER BANCSHARES, INC.
By: /s/ D. WARREN ROBISON
----------------------------------
Printed: D. Warren Robison
-----------------------------
Title: Vice President and Treasurer
-------------------------------
Page 2 of 2 Pages
<PAGE>
PROMISSORY NOTE
Shelbyville, Indiana
$100,000.00 Effective Date: March 18, 1997
Maturity: On Demand
For Value Received, Blue River Bancshares, Inc., an Indiana corporation
(hereinafter referred to as "Maker"), hereby promises to pay to the order of
D. Warren Robison, an Indiana resident (hereinafter referred to as "Lender"),
ON DEMAND, in lawful money of the United States of America the principal sum
of One Hundred Thousand and no/100 Dollars ($100,000.00) or as much thereof as
may then be outstanding, and to pay interest on the unpaid principal balance
outstanding from time to time as provided below.
This Note evidences indebtedness incurred by the Maker. The principal
amount of this Note outstanding from time to time shall be determined by
reference to the books and records of the Maker on which all advances and any
payments under this Note shall be recorded. Such books and records shall be
deemed prima facie to be correct.
Until demand, interest on the unpaid principal balance of this Note
outstanding from time to time shall accrue at the rate of eight and one-half
percent (8.50%) per annum. Interest shall be calculated on the basis of a
365-day year. Interest shall accrue from and including the Effective Date of
this Note (as set forth above) to and including the date of payment hereof.
Notices, demands or payments, as appropriate, under this Note shall
(unless otherwise expressly provided) be in writing and shall be delivered, by
hand, courier, or the United States Mail (registered or certified mail), with
all expenses of delivery being prepaid, and shall be addressed as follows:
If to the Maker: Blue River Banchshares, Inc.
116 South Harrison Street
Shelbyville, Indiana 46176
If to the Lender: D. Warren Robison
5870 W. 400 N.
Fairland, Indiana 46126
or at such other address as the Maker or Lender shall have furnished to the
other in writing. Any notice or demand so addressed and mailed by registered
or certified mail shall be deemed to be given three (3) days after the date so
mailed. Any notice or demand so addressed and otherwise delivered shall be
deemed to be given when actually received by the addressee. Any payment so
addressed and mailed or otherwise delivered shall be deemed to be given when
actually received by the Lender.
Page 1 of 2 Pages
<PAGE>
The Maker, together with any endorser, co-signor, guarantor or surety of
this Note, if any, agree to pay, and save the Lender or any holder of this
Note harmless against, any liability for the payment of any costs and
expenses, including reasonable attorneys fees, arising or incurred in
connection with the enforcement by the Lender or any holder of the Note of any
rights under this Note.
All amounts payable under the terms of this Note shall be payable with
attorneys' fees and other legal expenses and costs of collection, and without
relief from valuation and appraisement laws. The Maker and any endorsers
severally waive demand, presentment for payment and notice of nonpayment of
this Note, and each of them consents to all extensions of the time of payment
hereof without notice. This Note is made under and will be governed by the
internal laws of the State of Indiana.
Dated as of: March 18, 1997 BLUE RIVER BANCSHARES, INC.
By: /s/ STEVEN R. ABEL
-------------------------------
Printed: Steven R. Abel
--------------------------
Title: Chairman
----------------------------
Page 2 of 2 Pages
<PAGE>
PROMISSORY NOTE
Shelbyville, Indiana
$150,000.00 Effective Date: August 11, 1997
Maturity: On Demand
For Value Received, Blue River Bancshares, Inc., an Indiana corporation
(hereinafter referred to as "Maker"), hereby promises to pay to the order of
Robert C. Reed, an Indiana resident (hereinafter referred to as "Lender"), ON
DEMAND, in lawful money of the United States of America the principal sum of
One Hundred and Fifty Thousand and no/100 Dollars ($150,000.00) or as much
thereof as may then be outstanding, and to pay interest on the unpaid
principal balance outstanding from time to time as provided below.
This Note evidences indebtedness incurred by the Maker. The principal
amount of this Note outstanding from time to time shall be determined by
reference to the books and records of the Maker on which all advances and any
payments under this Note shall be recorded. Such books and records shall be
deemed prima facie to be correct.
Until demand, interest on the unpaid principal balance of this Note
outstanding from time to time shall accrue at the rate of eight and one-half
percent (8.50%) per annum. Interest shall be calculated on the basis of a
365-day year. Interest shall accrue from and including the Effective Date of
this Note (as set forth above) to and including the date of payment hereof.
Notices, demands or payments, as appropriate, under this Note shall
(unless otherwise expressly provided) be in writing and shall be delivered, by
hand, courier, or the United States Mail (registered or certified mail), with
all expenses of delivery being prepaid, and shall be addressed as follows:
If to the Maker: Blue River Banchshares, Inc.
116 South Harrison Street
Shelbyville, Indiana 46176
If to the Lender: Robert C. Reed
471 Locust Drive
Morristown, Indiana 46161
or at such other address as the Maker or Lender shall have furnished to the
other in writing. Any notice or demand so addressed and mailed by registered
or certified mail shall be deemed to be given three (3) days after the date so
mailed. Any notice or demand so addressed and otherwise delivered shall be
deemed to be given when actually received by the addressee. Any payment so
addressed and mailed or otherwise delivered shall be deemed to be given when
actually received by the Lender.
Page 1 of 2 Pages
<PAGE>
The Maker, together with any endorser, co-signor, guarantor or surety of
this Note, if any, agree to pay, and save the Lender or any holder of this
Note harmless against, any liability for the payment of any costs and
expenses, including reasonable attorneys fees, arising or incurred in
connection with the enforcement by the Lender or any holder of the Note of any
rights under this Note.
All amounts payable under the terms of this Note shall be payable with
attorneys' fees and other legal expenses and costs of collection, and without
relief from valuation and appraisement laws. The Maker and any endorsers
severally waive demand, presentment for payment and notice of nonpayment of
this Note, and each of them consents to all extensions of the time of payment
hereof without notice. This Note is made under and will be governed by the
internal laws of the State of Indiana.
Dated as of: August 11, 1997 BLUE RIVER BANCSHARES, INC.
By: /s/ STEVEN R. ABEL
--------------------------------
Printed: Steven R. Abel
---------------------------
Title: Chairman
-----------------------------
Page 2 of 2 Pages
EXHIBIT 10.5
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT ("Agreement"), is made and entered into as of
February 5, 1998, by and between BLUE RIVER BANCSHARES, INC. ("Blue River"),
an Indiana corporation, and SHELBY COUNTY BANCORP ("Shelby County"), an
Indiana corporation,
W I T N E S S E T H:
--------------------
WHEREAS, Blue River, Shelby County and Shelby County Savings Bank, FSB
("Bank"), a wholly-owned subsidiary of Shelby County, have entered into an
Agreement of Affiliation and Merger ("Merger Agreement") dated of even date
herewith contemporaneously with the execution of this Agreement. The Merger
Agreement provides for, among other items, the conversion of each issued and
outstanding share of common stock of Shelby County at the Effective Time (as
defined in the Merger Agreement) into the right to receive a cash amount equal
to $58.00 from Blue River; and
WHEREAS, Blue River has paid to Shelby County the sum of One Hundred
Dollars ($100) in consideration for the grant of the Option (as hereinafter
defined) by Shelby County to Blue River, which has been granted to further
induce Blue River to enter into the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the cash
payment referenced therein, the receipt of which is hereby acknowledged, the
mutual covenants and obligations set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
Section 1. Grant of Option. Shelby County hereby grants to Blue
River an irrevocable option (the "Option") to purchase up to such number of
shares of common stock of Shelby County, which will, immediately following the
exercise of the Option in its entirety, aggregate twenty-four and 80/100
percent (24.80%) of the issued and outstanding shares of common stock of
Shelby County ("Option Shares") (such issued and outstanding shares shall for
purposes of this Agreement be deemed to include all shares that are issuable
pursuant to the exercise of stock options granted to directors and employees
of Shelby County or the Bank) at a price per Option Share equal to $49.16
("Purchase Price"); provided, however, that this Agreement and the Option
shall automatically expire and be of no further force or effect (a) on and
after the date the Merger Agreement has been terminated pursuant to Section 9
of the Merger Agreement and (b) only so long as neither Shelby County nor SCSB
has breached the covenants set forth in Section 6.05 of the Merger Agreement.
In the event that Shelby County or SCSB breaches the covenants set forth in
Section 6.05 of the Merger Agreement, then this Agreement and the Option shall
automatically expire and be of no further force or effect on and after the
date which is one (1) year following the date of termination of the Merger
Agreement pursuant to Section 9 thereof.
Section 2. Exercise of Option. Subject to Sections 1, 3 and 9
hereof, the Option may be exercised by Blue River, in whole or in part, at any
time, and from time to time, on or before the later of September 30, 1998 or
the date which is one (1) year following the termination of the Merger
<PAGE>
Agreement. If the Option has not expired pursuant to Section 1 hereof or has
not been exercised by the later of September 30, 1998 or the date which is one
(1) year following the termination of the Merger Agreement, then this
Agreement and the Option shall automatically terminate on the succeeding day
and thereafter be of no further force or effect. In the event Blue River
wishes to exercise the Option, Blue River shall deliver a written notice(s) to
Shelby County specifying the total number of Option Shares that it will
purchase and a place and date not later than sixty (60) days from the date of
delivery of such notice for the closing ("Closing") of such purchase;
provided, however, that if the approval of any governmental authority required
for purchasing the Option Shares shall not have been obtained prior to the
Closing, the date of the Closing shall be postponed to a date five (5)
business days following receipt of all such required governmental approvals;
provided, further, that Blue River, at any time prior to the Closing, may
rescind such notice of intent to purchase the Option Shares and shall not
thereafter be obligated to purchase any or all of the Option Shares. The
Option fee of One Hundred Dollars ($100) paid by Blue River as of the date
hereof shall be applied against the purchase price of the Option Shares.
Section 3. Conditions to Exercise of Option. Blue River may exercise
the Option only if any of the following events occurs or has occurred without
the prior written consent of Blue River:
(a) The acquisition, following the date of this Agreement, by any
entity, person or group, other than Blue River, of beneficial ownership of
twenty percent (20%) or more (in the aggregate) of the shares of Shelby County
Common Stock (as defined in the Merger Agreement) (for purposes of this
Section 3, the terms "group" and "beneficial ownership" shall have the same
meanings ascribed to them in Section 13(d) of the Securities Exchange Act of
1934, as amended, and the regulations promulgated thereunder), but only if (i)
such entity, person or group has publicly announced its opposition to the
Merger Agreement or the Merger (as defined in the Merger Agreement) or its
intention not to vote the common stock beneficially owned by the entity,
person or group in favor of the Merger Agreement or the Merger and has
solicited or indicated its intention to solicit proxies or votes against the
Merger Agreement or the Merger; (ii) such entity, person or group has
proposed, indicated an intention to propose, or entered into an agreement to
effect a merger, consolidation, share exchange or other combination with
Shelby County or the Bank; or (iii) such entity, person or group has voted
against the Merger Agreement or the Merger at the meeting of shareholders of
Shelby County at which the Merger Agreement and the Merger are voted upon; or
(b) The making, following the date of this Agreement, by any entity,
person or group, other than Blue River, of a tender or exchange offer for, or
any other offer to purchase, an amount equivalent to twenty percent (20%) or
more (in the aggregate) of the shares of Shelby County Common Stock; or
(c) The acceptance by Shelby County or the Bank of any proposal
(however conditional or future) of, or the execution by Shelby County or the
Bank of any letter of intent, agreement in principle or other agreement
(whether binding or non-binding) with, any entity, person or group, other than
Blue River, to (i) acquire Shelby County or the Bank by merger, consolidation,
share
2
<PAGE>
exchange, combination, purchase of all or substantially all of Shelby County's
or the Bank's assets or capital stock or any other similar transaction, or
(ii) make a tender or exchange offer for any shares of Shelby County Common
Stock.
Section 4. Payment and Delivery of Certificate(s). Subject to any
necessary regulatory approval, at any Closing hereunder (a) Blue River shall
pay to Shelby County the aggregate purchase price for the Option Shares so
purchased by delivery of a cashier's or certified check or other immediately
available funds payable to the order of Shelby County, less the Option fee of
One Hundred Dollars ($100), and (b) Shelby County shall promptly thereafter
issue the Option Shares in compliance with all applicable laws and regulations
and deliver to Blue River a certificate or certificates representing the
Option Shares as purchased, free and clear of all liens, claims, pledges,
security interests, charges and rights of any third parties.
Section 5. Representations, Warranties and Covenants of Shelby
County. Shelby County hereby represents, warrants and covenants to Blue River
as follows:
(a) This Agreement and the consummation by Shelby County of the
transactions contemplated hereby have been duly authorized and approved by all
necessary corporate action on the part of Shelby County, have been duly
executed and delivered by an authorized officer of Shelby County and
constitute a valid and binding obligation of Shelby County. Shelby County is
an Indiana corporation duly organized and validly existing under the laws of
the State of Indiana and has all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby.
(b) As of the date of this Agreement, the authorized capital stock of
Shelby County consists of 5,000,000 shares of common stock, no par value per
share, 175,950 shares of which are issued and outstanding, which number of
issued and outstanding shares is subject to increase to a total of 189,750
shares pursuant to the exercise of certain stock options granted to employees
and directors of Shelby County. Shelby County has no other capital stock
authorized and is under no obligation to and shall not authorize or issue any
other shares of capital stock or any additional options or rights to acquire
shares of common stock of Shelby County. Upon exercise in full of the Option,
the Option Shares shall at all times represent not less than 24.80% of the
outstanding shares of capital stock of Shelby County.
(c) Shelby County has taken all necessary corporate and other action
to authorize and reserve and to permit it to issue the Option Shares pursuant
hereto. At all times from the date hereof until such time as the obligation
to deliver the Option Shares hereunder terminates, Shelby County will have
reserved for issuance upon exercise of the Option by Blue River sufficient
shares of common stock of Shelby County, all of which, upon issuance pursuant
hereto, shall be duly authorized, validly issued, fully paid and
nonassessable, shall be free and clear of all liens, claims, pledges, security
interests, charges and rights of any third parties of any nature whatsoever
and shall not have been issued in violation of any preemptive right of any of
the shareholders of Shelby County.
3
<PAGE>
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will violate or result in
any violation of or be in conflict with, result in acceleration or termination
of or constitute a default under any term or provision of the Articles of
Incorporation or By-Laws of Shelby County or of any agreement, note, bond,
indenture, instrument, obligation, judgment, decree, order, law, rule or
regulation binding upon or applicable to Shelby County or any of its
subsidiaries or any of their respective properties or assets. If Blue River
exercises the Option, whether in whole or in part, Shelby County shall
immediately thereafter redeem the rights granted pursuant to the Rights
Agreement (as defined in the Merger Agreement) at an aggregate cost not to
exceed Twenty Thousand Dollars ($20,000).
(e) Upon any exercise of the Option, whether in whole or in part, the
Option Shares (i) shall be entitled to vote on all matters to come before the
shareholders of Shelby County at any meeting thereof, (ii) shall be entitled
to the same preferences, limitations and relative voting and other rights
(including dividend and distribution rights) as possessed by all other holders
of Shelby County Common Stock, and (iii) shall not be subject to any
limitation or restriction not imposed on all other shareholders of Shelby
County generally.
(f) The representations and warranties of Shelby County contained
herein are true, accurate and complete on and as of the date hereof, shall
survive the execution of this Agreement and shall continue to be true,
accurate and complete during the period that the Option may be exercised by
Blue River. Shelby County shall comply with the covenants applicable to it
contained herein from the date of this Agreement through and until such time
as the Option terminates.
Section 6. Representations and Warranties of Blue River. Blue River
hereby represents and warrants to Shelby County as follows:
(a) This Agreement and the consummation by Blue River of the
transactions contemplated hereby have been duly authorized and approved by all
necessary corporate action on the part of Blue River, have been duly executed
and delivered by an authorized officer of Blue River and constitute a valid
and binding obligation of Blue River. Blue River is a corporation duly
organized and validly existing under the laws of the State of Indiana and has
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
(b) Blue River is purchasing the Option, and any shares of common
stock of Shelby County issued upon exercise of the Option, for its own account
and not with a view to the public distribution thereof and will not sell,
assign or transfer any such shares of common stock issued to Blue River upon
exercise of the Option except in compliance with all applicable laws and
regulations and a legend to such effect shall be noted on the certificate or
certificates representing the Option Shares issued upon exercise of the
Option.
(c) The representations and warranties of Blue River contained herein
are true, accurate and complete on and as of the date hereof, shall survive
the execution of this Agreement and shall
4
<PAGE>
continue to be true, accurate and complete during the period that the Option
may be exercised by Blue River.
Section 7. Certain Rights.
---------- ---------------
(a) In the event that Blue River exercises the Option and desires to
sell any of the Option Shares, and so requests in writing, Shelby County
agrees to use its best efforts to assist Blue River in complying with all
applicable federal laws relating to such sale and any applicable state
securities laws (including, without limitation, providing Blue River with
appropriate information relating to Shelby County to be included in any
registration statement filed by Blue River), not later than thirty (30) days
after Blue River requests such assistance, with respect to that number of the
Option Shares beneficially owned by Blue River for which Blue River requests
such assistance, unless, in the opinion of counsel to Shelby County addressed
to Blue River, which opinion shall be in form and substance reasonably
satisfactory to Blue River and its counsel, a registration statement is not
required for the proposed sale or distribution of such Option Shares. All
registration statements and all actions relating to compliance with federal
and state law pursuant to this Section 7(a) shall be completed at Blue River's
expense except for any fees and disbursements of counsel for Shelby County,
which shall be paid by Shelby County.
(b) In addition to the foregoing rights, if at any time Shelby County
proposes to offer for sale for cash in an offering to the public any of its
equity securities, Shelby County at such time will provide written notice to
Blue River of its intention to do so. Upon written request of Blue River,
given within fifteen (15) days after the providing of any such notice to Blue
River by Shelby County (which request shall state the intended method of
disposition of such shares), Shelby County shall cause that number of the
Option Shares as to which Blue River identifies in such request to be included
in Shelby County's registration statement in compliance with all applicable
federal and state securities laws. Such Option Shares so identified by Blue
River shall be included in Shelby County's registration statement proposed to
be filed by Shelby County, unless, in the opinion of counsel to Shelby County
addressed to Blue River, which opinion shall be in form and substance
reasonably satisfactory to Blue River and its counsel, inclusion of such
shares in such registration statement is not required for any proposed sale or
distribution of such Option Shares by Blue River. All registration statements
and all actions relating to compliance with federal and state law pursuant to
this Section 7(b) shall be completed at Shelby County's expense except for any
fees and disbursements of counsel for Blue River, which shall be paid by Blue
River.
Section 8. Adjustment Upon Changes in Capitalization. In the event
of any changes in the capital stock of Shelby County by reason of any stock
dividend, stock split, merger, recapitalization, combination, exchange of
shares or otherwise, the number and kind of Option Shares subject to this
Agreement and the Option and the purchase price per Option Share hereunder
shall be appropriately adjusted so that the number of Option Shares subject to
the Option following the occurrence of any of the foregoing events shall be
equal to the same percentage of voting capital stock referenced in Section
5(b) hereof.
5
<PAGE>
Section 9. Right of Repurchase.
---------- --------------------
(a) In the event that Blue River has purchased all of the Option
Shares pursuant to this Agreement, and Blue River so requests in writing,
Shelby County shall pay to Blue River an amount in cash equal to the highest
price paid or to be paid by any entity, person or group referenced in Section
3 hereof for any share of Shelby County Common Stock (or the aggregate
consideration paid for the assets of Shelby County divided by the number of
shares of Shelby County Common Stock then outstanding), as the case may be,
multiplied by the total number of Option Shares, plus interest at the rate of
8% per annum from the date of the purchase of the Option Shares through the
repurchase contemplated hereby (the value of any such price or consideration
other than cash to be determined, in the case of consideration with a
readily-ascertainable market value, on the basis of such market value and, in
the case of any other consideration, by Blue River in good faith).
(b) In the event that (i) Blue River has purchased any of the Option
Shares pursuant to this Agreement and (ii) the Merger Agreement has been duly
executed and delivered but subsequently has been terminated in accordance with
the terms thereof, then Shelby County shall have the right to purchase, and
Blue River shall have the right to require Shelby County to purchase, for
cash, all, but not less than all, of the Option Shares theretofore purchased
by Blue River pursuant to this Agreement. If Shelby County exercises its
right to purchase, or if Blue River exercises its right to require Shelby
County to purchase, the Option Shares so held such party shall give written
notice of its intention to so exercise its right to the other party within
fifteen (15) days after the event giving rise to such right. The purchase
price for each Option Share held by Blue River shall be a cash amount equal to
the highest price paid or to be paid by any entity, person or group referenced
in Section 3 hereof for any share of Shelby County Common Stock (or the
aggregate consideration paid for the assets of Shelby County divided by the
number of shares of Shelby County Common Stock then outstanding), as the case
may be, multiplied by the total number of Option Shares, plus interest at the
rate of 8% per annum from the date of the purchase of the Option Shares
through the repurchase contemplated hereby (the value of any such price or
consideration other than cash to be determined, in the case of consideration
with a readily-ascertainable market value, on the basis of such market value
and, in the case of any other consideration, by Blue River in good faith).
(c) If any of the events specified in Section 3 hereof shall occur
during the period in which Blue River is entitled to exercise the Option,
Shelby County shall, upon Blue River's written request, pay to Blue River an
amount in cash equal to the difference between the highest price paid or to be
paid by any entity, person or group for any share of Shelby County Common
Stock (or the aggregate consideration paid for the assets of Shelby County or
the Bank divided by the number of shares of Shelby County Common Stock then
outstanding) and the Purchase Price, multiplied by the total number of Option
Shares (the value of any such price or consideration other than cash to be
determined, in the case of consideration with a readily-attainable market
value, on the basis of such market value and, in the case of any other
consideration, by determination by Blue River in good faith). If Blue River
exercises its rights under this Section 9(c), then the rights granted to Blue
River under Sections 9(a) and 9(b) hereof shall terminate.
6
<PAGE>
(d) The closing of any of the transactions contemplated by this
Section 9 shall be made within ten (10) business days of any request made
pursuant to this Section 9. Payment for the Option Shares shall be made by
Shelby County to Blue River at the closing by delivery of cash or immediately
available funds. Any closing pursuant to this Section 9 may be delayed to a
date no later than ten (10) business days after the receipt of any applicable
regulatory clearance, and Shelby County shall promptly file any notice or
application for such clearance.
Section 10. Injunction; Specific Performance. Each of the parties
hereto hereby acknowledges that the other party will suffer irreparable damage
and injury and will not have an adequate remedy at law in the event of any breac
h of any of its obligations under this Agreement. Accordingly, in the event
of such a breach or of a threatened or attempted breach, in addition to all
other remedies to which each party hereto is entitled to at law, each party
shall be entitled to a temporary and permanent injunction (without the
necessity of showing any actual damage) or a decree of specific performance of
the provisions hereof, and no bond or other security shall be required in that
connection. The remedies described in this Section 10 shall not be exhaustive
and shall be in addition to all other remedies that either party may have at
law, in equity or otherwise.
Section 11. Miscellaneous.
----------- --------------
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that neither party may assign this Agreement without the prior
written consent of the other party.
(b) This Agreement may be modified, amended or supplemented only by a
written agreement executed by the parties hereto.
(c) All notices, requests and other communications hereunder shall be
in writing and shall be delivered by hand, by certified United States mail
(return receipt requested, first-class postage pre-paid) or by overnight
express receipted delivery service (i) to Blue River, at 113 South Harrison
Street, Shelbyville, Indiana 46176, attention: Robert C. Reed, President, and
(ii) to Shelby County, at 29 East Washington, Shelbyville, Indiana 46176,
attention: James M. Robison, Chairman.
(d) In case any one or more of the provisions contained herein shall,
for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement, but this Agreement shall be construed as if
such invalid, illegal or unenforceable provision or provisions had never been
contained herein.
(e) This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
7
<PAGE>
(f) The headings in this Agreement have been inserted solely for
convenience and ease of reference and shall not be considered in the
interpretation or construction of this Agreement.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of Indiana without giving effect to the choice of
law principles thereof.
(h) This Agreement supersedes all other prior understandings,
commitments, representations, negotiations or agreements, whether oral or
written, between the parties hereto relating to the matters contemplated by
this Agreement and constitutes the entire agreement between the parties hereto
relating to the subject matter hereof.
(i) The rule of construction to the effect at any ambiguities are to
be resolved against the drafting party shall not be employed in the
interpretation of this Agreement.
(j) No waiver by any party hereto of any right or provision of this
Agreement shall be effective unless the same shall be in writing and signed by
the waiving party. The failure in one or more instances of any party to
enforce any term or provision of this Agreement or to exercise any right or
remedy shall not prohibit any subsequent enforcement or exercise thereof or
constitute a waiver of any such term, provision, right or remedy. The waiver
by any party hereto of a breach of or noncompliance with any term, covenant,
restriction or provision of this Agreement shall not operate or be construed
as a continuing waiver or as a waiver of any other or subsequent breach or
noncompliance hereunder.
* * *
8
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed, entered into and
delivered this Agreement as of the day and year first above written.
BLUE RIVER BANCSHARES, INC.
By: /s/ Robert C. Reed
--------------------------------
Robert C. Reed, President
ATTEST:
By: /s/ D. Warren Robison
--------------------------------
D. Warren Robison, Secretary
SHELBY COUNTY BANCORP
By: /s/ James M. Robison
--------------------------------
James M. Robison, Chairman
ATTEST:
By: /s/ David A. Carmony
--------------------------------
David A. Carmony, Secretary
9
EXHIBIT 10.6
TERMINATION
OF
EMPLOYMENT AGREEMENT
--------------------
THIS TERMINATION OF EMPLOYMENT AGREEMENT (the "Agreement"), made and
entered into this 5th day of February, 1998, by and among SHELBY COUNTY
SAVINGS BANK, FSB (the "Bank"), a federal stock savings bank headquartered in
Shelbyville, Indiana, BLUE RIVER BANCSHARES, INC. ("Blue River"), an Indiana
corporation headquartered in Shelbyville, Indiana, and RODNEY L. MEYERHOLTZ
(the "Employee"), an Indiana resident,
W I T N E S S E T H:
--------------------
WHEREAS, the Bank and the Employee are parties to that certain Employment
Agreement (the "Employment Agreement") dated October 17, 1991, pursuant to
which the Bank is presently employing the Employee, and a copy of which
Employment Agreement is attached hereto; and
WHEREAS, the Bank has determined to affiliate with Blue River pursuant to
that certain Agreement of Affiliation and Merger (the "Merger Agreement")
dated of even date herewith by and among the Bank, Shelby County Bancorp
("Shelby County"), the sole shareholder of the Bank, and Blue River; and
WHEREAS, the Employee has advised Blue River and the Bank that he does
not desire to continue to be employed by the Bank upon consummation of the
transactions contemplated by the Merger Agreement and that he desires to
terminate the Employment Agreement pursuant hereto; and
WHEREAS, Blue River, the Bank and the Employee have agreed to the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the
agreements and obligations contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Bank, the Employee and Blue River, intending to be legally bound, hereby
agree as follows:
Section 1. Termination of the Employment Agreement. (a) The Bank
and the Employee hereby agree that the Employment Agreement shall be
automatically terminated in its entirety (without the need for any further
action, writing or notice by either party hereto) immediately following the
Effective Time (as defined in the Merger Agreement) and that following the
Effective Time, neither the Bank nor the Employee shall have any obligation to
the other under the Employment Agreement. In the event that the Merger
Agreement is terminated as provided therein, then this Agreement shall also
automatically terminate as of the same time that the Merger Agreement has been
terminated.
(b) The termination of the Employment Agreement pursuant hereto shall
not be deemed a termination by the Bank of the Employee's employment under the
Employment Agreement with or
<PAGE>
without "cause" (as defined in Section 7(A) of the Employment Agreement), a
termination by the Employee of the Employee's employment under the Employment
Agreement with or without "cause" (as defined in Section 7(C) of the
Employment Agreement) or otherwise. Accordingly, the termination of the
Employment Agreement pursuant hereto shall not require the Bank to pay any
compensation or provide any continued employee benefits to the Employee under
the Employment Agreement.
Section 2. Payment and Health Insurance.
---------- -----------------------------
2.01. Payment.
- ----- --------
(a) As further consideration to the Employee to enter into this
Agreement and to terminate the Employment Agreement pursuant hereto, the Bank
shall pay to the Employee an amount equal to Two Hundred Eleven Thousand
Ninety-Four Dollars ($211,094) without any interest thereon (the "Amount"),
less any withholdings for applicable taxes required by law; provided, however,
that the Bank shall pay the Employee the Amount only if the merger
contemplated by the Merger Agreement is consummated. The Bank shall pay the
Amount to the Employee in thirty-five (35) equal installments of $5,863.72 and
a final installment of $5,863.80, commencing the later of (i) the first day of
the month following the Effective Time or (ii) seven (7) days following the
Effective Time; and continuing on the first day of each and every calendar
month thereafter until paid in full; provided, however, that if the Employee
shall have died before the final installment has been paid, then all
installments due following the Employee's death, less any withholdings for
applicable taxes required by law, shall be paid to the Employee's estate.
(b) The Employee hereby acknowledges and agrees that the Amount is a
sum which he advised the Bank was the sum that he would accept in order to
terminate the Employment Agreement and to provide the release and the
covenants specified in this Agreement and that the Amount was calculated
notwithstanding the terms of the Employment Agreement.
2.02. Health Insurance. (a) As further consideration to the
Employee to enter into this Agreement and to terminate the Employment
Agreement pursuant hereto, the Employee shall have the choice as to whether he
desires to receive health insurance coverage following the Effective Time
either pursuant to the exercise of his COBRA rights pursuant to Section
2.02(c) hereof or pursuant to Section 2.02(b) hereof, and shall provide
written notice to the Bank and Blue River indicating his decision at the
Effective Time.
(b) If the Employee chooses to receive health insurance coverage
pusuant to this Section 2.02(b), then for a period of three (3) years
following the Effective Time, Blue River shall (a) provide, at its sole cost
and expense, health insurance to the Employee under Blue River's group health
insurance policy, subject to the terms and conditions of the insurer(s)
providing such insurance policy, and (b) permit the Employee's wife and three
(3) children to be covered, at the Employee's sole cost and expense, under
Blue River's group health insurance policy, subject to the terms and
conditions of the insurer(s) providing such insurance policy; provided,
however, if the
2
<PAGE>
Employee fails to pay in a timely manner all premiums and other amounts
relating to such insurance for the Employee's wife and children, then Blue
River, in its sole discretion and without any liability to the Employee, his
wife and his children, may either pay such premiums and other costs and deduct
the amount therefor from the Amount or remove the Employee's wife and children
from coverage under Blue River's group health insurance policy. Coverage
under this Section 2.02(b) will only be provided if the Employee and the
Employee's family waive their COBRA continuation coverage rights pursuant to
procedures established by the Bank for that purpose.
(c) If the Employee chooses to receive health insurance coverage
through the exercise of his COBRA rights pursuant to this Section 2.02(c),
then for a period of eighteen (18) months Blue River shall reimburse the
Employee for the COBRA cost of his individual coverage. The Employee shall be
responsible for the cost and expense of COBRA continuation coverage for his
spouse and children.
(d) Notwithstanding the foregoing, in the event that the Employee
becomes eligible to participate in a group health insurance policy or plan of
a subsequent employer, then Blue River's obligations under this Section 2.02
shall immediately terminate.
Section 3. Certain Other Matters.
---------- ----------------------
3.01. Other Agreements. The Bank and the Employee hereby acknowledge
and agree that the Employment Agreement (including the agreements and
arrangements referred to therein) constitutes the only contract, agreement,
commitment, understanding or arrangement between the Bank and the Employee
relating to the Bank's employment of the Employee. The Bank and the Employee
further acknowledge and agree that the Employment Agreement has never been
amended or modified in any respect, except for extensions to the term
thereof. The Employee represents and agrees that neither Shelby County nor
either of the Subsidiaries (as defined in the Merger Agreement) is bound by
any contract, agreement, commitment, understanding or arrangement regarding
(a) the employment of the Employee, (b) the payment to the Employee of any
salary or other compensation (other than regular director's fees of Shelby
County payable to the Employee), and (c) employee pension benefit, employee
welfare benefit plans or any other plans or programs of any nature (other than
with respect to unexercised options of the Employee to purchase an aggregate
of 2,415 shares of common stock of Shelby County).
3.02. Release. (a) In consideration of the recitals stated above,
the Bank's payment to the Employee of the Amount, the provision by the Bank of
health insurance pursuant to Sections 2.01 and 2.02 hereof and other good and
valuable consideration, the Employee, effective on and after the Effective
Time, hereby (i) forever releases, waives and relinquishes any and all rights
or claims to any and all salary and other payments, health and hospitalization
insurance, life and disability insurance, other employee pension benefit and
employee welfare benefit plans and other plans, programs or benefits provided
by Shelby County, the Bank and either of the Subsidiaries, whether under the
Employment Agreement or otherwise (other than pursuant to Sections 2.01 and
2.02 of this Agreement); (ii) forever releases, waives and discharges any and
all claims, causes of action, suits,
3
<PAGE>
proceedings, losses and damages under or relating to the Employment Agreement
and the Employee's employment by Shelby County, the Bank and the Subsidiaries
which the Employee had prior to or has as of and following the Effective Time
against Shelby County, the Bank, either of the Subsidiaries or Blue River, or
any predecessor or successor to any of them, or against any of their
respective directors, officers, employees and agents; and (iii) forever
releases, waives and discharges any and all other claims, causes of action,
suits, proceedings, losses and damages which the Employee had prior to or has
as of and following the Effective Time against Shelby County, the Bank, either
of the Subsidiaries or Blue River, or any predecessor or successor to any of
them, or against any of their respective directors, officers, employees or
agents, whether arising under or relating to the mutual termination of the
Employment Agreement pursuant hereto, this Agreement (other than pursuant to
Sections 2.01 and 2.02 hereof) or otherwise and whether arising under the Age
Discrimination in Employment Act of 1967, as amended, Title VII of the Civil
Rights Act of 1964, as amended, the Americans with Disabilities Act, as
amended, and all other federal, state, local or other laws, statutes, rules or
regulations regarding retirement, discrimination, employment or otherwise.
(b) The Employee hereby further understands, acknowledges and agrees
as follows:
(i) The Employee is hereby advised to consult with an attorney
prior to executing this Agreement. The Employee represents
that he has consulted with an attorney prior to executing
this Agreement.
(ii) The Employee hereby expressly acknowledges that he has been
given twenty-one (21) days prior to the date of this
Agreement to decide whether to sign this Agreement.
(iii) The Employee has the right to revoke this Agreement for
seven (7) days following his execution of this Agreement and
for seven (7) days following the Effective Time. The
Employee must communicate in writing any such revocation to
the Chairman of the Board of Directors of the Bank and the
President of Blue River within the designated seven (7) day
period.
3.03. No Breaches. The Bank and the Employee hereby acknowledge and
agree that neither the Bank nor the Employee has breached or defaulted under,
or is presently in breach of or default under, the Employment Agreement and
that no act, omission or event has occurred which would permit the Employee to
terminate his employment for "cause" pursuant to Section 7(C) of the
Employment Agreement. The Bank and the Employee hereby further acknowledge
and agree that neither the Bank nor the Employee has waived compliance by the
other of any term, condition or provision of the Employment Agreement.
3.04. Covenants of the Employee. In consideration of the recitals
stated above, the Bank's payment to the Employee of the Amount, the provision
by the Bank of health insurance pursuant to
4
<PAGE>
Sections 2.01 and 2.02 hereof and other good and valuable consideration, and
in order to induce the Bank to enter into this Agreement, the Employee hereby
covenants and agrees, from and after the Effective Time, with the Bank and
Blue River as follows:
(a) Employee shall not divulge, disclose or furnish any trade secrets
(as defined in Indiana Code Section 24-2-3-2 as now in effect or as hereafter
amended) of the Bank or Shelby County and any confidential information
acquired by him while employed by the Bank or while serving as the President
and Chief Executive Officer of Shelby County concerning the business,
operations, affairs, policies, plans, procedures, strategies and customers of
the Bank or Shelby County to any person, financial institution, corporation or
other entity, or use any such trade secrets or confidential information
directly or indirectly for Employee's own benefit or for the benefit of any
person, financial institution, corporation or other entity since such trade
secrets and confidential information are confidential and shall at all times
remain the sole and exclusive property of the Bank or Shelby County. In
addition, the Employee shall not divulge, disclose or furnish any confidential
information relating to Blue River to any person, financial institution,
corporation or other entity. As used in this Section 3.04(a), confidential
information shall include any and all documents, writings, records, data and
information relating to Blue River or to Shelby County, the Bank, the
Subsidiaries or any of their customers (i) that any of them considers to be
confidential or proprietary or (ii) that is not available to the public other
than through the breach of this Agreement or any other confidentiality
obligation.
(b) Employee hereby understands, acknowledges and agrees that, by
virtue of his position with the Bank, he has advantageous familiarity and
personal contacts with Shelby County's and the Bank's customers, where ever
located, and the business, operations and affairs of Shelby County and the
Bank. Accordingly, for a period of eighteen (18) months after the Effective
Time, Employee shall not, directly or indirectly, or individually or jointly,
(i) provide bank, savings bank or bank-related products or services to or
solicit the bank, savings bank or bank-related business of any party who is an
existing customer of Shelby County or the Bank at the Effective Time or who
was an actual or prospective customer of Shelby County or the Bank during the
one (1) year period immediately preceding the Effective Time, (ii) request,
suggest or advise any customer of the Bank to close, terminate, reduce, limit
or change his account, business or relationship with the Bank, or (iii)
induce, request or attempt to influence any employee of the Bank to terminate
his employment with the Bank.
(c) Employee hereby understands, acknowledges and agrees that, by
virtue of his position with the Bank, he has advantageous familiarity and
personal contacts with Shelby County's and the Bank's customers, where ever
located, and the business, operations and affairs of Shelby County and the
Bank. Accordingly, for a period of eighteen (18) months after the Effective
Time, Employee shall not, directly or indirectly, or individually or jointly,
in Shelby County, Indiana, or within a radius of 25 miles of the main office
of the Bank, as owner, shareholder, member, investor, partner, proprietor,
principal, director, officer, employee, agent, representative, consultant or
otherwise, compete against, engage in, assist another party in engaging in
5
<PAGE>
or provide services to any party engaging in any banking, savings bank,
financial services or bank-related business or engaging in any other business,
operation or venture that competes or is contemplating competing with the
business of the Bank.
(d) At the Effective Time, Employee shall turn over to the Bank all
furniture, equipment, property, computers, computer software, programs and
disks, business correspondence, letters, papers, reports, customer lists,
financial statements, credit reports, manuals and other confidential
information or documents of Shelby County and/or the Bank in the possession or
control of Employee, all of which items are and continue to be the sole and
exclusive property of Shelby County and/or the Bank.
(e) At all times prior to and after the Effective Time, the Employee
shall not make any negative, unfavorable or disparaging statements or comments
about the IPO (as defined in the Merger Agreement), the Bank, Shelby County,
Blue River or any of their respective directors, officers, employees or agents
or the transactions contemplated by the Merger Agreement .
(f) The Employee, the Bank and Blue River each acknowledge and agree
that the restrictions specified in this Section 3.04 are reasonable in view of
the nature of the business in which Shelby County and the Bank are presently
engaged, the Employee's position with Shelby County and the Bank as of the
date of this Agreement and the Employee's knowledge of and familiarity with
Shelby County's and the Bank's business, operations, affairs and customers.
Notwithstanding anything contained herein to the contrary, if the scope of any
restriction contained in this Section 3.04 is determined by a court of
competent jurisdiction to be too broad to permit enforcement of such
restriction to its fullest extent, then such restriction shall be enforced to
the maximum extent permitted by law.
3.05. Payments under the Employment Agreement. The Employee hereby
acknowledges and agrees that he has received in full all benefits under all
plans or programs, salary, compensation, employee benefits and payments to
which he is entitled under the Employment Agreement or otherwise from Shelby
County and the Bank from the date of the Employment Agreement through and
including the date hereof.
3.06. Confirmation. Immediately prior to the Effective Time, the
Bank and the Employee shall, if requested by Blue River, confirm in writing
that the acknowledgments and agreements contained in this Section 3 continue
to be true and accurate as of the Effective Time and shall remain in full
force and effect on and after the Effective Time.
3.07. Resignation. The Employee hereby resigns as a director and
officer of the Bank, and the Bank hereby accepts such resignation, effective
as of the Effective Time; provided, however, that if this Agreement is
terminated because of the termination of the Merger Agreement, then this
resignation shall also terminate and be of no force or effect.
3.08 Amendment to Employment Agreement. On the date hereof, the
Employment Agreement is hereby amended such that the Employee shall not be
entitled to any grants of options
6
<PAGE>
to purchase shares of common stock of Shelby County in addition to the options
presently held by the Employee.
Section 4. Certain Remedies; Withhold.
---------- ---------------------------
4.01. Certain Remedies. The Employee hereby understands,
acknowledges and agrees that irreparable harm to the Bank and/or Blue River
would occur if any actual or threatened breach of or non-compliance with any
provision of this Agreement by the Employee occurred, that the Bank and Blue
River shall be entitled to specific performance or an injunction or
restraining order as a remedy for any such actual or threatened breach or
non-compliance, that a bond posted by the Bank or Blue River in the amount of
$1,000 would be adequate and appropriate in connection with such injunction or
restraining order, that actual damages need not be proved by the Bank or Blue
River prior to it being entitled to obtain such injunction or restraining
order, and that the Bank and Blue River shall be entitled to recover their
attorneys' fees and disbursements, costs and other expenses in connection with
the enforcement of this Agreement against the Employee. The foregoing
remedies shall not be deemed to be the exclusive remedies for any actual or
threatened breach of or non-compliance with this Agreement by the Employee but
shall be in addition to all other rights and remedies available hereunder or
at law, in equity or otherwise to the Bank and/or Blue River. The Employee
further understands, acknowledges and agrees that no failure or delay in
exercising any right or remedy hereunder or at law, in equity or otherwise
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
right or remedy hereunder or at law, in equity or otherwise.
Section 4.02. Withhold. In addition to any other rights and remedies
available to the Bank under Section 4.01 hereof or at law, in equity or
otherwise, the Bank shall have the right to withhold and refrain from paying
any installments of the Amount during such times that the Employee is in
breach of or non-compliance with any covenant or provision of this Agreement.
Section 5. Miscellaneous.
5.01. Notices. All notices, requests and other communications
hereunder shall be in writing (which shall include facsimile communication)
and shall be deemed to have been duly given if (a) delivered by hand and
receipted for, (b) sent by certified United States Mail, return receipt
requested, first class postage pre-paid, (c) delivered by receipted overnight
delivery service or (d) telecopied if confirmed immediately thereafter by also
mailing a copy of such notice, request or other communication by certified
United States Mail, return receipt requested, first class postage pre-paid, as
follows:
7
<PAGE>
If to Blue River: with a copy to (which shall not
constitute notice):
113 South Harrison Street Krieg DeVault Alexander & Capehart
Shelbyville, Indiana 46176 One Indiana Square, Suite 2800
ATTN: Robert C. Reed Indianapolis, Indiana 46204-2017
Telephone: (317) 392-7700 ATTN: Nicholas J. Chulos, Esq.
Telecopier: (317) 398-7004 Telephone: (317) 238-6224
Telecopier: (317) 636-1507
If to the Bank: with a copy to (which shall not
constitute notice):
Shelby County Savings Bank, FSB Bose McKinney & Evans
29 East Washington Street 2700 First Indiana Building
P.O. Box 438 135 South Pennsylvania Street
Shelbyville, Indiana 46176 Indianapolis, Indiana 46204
ATTN: James M. Robinson, Chairman ATTN: David A. Butcher, Esq.
Telephone: (317) 398-9721 Telephone: (317) 684-5000
Telecopier: (317) 835-0306 Telecopier: (317) 684-5173
If to the Employee:
Mr. Rodney L. Meyerholtz
1105 Executive Drive
Shelbyville, Indiana 46176
or such substituted address or person as either party has given to the other
in writing.
All such notices, requests and other communications shall be effective
(a) if delivered by hand, when delivered, (b) if mailed in the manner provided
herein, two (2) business days after deposit with the United States Postal
Service, (c) if delivered by overnight express delivery service, on the next
business day after deposit with such service, and (d) if by telecopier, on the
next business day if also confirmed by mail in the manner provided
herein.
5.02. Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
heirs, representatives, successors and assigns as of the date hereof;
provided, however, that no party hereto may assign this Agreement without the
prior written consent of the other parties, except that no consent shall be
required if this Agreement is assigned to any successor to Blue River or the
Bank following the Effective Time.
5.03. Waiver; Amendment. (a) Either the Employee or the Bank may by
an instrument in writing waive the performance by the other of any of the
covenants or agreements to be performed by such other party under this
Agreement; provided, however, that no such waiver shall be effective
8
<PAGE>
unless Blue River shall first consent in writing thereto. The waiver by any
party hereto of a breach of or noncompliance with any provision of this
Agreement shall not operate or be construed as a continuing waiver or a waiver
of any other or subsequent breach or noncompliance hereunder.
(b) Except as expressly provided otherwise herein, this Agreement and
the Employment Agreement may be terminated, amended, modified or supplemented
only by a written agreement executed by the Bank, the Employee and Blue River.
5.04. Headings. The headings in this Agreement have been inserted
solely for ease of reference and shall not be considered in the
interpretation, construction or enforcement of this Agreement.
5.05. Severability. In case any one or more of the provisions (or
any portion thereof) contained herein shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or provisions (or portion thereof) had never been
contained herein.
5.06. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same agreement.
5.07. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without
reference to the choice of law principles or rules thereof.
5.08. Entire Agreement. This Agreement supersedes all other prior
understandings, commitments, representations, negotiations or agreements,
whether oral or written, among or between the parties hereto relating to the
matters contemplated hereby and, together with the Employment Agreement (until
such time as it is terminated pursuant hereto), constitute the entire
agreement among or between the parties hereto relating to the subject matter
hereof.
5.09. Construction. The rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
5.10. Review and Consultation. The Bank, the Employee and Blue River
hereby acknowledge and agree that each (i) has read this Agreement in its
entirety prior to executing it, (ii) understands the provisions and effects of
this Agreement, and (iii) has consulted with such attorneys, accountants and
other advisors as it or he has deemed appropriate in connection with its or
his execution of this Agreement. THE EMPLOYEE HEREBY UNDERSTANDS, ACKNOWLEDGES
AND AGREES THAT THIS AGREEMENT HAS BEEN PREPARED BY LEGAL COUNSEL FOR BLUE
RIVER AND THAT HE HAS NOT RECEIVED ANY ADVICE OR RECOMMENDATION WITH RESPECT
TO THIS AGREEMENT FROM
9
<PAGE>
SUCH LEGAL COUNSEL OR FROM LEGAL COUNSEL FOR THE BANK OR SHELBY COUNTY.
5.11. Certain References. Whenever in this Agreement a singular word
is used, it also shall include the plural wherever required by the context and
vice-versa. All references to the masculine, feminine or neuter genders
herein shall include any other gender, as the context requires. All
references herein to the "Bank" shall include Shelby County Savings Bank, FSB
and its predecessors and successors. All capitalized terms used in this
Agreement that are not otherwise defined herein shall have the same meanings
ascribed to them in the Merger Agreement.
5.12. Taxes. All federal, state, local and other taxes (including,
without limitation, interest, fines and penalties) resulting from, imposed
upon by virtue of or relating to the Employee's receipt of the Amount and the
transactions contemplated by this Agreement shall be paid by the Employee,
except for the Bank's share of FICA taxes, if any, owed on the Amount.
IN WITNESS WHEREOF, the Bank, Blue River and the Employee have entered
into, executed and delivered this Agreement, and this Agreement shall be
effective, as of the day and year first above written.
/S/ RODNEY L. MEYERHOLTZ
-------------------------------------------------
Rodney L. Meyerholtz (in his individual capacity)
SHELBY COUNTY SAVINGS BANK, FSB
By: /S/ JAMES M. ROBISON
------------------------------------
James M. Robison, Chairman
ATTEST:
By: /S/ DAVID A. CARMONY
----------------------------------
David A. Carmony, Secretary
10
<PAGE>
BLUE RIVER BANCSHARES, INC.
By: /S/ ROBERT C. REED
------------------------------------
Robert C. Reed, President
ATTEST:
By: /S/ D. WARREN ROBISON
----------------------------------
D. Warren Robison, Secretary
11
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Blue River Bancshares,
Inc. on Form SB-2 of our report dated March 17, 1998 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
development stage of the Company described in Note 1 to the financial
statements), appearing in the Prospectus, which is part of this Registration
Statement and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 18, 1998
Exhibit 23.3
The Board of Directors
Shelby County Bancorp:
We consent to the inclusion of our report dated November 21, 1997, with
respect to the consolidated statements of financial condition of Shelby County
Bancorp and subsidiary as of September 30, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the years then ended, which report appears in the Registration Statement on
Form SB-2 filed by Blue River Bancshares, Inc. We also consent to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK, LLP
- ---------------------------
KPMG PEAT MARWICK, LLP
Indianapolis, Indiana
March 18, 1998
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a Director of
Blue River Bancshares, Inc. (the "Company"), an Indiana corporation with its
principal office located in Shelbyville, Indiana, does hereby severally make,
constitute and appoint Robert C. Reed and Bradley A. Long, and each of them
singly, as his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for and on his behalf and in his name, place
and stead, and in all capacities, (a) to execute any and all registration
statements and any and all amendments, revisions, supplements, exhibits and
other documents in connection therewith relating to the proposed registration,
offering and sale of common stock of the Company; (b) to file any and all of
the foregoing, in substantially the form which has been presented to me or
which any of the above-named attorneys-in-fact and agents may approve, with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended (the "Act"), and the rules and regulations promulgated thereunder,
and any state securities laws, rules or regulations; and (c) to do, or cause
to be done, any and all other acts and things whatsoever as fully and to all
intents and purposes as the undersigned might or could do in person which any
of the above- named attorneys-in-fact and agents may deem necessary or
advisable in the premises and in order to enable the Company to register its
debt securities under and otherwise comply with the Act and the rules and
regulations promulgated thereunder, and any state securities laws, rules or
regulations; hereby approving, ratifying and confirming all actions heretofore
or hereafter lawfully taken, or caused to be taken, by any of the above-named
attorneys-in-fact and agents by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the
day and year indicated below.
/S/ STEVEN R. ABEL
- ----------------------------------
DIRECTOR
Printed Name Steven R. Abel
---------------------
Dated: March 19, 1998
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a Director of
Blue River Bancshares, Inc. (the "Company"), an Indiana corporation with its
principal office located in Shelbyville, Indiana, does hereby severally make,
constitute and appoint Robert C. Reed and Bradley A. Long, and each of them
singly, as his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for and on his behalf and in his name, place
and stead, and in all capacities, (a) to execute any and all registration
statements and any and all amendments, revisions, supplements, exhibits and
other documents in connection therewith relating to the proposed registration,
offering and sale of common stock of the Company; (b) to file any and all of
the foregoing, in substantially the form which has been presented to me or
which any of the above-named attorneys-in-fact and agents may approve, with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended (the "Act"), and the rules and regulations promulgated thereunder,
and any state securities laws, rules or regulations; and (c) to do, or cause
to be done, any and all other acts and things whatsoever as fully and to all
intents and purposes as the undersigned might or could do in person which any
of the above- named attorneys-in-fact and agents may deem necessary or
advisable in the premises and in order to enable the Company to register its
debt securities under and otherwise comply with the Act and the rules and
regulations promulgated thereunder, and any state securities laws, rules or
regulations; hereby approving, ratifying and confirming all actions heretofore
or hereafter lawfully taken, or caused to be taken, by any of the above-named
attorneys-in-fact and agents by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the
day and year indicated below.
/S/ D. WARREN ROBISON
- ----------------------------------
DIRECTOR
Printed Name D. Warren Robison
---------------------
Dated: March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE PERIOD FROM MARCH 18, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001055870
<NAME> BLUE RIVER BANCSHARES, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-18-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 1,001
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
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<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 103,197
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<LIABILITIES-OTHER> 201,987
<LONG-TERM> 0
0
0
<COMMON> 18,000
<OTHER-SE> (116,790)
<TOTAL-LIABILITIES-AND-EQUITY> 103,197
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<EXPENSE-OTHER> 116,790
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (116,790)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
<YIELD-ACTUAL> 0
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</TABLE>
