<PAGE> 1
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.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-48269
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
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
(State or jurisdiction of
incorporation or organization)
6035
(Primary Standard Industrial
Classification Code Number)
35-2016637
(I.R.S. Employer
Identification No.)
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.
MICHAEL J. MESSAGLIA, ESQ.
Krieg DeVault Alexander & Capehart
One Indiana Square, Suite 2800
Indianapolis, IN 46204
Telephone: (317) 636-4341
Fax: (317) 636-1507
MARK B. BARNES, ESQ.
Leagre Chandler & Millard
1400 First Indiana Plaza
135 N. Pennsylvania Street
Indianapolis, IN 46204
Telephone: (317) 808-3000
Fax: (317) 808-3100
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. [ ]
------------------
================================================================================
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PER SHARE(1) PRICE(1) FEE(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value............. 1,725,000 shares $12.00 $20,700,000 $6,107
=========================================================================================================================
</TABLE>
(1) Includes 225,000 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. $5,089 of this Registration Fee was paid upon the initial filing.
================================================================================
<PAGE> 2
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.
SUBJECT TO COMPLETION, DATED JUNE 8, 1998
PROSPECTUS
1,500,000 SHARES
BLUE RIVER BANCSHARES, INC. LOGO
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 Capital Markets, a division of First Chicago Capital Markets, Inc.
(the "Underwriter"), 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 41,750 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 13 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)........................... $18,000,000 $ $
=============================================================================================================================
</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 % 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. 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 Capital Markets Logo
The Date of this Prospectus is , 1998.
<PAGE> 3
[MAP]
----------------------
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.
2
<PAGE> 4
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> 5
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 March 31, 1998 SCB had total assets of $98.5 million and
total deposits of $70.5 million. The Company will acquire the Bank pursuant to
the Amended and Restated Agreement of Affiliation and Merger dated March 12,
1998, as amended (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, (i) SCB obtaining requisite and
satisfactory shareholder approval of the Merger, (ii) the Company and the Bank
having received all necessary regulatory approvals with respect to the Merger
and satisfying certain conditions contained therein and (iii) the Company, SCB
and the Bank satisfying the other conditions set forth in the Merger Agreement.
The Company currently expects the Merger to close concurrently with, or
immediately following, the closing of the offering.
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 many of 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 selling a portion of the Bank's lower yielding fixed-rate
mortgages and increasing the volume of adjustable rate and balloon
mortgages and higher yielding shorter-term commercial and consumer
loans.
- 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.
4
<PAGE> 6
- 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 take advantage of the
commercial banking skills of the Company's management with the existing 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.
RECENT DEVELOPMENTS
In April and May, 1998, the Office of Thrift Supervision (the "OTS")
conducted a regularly scheduled safety and soundness examination of the Bank.
Concurrently with this examination, the Company updated and expanded its own
review of the portfolio with the assistance of Pyramid Business Consultants
("Pyramid"), a financial institutions consulting firm.
On May 6, 1998, the Bank received a letter from the OTS indicating that the
current Board of Director of the Bank had failed to establish systems necessary
to prudently conduct commercial real estate and commercial lending and that such
lending should cease until certain corrective action is taken and approval to
resume commercial real estate and commercial lending has been obtained from the
OTS. The OTS noted several supervisory concerns including loan documents which
fail to clearly establish repayment terms, loans priced below market rates and
extended maturities at fixed rates, failure to perform and document proper
credit analysis and reliance on overstated collateral values. In connection with
the OTS exam, the Bank has made an additional provision to its allowance for
loan losses reserve of $375,000 for the quarter ended March 31, 1998. This
provision is consistent with the estimates of the Company. In compliance with
the OTS letter, the Bank has determined to cease all such lending while the
transaction is pending and until approval to reestablish such lending is granted
by the OTS.
The Company has been in consultation with the OTS in connection with the
lifting of these restrictions at the time of its acquisition of the Bank. The
Company has implemented a four-step strategy intended to facilitate removal of
the restrictions on commercial real estate and commercial lending at the time of
the closing of the Merger. First, the Company hired a Chief Credit Officer of
the Bank with responsibilities for commercial lending in addition to the Bank's
other lending activities. The Chief Credit Officer will replace the officer of
the Bank who was responsible for commercial lending. In addition, all current
Bank directors will be replaced by the Company's directors. Second, the Company
has engaged Pyramid to conduct reviews of the commercial real estate and
commercial loan portfolio. Third, the Company, in consultation with Pyramid, has
drafted a comprehensive loan policy for the Bank which specifically addresses
the concerns expressed by the OTS and will be adopted and implemented
immediately upon closing of the Merger. Fourth, the Company has responded to the
OTS with respect to the corrective action to be taken by the Company as a result
of the OTS' most recent safety and soundness examination of the Bank.
The Company believes that this strategy addresses the OTS' concerns with
respect to commercial real estate and commercial lending and will result in the
restrictions on such lending being removed at the closing of the Merger.
5
<PAGE> 7
In connection with the proposed acquisition of the Bank and at the request
of the Company, the Bank agreed in April, 1998 to begin the process to submit
the St. Paul branch location into Indiana's Voluntary Remediation Program ("the
"VRP"). Accordingly, the Bank engaged an environmental consultant to assist.
After performing preliminary testing, the consultant informed the Bank that
remediation would be necessary to remove diesel or fuel oil and gasoline
constituents in the ground water. The consultant estimated the remediation and
costs associated with the VRP to be $157,920 plus any costs incurred by the
Indiana Department of Environmental Management ("IDEM") which are believed to be
immaterial. The Bank charged to expenses approximately $150,000 in its income
statement for the period ending March 31, 1998. See "RISK FACTORS --
Environmental Matters relating to St. Paul Property" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
SHELBY COUNTY BANCORP -- Results of Operations."
In consideration of the above, the Company, SCB and the Bank negotiated a
price reduction in the total amount of $379,500, which results in the total
consideration to be received by shareholders of SCB being reduced from
$11,005,500 to $10,626,000.
The Bank has a substantial negative interest rate gap which means the
Bank's earnings would be significantly adversely affected by periods of rising
interest rates. For information regarding the Bank's interest rate risk
sensitivity, and its negative interest rate gap at September 30, 1997 as
computed on various future time horizons, see "RISK FACTORS -- Interest Rate
Risk Sensitivity," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OF SHELBY COUNTY BANCORP -- Asset Liability Management," "BUSINESS OF SHELBY
COUNTY BANCORP -- Lending Activities, Origination, Purchase and Sale of Loans"
and "SUPERVISION AND REGULATION -- Regulation of the Bank as a Savings Bank,
Savings Association Regulatory Capital." The Company intends to reduce the
Bank's negative interest rate gap by: (i) establishing a mortgage secondary
market operation to sell long-term fixed-rate mortgages from the Bank's loan
portfolio, (ii) ceasing to make long-term fixed-rate commercial loans, (iii)
increasing the volume of adjustable rate and balloon mortgages and (iv) reducing
reliance upon variable-rate borrowings from the FHLB through increasing deposits
at the 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 $10,626,000 (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 STATEMENTS."
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."
6
<PAGE> 8
For additional information regarding the Company, see "BUSINESS OF BLUE
RIVER BANCSHARES, INC." and "FINANCIAL STATEMENTS OF BLUE RIVER BANCSHARES,
INC."
For additional information regarding SCB and the Bank, see "BUSINESS OF
SHELBY COUNTY BANCORP," "SUMMARY CONDENSED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA OF BLUE RIVER BANCSHARES, INC. AND 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 OF SHELBY COUNTY BANCORP."
For additional information regarding the Company and SCB, see "PRO FORMA
COMBINED FINANCIAL STATEMENTS."
ACQUISITION OF SHELBY COUNTY BANK
[GRAPHIC]
- -------------------------
(1) Pursuant to the Merger Agreement, SCB will be merged with and into the
Company. The Company will survive the Merger and the separate corporate
existence of SCB will cease.
(2) As a result of the Merger, the Bank will be a wholly-owned subsidiary of the
Company. Upon consummation of the Merger, the Bank will change its name to
"Shelby County Bank."
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
7
<PAGE> 9
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.
Stephen R. Cartwright, age 50, Vice President and Chief Credit Officer, has
over 20 years of banking experience. Prior to his employment by the Company, Mr.
Cartwright was the Senior Vice President for Retail Lending for Fort Wayne
National Bank (now a part of National City Bank, Indiana) from January, 1998 to
May, 1998. Prior to his employment by Fort Wayne National Bank, he was the
Senior Vice President and Direct Consumer Loan Production Manager for First of
America Bank, Indianapolis from February, 1997 to January, 1998, and prior to
this time, he served as First of America's Banks Vice President for Indirect
Lending from December, 1991 to February, 1997. Mr. Cartwright began his banking
career with Mutual Federal Savings Bank in Muncie, Indiana where he was the
Assistant Vice President for Consumer Lending from August, 1977 to December,
1991. At Mutual Federal Savings Bank, he was responsible for all direct and
indirect consumer loans, credit cards and commercial loans.
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 also a Vice President and
Senior Lending Officer of Central Indiana Bank (now a part of Key Bank). D.
Warren Robison, age 32, is a licensed real estate appraiser and is the President
and sole shareholder of Hoosier Appraisal Service, Inc. Wendell L. Bernard, age
53, owns and operates a real estate agency in Shelbyville, Indiana, and is the
former Director and Vice President of Finance of Williams Industrial, Inc., a
manufacturing company. 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.
None of the current directors of SCB or the Bank will serve as directors of
the Company or the Bank following 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. See
8
<PAGE> 10
"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 41,750 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, and approximately 990 of these
businesses have annual sales of $2.0 million or less. 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....................... 1,500,000 shares of Common Stock. In addition,
the Company has granted the Underwriter an
option to purchase up to an additional 225,000
shares to cover over-allotments. See
"DESCRIPTION OF CAPITAL STOCK" and
"UNDERWRITING."
COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERING............ 1,500,000 shares (1,725,000 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
9
<PAGE> 11
SUMMARY CONDENSED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA OF BLUE RIVER BANCSHARES, INC.
AND SHELBY COUNTY BANCORP
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND 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 six month periods ended March 31, 1998 and 1997. 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 OF SHELBY COUNTY BANCORP." In
the opinion of management of SCB, the data presented for the six month periods
ended March 31, 1998 and 1997 reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Results
for the six month periods ending March 31, 1998 and 1997 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 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 OF SHELBY COUNTY BANCORP" and "FINANCIAL STATEMENTS OF 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 and (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.
10
<PAGE> 12
<TABLE>
<CAPTION>
SHELBY COUNTY BANCORP BLUE RIVER BANCSHARES, INC.
---------------------------------------- -----------------------------
AT OR FOR THE AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED THREE MONTHS FOR THE
MARCH 31, SEPTEMBER 30, ENDED YEAR ENDED
------------------ ------------------ MARCH 31, DECEMBER 31,
HISTORICAL HISTORICAL ------------- ------------
------------------ ------------------ PRO FORMA PRO FORMA
1998 1997 1997 1996 1998 1997
---- ---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income................ $ 3,740 $ 3,270 $ 6,708 $ 5,839 $ 1,898 $7,092
Interest expense............... 2,219 1,914 3,892 3,341 1,034 3,811
------- ------- ------- ------- -------- ------
Net interest income............ 1,521 1,356 2,816 2,498 864 3,281
Provision for loan losses...... 435 50 104 100 405 111
Non-interest income............ 219 168 349 518 118 365
Non-interest expense........... 1,302 1,072 2,253 2,546 906 2,780
------- ------- ------- ------- -------- ------
Income before income (loss)
taxes....................... 3 402 808 370 (329) 755
Provision for income taxes..... 1 153 295 134 (104) 375
------- ------- ------- ------- -------- ------
Net income (loss)(7)........... $ 2 $ 249 $ 513 $ 236 $ (225) $ 380
======= ======= ======= ======= ======== ======
PER SHARE DATA:(6)
Basic earnings (loss) per
share....................... -- -- -- -- $ (0.15) $ 0.25
Diluted earnings (loss) per
share....................... -- -- -- -- (0.15) 0.25
Cash dividends per share....... -- -- -- -- -- --
Book value per share........... -- -- -- -- 10.75 --
Tangible book value per
share(4).................... -- -- -- -- 7.89 --
BALANCE SHEET DATA:
Total assets................... $98,465 $87,795 $90,609 $82,676 $107,810 --
Loans, net..................... 85,133 70,349 76,038 66,098 84,934 --
Allowance for loan losses...... 715 362 392 326 715 --
Securities..................... 8,834 8,410 8,695 8,511 8,850 --
Goodwill....................... -- -- -- -- 3,917 --
Deposits....................... 70,533 65,853 64,633 65,286 71,196 --
Shareholders' equity........... 7,346 6,730 7,171 6,433 16,126 --
Tangible shareholders' equity
(5)......................... 7,346 6,730 7,171 6,433 12,209 --
PERFORMANCE RATIOS:(1)
Return on average assets....... 0.00% 0.58% 0.59% 0.31% -- --
Return on average shareholders'
equity...................... 0.05 7.57 7.66 3.83 -- --
Net interest margin............ 3.23 3.29 3.37 3.46 -- --
Non-interest income to total
average assets.............. 0.45 0.39 0.40 0.68 -- --
Non-interest expense to total
average assets.............. 2.67 2.50 2.59 3.36 -- --
Efficiency ratio(2)............ 74.83 70.34 71.18 84.42 -- --
ASSET QUALITY RATIOS:
Non-performing loans to total
gross loans................. 0.78% 0.79% 0.54% 0.45% -- --
Allowance for loan losses to
total gross loans........... 0.83 0.51 0.52 0.49 -- --
Allowance for loan losses to
non-performing loans........ 106.24 64.53 86.34 108.67 -- --
Net charge-off loans to average
loans(1).................... 0.14 0.02 0.05 0.02 -- --
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
SHELBY COUNTY BANCORP
----------------------------------- BLUE RIVER BANCSHARES, INC.
AT OR FOR THE -----------------------------
SIX MONTHS AT OR FOR THE AT OR FOR THE
ENDED YEAR ENDED THREE MONTHS FOR THE
MARCH 31, SEPTEMBER 30, ENDED YEAR ENDED
--------------- -------------- MARCH 31, DECEMBER 31,
HISTORICAL HISTORICAL ------------- ------------
--------------- -------------- PRO FORMA PRO FORMA
1998 1997 1997 1996 1998 1997
---- ---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS: (3)
Shareholders' equity to assets......... 7.46% 7.67% 7.91% 7.78% -- --
Tangible capital ratio................. 5.91 6.41 6.32 6.09 -- --
Core capital ratio..................... 5.91 6.41 6.32 6.09 -- --
Total risk-based capital ratio......... 8.89 10.17 9.49 9.66 -- --
</TABLE>
- -------------------------
(1) Performance ratios for the six months ended March 31, 1998 and 1997 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 SCB'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.
(7) Net income decreased for the six months ended March 31, 1998 compared to
March 31, 1997. The decrease was due to additional charges taken in the
second quarter. The Bank increased its provision for loan losses and
non-interest expense. The primary increase in non-interest expense relates
to costs incurred in connection with the proposed acquisition of the
Company, environmental remediation costs and costs associated with the VRP.
See "SUPERVISION AND REGULATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SHELBY COUNTY BANCORP."
12
<PAGE> 14
RISK FACTORS
The Common Stock offered hereby involves a significant risk. The following
potential risks of an investment in the Common Stock 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. The Bank's parent company, SCB, is subject to the
informational requirements of the Exchange Act. Upon consummation of the Merger,
SCB's separate corporate existence will cease and shares of common stock of SCB
will no longer be traded. See "AVAILABLE INFORMATION."
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
"SUPERVISION AND REGULATION -- 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 the Bank in the past has experienced.
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 the Bank's management to properly assess such underwriting
criteria or the deterioration of the borrower's business or collateral could
result in credit losses. On May 6, 1998, the Bank received a letter from the OTS
indicating that the current Board of Directors of the Bank had failed to
establish systems necessary to prudently conduct commercial real estate and
commercial lending and that such lending should cease until certain corrective
action is taken and approval to resume commercial real estate and commercial
lending has been obtained from the OTS. The OTS noted several supervisory
concerns including loan documents which fail to clearly establish repayment
terms, loans priced below market rates and extended maturities at fixed
13
<PAGE> 15
rates, failure to perform and document proper credit analysis and reliance on
overstated collateral values. See "BUSINESS OF BLUE RIVER BANCSHARES -- Recent
Developments."
Consumer 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. 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,
livestock and farm equipment). In addition, agricultural loans rely primarily
upon crops which may be adversely affected by weather, disease and commodity
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 $850,000 to $2,000,000 based upon the information as of March
31, 1998 set forth in "PRO FORMA COMBINED FINANCIAL STATEMENTS." 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. The Bank has historically originated
long-term fixed rate mortgages and recently originated some long-term fixed rate
commercial real estate and commercial loans and have held such loans in its loan
portfolio. As a result, the Bank has a substantial negative interest rate gap
which means the Bank's earnings would be significantly adversely affected by
periods of rising interest rates because during such periods the interest
expense paid on deposits and borrowings will generally increase more rapidly
than the interest income earned on loans and investments. For information
regarding the Bank's interest rate risk sensitivity, and its negative interest
rate gap at September 30, 1997 as computed on various future time horizons, see
"BUSINESS OF BLUE RIVER BANCSHARES, INC. -- Recent Developments," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF SHELBY COUNTY BANCORP -- Asset
Liability Management," "BUSINESS OF SHELBY COUNTY BANCORP -- Lending Activities,
Origination,
14
<PAGE> 16
Purchase and Sale of Loans" and "SUPERVISION AND REGULATION -- Regulation of the
Bank as a Savings Bank, Savings Association Regulatory Capital." 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.
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of a financial institution's interest-earning
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 March
31, 1998, the market value of the investment securities available for sale and
held to maturity portfolio was $8,850,000 which included a unrealized gain of
$1,420,000. 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 by 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 $3.9 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 operations, the Company's accumulated deficit and
borrowings will continue to increase (and book value per share will
15
<PAGE> 17
continue to 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. On May 13, 1998, the House of
Representatives passed financial reform legislation. The legislation is intended
to break down barriers between banking, securities and insurance activities,
while maintaining the bank holding company structure and continuing to restrict
commercial activity by banks. Under the bill, financial services holding
companies, which would be regulated by the Federal Reserve, would be allowed to
own banks, securities firms and insurance companies.
The bill contains provisions regulating the commercial activities of
holding companies. Additionally, the bill contains language allowing the Office
of the Comptroller of the Currency to preempt state insurance laws' application
to national banks in certain instances. The bill must be considered by the
Senate Banking Committee and ultimately passed by the Senate. 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."
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
16
<PAGE> 18
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, and 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 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 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 IDEM to enter the site in the
VRP. In contemplation of entering the VRP, the Bank's environmental consultant
in May, 1998 performed additional testing on the
17
<PAGE> 19
portion of the St. Paul property still owned by the Bank. These tests discovered
the presence of diesel or fuel oil and gasoline constituents in the ground
water. The Bank intends to remediate the discovered contamination prior to
entering the 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, including the remediation prior
to entering the VRP, is $157,920 plus any costs incurred by IDEM which are
believed to be immaterial. As a result of the consultant's estimate, the Bank
has charged to expenses approximately $150,000 in its income statement for the
period ending March 31, 1998 for the costs associated with the proposed
remediation and completion of the VRP. The Company believes that there should be
no additional material costs associated with the remediation and entering the
VRP. There can be no assurance that the Bank will successfully complete the VRP
or that the cost relating to the VRP will not exceed $157,920 plus any costs
incurred by IDEM which are believed to be immaterial. 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. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SHELBY COUNTY BANCORP -- Results of Operations."
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. Approval for quotation on the NASDAQ
Small Cap Market requires, among other things, that there be at least three
market makers for the Common Stock. The Company expects that it will have at
least three market makers for the Common Stock, including the Underwriter,
following completion of the offering. 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 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
18
<PAGE> 20
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 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 of 1933, as amended (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 ELIGIBLE FOR FUTURE SALE" and "UNDERWRITING."
YEAR 2000 COMPLIANCE
Some early mainframes and 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, commonly referred to
as the "Year 2000 Problem." A failure by a business to identify properly and to
correct a Year 2000 Problem in its operations could result in system failures or
miscalculations. In turn, this could result in disruptions of operations,
including, among other things, a temporary inability to process transactions,
send statements or invoices, or otherwise engage in routine business
transactions on a day-to-day basis. 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 the fall of 1998. Currently, Intrieve is testing certain of the
Bank's
19
<PAGE> 21
systems. Intrieve is assisting 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.
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 $10,626,000, 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 $10,626,000 of the net proceeds of the offering. See "USE OF
PROCEEDS" and "PRO FORMA COMBINED FINANCIAL STATEMENTS." The Merger
Consideration was determined through arm's-length negotiations between the
Company and SCB. The Company consulted with its financial advisor, Roney Capital
Markets, a division of First Chicago Capital Markets, Inc., 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 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
20
<PAGE> 22
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 93.8%
(with total assets growing to $98.5 million at March 31, 1998), and increased
net loans by more than 104% (with total net loans growing to $85.1 million at
March 31, 1998). 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. 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.
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 possible 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 concurrently with, or immediately
following, the closing of the offering.
The preceding statements in this "PENDING TRANSACTION -- Reasons for 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 STATEMENTS," "FINANCIAL STATEMENTS OF BLUE RIVER BANCSHARES,
INC." and "CONSOLIDATED FINANCIAL STATEMENTS OF 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.
21
<PAGE> 23
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
estimated fair market values, with the excess of the purchase price over the net
fair market value recorded as goodwill. See "RISK FACTORS -- Impact of Purchase
Accounting on Tangible Book Value and Future Earnings" and "PRO FORMA COMBINED
FINANCIAL STATEMENTS."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby are estimated to be at least $16,300,000
($18,800,000 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. 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 whom 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 March
31, 1998 were in the aggregate amount of principal and interest of approximately
$172,000) 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 Founders." 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 March 31, 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:
<TABLE>
<S> <C> <C>
Payment of Merger Consideration to shareholders of
SCB................................................... $10,626,000 65.2%
Contribution of additional capital to the Bank.......... $ 2,154,000 13.2%
Payment of Company's borrowings and pre-closing
expenditures.......................................... $ 520,000 3.2%
Working capital......................................... $ 3,000,000 18.4%
----------- ------
Total................................................. $16,300,000 100.0%
=========== ======
</TABLE>
The Company expects that the Bank will use $2,154,000 of offering proceeds
received from the Company in connection with the contribution of additional
capital to the Bank as working capital which will enable the
22
<PAGE> 24
Bank to be classified as "well capitalized" under the FDIC's regulations
implementing the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). See "SUPERVISION AND
REGULATION -- Regulations Applicable to the Bank as a Savings Bank or Commercial
Bank, Prompt Corrective Action."
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as it is
projected to be immediately after the sale of 1,500,000 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
STATEMENTS."
<TABLE>
<S> <C>
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;
1,500,000 shares issued and outstanding................... $16,300,000
Retained earnings (deficit)................................. (174,133)
===========
Total shareholders' equity.................................. $16,125,867
===========
</TABLE>
23
<PAGE> 25
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. On February 5, 1998,
the Company entered 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, (i) SCB obtaining requisite and satisfactory shareholder approval, (ii)
the Company and the Bank having received all necessary regulatory approvals with
respect to the Merger and satisfying certain conditions contained therein and
(iii) the Company, SCB and the Bank satisfying the other conditions 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 many of 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 and the Bank's
interest rate sensitivity by selling a portion of the Bank's lower
yielding fixed-rate mortgages and increasing the volume of adjustable
rate and balloon mortgages and higher yielding shorter-term commercial
and consumer loans.
- 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 take advantage of the
commercial banking skills of the Company's management together with the existing
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
24
<PAGE> 26
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 the Merger" and "BUSINESS OF
SHELBY COUNTY BANCORP."
RECENT DEVELOPMENTS
In April and May, 1998, the OTS conducted a regularly scheduled examination
of the Bank. Concurrently with this examination, the Company updated and
expanded its own review of the portfolio with the assistance of Pyramid, a
financial institutions consulting firm.
On May 6, 1998, the Bank received a letter from the OTS indicating that the
current Board of Directors of Bank had failed to establish systems necessary to
prudently conduct commercial real estate and commercial lending and that such
lending should cease until certain corrective action is taken and approval to
resume commercial real estate and commercial lending has been obtained from the
OTS. The OTS noted several supervisory concerns including loan documents which
fail to clearly establish repayment terms, loans priced below market rates and
extended maturities at fixed rates, failure to perform and document proper
credit analysis and reliance on overstated collateral values. In connection with
the OTS exam, the Bank has made an additional provision to its allowance for
loan losses reserve of $375,000 for the quarter ended March 31, 1998. This
provision is consistent with the estimates of the Company. In compliance with
the OTS letter, the Bank has determined to cease all such lending while the
transaction is pending and until approval to reestablish such lending is granted
by the OTS.
The Company has been in consultation with the OTS in connection with the
lifting of these restrictions at the time of its acquisition of the Bank. The
Company has implemented a four-step strategy intended to facilitate removal of
the restrictions on commercial real estate and commercial lending at the time of
the closing of the Merger. First, the Company hired a Chief Credit Officer of
the Bank with responsibilities for commercial lending in addition to the Bank's
other lending activities. The Chief Credit Officer will replace the officer of
the Bank who was responsible for commercial lending. In addition, all current
Bank directors will be replaced by the Company's directors. Second, the Company
has engaged Pyramid to conduct reviews of the commercial real estate and
commercial loan portfolio. Third, the Company, in consultation with Pyramid, has
drafted a comprehensive loan policy for the Bank which specifically addresses
the concerns expressed by the OTS and will be adopted and implemented
immediately upon closing of the Merger. Fourth, the Company has responded to the
OTS with respect to the corrective action to be taken by the Company as a result
of the OTS' most recent safety and soundness examination of the Bank.
The Company believes that this strategy addresses the OTS' concerns with
respect to commercial real estate and commercial lending and will result in the
restrictions on such lending being removed at the closing of the Merger.
In connection with the proposed acquisition of the Bank and at the request
of the Company, the Bank agreed in April, 1998 to begin the process to submit
the St. Paul branch location into the VRP. Accordingly, the Bank engaged an
environmental consultant to assist. After performing preliminary testing, the
consultant informed the Bank that remediation would be necessary to remove
diesel or fuel oil and gasoline constituents in the ground water. The consultant
estimated the remediation and costs associated with the VRP to be $157,920 plus
any costs incurred by IDEM which are believed to be immaterial. The Bank has
charged to expense approximately $150,000 in its income statement for the period
ending March 31, 1998. See "RISK FACTORS -- Environmental Matters relating to
St. Paul Property" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SHELBY COUNTY BANCORP -- Results of
Operations."
In consideration of the above, the Company, SCB and the Bank negotiated a
price reduction in the total amount of $379,500, which results in the total
consideration to be received by shareholders of SCB being reduced from
$11,005,500 to $10,626,000.
25
<PAGE> 27
The Bank has a substantial negative interest rate gap which means the
Bank's earnings would be significantly adversely affected by periods of rising
interest rates. For information regarding the Bank's interest rate risk
sensitivity, and its negative interest rate gap at September 30, 1997 as
computed on various future time horizons, see "RISK FACTORS -- Interest Rate
Risk Sensitivity," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OF SHELBY COUNTY BANCORP -- Asset Liability Management," "BUSINESS OF SHELBY
COUNTY BANCORP -- Lending Activities, Origination, Purchase and Sale of Loans"
and "SUPERVISION AND REGULATION -- Regulation of the Bank as a Savings Bank,
Savings Association Regulatory Capital." The Company intends to reduce the
Bank's negative interest rate gap by: (i) establishing a mortgage secondary
market operation to sell long-term fixed-rate mortgages from the Bank's loan
portfolio, (ii) ceasing to make long-term fixed-rate commercial loans, (iii)
increasing the volume of adjustable rate and balloon mortgages and (iv) reducing
reliance upon variable-rate borrowings from the FHLB through increasing deposits
at the Bank. There can be no assurances that the Company will ever be able to
significantly reduce the Bank's negative interest rate gap.
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. The Company intends
for the Bank to market extensively to companies in the Shelby County area with
annual sales of up to $2.0 million. The Shelby County Chamber of Commerce has
indicated that approximately 990 of the estimated 1,100 companies in Shelby
County have annual sales of $2.0 million or less. 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 Vice
President and Secretary, and Bradley A. Long will serve as Vice President, Chief
Financial Officer and Treasurer. No officer, other than Messrs. Reed, Long and
Cartwright, will receive compensation from the Company for serving as an 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, Rodney L. Meyerholtz will resign as
President and Chief Executive Officer and 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."
26
<PAGE> 28
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 and not independently confirmed by the
Company.
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 management, 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.
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
27
<PAGE> 29
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 six month period ended March 31, 1998, net earnings decreased
to $2,000 compared to net earnings of $249,000 during the six month period ended
March 31, 1997. 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 12.7% 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.
In connection with an ongoing OTS safety and soundness examination, the OTS
has requested the Bank increase its allowance for loan losses as of March 31,
1998 an additional amount of $375,000. While management of the Bank notes that
none of the commercial real estate or commercial loans are non-performing at
this time, that type of lending has increased over the last two years.
Accordingly, the Bank's lending risks have increased because commercial real
estate and commercial loans are generally believed to be more risky than other
types of lending such as residential mortgage lending. Therefore, the Bank has
increased its provision for loan losses of $50,000 for the six months ended
March 31, 1997 to $435,000 for the six months ended March 31, 1998.
On May 6, 1998, the OTS advised the Bank that, until certain corrective
actions are undertaken, the Bank should cease all commercial real estate and
commercial lending. In light of the pending acquisition of the Bank by the
Company, the Board of Directors of the Bank has determined to cease all such
lending while the transaction is pending. Management of the Bank does not expect
that ceasing to make such loans during that interim period will have a material
adverse effect on the net earnings of the Bank.
During the last several years, certain environmental monitoring and
remediation has occurred at the Bank's St. Paul Branch location and an adjoining
property (which adjoining property was transferred to an unrelated third party
in 1995). At the conclusion of those environmental efforts, it was determined
that no further environmental remediation was necessary at that time. Since
then, IDEM has initiated the VRP. Pursuant to the VRP, a parcel of real property
may be "submitted" and, after successful completion of testing and monitoring by
the applicant and review by IDEM, the Indiana Governor's Office will issue a
Certificate of Completion and Covenant Not to Sue. In connection with the
proposed acquisition of the Bank and at the request of the Company, the Bank
agreed in April, 1998 to begin the process to submit the St. Paul branch
location into the VRP. Accordingly, the Bank engaged an environmental consultant
to assist.
As mentioned above, when deciding to begin the process, management of the
Bank, based upon prior environmental reports and remediation efforts, believed
that the environmental consultant would only need to undertake monitoring (and
not any remediation) in connection with the VRP. However, after undertaking
preliminary testing, the consultant informed the Bank that remediation would be
necessary to remove certain liquid phase hydrocarbons (i.e. petroleum-based
liquids). Accordingly, management of the Bank asked the consultant to proposed
what remediation would be necessary and to estimate the expected cost. The
consultant did so on May 18, 1998, and estimated the remediation and costs
associated with the VRP to be $157,920. The Bank has charged to expenses
approximately $150,000 in its income statement for the six month period ending
28
<PAGE> 30
March 31, 1998. The expected amount of time for the VRP, including expected
monitoring, is approximately three (3) years.
The environmental consultant has only provided an estimate, and the actual
total costs may be different. In addition, certain costs which may be incurred
may not be estimated in the proposal. However, at this time, management of the
Bank does not believe material additional expenditures in connection with this
matter will be necessary during the foreseeable future. The Bank's actions are
voluntary, and have not been required by any governmental agency or body.
Accordingly, the Bank has the right not to proceed with the VRP as to the St.
Paul branch property, although management of the Bank intends to proceed at this
time. Except for the VRP, no administrative, legal, or other proceeding is
pending in connection with this matter and, to the knowledge of management of
the Bank, none is threatened.
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>
SIX MONTHS ENDED MARCH 31, YEAR ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1998 1997 1997 1996
------------------ ------------------ ------------------ ------------------
INTEREST INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE EARNED/ AVERAGE EARNED/ AVERAGE EARNED/
BALANCE PAID BALANCE PAID BALANCE PAID BALANCE PAID
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Interest-earning
deposits.......... $ 4,133 $ 97 $ 3,824 $ 68 $ 2,781 $ 108 $ 5,055 $ 234
Investment
securities........ 4,650 144 2,899 118 3,286 171 2,998 223
Loans(1)............. 81,380 3,382 70,023 2,923 72,195 6,066 58,485 5,036
Stocks in FHLB of
Indianapolis...... 933 37 690 26 746 59 458 35
Mortgage-backed
securities........ 2,951 80 5,093 135 4,622 304 5,261 311
------- ------ ------- ------ ------- ------ ------- -------
Total
interest-earning
assets.......... 94,047 3,740 82,529 3,270 83,630 6,708 72,257 5,839
======= ====== ======= ====== ======= ====== ======= =======
Interest-bearing
liabilities:
Passbook accounts.... 8,905 133 9,969 141 10,027 283 10,175 313
NOW and money market
accounts.......... 19,688 278 14,405 157 14,468 314 13,062 302
Certificates of
deposit........... 42,282 1,288 41,007 1,227 40,536 2,399 43,173 2,604
------- ------ ------- ------ ------- ------ ------- -------
Total deposits.... 70,875 1,699 65,381 1,525 65,031 2,996 66,410 3,219
Borrowings........... 18,316 520 13,067 389 14,372 896 2,503 122
------- ------ ------- ------ ------- ------ ------- -------
Total
interest-bearing
liabilities..... 89,191 2,219 78,448 1,914 79,403 3,892 68,913 3,341
Net interest-earning
assets............... $ 4,856 $ 4,081 $ 4,227 $ 3,344
------- ------ ------- ------ ------- ------ ------- -------
Net interest income.... $1,521 $1,356 $2,816 $ 2,498
------- ------ ------- ------ ------- ------ ------- -------
Average
interest-earning
assets to average
interest-bearing
liabilities.......... 105.44% 105.20% 105.32% 104.85%
</TABLE>
- -------------------------
(1) Average balances include non-accrual loans.
29
<PAGE> 31
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>
SIX MONTHS
ENDED YEAR ENDED
AT AT MARCH 31, SEPTEMBER 30,
MARCH 31, SEPTEMBER 30, -------------- --------------
1998 1997 1998 1997 1997 1996
--------- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest rate earned on:
Interest-earning deposits................ 5.50% 5.56% 4.69% 3.56% 3.88% 4.63%
Investment securities.................... 6.32 7.00 6.19 8.14 5.20 7.44
Loans.................................... 8.53 8.42 8.31 8.35 8.40 8.61
Stock in FHLB of Indianapolis............ 8.00 8.25 7.93 7.54 7.91 7.64
Mortgage-backed securities............... 6.61 6.60 5.42 5.30 6.58 5.91
--- --- ---- ---- ---- ----
Total interest-earning assets......... 8.26% 8.30% 7.96% 7.92 8.02% 8.08%
Weighted average interest rate cost of:
Passbook accounts........................ 2.96% 2.81% 2.99% 2.83% 2.82% 3.08%
NOW and money market accounts............ 3.24 2.74 2.82 2.18 2.16 2.31
Certificates of deposit.................. 6.10 6.07 6.09 5.98 5.92 6.03
Borrowings............................... 6.51 6.88 5.68 5.95 6.23 4.87
--- --- ---- ---- ---- ----
Total interest-bearing liabilities.... 5.35% 5.24% 4.98% 4.88% 4.90% 4.85%
Interest rate spread(1).................... 2.91% 3.06% 2.98% 3.04% 3.12% 3.23%
=== === ==== ==== ==== ====
Net yield on weighted average
interest-earning assets (Net Interest
Margin)(2)............................... N/A N/A 3.23% 3.29% 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 March 31, 1998, because the computation of net yield is applicable only
over a period rather than at a specific date.
30
<PAGE> 32
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
-----------------------------
TOTAL NET DUE TO DUE TO
CHANGE RATE VOLUME
--------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Interest-earning assets:
Interest-earning deposits................................. $ 29 $ 23 $ 6
Investment securities..................................... 26 (17) 43
Loans..................................................... 459 (14) 473
Stock in FHLB of Indianapolis............................. 11 1 10
Mortgage-backed securities................................ (55) 3 (58)
------ ----- ------
Total................................................ $ 470 $ (4) $ 474
------ ----- ------
Interest-bearing liabilities:
Passbook accounts......................................... (8) 9 (17)
NOW and money market accounts............................. 121 54 67
Certificates of deposit................................... 61 23 38
Borrowings................................................ 131 (17) 148
------ ----- ------
Total................................................ $ 305 $ 69 $ 236
------ ----- ------
Net change in net interest income........................... $ 165 $ (73) $ 238
====== ===== ======
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>
COMPARISON OF OPERATING RESULTS FOR SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1997
General. During the six month period ended March 31, 1998, net earnings
decreased to $2,000 (basic EPS of $.01 per share) compared to net earnings of
$249,000 during the six month period ended March 31, 1997. The decrease in
earnings is primarily the result of an increase in the provision for loan loss
of $375,000 for a period for six months ended March 31, 1998 relating to the
recent OTS safety and soundness exam and a reserve of $150,000 established for
environmental matters relating to the St. Paul branch location. Net interest
31
<PAGE> 33
income was $1,086,000, after provision for loan losses, for the six months ended
March 31, 1998, compared to $1,306,000 for the six months ended March 31, 1997.
Net interest margin for the six months ended March 31, 1998 was 3.23%, compared
to 3.29% for the same period one year ago.
Interest Income. Interest income increased from $3,270,000 for the six
months ended March 31, 1997 to $3,740,000 for the six months ended March 31,
1998.
Interest Expense. Interest expense for the six month period ended March 31,
1998 was $2,219,000 compared to $1,914,000 for the six months ended March 31,
1997. This increase is primarily attributed to the increase in deposit accounts.
Non-Interest Income. Total non-interest income was $219,000 for the six
months ended March 31, 1998, compared to $168,000 for the same period in 1997.
Non-Interest Expense. Non-interest expense totaled $1,302,000 for the six
months ended March 31, 1998 compared to $1,072,000 for the same period in the
prior year. The primary increase in non-interest expense relates to costs
incurred in connection with the proposed acquisition of the Company,
environmental remediation costs and costs associated with the VRP.
Provision for Loan Losses. The Bank's provision for loan losses was
$435,000 for the six months ended March 31, 1998 compared to $50,000 for the
same period in the prior year. Non-performing assets increased from $561,000 at
March 31, 1997 to $710,000 at March 31, 1998.
COMPARISON OF OPERATING RESULTS FOR 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.
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 4.85% 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
32
<PAGE> 34
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 86% at September 30, 1997, compared to
109% at September 30, 1996. At September 30, 1997, non-performing loans as a
percent of total gross loans were .54%.
FINANCIAL CONDITION AT MARCH 31, 1998 COMPARED TO SEPTEMBER 30, 1997
Total assets at March 31, 1998, were $98,465,000, an increase of $7,856,000
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
$85,133,000 at March 31, 1998. 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.
Total deposits at September 30, 1997 of $64,633,000 increased to
$70,533,000 at March 31, 1998. This increase in deposits is primarily due to an
increase in certificates of deposit and checking accounts.
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.
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,
33
<PAGE> 35
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 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 three months 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
34
<PAGE> 36
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.
Given the negative gap position, in the event of increasing interest rates,
SCB may be exposed to the resulting demands for liquidity and funding. If
additional liquidity or funding is necessary, at March 31, 1998, the Bank had
the ability to borrow an additional $10.2 million from the FHLB. See additional
discussion in the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SHELBY COUNTY BANCORP -- Liquidity and Capital
Resources."
35
<PAGE> 37
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 MATURING OR REPRICING IN
-------------------------------------------------------------------------------------------------------
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 TOTAL
------ ------ --------- ------ ------ ------- -------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Adjustable rate
mortgages.......... $ 749 $ 3,763 $ 174 $ 2,808 $ -- $ -- $ -- $ -- $ 7,494
Fixed-rate
mortgages.......... 816 811 1,616 6,367 7,359 15,778 16,934 8,479 58,160
Non-mortgage loans... 834 854 1,770 6,541 1,758 -- -- -- 11,757
Non-mortgage
investments........ 3,566 -- -- -- 4,168 1,398 -- -- 9,132
-------- -------- -------- -------- -------- -------- ------- ------ --------
Total interest-
earning
assets......... $ 5,965 $ 5,428 $ 3,560 $ 15,716 $ 13,285 $ 17,176 $16,934 $8,479 $ 86,543
======== ======== ======== ======== ======== ======== ======= ====== ========
Liabilities:
Interest-bearing
liabilities:
Fixed maturity
deposits........... $ 8,359 $ -- $ 11,427 $ 15,927 $ 4,021 $ -- $ -- $ -- $ 39,734
Other deposits....... 2,640 2,191 3,444 6,937 2,941 3,827 2,462 688 25,130
Variable-rate fixed
maturity........... 17,746 -- -- -- -- -- -- -- 17,746
Other liabilities.... $ 625 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 625
-------- -------- -------- -------- -------- -------- ------- ------ --------
Total interest-
bearing
liabilities.... $ 29,370 $ 2,191 $ 14,871 $ 22,864 $ 6,962 $ 3,827 $ 2,462 $ 688 $ 83,235
======== ======== ======== ======== ======== ======== ======= ====== ========
Excess (deficiency)
of interest-bearing
assets over
interest-bearing
liabilities........ $(23,405) $ 3,237 $(11,311) $ (7,148) $ 6,323 $ 13,349 $14,472 $7,791 $ 3,308
Cumulative excess
(deficiency) of
interest-bearing
assets over
interest-bearing
liabilities........ $(23,405) $(20,168) $(31,479) $(38,627) $(32,304) $(18,955) $(4,483) $3,308 $ 3,308
Cumulative interest
sensitivity gap as
a percentage of
total assets....... (26.16)% (22.54)% (35.18)% (43.17)% (36.10)% (21.18)% (5.01)% 3.70% 3.70%
</TABLE>
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 9.06% 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
36
<PAGE> 38
four-family residential properties with remaining terms to maturity of more than
5 years will prepay annually as follows:
<TABLE>
<CAPTION>
INTEREST RATE PREPAYMENT ASSUMPTION
------------- ---------------------
<S> <C>
Less than 8%.............................................. 9.06%
8 to 8.99%................................................ 12.06%
9 to 9.99%................................................ 19.50%
10 to 10.99%.............................................. 29.82%
11 and over............................................... 42.78%
</TABLE>
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> 39
SUMMARY CONDENSED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA OF BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND 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 six month periods ended March 31, 1998 and 1997. 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 OF SHELBY COUNTY BANCORP." In
the opinion of management of SCB, the data presented for the six month periods
ended March 31, 1998 and 1997 reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Results
for the six month periods ending March 31, 1998 and 1997 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 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 STATEMENTS," and "CONSOLIDATED
FINANCIAL STATEMENTS OF SHELBY COUNTY BANCORP" and "FINANCIAL STATEMENTS OF 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 and (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
38
<PAGE> 40
that actually would have occurred had the Merger been consummated on the dates
indicated or that may occur in the future.
<TABLE>
<CAPTION>
BLUE RIVER
BANCSHARES, INC.
SHELBY COUNTY BANCORP ----------------------------
------------------------------------- AT OR FOR THE
AT OR FOR THE SIX AT OR FOR THE THREE MONTHS FOR THE
MONTHS ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, MARCH 31, DECEMBER 31,
----------------- ----------------- ------------- ------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
----------------- ----------------- ------------- ------------
1998 1997 1997 1996 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income................ $ 3,740 $ 3,270 $ 6,708 $ 5,839 $ 1,898 $7,092
Interest expense............... 2,219 1,914 3,892 3,341 1,034 3,811
------- ------- ------- ------- -------- ------
Net interest income............ 1,521 1,356 2,816 2,498 864 3,281
Provision for loan losses...... 435 50 104 100 405 111
Non-interest income............ 219 168 349 518 118 365
Non-interest expense........... 1,302 1,072 2,253 2,546 906 2,780
------- ------- ------- ------- -------- ------
Income before income (loss)
taxes....................... 3 402 808 370 (329) 755
Provision for income taxes..... 1 153 295 134 (104) 375
------- ------- ------- ------- -------- ------
Net income (loss)(7)........... $ 2 $ 249 $ 513 $ 236 $ (225) $ 380
======= ======= ======= ======= ======== ======
PER SHARE DATA:(6)
Basic earnings (loss) per
share....................... -- -- -- -- $ (0.15) $ 0.25
Diluted earnings (loss) per
share....................... -- -- -- -- (0.15) 0.25
Cash dividends per share....... -- -- -- -- -- --
Book value per share........... -- -- -- -- 10.75 --
Tangible book value per
share(4).................... -- -- -- -- 7.89 --
BALANCE SHEET DATA:
Total assets................... $98,465 $87,795 $90,609 $82,676 $107,810 --
Loans, net..................... 85,133 70,349 76,038 66,098 84,934 --
Allowance for loan losses...... 715 362 392 326 715 --
Securities..................... 8,834 8,410 8,695 8,511 8,850 --
Goodwill....................... -- -- -- -- 3,917 --
Deposits....................... 70,533 65,853 64,633 65,286 71,196 --
Shareholders' equity........... 7,346 6,730 7,171 6,433 16,126 --
Tangible shareholders'
equity(5)................... 7,346 6,730 7,171 6,433 12,209 --
PERFORMANCE RATIOS:(1)
Return on average assets....... 0.00% 0.58% 0.59% 0.31% -- --
Return on average shareholders'
equity...................... 0.05 7.57 7.66 3.83 -- --
Net interest margin............ 3.23 3.29 (3.37) 3.46 -- --
Non-interest income to total
average assets.............. 0.45 0.39 0.40 0.68 -- --
Non-interest expense to total
average assets.............. 2.67 2.50 2.59 3.36 -- --
Efficiency ratio(2)............ 74.83 70.34 71.18 84.42 -- --
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
BLUE RIVER
BANCSHARES, INC.
SHELBY COUNTY BANCORP ----------------------------
------------------------------------- AT OR FOR THE
AT OR FOR THE SIX AT OR FOR THE THREE MONTHS FOR THE
MONTHS ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, MARCH 31, DECEMBER 31,
----------------- ----------------- ------------- ------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
----------------- ----------------- ------------- ------------
1998 1997 1997 1996 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS:
Non-performing loans to total
gross loans................. 0.78% 0.79% 0.54% 0.45% -- --
Allowance for loan losses to
total gross loans........... 0.83 0.51 0.52 0.49 -- --
Allowance for loan losses to
non-performing loans........ 106.24 64.53 86.34 108.67 -- --
Net charge-off loans to average
loans(1).................... 0.14 0.02 0.05 0.02 -- --
CAPITAL RATIOS:(3)
Shareholders' equity to
assets...................... 7.46% 7.67% 7.91% 7.78% -- --
Tangible capital ratio......... 5.91 6.41 6.32 6.09 -- --
Core capital ratio............. 5.91 6.41 6.32 6.09 -- --
Total risk-based capital
ratio....................... 8.89 10.17 9.49 9.66 -- --
</TABLE>
- -------------------------
(1) Performance ratios for the six months ended March 31, 1998 and 1997 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 SCB'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.
(7) Net income decreased for the six months ended March 31, 1998 compared to
March 31, 1997. The decrease was due to additional charges taken in the
second quarter. The Bank increased its provision for loan losses and
non-interest expense. The primary increase in non-interest expense relates
to costs incurred in connection with the proposed acquisition of the
Company, environmental remediation costs and costs associated with the VRP.
See "SUPERVISION AND REGULATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SHELBY COUNTY BANCORP."
40
<PAGE> 42
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 and not independently confirmed by the
Company.
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 management, 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.
41
<PAGE> 43
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 after consideration of the
allowance for possible loan losses and deferred net loan fees on loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MARCH 31, --------------------------------------------
1998 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................... $54,334 63.14% $46,870 61.17% $42,131 63.24%
Residential construction............. 1,148 1.33 1,054 1.38 1,003 1.51
Multi-family......................... 4,800 5.58 4,512 5.89 3,406 5.11
Non-residential...................... 12,659 14.71 11,746 15.33 10,418 15.64
Home equity loans.................... 1,268 1.47 977 1.28 740 1.11
Consumer loans:
Installment loans.................... 2,968 3.45 3,411 4.45 2,494 3.74
Auto loans........................... 4,043 4.69 3,878 5.06 3,423 5.14
Home improvement loans............... 100 0.12 86 .11 -- --
Loans secured by deposits............ 258 0.30 137 .18 169 .25
Commercial loans....................... 4,489 5.21 3,947 5.15 2,838 4.26
------- ------ ------- ------ ------- ------
Gross loans receivable............ $86,067 100.00% $76,618 100.00% $66,622 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four family(1)................ $56,850 66.05% $48,987 63.94% $43,874 65.86%
Non-residential real estate.......... 12,659 14.70 11,746 15.33 10,418 15.63
Multi-family......................... 4,800 5.58 4,512 5.89 3,406 5.11
Autos................................ 4,043 4.70 3,878 5.06 3,423 5.14
Deposits............................. 258 0.30 137 .18 169 .25
Other security....................... 4,137 4.81 4,027 5.26 3,009 4.52
Unsecured............................ 3,320 3.86 3,331 4.34 2,323 3.49
------- ------ ------- ------ ------- ------
Gross loans receivable............ $86,067 100.00% $76,618 100.00% $66,622 100.00%
======= ====== ======= ====== ======= ======
Deduct:
Allowance for possible losses on
loans............................. 715 .83% 392 .51% 326 .49%
Deferred net loan fees............... 219 .25 188 .25 198 .30
------- ------ ------- ------ ------- ------
Net loans receivable................... $85,133 98.92% $76,038 99.24% $66,098 99.21%
======= ====== ======= ====== ======= ======
</TABLE>
- -------------------------
(1) Includes residential construction, home equity loans and home improvement
loans.
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 March 31, 1998, 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.
42
<PAGE> 44
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 MARCH 31,
BALANCE -------------------------------------------------------------
OUTSTANDING 2001 2003 2008 2013
MARCH 31, TO TO TO AND
1998 1999 2000 2002 2007 2012 FOLLOWING
----------- ---- ---- ---- ---- ---- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential one-to-four family
mortgage loans............. $54,334 $ 3,473 $2,133 $2,192 $4,676 $12,454 $29,406
Residential construction...... 1,148 1,071 9 10 18 40 --
Multi-family loans............ 4,800 778 149 194 504 1,192 1,983
Non-residential............... 12,659 742 495 608 1,495 4,046 5,273
Home equity................... 1,268 33 32 62 141 124 876
Consumer loans:
Home improvement loans........ 100 36 17 19 28 -- --
Auto.......................... 4,043 1,577 1,041 751 653 21 --
Installment loans............. 2,968 2,185 211 124 108 195 145
Loans secured by deposits..... 258 194 11 9 13 26 5
Commercial loans................ 4,489 2,772 394 339 482 502 --
------- ------- ------ ------ ------ ------- -------
Gross loans receivable........ $86,067 $12,861 $4,492 $4,308 $8,118 $18,600 $37,688
======= ======= ====== ====== ====== ======= =======
</TABLE>
The following table sets forth, as of March 31, 1998, 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 MARCH 31, 1999
--------------------------------------
FIXED RATES VARIABLE RATES TOTAL
----------- -------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgages:
Residential one-to-four family mortgage loans............. $47,534 $3,327 $50,861
Multi-family loans........................................ 2,802 1,220 4,022
Non-residential........................................... 9,552 2,365 11,917
Home equity............................................... -- 1,235 1,235
Residential Construction.................................. 77 -- 77
Consumer loans:
Home improvement loans.................................... 64 -- 64
Auto...................................................... 2,466 -- 2,466
Installment loans......................................... 783 -- 783
Loans secured by deposits................................. 64 -- 64
Commercial loans............................................ 1,717 -- 1,717
------- ------ -------
Total.................................................. $65,059 $8,147 $73,206
======= ====== =======
</TABLE>
Residential Loans. Approximately $54 million, or 63.1% of the Bank's total
loan portfolio at March 31, 1998, consisted of one-to-four family mortgage
loans, of which 93.5% 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
March 31, 1998, approximately 6.5% of the mortgage loans on one-to-four family
residences included in the Bank's loan and
43
<PAGE> 45
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 March 31, 1998, residential mortgage loans amounting to $673,000,
or .78% of the Bank's total loan 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 March 31, 1998, the Bank had $1.1 million, or 1.3% of its total loan
portfolio, in residential construction loans outstanding.
Non-Residential Real Estate Loans. At March 31, 1998, $13 million, or
14.7%, of the Bank's total loan portfolio consisted of mortgage loans secured by
non-residential real estate. The non-residential mortgage loans are written for
terms not exceeding 25 years, and generally require a 75% or lower loan-to-value
ratio. The largest non-residential mortgage loan as of March 31, 1998, had a
balance of approximately $740,000. 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 March 31, 1998, $4.8 million, or 5.6%, of the Bank's
total loan 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 March 31, 1998, had a balance
of approximately $639,000 and none of these loans were non-performing at that
time. As with the Bank's non-residential real estate loans, multi-family
mortgage 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
44
<PAGE> 46
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.
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 March 31, 1998, the Bank had
approximately $1.3 million outstanding home equity loans, or 1.5% of its total
loan portfolio, with approximately $612,000 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 March 31, 1998,
approximately nine years after the Bank began making consumer loans, these
loans, consisting primarily of auto, installment, loans secured by deposits and
home improvement loans, were $7.4 million, or approximately 8.6% of the Bank's
total loan 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 March 31, 1998, no consumer loans
were included in non-performing assets.
The Bank's portfolio of automobile loans was $4 million, or 4.7% of its
total loan portfolio at March 31, 1998. 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 $3.3 million, or 4% of the Bank's total loan portfolio at March 31,
1998.
Commercial Loans. The Bank has historically made a limited number of
secured commercial loans. At March 31, 1998, these loans, which included
inventory financing for a lawn and garden equipment supplier, totaled $4.5
million, or 5.2% of the Bank's total loan portfolio.
On May 6, 1998, the Bank received a letter from the OTS indicating that the
current Board of Directors of the Bank had failed to establish systems necessary
to prudently conduct commercial real estate and commercial lending and that such
lending should cease until certain corrective action is taken and approval to
resume commercial real estate and commercial lending has been obtained from the
OTS. The OTS noted several supervisory concerns including loan documents which
fail to clearly establish repayment terms, loans priced below market rates and
extended maturities at fixed rates, failure to perform and document proper
credit analysis and reliance on overstated collateral values. In light of the
pending acquisition of the Bank by the Company, the Board of Directors of the
Bank has determined to cease all such lending while the transaction is pending.
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
45
<PAGE> 47
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 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 $850,000 at March 31, 1998. At that
date, the highest outstanding balance of loans by the Bank to one borrower and
related entities was approximately $740,000, 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 March 31, 1998, 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 $4,657,000.
46
<PAGE> 48
The following table shows loan origination, purchase, sale and repayment
activity for the Bank during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross loans receivable at beginning of period....... $76,618 $66,622 $66,622 $50,927
Originations:
First mortgage loans:
Residential....................................... 10,856 5,300 12,150 17,084
Non-residential................................... 1,579 582 3,559 3,087
Miscellaneous additions........................... -- -- 744 271
------- ------- ------- -------
Total first mortgage loans..................... 12,435 5,882 16,453 20,442
------- ------- ------- -------
Consumer loans:
Installment loans................................. 5,551 4,475 13,327 10,302
Loans secured by deposits......................... 24 38 54 72
Miscellaneous additions........................... -- -- -- --
------- ------- ------- -------
Total consumer loans........................... 5,575 4,513 13,381 10,374
------- ------- ------- -------
Commercial loans.................................... 2,721 1,256 1,103 3,920
------- ------- ------- -------
Total originations............................. 20,731 11,651 30,937 34,736
------- ------- ------- -------
Purchases:
First mortgage loans.............................. 250 1,784 536 1,636
------- ------- ------- -------
Total originations and purchases............... 20,981 13,435 31,473 36,372
------- ------- ------- -------
Sales:
First mortgage loans.............................. -- -- -- --
------- ------- ------- -------
Total sales.................................... -- -- -- --
------- ------- ------- -------
Repayments and other deductions..................... 11,532 9,139 21,477 20,677
------- ------- ------- -------
Gross loans receivable at end of period............. $86,067 $70,918 $76,618 $66,622
======= ======= ======= =======
</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.
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
47
<PAGE> 49
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 March 31, 1998, $710,000, or .72%, 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 MARCH 31, AT SEPTEMBER 30,
------------ -----------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans(1)............................ $673 $417 $300
Real estate owned -- net........................ 37 37 --
Troubled debt restructurings.................... -- -- --
---- ---- ----
Total non-performing assets................ $710 $454 $300
---- ---- ----
Non-performing assets to total assets............. .72% .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 March 31, 1998, all $673,000 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.
As of March 31, 1998, the Bank held loans delinquent from 30 to 89 days
aggregating approximately $2.1 million or 2.13% of total assets. The amount of
past due payments on such loans aggregated approximately $35,000. 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.
48
<PAGE> 50
The following table analyzes changes in the allowance during the two years
ended September 30, 1997 and 1996 and the six months ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
----------------- -----------------
1998 1997 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............................ 435 50 104 100
Recoveries of loans previously charged off........... 4 -- 1 --
Less gross charge-offs:
Residential real estate loans........................ -- 14 -- --
Consumer loans....................................... 116 -- 39 15
---- ---- ---- ----
Gross charge-offs.................................... 116 14 39 15
---- ---- ---- ----
Balance of allowance at end of period.................. $715 $362 $392 $326
==== ==== ==== ====
Net charge-offs to total average loans outstanding..... .14% 0.02% 0.05% 0.02%
==== ==== ==== ====
Allowance at end of period to total gross loans
outstanding.......................................... 0.83% 0.51% 0.52% 0.49%
==== ==== ==== ====
</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.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
----------------------------------------------- -----------------------------------------------
1998 1997 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........ $415 86.23% $238 85.53% $283 85.05% $202 86.61%
Consumer loans........ 300 8.56% 124 9.49% 109 9.80% 124 9.13%
Commercial loans...... -- 5.21% -- 4.98% -- 5.15% -- 4.26%
---- ------- ---- ------- ---- ------- ---- -------
Total............... $715 100.00% $362 100.00% $392 100.00% $326 100.00%
==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
INVESTMENTS
The Bank's investment portfolio consists of mortgage-backed securities,
corporate and municipal bonds and FHLMC preferred stock.
49
<PAGE> 51
The following table sets forth the amortized cost and fair value of the
Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT MARCH 31, AT SEPTEMBER 30, AT SEPTEMBER 30,
1998 1997 1997 1996
------------------ ------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
Mortgage-backed
securities............. $2,174 $2,160 $3,279 $3,215 $2,997 $2,973 $4,700 $4,583
Municipal bonds........... 2,519 2,496 444 436 1,339 1,353 445 435
Corporate bonds........... 1,863 1,861 1,759 1,690 2,253 2,227 1,517 1,446
Agencies.................. 98 99 1,083 1,048 -- -- -- --
Treasury notes............ -- -- -- -- 224 225 -- --
FHLMC preferred stock..... 31 1,473 31 867 31 1,109 31 780
------ ------ ------ ------ ------ ------ ------ ------
Total preferred........ 6,685 8,089 6,596 7,256 6,844 7,887 6,693 7,244
------ ------ ------ ------ ------ ------ ------ ------
Held to maturity:
Mortgage-backed
securities............. 274 282 388 399 336 325 633 637
Municipal bonds........... 221 226 225 223 223 227 227 224
Corporate bonds........... 250 253 404 410 250 255 408 414
Derivatives............... -- -- 107 107 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total.................. 745 761 1,124 1,139 809 807 1,268 1,275
------ ------ ------ ------ ------ ------ ------ ------
Total investment
securities................ $7,430 $8,850 $7,720 $8,395 $7,653 $8,694 $7,961 $8,519
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the amount of investment securities
(excluding FHLMC preferred stock which is an equity security) which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT AT MARCH 31, 1998 WHICH MATURES IN
----------------------------------------------------------------------------------------
ONE YEAR TO SIX YEARS TO
ONE YEAR OR LESS FIVE YEARS TEN YEARS OVER TEN YEARS
------------------- ------------------- ------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities... $ -- -- $ 566 5.99% $1,129 6.80% $740 4.32%
Municipal and corporate
bonds...................... -- -- 2,669 5.10% 1,923 7.61% 236 6.10%
Agencies..................... -- -- -- -- 99 5.66% -- --
</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 March 31, 1998, the Bank had liquid assets
of $5.4 million, and a regulatory liquidity ratio of 6.13%, of which 62.87% were
short-term investments.
As of March 31, 1998, $2.4 million, or 33% of the Bank's total investment
securities portfolio consisted of mortgage-backed securities. These
mortgage-backed securities had an estimated market value of $2.4 million at
March 31, 1998. Management has classified these securities into held to maturity
and available for sale
50
<PAGE> 52
portfolios in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
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> 53
An analysis of the Bank deposit accounts by type, maturity, and rate at
March 31, 1998 and September 30, 1997, is as follows:
<TABLE>
<CAPTION>
MINIMUM BALANCE AT WEIGHTED BALANCE AT WEIGHTED
OPENING MARCH 31, % OF AVERAGE SEPTEMBER 30, % OF AVERAGE
BALANCE 1998 DEPOSITS RATE 1997 DEPOSITS RATE
------- ---------- -------- -------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
TYPE OF ACCOUNT
Withdrawable:
Savings accounts............ $ 25 $ 8,351 11.84% 2.97% $ 9,206 14.24% 2.81%
NOW......................... 100 15,625 22.15 2.78 13,063 20.21 2.15
Money Market................ 10,000 6,647 9.42 5.50 2,732 4.23 5.60
------- ------ ------- ------
Total withdrawable............ 30,623 43.41 25,001 38.68
------- ------ ------- ------
Certificates (original terms):
31 days..................... 2,500 7 .01 2.75 67 .10 4.77%
3 months.................... 1,000 420 .60 4.65 601 .93 4.60
6 months.................... 1,000 4,934 7.00 5.13 5,854 9.06 5.11
12 months................... 500 4,266 6.05 5.62 3,850 5.96 5.53
18 months................... 500 1,444 2.05 5.68 1,529 2.37 5.59
30 months................... 500 4,587 6.50 5.72 4,602 7.12 5.78
48 months................... 500 1,158 1.64 6.18 1,039 1.61 6.13
60 months................... 500 9,715 13.77 6.70 10,700 16.56 6.67
IRA's
6 months.................... 1,000 146 .21 5.17 140 .22 5.12
12 months................... 500 170 .24 5.91 156 .24 5.75
18 months................... 500 46 .07 5.70 49 .08 5.67
30 months................... 500 609 .86 5.67 608 .94 5.73
48 months................... 500 21 .03 5.88 17 .03 5.89
60 months................... 500 2,766 3.92 6.53 2,779 4.30 6.57
96 months................... 1,000 -- -- -- -- -- --
Jumbo certificates............ 100,000 9,621 13.64 6.42 7,641 11.80 6.49
------- ------ ------- ------
Total certificates.......... 39,910 56.59 39,632 61.32
------- ------ ------- ------
Total deposits.............. $70,533 100.00% $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:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT MARCH 31, --------------------
1998 1997 1996
------------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Under 5%..................................... $ 3,011 $ 4,066 $ 5,374
5.01 - 7.00%................................. 33,588 32,250 33,106
7.01 - 9.00%................................. 3,311 3,316 3,245
9.01 and over................................ -- -- --
------- ------- -------
Total...................................... $39,910 $39,632 $41,725
======= ======= =======
</TABLE>
52
<PAGE> 54
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during future years following March 31, 1998.
Matured certificates which have not been renewed as of March 31, 1998, have been
allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
AMOUNTS AT MARCH 31, 1998, MATURING IN
----------------------------------------------------------
ONE YEAR GREATER THAN
OR LESS TWO YEARS THREE YEARS THREE YEARS
-------- --------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Under 5%......................... $ 2,916 $ 95 $ -- $ --
5.01 - 7.00%..................... 16,004 4,099 10,599 2,886
7.01 - 9.00%..................... 228 2,027 414 642
9.01 - and over.................. -- -- -- --
------- ------ ------- ------
Total.......................... $19,148 $6,221 $11,013 $3,528
======= ====== ======= ======
</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 March 31,
1998.
<TABLE>
<CAPTION>
MATURITY
- -------- (IN THOUSANDS)
<S> <C>
Three months or less........................................ $2,647
Greater than three months through six months................ 750
Greater than six months through twelve months............... 900
Over twelve months.......................................... 5,324
------
Total..................................................... $9,621
======
</TABLE>
53
<PAGE> 55
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
MARCH 31, % OF SEPTEMBER 30, SEPTEMBER 30, % OF SEPTEMBER 30,
1998 DEPOSITS 1997 1997 DEPOSITS 1996
---------- -------- ------------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Withdrawable:
Savings accounts..... $ 8,351 11.84% $ (855) $ 9,206 14.24% $ (822)
NOW.................. 15,625 22.15 2,562 13,063 20.21 (470)
Money Market......... 6,647 9.42 3,915 2,732 4.23 2,732
------- ------ ------ ------- ------ -------
Total withdrawable..... 30,623 43.41 5,622 25,001 38.68 1,440
------- ------ ------ ------- ------ -------
Certificates (original terms):
31 days.............. 7 .01 (60) 67 .10 (7)
3 months............. 420 .60 (181) 601 .93 155
6 months............. 4,934 7.00 (920) 5,854 9.06 (2,130)
12 months............ 4,266 6.05 416 3,850 5.96 716
18 months............ 1,444 2.05 (85) 1,529 2.37 382
30 months............ 4,587 6.50 (15) 4,602 7.12 (548)
48 months............ 1,158 1.64 119 1,039 1.61 (1,405)
60 months............ 9,715 13.77 (985) 10,700 16.56 (541)
IRA's
6 months............. 146 .21 6 140 .22 7
12 months............ 170 .24 14 156 .24 58
18 months............ 46 .07 (3) 49 .08 (6)
30 months............ 609 .86 1 608 .94 70
48 months............ 21 .03 4 17 .03 (5)
60 months............ 2,766 3.92 (13) 2,779 4.30 152
96 months............ -- -- -- -- -- --
Jumbo certificates..... 9,621 13.64 1,980 7,641 11.80 1,009
------- ------ ------ ------- ------ -------
Total
certificates.... 39,910 56.59 278 39,632 61.32 (2,093)
------- ------ ------ ------- ------ -------
Total deposits..... $70,533 100.00% $5,900 $64,633 100.00% $ (653)
======= ====== ====== ======= ====== =======
<CAPTION>
DEPOSIT ACTIVITY
------------------------
BALANCE AT
SEPTEMBER 30, % OF
1996 DEPOSITS
------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Withdrawable:
Savings accounts..... $10,028 15.36%
NOW.................. 13,533 20.73
Money Market......... -- --
------- ------
Total withdrawable..... 23,561 36.09
------- ------
Certificates (original
31 days.............. 74 .11
3 months............. 446 .68
6 months............. 7,984 12.23
12 months............ 3,134 4.80
18 months............ 1,147 1.76
30 months............ 5,150 7.89
48 months............ 2,444 3.75
60 months............ 11,241 17.22
IRA's
6 months............. 133 .21
12 months............ 98 .15
18 months............ 55 .08
30 months............ 538 .82
48 months............ 22 .03
60 months............ 2,627 4.02
96 months............ -- --
Jumbo certificates..... 6,632 10.16
------- ------
Total
certificates.... 41,725 63.91
------- ------
Total deposits..... $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 "SUPERVISION AND REGULATION -- 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 March 31, 1998, the Bank had approximately
$19.6 million in borrowings outstanding, of which approximately $19.3 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> 56
The following table represents certain information relating to our
borrowings at or for the six months ended March 31, 1998 and 1997 and at or for
the years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
------------------ -----------------
1998 1997 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances:
Outstanding at end of period........................... $19,321 $14,246 $17,746 $9,746
Average balance outstanding for period................. 18,009 12,746 14,054 2,173
Maximum amount outstanding at any month-end during the
period.............................................. 19,321 14,246 17,746 9,746
Weighted average interest rate during the period....... 5.77% 6.10% 6.19% 4.41%
Weighted average interest rate at end of the period.... 6.48% 7.10% 6.85% 6.48%
</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.
EMPLOYEES
As of March 31, 1998, SCB employed no persons on a full- or part-time
basis. As of March 31, 1998, the Bank employed 28 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 of the Bank 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.
55
<PAGE> 57
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.
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 is no longer be able to use the percentage of taxable income
method of computing its allocable tax bad debt deduction. The Bank is 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
56
<PAGE> 58
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 March 31, 1998, 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.
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 March 31, 1998, 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.
57
<PAGE> 59
The following table provides certain information with respect to the Bank's
offices as of March 31, 1998:
<TABLE>
<CAPTION>
NET BOOK VALUE APPROXIMATE
YEAR OPENED OF PROPERTY, SQUARE
DESCRIPTION AND ADDRESS OR ACQUIRED FURNITURE & FIXTURES FOOTAGE
----------------------- ----------- -------------------- -----------
<S> <C> <C> <C>
Shelbyville Main Office
29 East Washington Street......................... 1975 $787,359 15,000
Shelbyville Rampart Office
34 Rampart Street................................. 1995 $880,588 3,000
Morristown Office
127 East Main Street.............................. 1995 $ 45,471 1,800
St. Paul Office
105 County Line Road.............................. 1989 $ 36,138 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.
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 $132,000 at March 31, 1998.
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
Some early mainframes and 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. A failure by a
business to identify properly and to correct a Year 2000 Problem in its
operations could result in system failures or miscalculations. In turn, this
could result in disruptions of operations, including, among other things, a
temporary inability to process transactions, send statements or invoices, or
otherwise engage in routine business transactions on a day-to-day basis. 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 the
fall of 1998. Currently, Intrieve is testing certain of the Bank's systems.
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. The Bank does not expect the Year 2000 Problem to
materially affect the Bank's financial condition or results of operations, and
the Bank likewise does not expect costs associated with prevention or
remediation of the Year 2000 Problem to be material.
58
<PAGE> 60
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 POSITION(S)
NAME AND AGE THE COMPANY TERM EXPIRES WITH THE BANK
- ------------ ---------------- ------------ -------------
<S> <C> <C> <C>
Robert C. Reed, 32................ President, Chief 1999 President, Chief
Executive Officer and Executive Officer, and
Director Director
Steven R. Abel, 48................ Chairman of the Board, 2000 Chairman of the Board,
Director Director
D. Warren Robison, 32............. Vice President, Secretary 2001 Director
and Director
Wendell L. Bernard, 53............ Director 2000 Director
Ralph W. Van Natta, 68............ Director 2001 Director
Bradley A. Long, 34............... Vice President, Chief -- Senior Vice President and
Financial Officer and Treasurer
Treasurer
Stephen R. Cartwright, 50......... Vice President and Chief -- Senior Vice President and
Credit Officer Chief Credit Officer
</TABLE>
The directors of the Company are Steven R. Abel, Robert C. Reed, D. Warren
Robison, Wendell L. Bernard and Ralph W. Van Natta.
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.
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
59
<PAGE> 61
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 (Vice President, 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.
Wendell L. Bernard (Director). Mr. Bernard owns and operates a real estate
agency located in Shelbyville, Indiana, an agency he founded in 1982. He is the
former Director and Vice President of Finance of Williams Industrial, Inc., a
manufacturing company. He worked there for sixteen years until 1997. Mr. Bernard
is a member of the Shelby County Chamber of Commerce.
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.
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.
Stephen R. Cartwright (Vice President, Chief Credit Officer). Mr.
Cartwright has over 20 years of banking experience. Prior to his employment by
the Company, Mr. Cartwright was the Senior Vice President for Retail Lending for
Fort Wayne National Bank (now a part of National City Bank, Indiana) from
January, 1998 to May, 1998. Prior to his employment by Fort Wayne National Bank,
he was the Senior Vice President and Direct Consumer Loan Production Manager for
First of America Bank, Indianapolis from February, 1997 to January, 1998, and
prior to this time, he served as First of America's Banks Vice President for
Indirect Lending from December, 1991 to February, 1997. Mr. Cartwright began his
banking career with Mutual Federal Savings Bank in Muncie, Indiana where he was
the Assistant Vice President for Consumer Lending from August, 1977 to December,
1991. At Mutual Federal Savings Bank, he was responsible for all direct and
indirect consumer loans, credit cards and commercial loans.
60
<PAGE> 62
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.
The Company has accrued a salary to Mr. Reed for his services through March
31, 1998 in an amount of $73,346. The Company has accrued a salary to Mr. Long
for his services through March 31, 1998 in an amount of $3,937. Mr. Cartwright's
employment by the Company will begin on June 15, 1998, and his annual salary
will be $85,000. 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
61
<PAGE> 63
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 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 accrued 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 March 31, 1998.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------------------ ----------------------------------
PERIOD FROM
ORGANIZATION SECURITIES
NAME AND THROUGH UNDERLYING ALL OTHER
PRINCIPAL POSITION MARCH 31, 1998 SALARY($)(2) BONUS($) OPTIONS/SARS(#) COMPENSATION($)
------------------ -------------- ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert C. Reed............... 1998 $73,346 -- 33,400 --
President and Chief
Executive Officer
Bradley A. Long.............. 1998 $ 3,937 -- 6,000 --
Vice President and Chief
Financial Officer
</TABLE>
- -------------------------
(1) Each of 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 his employment began on August 11,
1997, and Mr. Long's annual salary is $67,500 and his employment began on
March 9, 1998.
62
<PAGE> 64
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the stock
options granted by the Company to employees through March 31, 1998:
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES EXERCISE OR EXPIRATION
NAME GRANTED(#)(1) IN FISCAL YEAR BASE PRICE($/SH) DATE
---- -------------------- -------------- ---------------- ----------
<S> <C> <C> <C> <C>
Robert C. Reed.................. 6,000 50% $12.00 , 20
President and Chief Executive
Officer
Bradley A. Long................. 6,000 50% $12.00 , 20
Vice President and Chief
Financial Officer
</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). Does not include
options granted to Mr. Reed under the Directors' Stock Option Plan to
purchase 27,500 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 150,000 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 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.
63
<PAGE> 65
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 50,000 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.
The Company will grant to Mr. Cartwright the option to acquire 6,000 shares of
Common Stock prior to the closing of the offering at an exercise price of $12.00
per share.
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 100,000 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 25,000 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, Bernard and Van Natta, received
options under the Directors' Stock Option Plan to acquire a total of 2,400
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.
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 $450,000
to fund certain expenses of the Company. As of March 31, 1998, there was
$172,000 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
64
<PAGE> 66
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. The
Company believes that its tax returns for the year ended December 31, 1997 were
properly prepared. Accordingly, the Company does not anticipate any adjustments
to its tax returns, and, therefore, no indemnification should be recognized
under the tax indemnification agreement. However, there can be no assurances
that there will not be any payments made under the tax indemnification
agreement.
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. which it has utilized for the past
13 years 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. The Company has adopted a Conflict of Interest Policy
consistent with OTS regulations which would prohibit Messrs. Abel or Robison
from engaging in any discussions by the Board of Directors relating to, or
voting upon, any loan for which they performed an appraisal.
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.
D. Warren Robison, Vice President, Secretary and Director of the Company,
is the nephew of James M. Robison, Chairman of SCB and the Bank. They have no
agreement or understanding as to any matter in connection with the Merger, and
the negotiations with respect to the Merger were conducted at arms-length.
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
65
<PAGE> 67
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 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).
66
<PAGE> 68
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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED OUTSTANDING SHARES
NAME AFTER OFFERING(1) AFTER OFFERING(4)
---- ------------------ ------------------
<S> <C> <C>
Steven R. Abel............................... 10,000(3) 0.67%
Robert C. Reed............................... 17,000(2)(3) 1.13%
D. Warren Robison............................ 8,500(3) 0.57%
Wendell L. Bernard........................... 2,000(3) 0.13%
Ralph W. Van Natta........................... 2,000(3) 0.13%
Bradley A. Long.............................. 1,250(2) 0.09%
Stephen R. Cartwright........................ 1,000(2) 0.07%(2)
Directors and executive officers as a group
(7 persons)................................ 41,750(2)(3) 2.78%
</TABLE>
- -------------------------
(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: 1,200 shares; Mr. Long: 1,200 shares; and Mr. Cartwright:
1,200).
(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: 5,480 shares; Mr. Reed: 5,480 shares; Mr. Bernard:
480 shares; Mr. Robison: 5,480 shares; and Mr. Van Natta: 480 shares.
(4) The percentages shown are based on the 1,500,000 shares offered hereby and
assume no exercise of the Underwriter's over-allotment option.
67
<PAGE> 69
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 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.
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 March 31, 1998,
the Bank's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
68
<PAGE> 70
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.
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.
69
<PAGE> 71
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 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 4% 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 March 31, 1998, 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.
70
<PAGE> 72
The following is a summary of the Bank's regulatory capital and capital
requirements at March 31, 1998:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Regulatory capital................................ $5,671 $5,671 $ 6,385
Minimum capital requirement....................... $1,459 $3,835 $ 5,748
Excess capital.................................... $4,212 $1,836 $ 637
------ ------ -------
Regulatory capital ratio.......................... 5.91% 5.91% 8.89%
------ ------ -------
Minimum capital ratio............................. 1.50% 4.00% 8.00%
------ ------ -------
</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 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
71
<PAGE> 73
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 March 31, 1998, 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 March 31, 1998, the Bank was in compliance with its
QTL requirement, with approximately 69.83% 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 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
72
<PAGE> 74
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.
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
73
<PAGE> 75
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."
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
74
<PAGE> 76
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 1,500,000 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 "SUPERVISION AND REGULATION --
Regulation of the Bank as a Savings Bank, Dividend Limitations" 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 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
75
<PAGE> 77
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 1 capital to total assets of 4% to 5% for all others, and (ii) a
risk-based capital requirement consisting 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
76
<PAGE> 78
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 than 3%; and (v) critically
undercapitalized if the bank has a ratio of tangible equity to total assets of
2% or less. At March 31, 1998, 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.
77
<PAGE> 79
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 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.
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
78
<PAGE> 80
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."
On May 13, 1998, the House of Representatives passed financial reform
legislation. The legislation is intended to break down barriers between banking,
securities and insurance activities, while maintaining the bank holding company
structure and continuing to restrict commercial activity by banks. Under the
bill, financial services holding companies, which would be regulated by the
Federal Reserve, would be allowed to own banks, securities firms and insurance
companies. The bill contains provisions regulating the commercial activities of
holding companies. Additionally, the bill contains language allowing the Office
of the Comptroller of the Currency to preempt state insurance laws' application
to national banks in certain instances.
The bill must be considered by the Senate Banking Committee and ultimately
passed by the Senate. 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.
79
<PAGE> 81
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 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, 1,500,000 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 150,000 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
80
<PAGE> 82
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.
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. Any future issuance of Preferred Stock will be
approved by a majority of those directors of the Company who (a) are not, and
have not been during the preceding two years, officers or employees of the
Company or any of its subsidiaries or their affiliates or associates, (b) do not
have any material business or professional relationship with the Company or any
of its
81
<PAGE> 83
affiliates or associates, (c) do not have an interest in the transaction and (d)
have had access, at the Company's expense, to the Company's or independent legal
counsel.
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 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
82
<PAGE> 84
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 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
Director in Class 1 will be Robert C. Reed, the Directors in Class 2 will be
Steven R. Abel and Wendell L. Bernard, 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
83
<PAGE> 85
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 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 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.
84
<PAGE> 86
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 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.
85
<PAGE> 87
See "RELATED TRANSACTIONS -- Redemption of Stock and Loans from Founders." Upon
completion of the offering, the Company expects to have 1,500,000 shares of
Common Stock outstanding (plus any shares issued and sold upon exercise by the
Underwriter of the over-allotment option). The 1,500,000 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 41,750 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
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company 1,500,000 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, Inc. (the "NASD"). The Underwriter is obligated to purchase
all 1,500,000 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 1,500,000 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.
86
<PAGE> 88
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 225,000
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 pay the Company $10,000 in partial reimbursement for
the offering expenses incurred by the Company. 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 Underwriter 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 rendered 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 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.
87
<PAGE> 89
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 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 their
authority as experts in accounting and auditing.
88
<PAGE> 90
BLUE RIVER BANCSHARES, INC.
AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined statements of operations for the three
month period ended March 31, 1998 and for the year ended December 31, 1997 and
the unaudited pro forma combined statement of financial condition as of March
31, 1998, 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 financial
statements assume that these transactions occurred on January 1, 1997 for the
pro forma combined statement of operations for the three month period ended
March 31, 1998, and for the pro forma combined statement of operations for the
year ended December 31, 1997. The pro forma combined statement of financial
condition assumes that these transactions occurred on March 31, 1998. 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
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 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 OF BLUE RIVER BANCSHARES, INC." and "CONSOLIDATED FINANCIAL
STATEMENTS OF 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 1,500,000 shares of Common Stock outstanding subsequent to the sale of the
Common Stock offered hereby.
89
<PAGE> 91
BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
BLUE RIVER SHELBY COUNTY(7) ADJUSTMENTS COMBINED
---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans.................................. $6,299,344 $ 123,656(1) $6,423,000
Interest-bearing deposits.............. 148,762 148,762
Investment securities.................. 459,033 (4,048)(2) 454,985
Dividends from FHLB.................... 65,368 65,368
--------- ---------- --------- ----------
Total interest income............. 6,972,507 119,608 7,092,115
--------- ---------- --------- ----------
Interest expense:
Interest expense on deposits........... 3,119,364 (294,555)(3) 2,824,809
Interest expense on FHLB advances and
other borrowings.................... 986,452 986,452
--------- ---------- --------- ----------
Total interest expense............ 4,105,816 (294,555) 3,811,261
--------- ---------- --------- ----------
Net interest income...................... 2,866,691 414,163 3,280,854
Provision for loan losses................ 111,000 111,000
--------- ---------- --------- ----------
Net interest income after provision for
losses................................. 2,755,691 414,163 3,169,854
--------- ---------- --------- ----------
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............... 261,143(5) 261,143
Other.................................. 71,245 451,770 523,015
--------- ---------- --------- ----------
Total non-interest expense........ 116,790 2,241,375 422,134 2,780,299
--------- ---------- --------- ----------
Income (loss) before income taxes........ (116,790) 879,545 (7,971) 754,784
Income taxes............................. 320,980 54,021(6) 375,001
--------- ---------- --------- ----------
Net income (loss)........................ $(116,790) $ 558,565 $ (61,992) $ 379,783
========= ========== ========= ==========
Basic earnings (loss) per share.......... $ (1.30) $ 3.17 $ 0.25
========= ========== ==========
Diluted earnings (loss) per share........ $ (1.30) $ 3.08 $ 0.25
========= ========== ==========
</TABLE>
90
<PAGE> 92
BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
BLUE RIVER SHELBY COUNTY ADJUSTMENTS COMBINED
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans...................................... $1,709,583 $ 25,967(1) $1,735,550
Interest-bearing deposits.................. 35,022 35,022
Investment securities...................... 109,875 (1,012)(2) 108,863
Dividends from FHLB........................ 18,152 18,152
-------- ---------- -------- ----------
Total interest income................. 1,872,632 24,955 1,897,587
-------- ---------- -------- ----------
Interest expense:
Interest expense on deposits............... 849,635 (67,623)(3) 782,012
Interest expense on FHLB advances and other
borrowings.............................. 251,785 251,785
-------- ---------- -------- ----------
Total interest expense................ 1,101,420 (67,623) 1,033,797
-------- ---------- -------- ----------
Net interest income.......................... 771,212 92,578 863,790
Provision for loan losses.................... 405,000 405,000
-------- ---------- -------- ----------
Net interest income after provision for
losses..................................... 366,212 92,578 458,790
-------- ---------- -------- ----------
Non-interest income:
Service charges............................ 60,545 60,545
Other...................................... 57,591 57,591
-------- ---------- -------- ----------
Total non-interest income............. 118,136 118,136
-------- ---------- -------- ----------
Non-interest expense:
Salaries and employee benefits............. $ 34,900 240,461 14,406(4) 289,767
Premises and equipment..................... 63,551 63,551
Federal deposit insurance.................. 33,392 33,392
Data processing............................ 69,141 69,141
Advertising................................ 27,114 27,114
Bank fees and charges...................... 12,576 12,576
Amortization of goodwill................... 65,286(5) 65,286
Other...................................... 22,443 322,353 344,796
-------- ---------- -------- ----------
Total non-interest expense............ 57,343 768,588 79,692 905,623
-------- ---------- -------- ----------
Income (loss) before income taxes............ (57,343) (284,240) 12,886 (328,697)
Income taxes................................. (112,039) 8,331(6) (103,708)
-------- ---------- -------- ----------
Net income (loss)............................ $(57,343) $ (172,201) $ 4,555 $ (224,989)
======== ========== ======== ==========
Basic earnings (loss) per share.............. $ (0.64) $ (0.98) $ (0.15)
======== ========== ==========
Diluted earnings (loss) per share............ $ (0.64) $ (0.98) $ (0.15)
======== ========== ==========
</TABLE>
91
<PAGE> 93
BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
AT MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION OFFERING PRO FORMA
BLUE RIVER SHELBY COUNTY ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash.......................... $ 17,318 $ 730,019 $(10,616,863)(8) $16,300,000(12) $ 6,341,879
64,400(11) (18,000)(13)
(171,764)(14)
36,769(15)
Interest-bearing deposits..... 9,407 9,407
--------- ----------- ------------ ----------- ------------
17,318 739,426 (10,552,463) 16,147,005 6,351,286
--------- ----------- ------------ ----------- ------------
Investment securities available
for sale...................... 8,089,139 8,089,139
Investment securities held to
maturity...................... 745,085 16,191(9) 761,276
Loans receivable................ 85,847,668 (199,435)(9) 85,648,233
Allowance for loan losses....... (714,480) (714,480)
Accrued interest receivable..... 553,673 553,673
Accrued interest receivable on
investment securities......... 105,929 105,929
Stock in FHLB of Indpls......... 998,900 998,900
Premises and equipment.......... 1,749,559 1,749,559
Prepaid expenses and other
assets........................ 349,820 349,820
Deferred acquisition costs...... 138,263 (138,263)(11)
Deferred offering costs......... 194,627 (194,627)(15)
Goodwill........................ 3,917,151(9) 3,917,151
--------- ----------- ------------ ----------- ------------
Total........................... $ 350,208 $98,464,719 $ (6,956,819) $15,952,378 $107,810,486
========= =========== ============ =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY LIABILITIES:
Deposits...................... $70,533,461 $ 662,451(9) $ 71,195,912
Advances from FHLB and other
borrowings.................. 19,625,790 19,625,790
Accrued interest payable...... 127,294 127,294
Deferred income taxes......... 478,617 (424,102)(9) 54,515
Notes payable to
shareholders................ $ 171,764 $ (171,764)(14)
Accrued expenses and other
liabilities................. 334,577 353,252 225,000(9) (157,858)(15) 681,108
(73,863)(11)
--------- ----------- ------------ ----------- ------------
Total liabilities......... 506,341 91,118,414 389,486 (329,622) 91,684,619
--------- ----------- ------------ ----------- ------------
SHAREHOLDERS' EQUITY:
Common stock.................. 18,000 1,358,123 (1,358,123) 16,300,000(12) 16,300,000
(18,000)(13)
S Corporation accumulated
deficit..................... (174,133) 174,133(16)
Retained earnings (deficit)... 5,145,456 (5,145,456) (174,133)(16) (174,133)
Net unrealized appreciation on
investment securities
available for sale.......... 842,726 (842,726)
--------- ----------- ------------ ----------- ------------
Total shareholders'
equity................. (156,133) 7,346,305 (7,346,305)(9) 16,282,000 16,125,867
--------- ----------- ------------ ----------- ------------
Total........................... $ 350,208 $98,464,719 $ (6,956,819) $15,952,378 $107,810,486
========= =========== ============ =========== ============
PER SHARE DATA:
Shares outstanding............ 90,000 175,950 1,500,000
Book value per share.......... $ (1.73) $ 41.75 $ 10.75
Tangible book value per
share....................... $ (5.43) $ 41.75 $ 7.89
</TABLE>
92
<PAGE> 94
NOTES TO BLUE RIVER BANCSHARES, INC. AND SHELBY COUNTY BANCORP
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects accretion of discount on loans of $199,435 over the projected
weighted average life (7 years) of the portfolio using the level yield
method.
(2) Reflects amortization of premium on investment securities of $16,191 over
the average remaining life (4 years) of the portfolio using the level yield
method.
(3) Reflects amortization of premium on deposits of $662,451 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
$3,917,151) 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 of March 31, 1998 as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $10,626,000
Acquisition costs........................................... 177,163
-----------
Subtotal.................................................. 10,803,163
Less proceeds from exercise of SCB options................ (186,300)
-----------
Net cost of acquisition................................... $10,616,863
===========
</TABLE>
(9) Reflects excess of estimated net fair value of assets acquired and
liabilities assumed in the Merger as follows:
<TABLE>
<S> <C>
Net cost of acquisition..................................... $10,616,863
Less SCB shareholders' equity at March 31, 1998............. (7,346,305)
-----------
Excess consideration over book value........................ 3,270,558
-----------
Adjustments to reflect fair value:
Investment securities held to maturity.................... 16,191
Loans..................................................... (199,435)
Deposits.................................................. (662,451)
Other liabilities......................................... (225,000)
Tax effect of above adjustments........................... 424,102(10)
-----------
Total fair value adjustments.............................. (646,593)
-----------
Total goodwill............................................ $ 3,917,151
===========
</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 asset attributable to purchase accounting
adjustments associated with the Merger at the combined statutory federal
and state rate of 40%.
93
<PAGE> 95
(11) To eliminate $138,263 of previously recorded deferred acquisition costs of
which $64,400 had been previously paid in cash at March 31, 1998. Such
amount is included in the total acquisition costs of $177,163 (See Note 8).
(12) Reflects issuance and sale of 1,500,000 shares of Common Stock at $12 per
share in this offering, net of estimated offering costs of $1.7 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 $194,627 of previously recorded deferred offering costs of
which $36,769 had been previously paid in cash at March 31, 1998. Such
amount is included in the total offering costs of $1.7 million (see Note
12).
(16) Reflects the reclassification of the Company's S Corporation accumulated
deficit to retained earnings (deficit) upon termination of the S
Corporation election.
94
<PAGE> 96
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 Exhibit filed as a part thereof, copies of
which can be inspected (without cost) (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 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.
95
<PAGE> 97
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Statements of Financial Condition as of March 31, 1998
(unaudited) and as of December 31, 1997................ F-3
Statements of Operations for the Three Months Ended March
31, 1998 (unaudited) and the Period March 18, 1997
(date of incorporation) Through March 31, 1997
(unaudited) and for the Period March 18, 1997 (date of
incorporation) Through December 31, 1997............... F-4
Statements of Changes in Shareholders' Deficiency for the
Three Months Ended March 31, 1998 (unaudited) and for
the Period March 18, 1997 (date of incorporation)
Through December 31, 1997.............................. F-5
Statements of Cash Flows for the Three Months Ended March
31, 1998 and the Period March 18, 1997 (date of
incorporation) Through March 31, 1997 (unaudited) and
for the Period March 18, 1997 (date of incorporation)
Through December 31, 1997.............................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 98
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.
Indianapolis, Indiana
March 17, 1998
F-2
<PAGE> 99
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash........................................................ $ 17,318 $ 1,001
Deferred acquisition costs.................................. 138,263 64,663
Deferred offering costs..................................... 194,627 37,533
--------- ---------
TOTAL....................................................... $ 350,208 $ 103,197
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Accrued liabilities....................................... $ 334,577 $ 132,587
Notes payable to shareholders............................. 171,764 69,400
--------- ---------
Total liabilities................................. 506,341 201,987
--------- ---------
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 18,000
Accumulated deficit....................................... (174,133) (116,790)
--------- ---------
Total shareholders' deficiency.................... (156,133) (98,790)
--------- ---------
TOTAL....................................................... $ 350,208 $ 103,197
========= =========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 100
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 18, PERIOD FROM
THREE MONTHS 1997 MARCH 18,
ENDED THROUGH 1997 THROUGH
MARCH 31, MARCH 31, DECEMBER 31,
1998 1997 1997
------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and employee benefits........................ $ 34,900 $ 45,545
Legal and professional expenses....................... 7,500 $ 2,513 33,591
Director fees......................................... 7,200 12,000
Other expenses........................................ 7,743 25,654
-------- ------- ---------
Total general and administrative expenses..... 57,343 2,513 116,790
-------- ------- ---------
NET LOSS................................................ $(57,343) $(2,513) $(116,790)
======== ======= =========
BASIC LOSS PER SHARE.................................... $ (0.64) $ (0.03) $ (1.30)
======== ======= =========
DILUTED LOSS PER SHARE.................................. $ (0.64) $ (0.03) $ (1.30)
======== ======= =========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 101
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
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)
Net loss (unaudited).............................. (57,343) (57,343)
------ ------- --------- ---------
Balance at March 31, 1998 (unaudited)............. 90,000 $18,000 $(174,133) $(156,133)
====== ======= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 102
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
THREE MONTHS MARCH 18, MARCH 18,
ENDED 1997 THROUGH 1997 THROUGH
MARCH 31, MARCH 31, DECEMBER 31,
1998 1997 1997
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(57,343) $(2,513) $(116,790)
Adjustments to reconcile net loss to net cash from
operating activities:
Increase in accrued liabilities................... 72,465 61,096
-------- ------- ---------
Net cash from operating activities........... 15,122 (2,513) (55,694)
-------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from shareholders.............. 6,000 18,000
Deferred acquisition costs........................... (64,400)
Deferred offering costs.............................. (36,769) (30,705)
Proceeds from notes payable to shareholders.......... 102,364 69,400
-------- ------- ---------
Net cash from financing activities........... 1,195 6,000 56,695
======== ======= =========
NET INCREASE IN CASH................................... 16,317 3,487 1,001
CASH, BEGINNING OF THE PERIOD.......................... 1,001 -0- -0-
-------- ------- ---------
CASH, END OF THE PERIOD................................ $ 17,318 $ 3,487 $ 1,001
======== ======= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued
liabilities at March 31, 1998 (unaudited) and December 31, 1997 include
$157,858 (unaudited) and $6,828 of deferred offering costs and $73,863
(unaudited) and $64,663 of deferred acquisition costs.
See notes to financial statements.
F-6
<PAGE> 103
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
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.
Basis of Presentation -- The statement of financial condition as of March
31, 1998 and the related statements of operations, changes in shareholders'
deficiency and cash flows for the three months ended March 31, 1998 and for the
period March 18, 1997 (date of incorporation) through March 31, 1997 are
unaudited. However, in the opinion of management, the interim financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for fair presentation of the Company's financial
statements. The results of operations for the unaudited three month period ended
March 31, 1998, are not necessarily indicative of the results which may be
expected for the entire fiscal year 1998.
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, as amended on June 2, 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 $56 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 $10,626,000, 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:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Net interest income......................................... $3,280,854
Income before income taxes.................................. 754,784
Net income.................................................. 379,783
Basic earnings per share.................................... 0.25
Diluted earnings per share.................................. 0.25
</TABLE>
F-7
<PAGE> 104
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
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
$18,000,000 in equity capital through the sale of 1,500,000 shares of the
Company's Common Stock at $12 per share. Underwriting discounts and offering
costs are estimated to be approximately $1.7 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 50,000 and 100,000
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 options of Common Stock at $12 per share
to shareholders of the Company. At December 31, 1997, the options have a
weighted average contractual maturity of approximately 15 years and such options
vest at a rate of 20% per year beginning within 60 days of the completion of the
offering. 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". Had compensation cost for the plans been determined based on the
fair value at the grant dates for awards under the plan consistent with the fair
value method of SFAS No. 123, the Company's net loss and net loss per share
would have increased to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(116,790)
Pro forma................................................. $(113,803)
Basic loss per share:
As reported............................................... $ (1.30)
Pro forma................................................. $ (1.49)
</TABLE>
The weighted average fair value of options granted was $3.19 in 1997. The
fair value of the options granted are estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield, risk-free interest rate of 6.28%, annualized volatility of 0% and an
expected life of five years. The pro forma amounts may not be representative of
the effects on reported net income for future years.
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
F-8
<PAGE> 105
BLUE RIVER BANCSHARES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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 after termination of employment.
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> 106
CONSOLIDATED FINANCIAL STATEMENTS OF SHELBY COUNTY BANCORP
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report................................ G-2
Financial Statements
Consolidated Statements of Financial Condition as of March
31, 1998 (Unaudited) and as of September 30, 1997 and
1996................................................... G-3
Consolidated Statements of Earnings for the Six Months
Ended March 31, 1998 and 1997 (Unaudited) and for the
Years Ended September 30, 1997 and 1996................ G-4
Consolidated Statements of Shareholders' Equity for the
Six Months Ended March 31, 1998 and 1997 (Unaudited)
and for the Years Ended September 30, 1997 and 1996.... G-5
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1998 and 1997 (Unaudited) and for the
Years Ended September 30, 1997 and 1996................ G-6
Notes to Consolidated Financial Statements................ G-7
</TABLE>
G-1
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
Shelby County Bancorp and Subsidiary:
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.
KPMG Peat Marwick LLP
Indianapolis, Indiana
November 21, 1997
G-2
<PAGE> 108
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, --------------------------
1998 1997 1996
--------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash................................................ $ 730,019 $ 663,335 $ 1,043,977
Interest-bearing deposits........................... 9,407 1,772,848 3,879,299
----------- ----------- -----------
739,426 2,436,183 4,923,276
Investment securities available for sale (note 2)..... 8,089,139 7,886,663 7,243,756
Investment securities held to maturity (market value:
$761,275 (unaudited), $806,995 and $1,275,717)(note
3).................................................. 745,085 808,817 1,267,448
Loans receivable, net (note 4)........................ 85,133,188 76,037,920 66,098,422
Accrued interest receivable on investment
securities.......................................... 105,929 133,053 104,504
Accrued interest receivable on loans.................. 553,673 486,247 424,054
Stock in FHLB of Indianapolis, at cost................ 998,900 920,200 620,100
Premises and equipment (note 5)....................... 1,749,559 1,774,961 1,874,702
Real estate owned..................................... 36,727 36,727 --
Prepaid expenses and other assets..................... 313,093 88,607 119,353
----------- ----------- -----------
$98,464,719 $90,609,378 $82,675,615
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 6)................................... $70,533,461 $64,633,384 $65,286,137
Advances from FHLB and other borrowings (note 7).... 19,625,790 18,057,629 10,071,360
Accrued interest on deposits and FHLB advances...... 127,294 126,484 133,492
Income taxes payable................................ 70,789 225,237
Deferred income taxes (note 8)...................... 478,617 333,912 4,954
Accrued expenses and other liabilities (note 6)..... 353,252 215,858 521,557
----------- ----------- -----------
$91,118,414 $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....... 5,145,456 5,187,531 4,744,525
Net unrealized appreciation on investment securities
available for sale (notes 2 and 8)............... 842,726 625,668 330,230
----------- ----------- -----------
7,346,305 7,171,322 6,432,878
----------- ----------- -----------
Commitments and contingencies (notes 4 and 7)
$98,464,719 $90,609,378 $82,675,615
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE> 109
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1997 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................ $3,382,187 $2,922,909 $6,065,982 $5,036,470
Mortgage-backed securities.................. 79,818 135,498 303,587 311,135
Interest-bearing deposits................... 97,310 67,756 108,161 234,009
Investment securities....................... 143,628 117,812 171,230 222,910
Dividends from FHLB......................... 36,707 26,269 59,049 35,008
---------- ---------- ---------- ----------
Total interest income............... 3,739,650 3,270,244 6,708,009 5,839,532
---------- ---------- ---------- ----------
Interest expense on deposits (note 6)......... 1,698,251 1,524,856 2,996,545 3,219,473
Interest expense on FHLB advances and other
borrowings (note 7)......................... 520,206 388,693 895,844 122,018
---------- ---------- ---------- ----------
Total interest expense.............. 2,218,457 1,913,549 3,892,389 3,341,491
---------- ---------- ---------- ----------
Net interest income................. 1,521,193 1,356,695 2,815,620 2,498,041
Provision for loan losses (note 4)............ 435,000 50,000 104,000 100,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses................... 1,086,193 1,306,695 2,711,620 2,398,041
---------- ---------- ---------- ----------
Non-interest income:
Service charges and fees.................... 123,620 119,341 249,383 235,991
Annuity commissions......................... -- -- 268 41,304
Other (note 2).............................. 95,266 48,368 99,683 240,478
---------- ---------- ---------- ----------
Total non-interest income........... 218,886 167,709 349,334 517,773
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits.............. 481,218 488,129 960,375 939,740
Premises and equipment...................... 126,536 130,175 268,952 271,121
Federal deposit insurance (note 6).......... 55,411 35,214 74,721 484,823
Data processing............................. 143,782 121,961 255,402 236,452
Advertising................................. 51,464 60,864 161,625 140,476
Bank fees and charges....................... 25,900 45,793 84,296 72,403
Other....................................... 417,632 190,463 447,483 400,518
---------- ---------- ---------- ----------
Total non-interest expense.......... 1,301,943 1,072,599 2,252,854 2,545,533
---------- ---------- ---------- ----------
Earnings before income taxes........ 3,136 401,805 808,100 370,281
Income taxes (note 8)......................... 1,223 152,845 294,720 134,100
---------- ---------- ---------- ----------
Net earnings........................ $ 1,913 $ 248,960 $ 513,380 $ 236,181
========== ========== ========== ==========
Basic earnings per share...................... $ .01 $ 1.41 $ 2.92 $ 1.34
========== ========== ========== ==========
Dilutive earnings per share................... $ .01 $ 1.39 $ 2.83 $ 1.32
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE> 110
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION ON
INVESTMENT
SECURITIES TOTAL
COMMON RETAINED AVAILABLE FOR SHAREHOLDERS
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.............. $1,358,123 5,187,531 625,668 7,171,322
Net change in unrealized appreciation on
investment securities available for
sale (unaudited)...................... -- -- 217,058 217,058
Dividends ($.25 per share) (unaudited)... -- (43,988) -- (43,988)
Net earnings (unaudited)................. -- 1,913 -- 1,913
---------- ---------- -------- ----------
Balance at March 31, 1998 (unaudited).... $1,358,123 $5,145,456 $842,726 $7,346,305
========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE> 111
SHELBY COUNTY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, SEPTEMBER 30,
-------------------------- ----------------------------
1998 1997 1997 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 1,913 $ 248,960 $ 513,380 $ 236,181
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 81,765 78,467 157,211 110,761
Net deferred loan origination fees............... (1,032) 7,214 (9,979) (8,117)
Deferred income taxes............................ -- -- 132,000 (155,846)
Provision for loan losses........................ 435,000 50,000 104,000 100,000
Loss on disposal of premises and equipment....... -- -- -- --
(Increase) decrease in accrued interest
receivable on investment securities............ 27,124 (2,057) (28,549) (36,223)
(Increase) decrease in other assets.............. (295,275) (19,613) 30,746 26,733
Increase (decrease) in other liabilities......... 138,205 (300,199) (467,155) 540,661
Gain on sale of securities available for sale.... 23,809 4,156 (5,807) (28,445)
----------- ----------- ------------ ------------
Net cash provided (used) by operating
activities................................ 411,509 66,928 425,847 785,705
----------- ----------- ------------ ------------
Cash flows from investing activities:
Loans funded net of collections..................... (9,596,660) (4,314,871) (10,132,439) (15,838,914)
Purchase of securities available for sale........... (4,513,507) (1,374,562) (5,201,233) (7,916,623)
Purchase of securities held to maturity............. -- -- -- (116,446)
Proceeds from sales of securities available for
sale............................................. 4,399,399 1,152,057 4,533,477 3,575,098
Maturities of securities available for sale......... 236,310 304,522 488,863 3,190,824
Maturities of securities held to maturity........... 61,163 138,114 448,255 148,102
Purchase of FHLB stock.............................. (78,700) (104,900) (300,100) (210,800)
Purchase of premises and equipment.................. (40,520) (31,981) (47,758) (37,645)
Disposals of premises and equipment................. -- 21,154 34,853 --
----------- ----------- ------------ ------------
Net cash used in investing activities....... (9,532,515) (4,210,467) (10,176,082) (17,206,404)
----------- ----------- ------------ ------------
Cash flows from financing activities:
Dividends paid on common stock...................... (43,988) (35,178) (70,374) (70,380)
Net increase (decrease) in deposits................. 5,900,077 567,357 (652,753) 4,084,063
Proceeds from FHLB advances and other borrowings.... 1,575,000 4,500,000 8,000,000 10,081,000
Repayments of FHLB advances and other borrowings.... (6,840) -- (13,731) (9,640)
Proceeds from issuance of common stock through stock
option plan...................................... -- 17,250
----------- ----------- ------------ ------------
Net cash provided by financing activities... 7,424,249 5,032,179 7,263,142 14,102,293
----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents......................................... (1,696,757) 888,640 (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.............. $ 739,426 $ 5,811,916 $ 2,436,183 $ 4,923,276
=========== =========== ============ ============
Supplemental cash flow information:
Interest paid....................................... $ 1,682,362 $ 1,536,393 $ 3,899,397 $ 3,320,806
=========== =========== ============ ============
Income taxes paid................................... $ 190,000 $ 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> 112
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 shareholders'
equity and cash flows for the six months ended March 31, 1998 and 1997 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 six month
period ended March 31, 1998, 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.
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
G-7
<PAGE> 113
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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 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.
G-8
<PAGE> 114
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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.
(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 MARKET
COST GAINS LOSSES 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-9
<PAGE> 115
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE -- CONTINUED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES 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.
At September 30, 1997, the Savings Bank had pledged approximately
$3,309,000 of investment securities as collateral for advances from FHLB.
G-10
<PAGE> 116
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity at September 30, consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES 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 MARKET
COST GAINS LOSSES 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>
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996, respectively, consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
G-11
<PAGE> 117
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LOANS RECEIVABLE -- CONTINUED
Activity in the allowance for loan losses for the years ended September 30,
consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
Balance at beginning of year................................ $ 996,255
New loans................................................... 218,822
Repayments.................................................. (388,035)
---------
Balance at end of year...................................... $ 827,042
=========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
G-12
<PAGE> 118
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) DEPOSITS
Deposits at September 30, consist of:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
AMOUNT % AMOUNT %
------ ---- ------ ----
<S> <C> <C> <C> <C>
Passbook accounts (2.85% at September 30, 1997 and
1996)............................................... $ 9,206,489 14% $10,027,894 15%
NOW and Super NOW (2.00% and 2.50% at September 30,
1997 and 2.00% at September 30, 1996)............... 13,062,895 21 13,532,702 21
Money Market (2.85% to 5.60% at September 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% $65,286,137 100%
=========== ==== =========== ====
Weighted average cost of all deposits................. 4.78% 4.75%
==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
AMOUNT %
------ -
<S> <C> <C>
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%
=========== ===
</TABLE>
Interest expense by type of deposit for the years ended September 30,
consist of:
<TABLE>
<CAPTION>
ACCOUNT TYPE 1997 1996
- ------------ ---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
G-13
<PAGE> 119
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) DEPOSITS -- CONTINUED
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.
(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:
<TABLE>
<CAPTION>
FHLB OTHER
ADVANCES BORROWINGS TOTAL
-------- ---------- -----
<S> <C> <C> <C>
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
=========== ======== ===========
</TABLE>
(8) INCOME TAXES
The composition of income taxes for the years ended September 30, consist
of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal............................................... $ 86,196 $ 228,946
State................................................. 76,524 61,000
-------- ---------
162,720 289,946
Deferred................................................ 132,000 (155,846)
-------- ---------
$294,720 $ 134,100
======== =========
</TABLE>
G-14
<PAGE> 120
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) INCOME TAXES -- CONTINUED
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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%
==== ====
</TABLE>
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.
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
G-15
<PAGE> 121
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) INCOME TAXES -- CONTINUED
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-16
<PAGE> 122
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) STOCKHOLDERS' EQUITY -- CONTINUED
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
------------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
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
------------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
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 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
G-17
<PAGE> 123
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) STOCKHOLDERS' EQUITY -- CONTINUED
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. At September 30, 1997,
there were 13,800 options outstanding and currently exercisable at prices
ranging from $10 to $20. The weighted average price was $13.50, and the weighted
average remaining contractual life was six years.
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-18
<PAGE> 124
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) PARENT COMPANY FINANCIAL INFORMATION
Following is condensed parent company financial information of the
Corporation:
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
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>
CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
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-19
<PAGE> 125
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) PARENT COMPANY FINANCIAL INFORMATION -- CONTINUED
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.
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.
G-20
<PAGE> 126
SHELBY COUNTY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<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.
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-21
<PAGE> 127
=========================================================
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
<TABLE>
<S> <C>
Available Information........................ 2
Prospectus Summary........................... 4
Risk Factors................................. 13
Pending Transaction.......................... 20
Use of Proceeds.............................. 22
Dividend Policy.............................. 23
Capitalization............................... 23
Business of Blue River Bancshares, Inc. ..... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operation of Shelby County Bancorp......... 27
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............ 41
Management of the Company and the Bank....... 59
Related Party Transactions................... 64
Principal Shareholders....................... 67
Supervision and Regulation................... 68
Description of Capital Stock................. 80
Shares Eligible for Future Sale.............. 85
Underwriting................................. 86
Legal Matters................................ 88
Experts...................................... 88
Pro Forma Combined Financial Statements...... 89
Additional Information....................... 95
Index to Financial Statements of Blue River
Bancshares, Inc. .......................... F-1
Index to Consolidated Financial Statements of
Shelby County Bancorp...................... G-1
</TABLE>
------------------------
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 CAPITAL MARKETS LOGO
, 1998
=========================================================
<PAGE> 128
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
1,500,000 shares in the offering.
<TABLE>
<S> <C>
Commission registration fee................................. $ 6,107
NASD filing fee............................................. 2,000
NASDAQ Small Cap listing fee................................ 1,000
Printing and mailing expenses............................... 25,000
Fees and expenses of counsel................................ 130,000
Accounting and related expenses............................. 235,000
Blue Sky fees and expenses (including counsel fees)......... 15,000
Miscellaneous............................................... 91,893
--------
Total..................................................... $506,000
========
</TABLE>
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).
II-1
<PAGE> 129
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1 Form of Underwriting Agreement
2.1 *Amended and Restated Agreement of Affiliation and Merger
dated March 12, 1998, among registrant, Shelby County
Bancorp and Shelby County Savings Bank, FSB
2.2 Amendment to Amended and Restated Agreement of Affiliation
and Merger dated June 2, 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
24 Powers of Attorney
27 Financial Data Schedule (EDGAR filing only)
</TABLE>
- -------------------------
* Filed with the original Registration Statement.
** 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.
II-2
<PAGE> 130
(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.
II-3
<PAGE> 131
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 Amendment No. 1
to this registration statement to be signed on its behalf by the undersigned, in
the City of Shelbyville, State of Indiana, on June 8, 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
Amendment No. 1 to this registration statement was signed by the following
persons in the capacities indicated on June 8, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/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 accounting officer)
Bradley A. Long
/s/ STEVEN R. ABEL* Director
- -----------------------------------------------------
Steven R. Abel
/s/ WENDELL L. BERNARD* Director
- -----------------------------------------------------
Wendell L. Bernard
/s/ D. WARREN ROBISON* Director
- -----------------------------------------------------
D. Warren Robison
/s/ RALPH W. VAN NATTA* Director
- -----------------------------------------------------
Ralph W. Van Natta
*By: /s/ ROBERT C. REED
- ----------------------------------------------------
Robert C. Reed, Attorney-in-fact
</TABLE>
II-4
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1 Form of Underwriting Agreement
2.1 *Amended and Restated Agreement of Affiliation and Merger
dated March 12, 1998, among registrant, Shelby County
Bancorp and Shelby County Savings Bank, FSB
2.2 Amendment to Amended and Restated Agreement of Affiliation
and Merger dated June 2, 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
24 Powers of Attorney
27.1 Financial Data Schedule (EDGAR filing only)
27.2 Financial Data Schedule (EDGAR filing only)
</TABLE>
- -------------------------
* Filed with the original Registration Statement.
** To be filed by pre-effective amendment.
<PAGE> 1
EXHIBIT 1
UNDERWRITING AGREEMENT
1,500,000 SHARES
BLUE RIVER BANCSHARES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________________, 1998
Roney Capital Management
One Griswold
Detroit, Michigan 48226
Dear Sirs:
Blue River Bancshares, Inc., an Indiana corporation (the"COMPANY"),
proposes to issue and sell 1,500,000 shares (the "FIRM SHARES") of its
authorized but unissued Common Stock (the "COMMON STOCK") to Roney Capital
Management, a division of First Chicago Capital Markets, Inc. ("RONEY" or
"UNDERWRITER"). In addition, the Company proposes to grant to the Underwriter an
option to purchase up to an additional 225,000 shares (the "OPTIONAL SHARES") to
cover over-allotments. The Firm Shares and the Optional Shares are called,
collectively, the "SHARES."
1. SALE AND PURCHASE OF THE SHARES.
(a) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, the Company agrees to issue and sell to the Underwriter,
and the Underwriter agrees to purchase the Firm Shares at a purchase
price of $11.16 per Share, except as set forth in Section 1(b) below.
(b) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, and pursuant to directions from the Company, the
Underwriter will offer to sell to each of the persons named in a list
provided by the Company to the Underwriter (who may purchase alone or
with family members to the extent permitted by the Free-Riding and
Withholding Interpretation (the "INTERPRETATION") under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
(the "NASD") the number of Shares set forth opposite their respective
names on the list. To the
<PAGE> 2
extent such persons (alone or with such members) buy such Shares, the
Underwriter agrees to purchase up to 183,333 of the Shares at a
purchase price of $11.52 per Share. The parties agree that the
securities purchased and sold under this subparagraph to the Company's
employees and directors shall constitute "issuer directed securities"
under the Interpretation. The provisions of this Section 1(b) shall
not affect the Underwriter's right, with respect to persons who are
not employees or directors of the Company, to withdraw, cancel or
modify orders or to reject orders in whole or in part.
(c) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, the Company grants to the Underwriter an option to purchase
all or any part of the Optional Shares at a price per Share of
$________. The over-allotment option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriter and
may be exercised in whole or in part at any time or times on or before
12:00 noon, Detroit time, on the day before the Firm Shares Closing
Date (as defined in Section 2 below), and only once at any time after
that date and within 30 days after the Effective Date (as defined in
Section 4 below), in each case upon written or transmitted facsimile
notice, or verbal notice confirmed by transmitted facsimile, written
or telegraphic notice, by Roney to the Company no later than 12:00
noon, Detroit time, on the day before the Firm Shares Closing Date or
at least three but not more than five full business days before the
Optional Shares Closing Date (as defined in Section 2 below), as the
case may be, setting forth the number of Optional Shares to be
purchased and the time and date (if other than the Firm Shares Closing
Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to
Roney and payment of the purchase price by certified or official bank check
payable in Detroit Clearing House (next day) funds to the Company, shall take
place at the offices of Roney Capital Management, One Griswold, Detroit,
Michigan 48226, at 10:00 a.m., Detroit time, at such time and date, not later
than the third (or, if the Firm Shares are priced, as contemplated by Rule 15c6-
1(c)under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
after 4:30 p.m., Washington, D.C. time, the fourth) full business day following
the first date that any of the Shares are released by the Underwriter for sale
to the public, as Roney shall designate by at least 48 hours prior notice to the
Company (the "FIRM SHARES CLOSING DATE"); provided, however, that if the
Prospectus (as defined in Section 4 below) is at any time prior to the Firm
Shares Closing Date recirculated to the public, the Firm Shares Closing Date
shall occur upon the later of the third or fourth, as the case the may be, full
business day following the first date that any of the Shares are released by the
Underwriter for sale to the public or the date that is 48 hours after the date
that the Prospectus has been so recirculated. To the extent the option with
respect to the Optional Shares is exercised, delivery by the Company of the
Optional Shares, and payment of the purchase price by certified or official bank
check payable in Detroit Clearing House (next day) funds to the Company,
2
<PAGE> 3
shall take place at the offices of Roney specified above at the time and on the
date (which may be the Firm Shares Closing Date) specified in the notice
referred to in Section l(c) (such time and date of delivery and payment are
called the "OPTIONAL SHARES CLOSING DATE"). The Firm Shares Closing Date and the
Optional Shares Closing Date are called, individually, a "CLOSING DATE" and,
collectively, the "CLOSING DATES." Certificates representing the Firm Shares
shall be registered in such names and shall be in such denominations as Roney
shall request at least two full business days before the Firm Shares Closing
Date or, in the case of the Optional Shares, on the day of notice of exercise of
the option as described in Section l(c), and shall be made available to Roney
for checking and packaging, at such place as is designated by Roney, at least
one full business day before the Closing Date.
3. PUBLIC OFFERING. The Company understands that the Underwriter proposes
to make a public offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date as Roney deems advisable. The
Company hereby confirms that the Underwriter and dealers have been authorized to
distribute each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Underwriter and agree with the Underwriter as follows:
(a) The Company has carefully prepared in conformity with the requirements
of the Securities Act of 1933, as amended (the "SECURITIES ACT") and
the rules and regulations adopted by the Securities and Exchange
Commission (the "COMMISSION") thereunder (the "RULES"), a registration
statement on Form SB- 2 (No. 333 - 48269), including a preliminary
prospectus, and has filed with the Commission the registration
statement and such amendments thereof as may have been required to the
date of this Agreement. Copies of such registration statement
(including all amendments thereof) and of the related preliminary
prospectus have heretofore been delivered by the Company to you. The
term "PRELIMINARY PROSPECTUS" means any preliminary prospectus (as
defined in Rule 430 of the Rules) included at any time as a part of
the registration statement. The registration statement as amended
(including any supplemental registration statement under Rule 462(b)
or any amendment under Rule 462(c) of the Rules) at the time and on
the date it becomes effective (the "EFFECTIVE DATE"), including the
prospectus, financial statements, schedules, exhibits, and all other
documents incorporated by reference therein or filed as a part
thereof, is called the "REGISTRATION STATEMENT"; provided, however,
that "REGISTRATION STATEMENT" shall also include all Rule 430A
Information (as defined below) deemed to be included in such
Registration Statement at the time such Registration Statement becomes
effective as provided by Rule 430A of the Rules. The term "PROSPECTUS"
means the Prospectus as filed with the Commission pursuant to Rule
424(b) of the Rules or, if no filing pursuant to Rule 424(b) of the
Rules is required, means the form of final
3
<PAGE> 4
prospectus included in the Registration Statement at the time such
Registration Statement becomes effective. The term "RULE 430A
INFORMATION" means information with respect to the Shares and the
offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A of the
Rules. Reference made herein to any preliminary prospectus or to the
Prospectus shall be deemed to refer to and include any document
attached as an exhibit thereto or incorporated by reference therein,
as of the date of such preliminary prospectus or the Prospectus, as
the case may be. The Company will not file any amendment of the
Registration Statement or supplement to the Prospectus to which Roney
shall reasonably object in writing after being furnished with a copy
thereof.
(b) Each preliminary prospectus, at the time of filing thereof, contained
all material statements which were required to be stated therein in
accordance with the Securities Act and the Rules, and conformed in all
material respects with the requirements of the Securities Act and the
Rules, and did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
Commission has not issued any order suspending or preventing the use
of any preliminary prospectus. When the Registration Statement shall
become effective, when the Prospectus is first filed pursuant to Rule
424(b) of the Rules, when any post-effective amendment of the
Registration Statement shall become effective, when any supplement to
or pre-effective amendment of the Prospectus is filed with the
Commission and at each Closing Date, the Registration Statement and
the Prospectus (and any amendment thereof or supplement thereto) will
comply with the applicable provisions of the Securities Act and the
Exchange Act and the respective rules and regulations of the
Commission thereunder, and neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representation or warranty as to the information
contained in the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by the
Underwriter, specifically for use in connection with the preparation
thereof.
(c) All contracts and other documents required to be filed as exhibits to
the Registration Statement have been filed with the Commission as
exhibits to the Registration Statement.
4
<PAGE> 5
(d) Deloitte & Touche LLP, whose report is filed with the Commission as
part of the Registration Statement, is, and during the periods covered
by its report was, an independent public accountant as required by the
Securities Act and the Rules.
(e) The Company has been duly organized and is validly existing as a
corporation under the laws of the State of Indiana. The Company does
not have any properties or conduct any business outside of the State
of Indiana which would require it to be qualified as a foreign
corporation in any jurisdiction outside of Indiana. The Company does
not have any directly or indirectly held subsidiaries. The Company has
all power, authority, authorizations, approvals, consents, orders,
licenses, certificates and permits needed to enter into, deliver and
perform this Agreement and to issue and sell the Shares.
(f) The Company intends to use proceeds from the public offering to
acquire Shelby County Savings Bank, FSB, headquartered in
Shelbyville, Indiana (the "Bank") as described in the Prospectus. The
Company's H-(e)1 Application to the OTS as filed on March 20, 1998 to
become a unitary savings and loan holding company and acquire all
issued capital stock of the Bank (the "APPLICATION") was approved on
______________, 1998 (the "Approval"), subject to certain conditions
specified in the Approval. All conditions in the Approval required to
be satisfied before the date of this Agreement have been satisfied.
The Application, at the time of its filing, contained all required
information and such information was complete and accurate in all
material respects. Other than the remaining conditions to be
fulfilled under the the Approval specified above, no authorization,
approval, consent, order, license, certificate or permit of and from
any federal, state, or local governmental or regulatory official,
body, or tribunal, is required for the Company to conduct its
business and own its properties as described in the Prospectus,
except such authorizations, approvals, consents, orders, licenses,
certificates, or permits as are not material to the commencement or
conduct of business or to the ownership of its properties.
(g) The financial statements of the Company and any related notes thereto,
included in the Registration Statement and the Prospectus, present
fairly the financial position of the Company as of the date of such
financial statements and for the period covered thereby. Such
statements and any related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
and certified by the independent accountants named in subsection 4(d)
above. No other financial statements are required to be included in
the Prospectus or the Registration Statement.
(h) The Company owns adequate and enforceable rights to use any patents,
patent applications, trademarks, trademark applications, service
marks, copyrights, copyright applications and other similar rights
(collectively, "INTANGIBLES")
5
<PAGE> 6
necessary for the conduct of the material aspects of its business as
described in the Prospectus and the Company has not infringed, is not
infringing, and has not received any notice of infringement of, any
Intangibles of any other person.
(i) The Company does not own any real property.
(j) There are no litigation or governmental or other proceedings or
investigations pending before any court or before or by any public
body or board or threatened against the Company and, to the best of
the Company's knowledge, there is no reasonable basis for any such
litigation, proceedings or investigations, which would have a material
adverse effect on commencement or conduct of the respective business
of the Company or its ownership of property.
(k) The Company has filed all federal, state, and local tax returns
required to be filed by it and paid all taxes shown due on such
returns as well as all other material taxes, assessments and
governmental charges which have become due; no material deficiency
with respect to any such return has been assessed or proposed. A valid
election with respect to the taxation of the Company under Subchapter
S of the Internal Revenue code of 1986, as amended, as been
continuously in effect with respect to the Company from _____________,
19__, through ______________, 1998. The voluntary revocation of such
status [will be/has been] made by the Company and its shareholders
effective _____________, 1998, and the related election not to prorate
income and loss between the S and C corporation periods will be made
effective as of _______________, 1998.
(l) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition (financial or other),
business, properties or prospects of the Company.
(m) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any material term, covenant or
condition, by the Company, or, to the best of the Company's knowledge,
any other party, of any lease, indenture, mortgage, note or any other
agreement or instrument to which the Company is a party or by which it
or its businesses may be bound or affected, except such defaults or
events as are not material to the commencement or conduct of its
business or ownership of its properties.
(n) The Company is not in violation of any term or provision of the
articles of incorporation or bylaws of the Company. The Company is not
in violation of, nor is it required to take any action to avoid any
material violation of, any franchise, license, permit, judgment,
decree, order, statute, rule or regulation.
6
<PAGE> 7
(o) Neither the execution, delivery or performance of this Agreement by
the Company nor the consummation of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the
Company of the Shares) will give rise to a right to terminate or
accelerate the due date of any payment due under, or conflict with or
result in the breach of any term or provision of, or constitute a
default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or require any consent under, or
result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to
the terms of, any lease, indenture, mortgage, note or other agreement
or instrument to which the Company is a party or by which it or its
business may be bound or affected, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation or violate any
provision of the articles of incorporation or bylaws of the Company,
except those which are immaterial in amount or effect.
(p) The Company has authorized capital stock as set forth in the
Prospectus. 90,000 shares of Common Stock of the Company are issued
and outstanding, which will be redeemed at or prior to the Closing if
permitted by applicable law. No shares of preferred stock are issued
and outstanding. The issuance, sale and delivery of the Shares have
been duly authorized by all necessary corporate action by the Company
and, when issued, sold and delivered against payment therefor pursuant
to this Agreement, will be duly and validly issued, fully paid and
nonassessable and none of them will have been issued in violation of
any preemptive or other right. There is no outstanding option, warrant
or other right calling for the issuance of, and no commitment, plan or
arrangement to issue, any share of stock of the Company or any
security convertible into or exchangeable for stock of the Company,
except for the stock options described in the Registration Statement
(the "STOCK OPTIONS") granted under the Company's 1997 Key Employee
Stock Option Plan and 1997 Directors' Stock Option Plan (collectively,
the "STOCK OPTION PLANS"). The Common Stock, the Shares and the Stock
Options conform to all statements in relation thereto contained in the
Registration Statement and the Prospectus.
(q) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, the Company has not (1)
issued any securities or incurred any material liability or
obligation, direct or contingent, (2) entered into any material
transaction, or (3) declared or paid any dividend or made any
distribution on any of its stock, except for the following: incurring
liabilities and obligations, and entering transactions reasonably
expected to be incurred or entered into based on the disclosures in
the Prospectus; the redemption of shares of Common Stock at or
promptly following the Closing as described in subparagraph (p) if
permitted by applicable law; and in connection with the revocation of
the S corporation election as contemplated by subparagraph (k) above.
7
<PAGE> 8
(r) This Agreement has been duly and validly authorized, executed and
delivered by the Company and is the legal, valid and binding agreement
and obligation of the Company.
(s) The Commission has not issued any order preventing or suspending the
use of any preliminary prospectus.
(t) Neither the Company, nor, to the Company's knowledge, any director,
officer, agent, employee or other person associated with the Company,
acting on behalf of the Company, has used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee
from corporate funds; violated or is in violation of any provision of
the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment.
(u) Neither the Company nor any affiliate of the Company has taken, and
they will not take, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the
price of the shares of the Common Stock in order to facilitate the
sale or resale of any of the Shares.
(v) No transaction has occurred between or among the Company and any of
its officers, directors, organizers or the Company's shareholder or
any affiliate or affiliates of any such officer, director, organizer,
or shareholder that is required to be described in and is not
described in the Prospectus.
(w) The Company is not and will not after the offering be an "investment
company", or a company "controlled" by an "investment company", within
the meaning of the Investment Company Act of 1940, as amended.
(x) The Company has obtained from all of its executive officers and
directors their written agreement that (i) for a period of 180 days
from the date of the Effective Date, they will not offer to sell,
sell, transfer, contract to sell, or grant any option for the sale of
or otherwise dispose of, directly or indirectly, any shares of Common
Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock), except for (1) the
exercise of Stock Options under the Stock Option Plans or (2) gifts of
Common Stock (or other securities) to a donee or donees who agree in
writing to be bound by this clause, and (ii) for a period of three
months from the date of the Effective Date, they will not sell,
transfer, assign, pledge, or hypothecate any shares of Common Stock
acquired under Section 1(b), above, except with respect to the 90,000
shares held by Messrs. Abel, Reed and
8
<PAGE> 9
Robison, which shares will be redeemed by the Company as described in
the Registration Statement.
5. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase the Shares shall be subject to the accuracy of the
representations and warranties of the Company in this Agreement as of the date
of this Agreement and as of the Firm Shares Closing Date or Optional Shares
Closing Date, as the case may be, to the accuracy of the statements of Company
officers made pursuant to the provisions of this Agreement, to the performance
by the Company of its obligations under this Agreement, and to the following
additional terms and conditions:
(a) The Registration Statement shall have become effective not later than
5:00 P.M., Detroit time, on the date of this Agreement or on such
later date and time as shall be consented to in writing by Roney ; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules, the Prospectus shall have been
filed in the manner and within the time period required by Rule 424(b)
of the Rules; at each Closing Date, if any, no stop order shall have
been issued or proceedings therefor initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement, or otherwise,
shall have been complied with to the reasonable satisfaction of Roney
(b) At each Closing Date, Roney shall have received the opinion of Krieg
DeVault Alexander & Capehart, counsel for the Company, dated the Firm
Shares Closing Date or the Optional Shares Closing Date, as the case
may be, addressed to the Underwriter and in form and scope reasonably
satisfactory to counsel for Roney to the effect that:
(i) The Company (A) is a corporation existing under the laws of
the State of Indiana, and (B) is not required to be
qualified to do business in any jurisdiction outside
Indiana, except where the failure to so qualify would not
have a material adverse effect on the Company;
(ii) The Company has full corporate power and authority and all
material authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental
regulatory officials and bodies necessary to own or lease
its properties and conduct its business as described in the
Registration Statement and Prospectus;
(iii) The Company has authorized capital stock as set forth in the
Prospectus and, prior to the Closing, had 90,000 shares of
Common Stock issued and outstanding; the Shares have been
duly authorized and validly issued and, upon receipt by the
Company of payment therefor in accordance with the
9
<PAGE> 10
terms of this Agreement, will be fully paid and
nonassessable and are not subject to preemptive
rights; the Shares and the other capital stock and Stock
Options of the Company conform in all material respects to
the descriptions thereof contained in the Registration
Statement and the Prospectus;
(iv) To such counsel's knowledge, after due inquiry, the Company
has no directly or indirectly held subsidiaries;
(v) Upon the consummation of the Company's acquisition of the
Bank as described in the Registration Statement, the Company
will be the registered holder of all of the outstanding
capital stock of the Bank, and all such shares of stock so
held will be duly authorized and validly issued, fully paid
and nonassessable and will be owned free and clear of any
liens, encumbrances or other claims or restrictions
whatsoever, subject to the provisions of the Banking Code;
(vi) The certificates evidencing the Shares are in the form
approved by the Board of Directors of the Company, comply
with the bylaws and the articles of incorporation of the
Company, and comply as to form and in all other material
respects with applicable legal requirements;
(vii) This Agreement has been duly and validly authorized,
executed and delivered by the Company, and is the legal,
valid and binding agreement and obligation of the Company
enforceable in accordance with its terms, except (a) as
enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws
relating to or affecting enforcement of creditors' rights or
by general equity principles, whether applied in an action
at law or in equity, or by the discretionary nature of
specific performance, injunctive relief, and other equitable
remedies, including the appointment of a receiver, and (b),
with respect to provisions relating to indemnification and
contribution, to the extent they are held by a court of
competent jurisdiction to be void or unenforceable as
against public policy;
(viii) The Company is conveying to the Underwriter good and valid
title to the Shares, free and clear of any liens,
encumbrances, security interests, restrictions, and adverse
claims;
(ix) To the best of such counsel's knowledge, after due inquiry,
there are (A) no contracts or other documents which are
required to be filed as exhibits to the Registration
Statement other than those filed as exhibits thereto, (B) no
legal or governmental proceedings pending or threatened
against the Company, and (C) no statutes or regulations
applicable to the Company or certificates, permits, grants
or other consents, approvals, orders, licenses or
authorizations
10
<PAGE> 11
from regulatory officials or bodies, which are required to
be obtained or maintained by the Company and which are of a
character required to be disclosed in the Registration
Statement and Prospectus which have not been so disclosed
and properly described therein;
(x) The statements in the Registration Statement and the
Prospectus, insofar as they are descriptions of corporate
documents, stock option plans, contracts, agreements or
other documents specifically identified in the Registration
Statement or descriptions of laws, regulations, or
regulatory requirements, or refer to compliance with law or
to statements of law or legal conclusions, are correct in
all material respects;
(xi) To the best of such counsel's knowledge, after due inquiry,
the execution, delivery and performance of this Agreement,
the consummation of the transactions herein contemplated and
the compliance with the terms and provisions hereof by the
Company will not give rise to a right to terminate or
accelerate the due date of any payment due under, or
conflict with or result in a breach of any of the terms or
provisions of, or constitute a default (or an event which,
with notice or lapse of time, or both, would constitute a
default) under, or require any consent under, or result in
the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company
pursuant to the terms of, any lease, indenture, mortgage,
note or other agreement or instrument to which the Company
is a party or by which it or its properties or business is
or may be bound or affected, nor will such action result in
any violation of the provisions of the articles of
incorporation or bylaws of the Company or any statute or any
order, rule, or regulation applicable to the Company of any
court or any federal, state, local or other regulatory
authority or other governmental body, the effect of which,
in any such case, would be expected to have a material
adverse effect to the Company;
(xii) To the best of such counsel's knowledge, after due inquiry,
no consent, approval, authorization or order of any court or
governmental agency or body, domestic or foreign, is
required to be obtained by the Company in connection with
the execution and delivery of this Agreement or the sale of
the Shares to the Underwriter as contemplated by this
Agreement, except such as have been obtained;
(xiii) To the best of such counsel's knowledge, after due inquiry,
(A) the Company is not in breach of, or in default (and no
event has occurred which, with notice or lapse of time, or
both, would constitute a default) under, any lease,
indenture, mortgage, note, or other agreement or instrument
to which the Company is a party; or (B) the Company is not
in violation of any term or
11
<PAGE> 12
provision of its articles of incorporation or bylaws, or of
any franchise, license, grant, permit, judgment, decree,
order, statute, rule or regulation; and (C) the Company has
not received any notice of conflict with the asserted rights
of others in respect of Intangibles necessary for the
commencement or conduct of its business, the effect of
which, in any such case, would be expected to have a
material adverse effect on the Company;
(xiv) The Registration Statement and the Prospectus and any
amendments or supplements thereto (other than the financial
statements as to which no opinion need be rendered) comply
as to form in all material respects with the requirements of
the Securities Act and the Rules; and
(xv) The Registration Statement is effective under the Securities
Act, and any required filing of the Prospectus pursuant to
Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b) and, to the best of such
counsel's knowledge, after due inquiry, no stop order
suspending the effectiveness of the Registration Statement
or any post-effective amendment to the Registration
Statement and no order directed at any document incorporated
by reference in the Registration Statement or the Prospectus
or any amendment or supplement thereto has been issued, and
no proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission.
In rendering the foregoing opinion, such counsel may rely upon
certificates of public officials (as to matters of fact and law) and
officers of the Company (as to matters of fact), and include customary
qualifications in its opinion as are acceptable to Roney Copies of all
such certificates shall be furnished to counsel to Roney on the
Closing Date. In addition, such counsel shall state that they have
participated in conferences with officials of the Company and its
independent auditors, and representatives of the Underwriter and its
counsel at which the content of the Registration Statement and
Prospectus and related matters were discussed, and also had
discussions with such officials of the Company with a view toward a
clear understanding on their part of the requirements of the Act with
reference to the preparation of registration statements and
prospectuses. Such counsel did not independently verify the accuracy
or completeness of the statements made in the Registration Statement
and Prospectus; however, based on such counsel's examination of the
Registration Statement and the Prospectus and on its participation in
the above-mentioned conferences, nothing has come to the attention of
such counsel that gives them reason to believe that the Registration
Statement or Prospectus (other than financial statements and notes,
any related schedules or other financial information contained in such
Registration Statement or Prospectus as to which such counsel need
express no opinion or belief), at the time the Registration Statement
became effective, contained any untrue statement of a material fact or
omitted to state any material fact
12
<PAGE> 13
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (other than financial
statement and notes, any related schedules or other financial
information contained in such Prospectus or amendment or supplement
thereto, as to which such counsel need express no opinion or belief),
as of the date of the opinion, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
(c) On or prior to each Closing Date, Roney shall have been furnished such
documents, certificates and opinions as they may reasonably require
for the purpose of enabling them to review the matters referred to in
subsection (b) of this Section 5, and in order to evidence the
accuracy, completeness or satisfaction of the representations,
warranties or conditions herein contained.
(d) Prior to each Closing Date, (i) there shall have been no material
adverse change in the condition or prospects, financial or otherwise,
of the Company; (ii) there shall have been no material transaction,
not in the ordinary course of business, entered into by the Company
except as set forth in the Registration Statement and Prospectus,
other than transactions referred to or contemplated therein or to
which Roney has given its written consent; (iii) the Company shall not
be in default (nor shall an event have occurred which, with notice or
lapse of time, or both, would constitute a default) under any
provision of any material agreement, understanding or instrument
relating to any outstanding indebtedness that is material in amount;
(iv) no action, suit or proceeding, at law or in equity, shall be
pending or threatened against the Company before or by any court or
Federal, state or other commission, board or other administrative
agency having jurisdiction over the Company which is expected to have
a material adverse effect on the Company; and (v) no stop order shall
have been issued under the Securities Act and no proceedings therefor
shall have been initiated or be threatened by the Commission.
(e) At each Closing Date, Roney shall have received a certificate signed
by the Chairman of the Board, the President, and the Treasurer of the
Company dated the Firm Shares Closing Date or Optional Shares Closing
Date, as the case may be, to the effect that the conditions set forth
in subsection (d) above have been satisfied and as to the accuracy, as
of the Firm Shares Closing Date or the Optional Shares Closing Date,
as the case may be, of the representations and warranties of the
Company set forth in Section 4 hereof.
(f) At or prior to each Closing Date, Roney shall have received a "blue
sky" memorandum (upon which Roney may rely) of Leagre Chandler &
Millard, counsel for Roney , addressed to Roney and in form and scope
reasonably satisfactory to Roney concerning compliance with the blue
sky or securities laws of the states listed in Exhibit A attached to
this Agreement.
13
<PAGE> 14
(g) All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be reasonably satisfactory in form and
substance to Roney and to counsel for Roney , and Roney shall have
received from counsel for Roney a favorable opinion, dated as of each
Closing Date, with respect to such of the matters set forth under
Subsections (b) (i), (iii), (vi), (vii), and (xv) of this Section 5,
and with respect to such other related matters as Roney may require,
if the failure to receive a favorable opinion with respect to such
other related matters would cause Roney to deem it inadvisable to
proceed with the sale of the Shares.
(h) There shall have been duly tendered to Roney certificates representing
all the Shares agreed to be sold by the Company on the Firm Shares
Closing Date or the Optional Shares Closing Date, as the case may be.
(i) No order suspending the sale of the Shares prior to each Closing Date,
in any jurisdiction listed in Exhibit A, shall have been issued on the
Firm Shares Closing Date or the Optional Shares Closing Date, as the
case may be, and no proceedings for that purpose shall have been
instituted or, to Roney's knowledge or that of the Company, shall be
contemplated.
(j) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to the Underwriter's participation in
the same. If any condition to the Underwriter's obligations hereunder
to be fulfilled prior to or at the Firm Shares Closing Date or the
Optional Shares Closing Date, as the case may be, is not so fulfilled,
Roney may terminate this Agreement pursuant to Section 9(c) hereof or,
if Roney so elects, waive any such conditions which have not been
fulfilled or extend the time of their fulfillment.
6. COVENANTS. The Company covenants and agrees that it will:
(a) Use its best efforts to cause the Registration Statement to become
effective and will notify Roney immediately, and confirm the notice in
writing, (i) when the Registration Statement and any post-effective
amendment thereto becomes effective, (ii) of the issuance by the
Commission of any stop order or of the initiation, or the threatening,
of any proceedings for that purpose and (iii) of the receipt of any
comments from the Commission. The Company will make every reasonable
effort to prevent the issuance of a stop order, and, if the Commission
shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest
possible moment.
(b) During the time when a prospectus is required to be delivered under
the Securities Act, comply so far as it is able with all requirements
imposed upon it by the
14
<PAGE> 15
Securities Act, as now and hereafter amended, and by the Rules, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Shares. If at any time when
a prospectus relating to the Shares is required to be delivered under
the Securities Act any event shall have occurred as a result of which,
in the reasonable opinion of counsel for the Company or counsel for
Roney , the Registration Statement or Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at
any time to amend or supplement the Registration Statement or
Prospectus to comply with the Securities Act, the Company will notify
Roney promptly and prepare and file with the Commission an appropriate
amendment or supplement in form satisfactory to Roney The cost of
preparing, filing and delivering copies of such amendment or
supplement shall be paid by the Company.
(c) Deliver to the Underwriter such number of copies of each preliminary
prospectus as may reasonably be requested by Roney and, as soon as the
Registration Statement, or any amendment or supplement thereto,
becomes effective, deliver to the Underwriter three signed copies of
the Registration Statement, including exhibits, and all post-effective
amendments thereto and deliver to the Underwriter such number of
copies of the Prospectus, the Registration Statement and supplements
and amendments thereto, if any, without exhibits, as Roney may
reasonably request.
(d) Endeavor in good faith, in cooperation with Roney and its counsel, at
or prior to the time the Registration Statement becomes effective, to
qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of the states listed in
Exhibit A. In each jurisdiction where such qualification shall be
effected, the Company will, unless Roney agrees that such action is
not at the time necessary or advisable, file and make such statements
or reports at such times as are or may reasonably be required by the
laws of such jurisdiction. The Company will advise Roney promptly of
the suspension of the qualification of the Shares for offering, sale
or trading in any jurisdiction, or any initiation or threat of any
proceeding for such purpose, and in the event of the issuance of any
order suspending such qualification, the Company, with the cooperation
of , will use all reasonable efforts to obtain the withdrawal thereof.
(e) Furnish its security holders as soon as practicable an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Securities Act or the Rules)
covering a period of at least twelve months beginning after the
effective date of the Registration Statement, which shall satisfy the
provisions of Section 11(a) of the Securities Act and the Rules
thereunder.
15
<PAGE> 16
(f) For a period of five years from the Effective Date, furnish to its
shareholders annual audited and quarterly unaudited consolidated
financial statements with respect to the Company including balance
sheets and income statements.
(g) For a period of five years from the Effective Date, furnish to Roney
the following:
(i) at the time they have been sent to shareholders of the
Company or filed with the Commission one copy of each
annual, quarterly, interim, or current financial and other
report or communication sent by the Company to its
shareholders or filed with the Commission;
(ii) as soon as practicable, one copy of every press release and
every material news item and article in respect of the
Company or the affairs of the Company which was released by
the Company;
(iii) all other information reasonably requested by Roney with
respect to the Company to comply with Rule 15c2-11 of the
Rules and Section 4 of Schedule H of the NASD By-Laws; and
(iv) such additional documents and information with respect to
the Company and its affairs as may from time to time
reasonably request.
(h) Acquire all of the Bank's outstanding capital stock, free and clear of
all liens, encumbrances, or other claims or restrictions whatsoever,
with the proceeds of the offering as described in the Registration
Statement and, in all other material respects, apply the net proceeds
from the offering in the manner set forth under "Use of Proceeds" in
the Prospectus.
(i) Not file any amendment or supplement to the Registration Statement or
Prospectus after the effective date of the Registration Statement to
which Roney shall reasonably object in writing after being furnished a
copy thereof.
(j) Comply with all registration, filing and reporting requirements of the
Securities Act or the Exchange Act, which may from time to time be
applicable to the Company.
(k) Use reasonable efforts to comply with the requirements of, and satisfy
the conditions of, the Approval; provided, however, that it shall not
be a breach of this Section 6(l) for the Company or the Bank to fail
to maintain any specified level of capital, surplus, capital ratio,
valuation reserve or financial or operating performance after the Bank
has commenced the business of banking if such failure is waived or
performance of such requirement or condition is accepted as sufficient
by the appropriate regulatory agencies.
16
<PAGE> 17
(l) Pay, or reimburse if paid by the Underwriter, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including those
relating to (1) the preparation, printing, filing and delivery of the
Registration Statement, including all exhibits thereto, each
preliminary prospectus, the Prospectus, all amendments of and
supplements to the Registration Statement and the Prospectus, and the
printing of the Underwriting Agreement and related agreements
including, without limitation, the Dealer Agreement; (2) the issuance
of the Shares and the preparation and delivery of certificates for the
Shares to the Underwriter; (3) the registration or qualification of
the Shares for offer and sale under the securities or "blue sky" laws
of the various jurisdictions referred to in Exhibit A, including the
fees and disbursements of counsel in connection with such registration
and qualification and the preparation and printing of preliminary,
supplemental, and final blue sky memoranda; (4) the furnishing
(including costs of shipping and mailing) to the Underwriter of copies
of each preliminary prospectus, the Prospectus and all amendments of
or supplements to the Prospectus, and of the several documents
required by this Section to be so furnished; (5) the filing
requirements and fees of the NASD in connection with its review of the
terms of the public offering and the underwriting; (6) the furnishing
(including costs of shipping and mailing) of copies of all reports and
information required by Section 6(g); (7) all transfer taxes, if any,
with respect to the sale and delivery of the Shares by the Company to
the Underwriter, and (8) the listing of the Shares for quotation on
the Nasdaq Smallcap Market.
(m) Promptly reimburse Roney for its out-of-pocket expenses, including
without limitation, road show expenses and legal fees of counsel to
Roney (such reimbursement shall not exceed $50,000) if the public
offering is not commenced and completed for any reason unless the
offering is not completed because of the Underwriter's refusal (except
for bona fide reasons related to the Company or its officers,
directors, employees or agents or market conditions) or inability to
perform, including without limitation (i) the failure of the Company
to consummate the proposed acquisition of the Bank substantially on
the agreed terms and substantially on the agreed timetable, regardless
of fault, (ii) the discovery of information being discovered in the
course of the investigation by Roney which is materially adverse when
compared with information provided as of the date hereof, and (iii)
market conditions. Upon a successful completion of the Offering, if
the Underwriter purchases all the Optional Shares, the Underwriter
will pay the Company the amount of $10,000 in partial reimbursement
for offering expenses incurred by the Company.
(n) Not, without the prior written consent of Roney , sell, contract to
sell or grant any option for the sale of or otherwise dispose of,
directly or indirectly, or register with the Commission, any shares of
Common Stock of the Company (or any securities
17
<PAGE> 18
convertible into or exercisable for such shares of Common Stock)
within 150 days after the date of the Prospectus, except as provided
in this Agreement and except for grants and exercises of Stock Options
under the Stock Option Plans as described in the Prospectus.
(o) For not less than 3 fiscal years after the Effective Date, maintain
the Exchange Act registration of the Common Stock, unless the
Company's shareholders direct the Company to deregister the Common
Stock.
(p) Use its best efforts to consummate the acquisition of the Bank as
described in the Prospectus and cause itself and the Bank to commence
their businesses as described in the Prospectus not later than
__________________________, 1998.
(q) Not, for one year after the Effective Date, issue any stock options to
purchase Common Stock under either of the Stock Option Plans, or any
other stock option plan of the Company, that have an exercise price of
less than $12.00 per share.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted),
to which they may become subject under the Securities Act, the
Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that such
indemnity shall not inure to the benefit of the Underwriter (or any
person controlling the Underwriter) on account of any losses, claims,
damages or liabilities arising from the sale of the Shares in the
public offering to any person by the Underwriter if such untrue
statement or omission or alleged untrue statement or omission was made
in such preliminary prospectus, the Registration Statement or the
Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of the Underwriter specifically for use therein. The Company
shall not be liable hereunder to the Underwriter (or any controlling
person thereof) to the extent that any loss, claim, damage or other
18
<PAGE> 19
liability incurred by the Underwriter arises from the Underwriter's
fraudulent act or omission.
(b) The Underwriter agrees to indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act,
each director of the Company and each officer of the Company who signs
the Registration Statement, to the same extent as the foregoing
indemnity from the Company to the Underwriter, but only insofar as
such losses, claims, damages or liabilities arise out of or are based
upon any untrue statement or omission or alleged untrue statement or
omission which was made in any preliminary prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Company by the Underwriter
specifically for use therein; provided, however, that the obligation
of the Underwriter to indemnify the Company (including any controlling
person, director or officer thereof) hereunder shall be limited to the
total price at which the Shares purchased by the Underwriter hereunder
were offered to the public. The Underwriter shall not be liable
hereunder to the Company (including any controlling person, director
or officer thereof) to the extent that any loss, claim, damage or
other liability incurred by the Company arises from a fraudulent act
or omission by the Company.
(c) Any party that proposes to assert the right to be indemnified under
this Section will, promptly after receipt of notice of commencement of
any action, suit or proceeding against such party in respect of which
a claim is to be made against an indemnifying party or parties under
this Section, notify each such indemnifying party of the commencement
of such action, suit or proceeding, enclosing a copy of all papers
served, but the omission so to notify such indemnifying party of any
such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense
thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for
any legal or other expenses, except as provided below and except for
the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (1) the employment of counsel
by such indemnified party has been authorized in writing by the
indemnifying parties, (2) the indemnified party
19
<PAGE> 20
shall have reasonably concluded that, because of the existence of
different or additional defenses available to the indemnified party or
of other reasons, there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of
the indemnified party) or that, under the circumstances, it is
otherwise appropriate, or (3) the indemnifying parties shall not have
employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable
for any settlement of any action, suit, proceeding or claims effected
without its written consent.
8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Section 7(a) or
7(b) is due in accordance with its terms but for any reason is held to be
unavailable, the Company and the Underwriter shall contribute to the aggregate
losses, claims, damages and liabilities (including any investigation, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claims asserted, but
after deducting any contribution received from other persons), to which the
Company and the Underwriter may be subject, in such proportion so that the
Underwriter is responsible for that portion represented by the percentage that
the underwriting discount appearing on the front cover page of the Prospectus
bears to the public offering price appearing thereon and the Company is
responsible for the balance; provided, however, that (a) in no case shall the
Underwriter be responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by the Underwriter hereunder and (b) no
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was guilty of such fraudulent misrepresentation. For purposes of this
Section, each person, if any, who controls the Underwriter within the meaning of
the Securities Act or the Exchange Act shall have the same rights to
contribution as the Underwriter, and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (a) and (b) of this Section. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or otherwise than
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its written consent.
In any proceeding relating to the Registration Statement, any
preliminary prospectus, the Prospectus or any supplement thereto or amendment
thereof, each party against whom contribution
20
<PAGE> 21
may be sought under this Section 8 hereby consents to the jurisdiction of any
court in Michigan, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
9. TERMINATION. This Agreement may be terminated by Roney by notifying
the Company at any time:
(a) before the earlier of (1) 11:00 a.m., Detroit time, on the business
day following the Effective Date, or (2) the time when the Shares are
first generally offered by the Underwriter to dealers by letter or
telegram;
(b) at or before any Closing Date if, in the judgment of Roney , payment
for and delivery of the Shares is rendered impracticable or
inadvisable because (1) additional material governmental restrictions,
not known to be in force and effect when this Agreement is signed,
shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the
New York Stock Exchange, on the American Stock Exchange or on the
over-the-counter market, or trading in securities generally shall have
been suspended on either such Exchange or on the over-the-counter
market or a general banking moratorium shall have been established by
federal, New York or Indiana authorities, (2) a war or other calamity
shall have occurred or shall have accelerated to such an extent as to
affect adversely the marketability of the Shares, (3) the Company or
the Bank shall have sustained a material loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act, which, whether or not said loss shall have been
insured, will in Roney 's opinion, make it inadvisable to proceed with
the offering of the Shares, (4) the Approval shall have been withdrawn
or materially altered, or notice shall have been received to the
effect that any of such approvals will not be received, or, if
received, will be subject to conditions that the Company would not be
able to fulfill in a reasonable time in Roney's reasonable opinion,
(5) in Roney's reasonable opinion it is not probable that the
Company's consummation of the acquisition of the Bank as described in
the Prospectus will occur so as to permit the Company and Bank to
commence business before ___________________________, 1998, for any
reason, or (6) there shall have been such material change in the
condition, business operations or prospects of the Company or the
market for the Shares or similar securities as in Roney's judgment
would make it inadvisable to proceed with the offering of the Shares;
or
(c) at or before any Closing Date, if any of the conditions specified in
Section 5 or any other agreements, representations or warranties of
the Company in this Agreement shall not have been fulfilled when and
as required by this Agreement. If this Agreement is terminated
pursuant to any of its provisions, except as otherwise
21
<PAGE> 22
provided in this Agreement, the Company shall not be under any
liability to the Underwriter (other than for obligations assumed in
Section 6 hereof), and the Underwriter shall not be under any
liability to the Company; provided, however, that if this Agreement is
terminated by Roney because of any failure, refusal or inability on
the part of the Company to comply with the terms or to fulfill any of
the conditions of this Agreement, or for any reasons provided in
subparagraphs (b) and (c) above, the Company will reimburse the
Underwriter for all accountable out-of- pocket expenses in accordance
with the terms of Section 6(m).
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement shall be
deemed to be representations, warranties and agreements at the Closing Dates,
and such representations, warranties and agreements of the Company, including,
without limitation, the payment and reimbursement agreements contained in
Section 6 hereof and the indemnity and contribution agreements contained
in Sections 7 and 8 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Underwriter or any
controlling person and shall survive termination of this Agreement and/or
delivery of the Shares to and payment for the Shares by the Underwriter
pursuant to this Agreement. In addition, the covenants contained in Section 6
hereof, the agreements contained in this Section 10 and in Sections 7, 8 and 9
shall survive termination of this Agreement and/or delivery of the Shares to
and payment for the Shares by the Underwriter pursuant to this Agreement.
11. MISCELLANEOUS. This Agreement has been and is made for the benefit of
the Underwriter, the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling the
underwriter or the Company, and directors and certain officers of the Company
and their respective successors and assigns, and no other person, partnership,
association or corporation shall acquire or have any right under or by virtue
of this Agreement. The term "SUCCESSORS AND ASSIGNS" shall not include any
purchaser of Shares from the Underwriter merely because of such purchase.
If any action or proceeding shall be brought by the Underwriter or the
Company in order to enforce any right or remedy under this Agreement, the
underwriter and the Company hereby consent to, and agree that they will submit
to, the jurisdiction of the courts of the State of Michigan and of any Federal
court sitting in the State of Michigan.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph, if subsequently confirmed in writing, to
Roney Capital Management, at One Griswold, Detroit, Michigan 48226 (facsimile
No. (313) 963-2303) (with a copy to Mark B. Barnes, Leagre Chandler & Millard,
9100 Keystone Crossing, Suite 800, Indianapolis, Indiana 46240 (facsimile number
(317) 846-7900)); and to the Company at P.O. Box 927, Shelbyville, Indiana
46176, Attention: Robert C. Reed, President (facsimile No. (317) 738-3915) (with
a copy to Nicholas J. Chulos, Krieg DeVault Alexander & Capehart, Suite 2800,
One Indiana Square, Indianapolis, Indiana 46204 (facsimile number (317)
636-1507)).
22
<PAGE> 23
This Agreement shall be construed in accordance with the laws of the state
of Michigan, without giving effect to principles of conflicts of laws. Please
confirm that the foregoing correctly sets forth the agreement between us.
Very truly yours,
BLUE RIVER BANCSHARES, INC.
By:__________________________________________
Robert C. Reed, President and Director
And by:______________________________________
Confirmed by Roney Capital Management
RONEY Capital Management
By:___________________________________________
John C. Donnelly Director, Corporate Finance
23
<PAGE> 24
EXHIBIT A
BLUE SKY STATES
Florida
Illinois
Indiana
Kentucky
Michigan
Minnesota
Missouri
New Jersey
New York
Ohio
Pennsylvania
Wisconsin
<PAGE> 1
EXHIBIT 2.2
AMENDMENT
TO
AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
This AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF AFFILIATION AND MERGER
(the "Amendment") is made and entered into as of this 2nd day of June, 1998, by
and among BLUE RIVER BANCSHARES, INC. ("Blue River"), SHELBY COUNTY BANCORP
("Shelby County") and SHELBY COUNTY SAVINGS BANK, FSB ("SCSB").
WITNESSETH:
WHEREAS, Blue River, Shelby County and SCSB are parties to that certain
Amended and Restated Agreement of Affiliation and Merger dated March 12, 1998
(the "Agreement"); and
WHEREAS, the federal Office of Thrift Supervision ("OTS") has required
SCSB, based upon the OTS's most recent examination of SCSB, to take certain
actions which will reduce the shareholders' equity of SCSB; and
WHEREAS, Blue River, Shelby County and SCSB have agreed to a reduction in
the consideration to be received by the shareholders of Shelby County under
Section 2.01 of the Agreement in order for Blue River to continue to pursue the
transactions contemplated by the Agreement; and
WHEREAS, a majority of the respective Boards of Directors of Blue River,
Shelby County and SCSB have approved this Amendment and have authorized its
execution and delivery.
NOW, THEREFORE, in consideration of the foregoing premises, the agreements
and mutual obligations contained herein and other good and valuable
consideration, the receipt and sufficiency are hereby acknowledged, Blue River,
Shelby County and SCSB hereby agree as follows:
1. The parties hereto hereby agree that the consideration to be received
by shareholders of Shelby County pursuant to the Agreement shall be reduced Two
Dollars ($2.00) per share from Fifty-Eight Dollars ($58.00) to Fifty-Six Dollars
($56.00) per share of Shelby County Common Stock. Accordingly, the parties
hereby agree that Section 2.01 of the Agreement is hereby amended and replaced
in its entirety such that, as amended, such section shall read as follows:
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-Six Dollars ($56.00)
("Conversion Price").
2. The parties hereto may restate the Agreement to reflect the provisions
set forth in this Amendment upon the due execution hereof.
3. Except as expressly provided herein, this Amendment shall not amend,
modify or supplement the terms, conditions or provisions of the Agreement.
<PAGE> 2
4. The parties hereto agree that all of their respective representations,
warranties, covenants and obligations set forth in the Agreement shall remain in
and continue in full force and effect as provided in the Agreement.
5. This Amendment 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.
6. This Amendment and the Agreement constitute the entire agreement among
the parties hereto relating to this 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 in accordance with their respective provisions.
7. All capitalized terms used herein that are not otherwise defined in
this Amendment shall have the same meanings ascribed to them in the Agreement.
8. This Amendment shall be governed by and construed in accordance with
the laws of the State of Indiana.
* * * *
-2-
<PAGE> 3
IN WITNESS WHEREOF, Blue River, Shelby County and SCSB have entered into,
executed and delivered this Amendment as of the date 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
SHELBY COUNTY SAVINGS BANK, FSB
By: /s/JAMES M. ROBISON
-------------------------------
James M. Robison, Chairman
ATTEST:
By: /s/BETTY J. BAKER
----------------------------------
Betty J. Baker, Secretary
-3-
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED 1997 DIRECTORS' STOCK OPTION PLAN
OF
BLUE RIVER BANCSHARES, INC.
1. Purpose. The 1997 Directors' Stock Option Plan of Blue River
Bancshares, Inc. (the "plan") is designed to promote the interests of Blue River
Bancshares, Inc. (the "company") and its subsidiaries through the granting of
nonqualified stock options to the members of the company's Board of Directors
(the "directors").
2. Administration.
(a) The plan shall be administered by a committee appointed by
the Board of Directors (the "committee"). The decision of a majority of the
members of the committee shall constitute the decision of the committee. In
administering the plan, the committee's actions and determinations shall be
binding on all interested parties.
(b) Notwithstanding any other provisions of the plan, the
committee shall have authority (i) to grant options; (ii) to determine the
number of shares to be made the subject of options; (iii) to determine the
option period; (iv) to determine the time or times at which options will be
granted; (v) to determine other conditions and limitations, if any, applicable
to the exercise of options; and (vi) to determine the nature and duration of the
restrictions, if any, to be imposed upon the sale or other disposition of shares
acquired by any director upon exercise of an option and the nature of the
events, if any, and the duration of the period, in which any director's rights
in respect of shares acquired upon exercise of an option may be forfeited. Each
option granted under the plan to a director shall be evidenced by a written
stock option agreement containing terms and conditions established by the
committee consistent with the provisions of the plan. Notwithstanding the
foregoing, the committee shall have no authority to alter the option price
specified in paragraph 5 or the option period specified in paragraph 6 with
respect to any options granted under the plan.
(c) The committee is authorized, subject to the provisions of
the plan, to adopt, amend and rescind such rules and regulations as it may deem
appropriate for the administration of the plan and to make determinations and
interpretations which it deems consistent with the plan's provisions. The
committee's determination and interpretations shall be final and conclusive.
(d) Neither the plan nor any stock option agreement executed
hereunder shall constitute a contract of employment. Participation in the plan
does not give any director the right to be retained, nominated or reelected as a
director of the company or a subsidiary.
3. Shares Covered by the Plan. The stock to be subject to options
under the plan shall be shares of authorized common stock of the company and
may be unissued shares or reacquired shares (including shares purchased in the
open market), or a combination thereof, as the committee may from time to time
determine. Subject to the provisions of paragraph 10, the maximum number of
shares to be delivered upon exercise of all options granted under the plan
shall not exceed one hundred thousand (100,000) shares. Shares covered by an
option that
<PAGE> 2
remain unpurchased upon expiration or termination of the option may be made
subject to further options. No individual shall be eligible to participate in
the plan or receive options on the basis of his or her status as a director of
more than one entity.
4. Eligibility. All individuals elected to serve as company
directors shall be eligible, from time to time, to receive options to acquire
shares of company stock as determined by the committee in its discretion.
However, an individual shall not receive additional options because he is a
member of more than one board of directors.
5. Option Price. The option price per share of stock under each
option granted to a Director hereunder shall be the greater of twelve dollars
($12.00) per share or the fair market value of the share on the date the
option is granted. For all purposes of the plan, the term "fair market value"
shall mean the value determined by the committee based upon quotations of the
entities which make a market in company stock and such other factors as the
committee shall deem appropriate. If the common stock of the company is not
quoted by entities which make a market in the company's stock, the fair market
value shall be determined by the committee based upon such factors as the
committee deems appropriate.
6. Option Period. No option period shall exceed fifteen (15)
years from the date of grant of such option.
7. Vesting and Exercise of Options.
(a) Options granted to directors hereunder shall vest, and
thereby become exercisable, at such time or times as shall be determined by the
committee in its sole discretion. The stock option agreement between the company
and the optionee shall include the schedule under which each option shall vest.
(b) Effective three (3) months from the date a director ceases
to be a director for any reason other than death, permanent and total disability
or cause, the options granted to that director shall terminate and shall not be
exercisable. If a director dies or becomes permanently and totally disabled, all
unexercised options may be exercised within one (1) year from the date his
status as a director ceases for such reason (but not later than the option
expires pursuant to its terms). During such period, subject to the limitations
of the option grant, the optionee, his guardian, attorney-in-fact, or personal
representative, as the case may be, may exercise the option. As used herein,
"permanent and total disability" shall have the same meaning ascribed to such
term by Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. If a
director's services are terminated by the company for cause, any options he
holds shall be exercisable as of that date. For purposes of the foregoing, a
director shall be deemed to be terminated for 'cause' if his services as a
director are terminated by the company due to (i) the director's willful and
continued failure to perform his required duties as a director of the company,
(ii) any action by the director which involves willful misfeasance of
-2-
<PAGE> 3
gross negligence, (iii) the requirement of or direction by a
federal or state regulation agency which has jurisdiction over
the company to terminate the director's services or (iv) the
conviction of the director of the commission of any criminal
offense which involves dishonesty or breach of trust.
8. Payment for Stock. Full payment for shares purchased shall be
made at the time of exercising the option in whole or in part. Such payment may
be made in (a) cash or (b) at the discretion of the committee, by delivering
whole shares of common stock of the company (the "delivered stock") or a
combination of cash and delivered stock. Delivered stock shall be valued by the
committee at the current fair market value determined as of the date of the
exercise of the option, in accordance with the provisions of paragraph 5. No
shares shall be issued until full payment for them has been made and the
director shall have none of the rights of a shareholder with respect to such
shares until such shares are issued to him. Upon payment of the full purchase
price, the company shall issue a certificate or certificates to the optionee
evidencing ownership of the shares purchased pursuant to the exercise of the
option which contain(s) such terms, conditions and provisions as may be
required and as are consistent with the terms, conditions and provisions of the
plan and the stock option agreement between the director and the company.
9. Nontransferability. No option shall be transferable, except
by the director's will or the laws of descent and distribution. During the
director's lifetime, his option shall be exercisable (to the extent
exercisable) only by him. The option and any rights and privileges pertaining
thereto shall not be transferred, assigned, pledged or hypothecated by him in
any way, whether by operation of law or otherwise and shall not be subject to
execution, attachment, or similar process.
10. Changes in Stock.
(a) In the event of any change in the common stock of the
company through stock dividends, split-ups, recapitalizations,
reclassifications, conversions, or otherwise, or in the event that other stock
shall be converted into or substituted for the present common stock of the
company as the result of any stock conversion, merger, consolidation,
reorganization or similar transaction which constitutes a change in control of
the company, then the committee may make appropriate adjustment or substitution
in the aggregate number, price, and kind of shares available under the plan and
in the number, price and kind of shares covered under any options granted or to
be granted under the plan. The committee's determination in this respect shall
be final and conclusive. Provided, however, that the company shall not, and
shall not permit its subsidiaries to, recommend, facilitate or agree or consent
to a transaction or series of transactions which would result in a change of
control of the company unless and until the person or persons or entity or
entities acquiring or succeeding to the assets or capital stock of the company
or any of its subsidiaries as a result of such transaction or transactions
agrees to be bound by the terms of the plan so far as it pertains to options
theretofore granted and agrees to assume and perform the obligations of the
company and its successor hereunder.
-3-
<PAGE> 4
(b) In the event of a change in control of the company
pursuant to which another person or entity acquires control of the company (such
other person or entity being the "successor"), the kind of shares of common
stock which shall be subject to the plan and to each outstanding option shall,
automatically by virtue of such change in control of the company, be converted
into and replaced by shares of common stock, or such other class of securities
having rights and preferences no less favorable than the class of stock of the
successor, and the number of shares subject to the option and the purchase price
per share upon exercise of the option shall be correspondingly adjusted, so
that, by virtue of such change in control of the company, each director shall
have the right to purchase (i) that number of shares of common stock of the
successor which have a fair market value equal, as of the date of such change in
control of the company, to the fair market value, as of the date of such change
in control, of the shares of common stock of the company theretofore subject to
his option and (ii) for a purchase price per share which, when multiplied by the
number of shares of common stock of the successor subject to the option, shall
equal the aggregate exercise price at which the optionee could have acquired all
of the shares of common stock of the company theretofore optioned to the
optionee.
11. Use of Proceeds. The proceeds received by the company from
the sale of stock pursuant to the plan will be used for general corporate
purposes.
12. Investment Representations. Unless the shares subject to an
option are registered under the Securities Act of 1933, as amended, each
director, in the stock option agreement between the company and the director,
shall agree for himself and his legal representatives that any and all shares
of common stock purchased upon the exercise of the option shall be acquired for
investment and not with a view to, or for sale in connection with, any
distribution thereof. Any share issued pursuant to an exercise of an option
subject to this investment representation shall bear a legend evidencing
such restriction.
13. Amendment and Discontinuance. The Board of Directors may, at
any time, without the approval of the stockholders of the company, (except as
otherwise required by applicable law, rule or regulations, including without
limitation any shareholder approval of the safe harbor provisions of Rule 16b-3
promulgated under the Securities Exchange Act of 1934) alter, amend, modify,
suspend, or discontinue the plan, but may not, without the consent of the holder
of an option, make any alteration which would adversely affect an option
previously granted under the plan.
14. Liability. No member of the Board of Directors, the committee
or officers or employees of the company or a subsidiary shall be personally
liable for any action, omission or determination made in good faith in
connection with the plan.
15. Effective Date and Duration. This plan shall become
effective upon its approval by a majority of the shares of the company's
common stock. No option may be exercised until the plan has been approved by
the shareholders of the company. On July 31, 2007, the plan shall expire
except as to outstanding options which options shall remain in effect until
they have been exercised, terminated, or have expired.
-4-
<PAGE> 5
16. Miscellaneous.
(a) The term "Board of Directors" used herein shall mean the
Board of Directors of the company, unless the context clearly requires
otherwise, and to the extent that any powers and discretion vested in the Board
of Directors are delegated to a committee of the Board of Directors, the term
"Board of Directors" shall also mean such committee.
(b) The term "subsidiary" or "subsidiaries" used herein shall
mean any banking institution or other corporation more than fifty percent (50%)
of whose total combined voting stock of all classes is held by the company or by
another corporation qualifying as a subsidiary within this definition.
(c) The term "change in control of the company" used herein
shall mean (i) any merger, consolidation or similar transaction which involves
the company or any subsidiary and in which persons who are the shareholders of
the company immediately prior to such transaction own, immediately after such
transaction, shares of the surviving or combined entity which possess voting
rights equal to or less than fifty percent (50%) of the voting rights of all
shareholders of such entity, determined on a fully diluted basis; (ii) any sale,
lease, exchange, transfer or other disposition of all or any substantial part of
the assets of the company or any subsidiary; (iii) any tender, exchange, sale or
other disposition (other than dispositions of the stock of the company or any
subsidiary in connection with bankruptcy, insolvency, foreclosure, receivership
or other similar transactions) or purchases (other than purchases by the company
or any company-sponsored employee benefit plan, or purchases by members of the
Board of Directors of the company or any subsidiary) of more than twenty-five
percent (25%) of the outstanding common stock of the company or any subsidiary;
(iv) during any period of two (2) consecutive years during the term of the plan
specified in paragraph 15, individuals who at the date of the adoption of the
plan constitute the Board of Directors of the company cease for any reason to
constitute at least a majority thereof, unless the election of each director at
the beginning of such period has been approved by directors representing at
least a majority of the directors then in office who were directors on the date
of the adoption of the plan; or (v) a majority of the Board of Directors or a
majority of the shareholders of the company approve, adopt, agree to recommend,
or accept any agreement, contract, offer or other arrangement providing for, or
any series of transactions resulting in, any of the transactions described
above. Notwithstanding the foregoing, a change in control of the company shall
not occur as a result of the issuance of stock by the company in connection with
any private placement offering of its stock or any public offering of its stock.
-5-
<PAGE> 6
AMENDED AND RESTATED AS Of: August 28, 1997.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
----------------------
Its: President
---------------------
ATTEST:
/s/ D. WARREN ROBISON
- ---------------------------
Its: Secretary
----------------------
-6-
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED 1997 KEY EMPLOYEES' STOCK OPTION PLAN
OF
BLUE RIVER BANCSHARES, INC.
1. Purpose. The 1997 Key Employees' Stock Option Plan of Blue
River Bancshares, Inc. (the "plan") is designed to promote the interest of Blue
River Bancshares, Inc. (the "company") and its subsidiaries by encouraging
their officers and key employees, upon whose judgment, initiative and industry
the company and its subsidiaries are largely dependent for the successful
conduct and growth of their business, to continue the association with the
company and its subsidiaries of such officers and key employees by providing
additional incentive and opportunity for unusual industry and efficiency
through stock ownership, and by increasing their proprietary interest in the
company and their personal interest in its continued success and progress. The
plan provides for the granting of (i) incentive stock options ("ISO's") and
(ii) nonqualified stock options ("NSO's").
2. Administration.
(a) The plan shall be administered by a committee appointed by
the Board of Directors of the company (the "committee"). No director who is also
an officer or key employee of the company or any of its subsidiaries shall be
eligible to serve as a member of the committee. No member of the committee shall
be eligible, at any time when he is such a member, to receive the grant of an
option under the plan. The decision of a majority of the members of the
committee shall constitute the decision of the committee. Subject to the
provisions of the plan, the committee is authorized (i) to grant ISO's and
NSO's; (ii) to determine the employees to be granted ISO's and NSO's; (iii) to
determine the option period, the option price and the number of shares subject
to each option; (iv) to determine the time or times at which options will be
granted; (v) to determine the time or times when each option becomes exercisable
and the duration of the exercise period; (vi) to determine other conditions and
limitations, if any, applicable to the exercise of each option; and (vii) to
determine the nature and duration of the restrictions, if any, to be imposed
upon the sale or other disposition of shares acquired by any optionee upon
exercise of an option, and the nature of the events, if any, and the duration of
the period, in which any optionee's rights in respect of shares acquired upon
exercise of an option may be forfeited. Each option granted under the plan shall
be evidenced by a written stock option agreement containing terms and conditions
established by the committee consistent with the provisions of the plan,
including such terms as the committee shall deem advisable in order that each
ISO shall constitute an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
(b) The committee is authorized, subject to the provisions of
the plan, to adopt, amend and rescind such rules and regulations as it may deem
appropriate for the administration of the plan and to make determinations and
interpretations which it deems consistent with the plan's provisions. The
committee's determinations and interpretations shall be final and conclusive.
<PAGE> 2
(c) The committee shall also determine, in its sole discretion,
with respect to each employee, whether such options shall be ISO's or NSO's, or
any combination thereof; and whether any employee shall be given discretion to
determine whether any options granted to him shall be ISO's or NSO's or any
combination thereof.
(d) Neither the plan nor any stock option agreement executed
hereunder shall constitute a contract of employment. Participation in the plan
does not give any employee the right to be retained in the employ of the company
or any subsidiary and does not limit in any way the right of the company or a
subsidiary to change the duties or responsibilities of any employee or to
terminate the employment of any employee.
3. Shares Covered by the Plan. The stock to be subject to options
under the plan shall be shares of authorized common stock of the company and
may be unissued shares or reacquired shares (including shares purchased in the
open market), or a combination thereof, as the committee may from time to time
determine. Subject to the provisions of paragraph 14, the maximum number of
shares to be delivered upon exercise of all options granted under the plan
shall not exceed fifty thousand (50,000) shares. Shares covered by an option
that remain unpurchased upon expiration or termination of the option may be
made subject to further options.
4. Eligibility. Officers and key employees of the company or of
any of its subsidiaries, as selected by the committee, shall be eligible to
receive grants of ISO's and NSO's under the plan. Members of the committee
shall not be eligible to receive grants of options under the plan while
serving as members of the committee.
5. Option Price.
(a) The option price per share of stock under each ISO shall be
not less than the greater of twelve dollars ($12.00) per share or one hundred
percent (100%) of the fair market value of the share on the date on which the
option is granted; provided, however, as to officers and key employees who, at
the time an ISO is granted, own, within the meaning of Section 425(d) of the
Code, more than ten percent (10%) of the total combined voting power of all
classes of stock of the company or any subsidiary ("shareholder-employees"), the
purchase price per share of stock under each ISO shall be not less than one
hundred ten percent (110%) of the fair market value of the stock on the date on
which the option is granted.
(b) The option price per share of stock under each NSO shall be
determined by the committee in its discretion; provided, however, the option
price per share shall not be less than twelve dollars ($12.00) per share or one
hundred percent (100%) of the fair market value of the share on the date on
which the option is granted.
(c) For all purposes of the plan, the term "fair market value"
shall mean the value determined by the committee based upon quotations of the
entities which make a market in company stock and such other factors as the
committee shall deem appropriate. If the common
-2-
<PAGE> 3
stock of the company is not quoted by entities which make a market in the
company's stock, the fair market value shall be determined by the committee
based upon such factors as the committee deems appropriate.
6. Option Period. No option period shall exceed ten (10) years,
and the option period with respect to ISO's granted to shareholder-employees
shall not exceed five (5) years.
7. Vesting and Exercise of Options. All options granted under the
plan shall vest, and thereby become exercisable, at such time or times as shall
be determined by the committee in its sole discretion. The stock option
agreement between the company and the optionee shall include the schedule under
which the option shall vest.
8. Special Calendar Year Limitation on Shares Subject to ISO's. The
aggregate fair market value (determined at the time of the grant of the ISO's)
of the stock with respect to which ISO's are exercisable for the first time by
an eligible employee during any calendar year (under all plans providing for the
grant of incentive stock options of the company or any of its subsidiaries)
shall not exceed one hundred thousand dollars ($100,000.00).
9. Sequence of Exercising Incentive Stock Options. Any ISO granted
to an employee pursuant to the plan shall be exercisable even if there are
outstanding previously granted but unexercised ISO's with respect to such
employee.
10. Early Termination of Option.
(a) Termination of Employment. All rights to exercise an option
shall terminate effective as of the day the optionee's employment terminates
unless such termination is "for cause" as defined in subparagraph (b) or is on
account of the permanent and total disability or death of the optionee (but not
later than the date the option expires pursuant to its terms). Transfer of
employment from the company to a corporation which is a subsidiary of the
company, or vice versa, or from one subsidiary to another, shall not be deemed
termination of employment. The committee shall have the authority to determine
in each case whether a leave of absence on military or government service shall
be deemed a termination of employment for purposes of this subparagraph.
(b) For Cause Termination. If an optionee's employment is
terminated for cause, no previously unexercised option granted hereunder may be
exercised. Rather, all unexercised options shall terminate effective on the date
the optionee receives notice of his termination for cause. As used in this plan,
"for cause" shall be defined as (i) the willful and continued failure of an
optionee to perform his required duties as an officer or employee of the company
or any subsidiary, (ii) action by an optionee involving willful misfeasance or
gross negligence, (iii) the requirement or direction of a federal or state
regulatory agency having jurisdiction over the company or any subsidiary to
terminate the employment of an optionee, (iv) conviction of an optionee of the
commission of any criminal offense involving dishonesty or breach of trust, or
(v) any intentional breach by an optionee of a material term, condition or
-3-
<PAGE> 4
covenant of any agreement of employment, termination or severance or any other
agreement between the optionee and the company or any subsidiary.
(c) Permanent and Total Disability or Death of Optionee. If an
optionee's employment terminates due to permanent and total disability or death,
his option shall terminate one (1) year after termination of his employment due
to his permanent and total disability or death (but not later than the date the
option expires pursuant to its terms). During such period, subject to the
limitations of the option grant, the optionee, his guardian, attorney-in-fact or
personal representative, as the case may be, may exercise the option in full. As
used herein, "permanent and total disability" shall have the meaning ascribed to
such term by Section 22(e)(3) of the Code.
(d) Change in Control or Death or Disability of Optionee. In the
event of a change in control of the company or upon the death or permanent and
total disability of the optionee, the options covered by such agreement may be
exercised in full without regard to any restrictions on the vesting of such
options contained in the option agreement between the company and the optionee.
11. Payment for Stock. Full payment for shares purchased shall be
made at the time of exercising the option in whole or in part. Such payment may
be made either (a) in cash or (b) at the discretion of the committee, by
delivering whole shares of common stock of the company (the "delivered stock")
or a combination of cash and delivered stock. Delivered stock shall be valued
by the committee at its fair market value determined as of the date of the
exercise of the option in accordance with the provisions of paragraph 5. No
shares shall be issued until full payment for them has been made, and an
optionee shall have none of the rights of a shareholder with respect to such
shares until such shares are issued to him. Upon payment of the full purchase
price, the company shall issue a certificate or certificates to the optionee
evidencing ownership of the shares purchased pursuant to the exercise of the
option which contain(s) such terms, conditions and provisions as may be
required and as are consistent with the terms, conditions and provisions of the
plan and the stock option agreement between the optionee and the company.
12. Income and Employment Tax Withholding.
(a) Payment by Optionee. The optionee shall be solely
responsible for paying to the company all required federal, state, city and
local taxes applicable to his (i) exercise of an NSO under the plan and (ii)
disposition of shares acquired pursuant to the exercise of an ISO in a
disqualifying disposition of the shares under Code Section 422(a)(1).
(b) NSO Tax Withholding. Notwithstanding the provisions of
subsection (a), with respect to stock to be issued pursuant to the exercise of
an NSO, the committee, in its discretion and subject to such rules as it may
adopt, may permit the optionee to satisfy, in whole or in part, any withholding
tax obligation which may arise in connection with the exercise of the NSO by
having the company retain shares of stock which would otherwise be issued in
-4-
<PAGE> 5
connection with the exercise of the NSO or accept delivery from the optionee of
shares of company stock which have a fair market value, determined as of the
date of the delivery of such shares, equal to the amount of the withholding tax
to be satisfied by that retention or delivery.
(c) ISO Disqualifying Disposition Tax Withholding.
Notwithstanding the provisions of subsection (a), with respect to shares of
stock to be issued pursuant to the exercise of any ISO, the committee, in its
discretion and subject to such rules as it may adopt, may permit the optionee to
satisfy, in whole or in part, any withholding tax obligation which may arise in
connection with the disqualifying disposition of the shares under Code Section
422(a)(1) by having the company accept delivery from the optionee of shares of
stock having a fair market value, determined as of the date of the delivery of
such shares, equal to the amount of the withholding tax to be satisfied by that
delivery.
13. Nontransferability. No option shall be transferable, except by
the optionee's will or the laws of descent and distribution. During the
optionee's lifetime, his option shall be exercisable (to the extent
exercisable) only by him. The option and any rights and privileges pertaining
thereto shall not be transferred, assigned, pledged or hypothecated by him in
any way, whether by operation of law or otherwise and shall not be subject to
execution, attachment, or similar process.
14. Changes in Stock.
(a) Subject to the provisions of paragraph 10(d), in the event
of any change in the common stock of the company through stock dividends,
split-ups, recapitalizations, reclassifications, conversions, or otherwise, or
in the event that other stock shall be converted into or substituted for the
present common stock of the company as the result of any merger, consolidation,
reorganization or similar transaction which results in a change in control of
the company, then the committee may make appropriate adjustment or substitution
in the aggregate number, price, and kind of shares available under the plan and
in the number, price and kind of shares covered under any options granted or to
be granted under the plan. The committee's determination in this respect shall
be final and conclusive. Provided, however, that the company shall not, and
shall not permit its subsidiaries to, recommend, facilitate or agree or consent
to a transaction or series of transactions which would result in a change of
control of the company unless and until the person or persons or entity or
entities acquiring or succeeding to the assets or capital stock of the company
or any of its subsidiaries as a result of such transaction or transactions
agrees to be bound by the terms of the plan so far as it pertains to options
theretofore granted but unexercised and agrees to assume and perform the
obligations of the company hereunder. Notwithstanding the foregoing provisions
of this paragraph 14(a), no adjustment shall be made which would operate to
reduce the option price of any ISO below the fair market value of the stock
(determined at the time the option was granted) which is subject to an ISO.
(b) Subject to the provisions of paragraph 10(d), in the event
of a change in control of the company pursuant to which another person or entity
acquires control of the company (such other person or entity being the
"successor"), the kind of shares of common stock
-5-
<PAGE> 6
which shall be subject to the plan and to each outstanding option, shall,
automatically by virtue of such change in control of the company, be converted
into and replaced by shares of common stock, or such other class of securities
having rights and preferences no less favorable than common stock of the
successor, and the number of shares subject to the option and the purchase price
per share upon exercise of the option shall be correspondingly adjusted, so
that, by virtue of such change in control of the company, each optionee shall
have the right to purchase (i) that number of shares of common stock of the
successor which have a fair market value equal, as of the date of such change in
control of the company, to the fair market value, as of the date of such change
in control, of the shares of common stock of the company theretofore subject to
his option, and (ii) for a purchase price per share which, when multiplied by
the number of shares of common stock of the successor subject to the option,
shall equal the aggregate exercise price at which the optionee could have
acquired all of the shares of common stock of the company theretofore optioned
to the optionee.
15. Use of Proceeds. The proceeds received by the company from the
sale of stock pursuant to the plan will be used for general corporate purposes.
16. Investment Representations. Unless the shares subject to an
option are registered under the Securities Act of 1933, each optionee in the
stock option agreement between the company and the optionee shall agree for
himself and his legal representatives that any and all shares of common stock
purchased upon the exercise of the option shall be acquired for investment and
not with a view to, or for sale in connection with, any distribution thereof.
Any share issued pursuant to an exercise of an option subject to this
investment representation shall bear a legend evidencing such restriction.
17. Amendment and Discontinuance. The Board of Directors may, at any
time, without the approval of the stockholders of the company, (except as
otherwise required by applicable law, rule or regulations, including without
limitation any shareholder approval of the safe harbor rule promulgated under
the Securities Exchange Act of 1934) alter, amend, modify, suspend, or
discontinue the plan, but may not, without the consent of the holder of an
option, make any alteration which would adversely affect an option previously
granted under the plan or, without the approval of the stockholders of the
company, make any alteration which would: (a) increase the aggregate number of
shares subject to options under the plan, except as provided in paragraphs 10(c)
and 14; (b) decrease the minimum option price, except as provided in paragraph
14; (c) permit any member of the committee to become eligible for options under
the plan; (d) withdraw administration of the plan from the committee or the
Board of Directors; (e) extend the term of the plan or the maximum period during
which any option may be exercised; (f) change the manner of determining the
option price; (g) change the class of individuals eligible for options under the
plan; or (h) without the consent of the holder of the option, alter or impair
any option previously granted under the plan.
18. Liability. No member of the Board of Directors, the committee or
officers or employees of the company or its subsidiaries shall be personally
liable for any action, omission or determination made in good faith in
connection with the plan.
-6-
<PAGE> 7
19. Effective Date and Duration. This plan shall become effective
upon its approval by a majority of the shares of common stock of the company.
Options may be granted under the Plan for a period of ten (10) years commencing
August 28, 1997, the date on which the Board of Directors approved the plan;
provided, however, that no option may be exercised until the plan has been
approved by the shareholders of the company, as provided in the first sentence
of this paragraph 19. No options shall be granted after August 27, 2007. Upon
such date, the plan shall expire except as to outstanding options and which
options and rights shall remain in effect until they have been exercised or
terminated or have expired. ISO's must be granted within ten (10) years of the
date the plan is adopted by the Board of Directors or approved by the
shareholders of the company, whichever is earlier.
20. Miscellaneous.
(a) The term "Board of Directors" used herein shall mean the
Board of Directors of the company, unless the context clearly requires
otherwise, and to the extent that any powers and discretion vested in the Board
of Directors are delegated to any committee of the Board of Directors, the term
"Board of Directors" shall also mean such committee.
(b) The term "subsidiary" or "subsidiaries" used herein shall
mean any banking institution or other corporation more than fifty percent (50%)
of whose total combined voting stock of all classes is held by the company or by
another corporation qualifying as a subsidiary within this definition.
(c) The term "change in control of the company" used herein
shall mean (i) any merger, consolidation or similar transaction which involves
the company or any subsidiary and in which persons who are the shareholders of
the company immediately prior to such transaction own, immediately after such
transaction, shares of the surviving or combined entity which possess voting
rights equal to or less than fifty percent (50%) of the voting rights of all
shareholders of such entity, determined on a fully diluted basis; (ii) any sale,
lease, exchange, transfer or other disposition of all or any substantial part of
the assets of the Company or any subsidiary; (iii) any tender, exchange, sale or
other disposition (other than dispositions of the stock of the company or any
subsidiary in connection with bankruptcy, insolvency, foreclosure, receivership
or other similar transactions) or purchases (other than purchases by the Company
or any company-sponsored employee benefit plan, or purchases by members of the
Board of Directors of the company or any subsidiary) of more than twenty-five
percent (25%) of the common stock of the company or any subsidiary; (iv) during
any period of two (2) consecutive years during the term of the plan specified in
paragraph 19, individuals who at the date of the adoption of the plan constitute
the Board of Directors cease for any reason to constitute at least a majority
thereof, unless the election of each director at the beginning of such period
has been approved by directors representing at least a majority of the directors
then in office who were directors on the date of the adoption of the plan; or
(v) a majority of the Board of Directors or a majority of the shareholders of
the company approve, adopt, agree to recommend, or accept any agreement,
contract, offer or other arrangement providing for, or any series of
transactions resulting in, any of the transactions described above.
Notwithstanding the foregoing, a change in
-7-
<PAGE> 8
control of the company shall not occur as a result of the issuance of stock by
the company in connection with any private placement offering of its stock or
any public offering of its stock.
* * * * * * * *
-8-
<PAGE> 9
AMENDED AND RESTATED AS OF: August 28, 1997.
BLUE RIVER BANCSHARES, INC.
By: /s/ ROBERT C. REED
---------------------
Its: President
---------------------
ATTEST:
/s/ D. WARREN ROBISON
- -----------------------------
Its: Secretary
-----------------------
-9-
<PAGE> 1
EXHIBIT 10.4
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"),
entered into this 16th day of March, 1998, and effective as of the 11th day of
August, 1997, by and between Blue River Bancshares, Inc., an Indiana corporation
("Employer"), and Robert C. Reed, a resident of Shelby County, Indiana
("Employee"), being parties to a certain Employment Agreement dated August 11,
1997 (the "Prior Agreement"), agree to amend and restate the Prior Agreement in
its entirety to read as follows:
WITNESSETH
WHEREAS, Employer desires to encourage Employee to make valuable
contributions to Employer's business operations and not to seek or accept
employment elsewhere;
WHEREAS, Employee desires to be assured of a secure minimum
compensation from Employer for his services over a defined term;
WHEREAS, Employer desires to assure the continued services of employee
on behalf of Employer on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt by any person to
obtain control of Employer;
WHEREAS, Employer recognizes that when faced with a proposal for a
change of control of Employer, Employee will have a significant role in helping
the Board of Directors assess the options and advising the Board of Directors on
what is in the best interests of Employer and its shareholders, and it is
necessary for Employee to be able to provide this advice and counsel without
being influenced by the uncertainties of his own situation;
WHEREAS, Employer desires to provide fair and reasonable benefits to
Employee on the terms and subject to the conditions set forth in this Agreement;
and
WHEREAS, Employer desires reasonable protection of its confidential
business and customer information which it will develop over the years at
substantial expense and assurance that Employee will not compete with Employer
for a reasonable period of time after termination of his employment with
Employer, except as otherwise provided herein.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and undertakings herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Employer and Employee, each intending to be legally bound, covenant and agree as
follows:
1. Upon the terms and subject to the conditions set forth in this
Agreement, Employer employs Employee as Employer's President and Chief Executive
Officer, and Employee accepts such employment.
2. Employee agrees to serve as Employer's President and Chief
Executive Officer and to perform such duties in that office as may reasonably
be assigned to him by Employer's Board of
<PAGE> 2
Directors; provided, however that such duties shall be performed in or from the
principal executive offices of Employer, currently located in Shelbyville,
Indiana, and shall be of the character as those generally associated with the
office of President and Chief Executive Officer. Employee shall not be required
to be absent from the location of the principal executive offices of employer on
travel status or otherwise more than 45 days in any calendar year. Employer
shall not, without the written consent of Employee, relocate or transfer
Employee to a location more than 30 miles from his principal residence. Although
while employed by Employer, Employee shall devote substantially all his business
time and efforts to Employer's business and shall not engage in any other
related business, Employee may use his discretion in fixing his hours and
schedule of work consistent with the proper discharge of his duties. Employer
shall nominate the Employee to successive terms as a member of Employer's Board
of Directors and shall use its best efforts to elect and re-elect Employee as a
member of such Board.
3. The term of this Agreement shall begin on August 11 1997 (the
"Effective Date") and shall end on the date which is three years following such
date; provided, however, that such term shall be extended automatically for an
additional year on each anniversary of the Effective Date, unless either party
hereto gives written notice to the other party not to so extend prior to an
anniversary, in which case no further automatic extension shall occur and the
term of this Agreement shall end two years subsequent to the anniversary as of
which the notice not to extend for an additional year is given (such term,
including any extension thereof shall herein be referred to as the "Term").
Notwithstanding the foregoing, this Agreement shall automatically terminate (and
the Term of this Agreement shall thereupon end) without notice when Employee
attains 65 years of age.
4. Employee shall receive an annual minimum salary of $110,000.00
("Base Compensation") payable at regular intervals in accordance with Employer's
normal payroll practices in effect from time to time Employer may consider and
declare from time to time increases in the salary it pays Employee and thereby
increases in his Base Compensation. After a Change in Control, Employer shall
consider and declare such salary increases based upon the following standards:
Inflation;
Adjustments to the salaries of other senior management
personnel; and
Past performance of Employee and the contribution which
Employee makes to the business and profits of Employer during
the Term.
Any and all increases in Employee's salary pursuant to this section shall cause
the level of Base Compensation to be increased by the amount of each such
increase for purposes of this Agreement. The increased level of Base
Compensation as provided in this section shall become the level of Base
Compensation for the remainder of the Term of this Agreement until there is a
further increase in Base Compensation as provided herein. Employee shall not
receive directors fees for his services as a director of Employer or any of the
Employer's subsidiaries, and any committees of the Boards of Directors.
-2-
<PAGE> 3
5. During the term of this Agreement, Employee shall be entitled
to participate in or receive benefits under (i) any life, health,
hospitalization, medical, dental, disability or other insurance policy or plan,
(ii) pension, retirement or employee stock ownership plan, (iii) bonus or
profit-sharing plan or program, (iv) deferred compensation plan or arrangement,
and (v) any other employee benefit plan, program or arrangement, made available
by Employer on the date of this Agreement and from time to time in the future
to Employer's directors, officers and employees on a basis consistent with the
terms, conditions and overall administration of the foregoing plans, programs
or arrangements and with respect to which Employee is otherwise eligible to
participate or receive benefits. Employee shall be entitled to a Country Club
membership and a car allowance.
6. (a) So long as Employee is employed by Employer pursuant to
this Agreement, Employee shall receive reimbursement from Employer for all
reasonable business expenses incurred in the course of his employment by
Employer, upon submission to Employer of written vouchers and statements for
reimbursement. Employee shall attend, at his discretion, those professional
meetings, conventions, and/or similar functions that he deems appropriate and
useful for purposes of keeping abreast of current developments in the industry
and/or promoting the interests of Employer.
(b) So long as Employee is employed by Employer pursuant to
this Agreement, Employee shall be entitled to office space and working
conditions consistent with his position as President and Chief Executive
Officer. During the term of this Agreement, Employee shall be entitled to five
(5) weeks per calendar year of paid vacation, which shall be utilized at such
times when his absence will not materially impair Employer's normal business
functions. Any unused vacation time in any calendar year may be carried over
and must be used prior to March 31 of the succeeding calendar year. If any
unused vacation time is not used by March 31 of the succeeding calendar year,
such unused vacation time shall lapse, and Employee shall not be entitled to
any additional compensation for any such unused and lapsed vacation time. In
addition to the vacation described above, Employee also shall be entitled to
all paid holidays customarily given by Employer to its officers.
(c) During the Term, Employer shall provide Employee with an
automobile (the size, make and model which is mutually agreeable to Employer
and Employee) for use in performing his duties under this Agreement. Such
automobile shall be replaced no less frequently than intervals of every three
(3) years during the Term, and all replacement automobiles shall be of
comparable size, make and model to that of the initial automobile agreed to by
Employer and Employee. All maintenance, repairs, insurance, fuel, taxes and
license plate fees on such automobile shall be paid by Employer. Employee's use
of the automobile will be consistent with applicable requirements and
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
(d) During the Term, Employee shall be provided with a family
membership at the Elks Country Club, and all membership fees, dues and
assessments shall be paid by Employer so long as Employee utilizes such
membership primarily in furtherance of his duties under this Agreement.
-3-
<PAGE> 4
7. Subject to the respective continuing obligations of the
parties, including but not limited to those set forth in subsections 9(A),
9(B), 9(C), and (D) hereof, Employee's employment by Employer may be terminated
prior to the expiration of the Term of this Agreement as follows:
(A) Employer, by action of its Board of Directors and upon written
notice to Employee, may terminate Employee's employment with
Employer immediately for cause. For purposes of this
subsection 7(A), "cause" shall be defined as (i) personal
dishonesty, (ii) incompetence, (iii) willful misconduct, (iv)
breach of fiduciary duty involving personal profit, (v)
intentional failure to perform stated duties, (vi) willful
violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order, or (vii) any material breach of any term, condition or
covenant of this Agreement.
(B) Employer, by action of its Board of Directors, may terminate
Employee's employment with Employer without cause at any time;
provided, however, that the "date of termination" for purposes
of determining benefits payable to Employee under subsection
8(B) hereof shall be the date which is 30 days after Employee
receives written notice of such termination.
(C) Employee, by written notice to Employer, may terminate his
employment with Employer immediately for cause. For purposes
of this subsection 7(C), "cause" shall be defined as (i) any
action by Employer's Board of Directors to remove the Employee
as President and Chief Executive Officer of Employer, except
where the Employer's Board of Directors properly acts to
remove Employee from such office for "cause" as defined in
subsection 7(A) hereof, (ii) any action by Employer's Board of
Directors to materially limit, increase, or modify Employee's
duties and/or authority as President and Chief Executive
Officer of Employer (including his authority, subject to
corporate controls no more restrictive than those in effect on
the date hereof, to hire and discharge employees who are not
bona fide officers of Employer), (iii) any failure of Employer
to obtain the assumption of the obligation to perform this
Agreement by any successor, as contemplated in section 18
hereof; or (iv) any intentional breach by Employer of a term,
condition or covenant of this Agreement.
(D) Employee, upon sixty (60) days written notice to Employer, may
terminate his employment with Employer without cause.
(E) Employee's employment with Employer shall terminate in the
event of Employee's death or disability. For purposes hereof,
"disability" shall be defined as Employee's inability by
reason of illness or other physical or mental incapacity to
perform the duties required by his employment for any
consecutive One Hundred Eighty (180) day period, provided that
notice of any termination by Employer because of Employee's
"disability" shall have been given to Employee prior to the
full resumption by him of the performance of such duties.
-4-
<PAGE> 5
8. In the event of termination of Employee's employment with
Employer pursuant to section 7 hereof, compensation shall continue to be paid
by Employer to Employee as follows:
(A) In the event of termination pursuant to subsection 7(A) or
7(D), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through such
date shall be paid when due under those plans. The date of
termination specified in any notice of termination pursuant to
subsection 7(A) shall be no later than the last business day
of the month in which such notice is provided to Employee.
(B) In the event of termination pursuant to subsection 7(B) or
7(C), compensation provided for herein (including Base
Compensation) shall continue to be paid, and Employee shall
continue to participate in the employee benefit, retirement,
and compensation plans and other perquisites as provided in
sections 5 and 6 hereof, through the date of termination
specified in the notice of termination. Any benefits payable
under insurance, health, retirement and bonus plans as a
result of Employee's participation in such plans through such
date shall be paid when due under those plans. In addition,
Employee shall be entitled to continue to receive from
Employer at his Base Compensation at the rates in effect at
the time of termination (1) for three additional 12-month
periods (or such shorter period as shall constitute the
remaining Term of the Agreement) if the termination follows a
Change of Control or (2) for two additional 12-month periods
(or such shorter period as shall constitute the remaining Term
of the Agreement) if the termination does not follow a Change
of Control. In addition, during such periods, Employer will
maintain in full force and effect for the continued benefit of
Employee each employee welfare benefit plan (as such term is
defined in the Employee Retirement Income Security Act of
1974, as amended) in which Employee was entitled to
participate immediately prior to the date of his termination,
unless an essentially equivalent and no less favorable benefit
is provided by a subsequent employer of Employee. If the terms
of any employee welfare benefit plan of Employer do not permit
continued participation by Employee, Employer will arrange to
provide to Employee a benefit substantially similar to, and no
less favorable than, the benefit he was entitled to receive
under such plan at the end of the period of coverage. For
purposes of this Agreement, a "Change of Control" shall mean a
change in control not approved in advance by the Board of
Directors of a nature which would be required to be reported
in response to Item 5(f) of Schedule 14A promulgated under the
Securities Exchange Act of 1934, as amended, or any merger
tender offer, consolidation or sale of substantially all of
the assets of Employer, or related series of such events, as a
result of which: (i) shareholders of Employer immediately
prior to such event hold less than 50% of the outstanding
voting securities of Employer or its survivor or successor
-5-
<PAGE> 6
immediately after such event; or (ii) persons holding less
than 20% of such securities before such event own more than
50% of such securities after such event; or (iii) persons
constituting a majority of the board of Directors were not
directors of Employer for at least 24 preceding months.
(C) In the event of termination pursuant to subsection 7(E),
compensation provided for herein (including Base Compensation)
shall continue to be paid, and Employee shall continue to
participate in the employee benefit, retirement, and
compensation plans and other perquisites as provided in
sections 5 and 6 hereof, (i) in the event of Employee's death,
through the date of death, or (ii) in the event of Employee's
disability, through the date of proper notice of disability as
required by subsection 7(E). Any benefits payable under
insurance, health, retirement and bonus plans as a result of
Employer's participation in such plans through such date shall
be paid when due under those plans.
(D) Employer will permit Employee or his personal representative(s) or
heirs, during a period of three months following Employee's termination of
employment (as specified in the notice of termination) by Employer for the
reasons set forth in subsections 7(B) or (C), if such termination follows a
Change of Control, to require Employer, upon written request, to purchase all
outstanding stock options previously granted to Employee under any Employer
stock option plan then in effect whether or not such options are then
exercisable or have terminated at a cash purchase price equal to the amount by
which the aggregate "fair market value" of the shares subject to such options on
the date of termination specified in the notice of termination exceeds the
aggregate option price for such shares. For purposes of this Section 8(D), "fair
market value" shall mean between the reported closing bid and ask prices for the
shares of common stock of the Company as quoted by the North American Securities
Dealer Automated Quotation System ("NASDAQ"). If the common stock of the
Employer is not quoted on NASDAQ, the fair market value shall be determined by
the Compensation Committee of the Board based upon quotations of the entities
which make a market in the Company's stock. In the event no entities make a
market in the Company's stock, "fair market value" shall mean the amount agreed
upon by the Employee and the Company. If the Employee and the Company are unable
to reach an agreement regarding the fair market value of the stock within ten
(10) days of the date of termination specified in the notice of termination,
then the Employee and the Company shall each select an appraisal firm and the
two firms shall determine the fair market value of the Employee's stock. If the
two appraisal firms cannot agree upon the value within thirty (30) days of their
appointment, they shall appoint a third appraiser, the decision of a majority of
the three (3) appraisers shall be final and binding on the Employee and the
Company; provided, however, the Employee may elect, by notifying the Company
within thirty (30) days after the date of termination specified in the notice of
termination, to have the following definition of "fair market value" apply for
purposes of this Section 8(D): the per share book value of the Company's stock,
calculated in accordance with generally accepted accounting principles as of the
last day of the month coinciding with or immediately preceding the date of
termination as specified in the notice of termination. The costs of any
appraisals shall be paid one-half by the Employer and one-half by the Employee
or his personal representative(s) or heirs, as the case may be.
-6-
<PAGE> 7
9. In order to induce Employer to enter into this Agreement,
Employee hereby agrees as follows:
(A) While Employee is employed by Employer and for a period of
three years after termination of such employment for reasons
other than those set forth in subsections 7(B) or (C) of this
Agreement, Employee shall not divulge or furnish any trade
secrets (as defined in IND. CODEss.24-2-3-2) of Employer or
any confidential information acquired by him while employed by
Employer concerning the policies, plans, procedures or
customers of employer to any person, firm or corporation,
other than Employer or upon its written request, or use any
such trade secret or confidential information directly or
indirectly for Employee's own benefit or for the benefit of
any person, firm or corporation other than Employer, since
such trade secrets and confidential information are
confidential and shall at all times remain the property of
Employer.
(B) For a period of three years after termination of Employee's
employment by Employer for reasons other than those set forth
in subsections 7(B) or (C) of this Agreement, Employee shall
not directly or indirectly provide banking or bank-related
services to or solicit the banking or bank-related business of
any customer of Employer at the time of such provision of
services or solicitation which Employee served either alone or
with others while employed by Employer in any city, town,
borough, township, village or other place in which Employee
performed services for Employer while employed by it, or
assist any actual or potential competitor of Employer to
provide banking or bank-related services to or solicit any
such customer's banking or bank- related business in any such
place.
(C) While Employee is employed by Employer and for a period of one
year after termination of Employee's employment by Employer
for reasons other than those set forth in subsections 7(B) or
(C) of this Agreement, Employee shall not, directly or
indirectly, as principal, agent, or trustee, or through the
agency of any corporation, partnership, trade association,
agent or agency, engage in any banking or bank- related
business or venture which competes with the business of
Employer as conducted during Employee's employment by Employer
within a radius of fifty (50) miles of Employer's main office.
(D) If Employee's employment by Employer is terminated for reasons
other than those set forth in subsections 7(B) or (C) of this
Agreement, Employee will turn over immediately thereafter to
Employer all business correspondence, letters, papers,
reports, customers' lists, financial statements, credit
reports or other confidential information or documents of
Employer or its affiliates in the possession or control of
Employee, all of which writings are and will continue to be
the sole and exclusive property of Employer or its affiliates.
-7-
<PAGE> 8
If Employee's employment by Employer is terminated during the Term of this
Agreement for reasons set forth in subsections 7(B) or (C) or this Agreement,
Employee shall have no obligations to Employer with respect to trade secrets,
confidential information or noncompetition under this section 9.
10. Any termination of Employee's employment with Employer as
contemplated by section 7 hereof, except in the circumstances of Employee's
death, shall be communicated by written "Notice of Termination" by the
terminating party to the other party hereto. Any "Notice of Termination"
pursuant to subsections 7(A), 7(C) or 7(E) shall indicate the specific
provisions of this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
11. If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Employer's or any affiliates' affairs by a
notice served under section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. ss. 1818(e)(3) and (g)(1)), Employer's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, Employer
shall (i) pay employee all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
12. If Employee is removed and/or permanently prohibited from
participating in the conduct of Employer's or any affiliates' affairs by an
order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act (12 U.S.C. ss. 1818(e)(4) or (g)(1)), all obligations of Employer under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the parties to the Agreement shall not be affected. If Employer is in
default (as defined in section 3(x)(1) of the Federal Deposit Insurance Act),
all obligations under this Agreement shall terminate as of the date of default,
but this provision shall not affect any vested rights of Employer or Employee.
13. All obligations under this Agreement may be terminated except
to the extent determined that the continuation of the Agreement is necessary
for the continued operation of Employer by order of any state or federal
banking regulatory with agency supervision of the Employer or any of its
affiliates, unless stayed by appropriate proceedings.
14. If a dispute arises regarding the termination of Employee
pursuant to section 7 hereof or as to the interpretation or enforcement of this
Agreement and Employee obtains a final judgment in his favor in a court
of competent jurisdiction or his claim is settled by Employer prior to the
rendering of a judgment by such a court, all reasonable legal fees and expenses
incurred by Employee is contesting or disputing any such termination or seeking
to obtain or enforce any right or benefit provided for in this Agreement or
otherwise pursuing his claim shall be paid by Employer, to the extent permitted
by law.
15. Should Employee die after termination of his employment with
Employer while any amounts are payable to him hereunder, this Agreement shall
inure to the benefit of and be
-8-
<PAGE> 9
enforceable by Employee's executors, administrators, heirs, distributees,
devisees and legatees and all amounts payable hereunder shall be paid in
accordance with the terms of this Agreement to Employee's devisee, legatee or
other designee or, if there is no such designee, to his estate.
16. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Employee: Mr. Robert C. Reed
471 Locust Drive
Morristown, Indiana 46161
If to Employer: Blue River Bancshares, Inc.
103 West Washington Street
Shelbyville, Indiana 46176
or to such other address as either party hereto may have furnished to the other
party in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
17. The validity, interpretation, and performance of this
Agreement shall be governed by the laws of the State of Indiana.
18. Employer shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of Employer, by agreement in form
and in substance satisfactory to Employee to expressly assume and agree
to perform this Agreement in the same manner and same extent that Employer
would be required to perform it if no such succession had taken place. Failure
of Employer to obtain such agreement prior to the effectiveness of any such
succession shall be a material intentional breach of this Agreement and shall
entitle Employee to terminate his employment with Employer pursuant to
subsection 7(C) hereof. As used in this Agreement, "Employer" shall mean
Employer as hereinbefore defined and any successor to its business or assets as
aforesaid.
19. No provision of this agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Employee and Employer. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a wavier of dissimilar provisions or conditions at the same or any prior
subsequent time. No agreements or representation, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
20. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and effect.
-9-
<PAGE> 10
21. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same agreement.
22. This Agreement is personal in nature and neither party hereto
shall, without consent of the other, assign or transfer this Agreement or any
rights or obligations hereunder except as provided in section 15 and section 18
above. Without limiting the foregoing, Employee's right to receive compensation
hereunder shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by his will or by the
laws of descent or distribution as set forth in section 14 hereof, and in the
event of any attempted assignment or transfer contrary to this paragraph,
Employer shall have no liability to pay any amounts so attempted to be assigned
or transferred. This Agreement shall be assigned to a yet-to-be formed
subsidiary of the Company, if and when the Company commences operations of a
financial institution through such subsidiary. The Company shall guarantee
obligations of such subsidiary hereunder.
23. Anything in this Agreement to the contrary notwithstanding
in the event Employer's independent public accountants determine that any
payment by Employer to or for the benefit of Employee, whether paid or
payable pursuant to the terms of this Agreement, would be non-deductible by
employer for federal income tax purposes because of Section 280G of the Code,
then the amount payable to or for the benefit of Employee pursuant to the
Agreement shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Section 23, the "Reduced Amount" shall be the amount which
maximizes the amount payable without causing the payment to be non-deductible
by Employer because of Section 280G of the Code.
* * * * * *
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties have caused the Agreement to be
executed and delivered as of the 11th day of August, 1997.
BLUE RIVER BANCSHARES, INC.
By:/s/STEVEN R. ABEL
----------------------
Steven R. Abel, Chairman
"Employer"
/s/ROBERT C. REED
-----------------------
Robert C. Reed
"Employee"
-11-
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-48269 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 such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
June 5, 1998
<PAGE> 1
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
June 8, 1998
<PAGE> 1
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/ WENDELL L. BERNARD
- --------------------------------------
Director
Printed Name Wendell L. Bernard
-------------------------
Dated: June 5, 1998
<PAGE> 2
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/ RALPH W. VAN NATTA
- -------------------------------------
Director
Printed Name Ralph W. Van Natta
-------------------------
Dated: June 5, 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.
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-18-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,001
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 103,197
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 201,987
<LONG-TERM> 0
0
0
<COMMON> 18,000
<OTHER-SE> (116,790)
<TOTAL-LIABILITIES-AND-EQUITY> 103,197
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<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
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANTS
FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001055870
<NAME> BLUE RIVER BANCSHARES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,318
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 350,208
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 506,341
<LONG-TERM> 0
0
0
<COMMON> 18,000
<OTHER-SE> (174,133)
<TOTAL-LIABILITIES-AND-EQUITY> 350,208
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 57,343
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,343)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
