Form 10-KSB for Blue River Bancshares, Inc. filed on March 31, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal
year ended December 31, 1998.
[ ] Transition report under Section 13 or 15 (d) of The
Securities Exchange Act of 1934 for the transition
period from ______to _____
COMMISSION FILE NUMBER 0-24501
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BLUE RIVER BANCSHARES, INC.
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(Name of small business issuer in its charter)
Indiana 35-2016637
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
29 E. Washington St., Shelbyville, Indiana 46176
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (317) 398-9721
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Securities to be registered under Section 12 (b) of the Act: None.
Securities to be registered under Section 12 (g) of the Act:
Common Stock, No Par Value
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(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's net interest income for the six months ended December 31, 1998:
$2,004,000.
State the aggregate market value of the voting and non-voting common stock held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked price of such common stock, as of a specified
date within the past 60 days (See definition of affiliate in Rule 12b-2 of the
Exchange Act): The aggregate market value of the voting common stock of the
issuer held by non-affiliates, based upon the price of a share of common stock
as quoted on the Small-Cap Issues Market of NASDAQ on February 26, 1999 was
$10,796,373.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,490,870.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are incorporated
by reference, briefly describe them and identify the part of the Form 10-KSB
(e.g. Part I, Part II, etc.) into which the document is incorporated: (1) any
annual report to security holders; (2) any proxy or information statement; (3)
any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933 ("Securities Act"). The listed documents should be clearly described for
identification purposes (e.g. annual report to security holders for fiscal year
ended December 31, 1998). The Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held May 27, 1999 is incorporated by reference
into Part III hereof, and the Annual Report of Shareholders for the year ended
December 31, 1998 is incorporated by reference into Part II hereof.
Transitional Small Business Disclosure Format: Yes No X
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Form 10-KSB Table of Contents
Part I Page
Item 1 - Description of Business....................................... 4
Item 2 - Legal Proceedings............................................. 21
Item 3 - Description of Properties..................................... 21
Item 4 - Submission of Matters to a Vote of Security Holders........... 22
Part II
Item 5 - Market for Common Equity and Related Stockholder Matters...... 22
Item 6 - Management's Discussion and Analysis or Results of Operation
Results of Operation...................................... 23
Item 7 - Financial Statements.......................................... 23
Item 8 - Changes in and Disagreements with Accountants on Accounting
and financial Disclosure.................................. 23
Part III
Item 9 - Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act......... 23
Item 10 - Executive Compensation........................................ 23
Item 11 - Security Ownership of Certain Beneficial Owners and
Management............................................... 23
Item 12 - Certain Relationships and Related Transactions................ 24
Item 13 - Exhibits, Financial Statements Schedules and
Reports on Form 8-K...................................... 24
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Part I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Blue River Bancshares, Inc. (the "Successor", "Company" or "Blue River") 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 an Agreement of Affiliation and Merger (the "Merger Agreement") with Shelby
County Bancorp ("SCB" or the "Predecessor") and Shelby County Savings Bank (the
"Bank") pursuant to which the Company would acquire the Bank through the merger
of SCB into the Company (the "Merger").
On June 26, 1998, the Successor completed a successful public offering of
1,500,000 new common shares at a price of $12 per share and acquired the Bank
pursuant to the Merger Agreement.
In December 1998, the Bank announced its intention to expand into the Fort
Wayne, Indiana market. These operations will be conducted as First Community
Bank of Fort Wayne. The Bank has filed the necessary application with its
primary banking regulator and expects to begin operations in the second quarter
of 1999, subject to approval of the application.
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. The three
largest financial institutions in Fort Wayne, Indiana have been acquired by
other financial institutions headquartered outside of Fort Wayne, Indiana.
Accordingly, management of the Company believes that a locally-managed bank
located in Shelbyville and Fort Wayne 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 changed 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 is to offer,
primarily in Shelby County and Allen County, a wide range of basic banking
products and services that are reasonably priced and easily understood by the
customer. The Bank's commercial strategy centers on small to medium-sized
businesses.
The Company's business strategy is 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 includes the following:
o Increase the volume of commercial lending. The Company has expanded
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.
o 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.
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o Increase the volume of consumer lending. The Bank has begun
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 is also
"cross-selling" the Bank's consumer loan products, including home
equity loans, to its existing mortgage and other customers.
o Increase deposits. The Bank has expanded its 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.
Regulatory Matters at the Bank Prior to Acquisition
In April and May, 1998 and prior to the acquisition of the Bank by the Company,
the Office of Thrift Supervision ("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
Business Consultants ("Pyramid"), a financial institutions consulting firm.
On May 6, 1998, the Bank received a letter from the OTS indicating that the
former 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
failed 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 made an additional provision to its allowance for loan
losses reserve of $375,000 for the quarter ended March 31, 1998. This provision
was consistent with the estimates of the Company. In compliance with the OTS
letter, the Bank determined to cease all such lending while the transaction was
pending and until approval to re-establish such lending was granted by the OTS.
The Company 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 replaced the officer of the
Bank who was responsible for commercial lending. In addition, all former Bank
directors were replaced by the Company's directors. Second, the Company engaged
Pyramid to conduct reviews of the commercial real estate and commercial loan
portfolio. Third, the Company, in consultation with Pyramid, drafted and
implemented a comprehensive loan policy for the Bank which specifically
addresses the concerns expressed by the OTS. Fourth, the Company 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.
On June 26, 1998 (the effective date of the Merger), the OTS lifted the
restrictions on commercial real estate and commercial lending at the Bank.
Following the Merger, the Bank, with the assistance of Pyramid, completed its
comprehensive review of the commercial loan portfolio which resulted in certain
credits being restructured, redocumented and recollateralized.
Environmental Matters Relating to St. Paul Property
In August 1993, the Bank 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
Bank engaged 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, the Bank sold a portion of the St. Paul property to a resident of St.
Paul, Indiana for nominal consideration. The Bank apprised the buyer of the
environmental matters relating to the real estate sold, and the buyer released
and indemnified the Bank 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
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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.
Prior to the acquisition, the Bank agreed with the Company in April, 1998 to
begin the process of submitting the St. Paul branch location into Indiana's
Voluntary Remediation Program (the "VRP"). Again, the Bank engaged an
environmental consultant to assist it in this process. 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
groundwater. 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 were believed to be immaterial. The Bank
charged to expense approximately $150,000 in its income statement for the period
ended March 31, 1998.
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, during
the Summer of 1998 and following the Merger, performed additional testing on the
portion of the St. Paul property still owned by the Bank. These tests confirmed
the presence of diesel or fuel oil and gasoline constituents in the groundwater.
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 (which is recorded) 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. Based upon the extent of
the contamination found during the Summer of 1998, the Bank's environmental
consultant revised its estimate for completion of the project. On November 17,
1998 the Bank's environmental consultant estimated that the total cost for
completion of the VRP, including the remediation prior to entering the VRP, is
$238,000 plus any costs incurred by IDEM which are believed to be immaterial.
The additional cost associated with the VRP have been added to the Company's
goodwill resulting from the Merger and will be amortized over a 15 year period.
There can be no assurance that the Bank will successfully complete the VRP or
that the cost relating to the VRP will not exceed $238,000 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.
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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. The
Bank's primary service area is 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, 1998, the preliminary unemployment rate for Shelby
County was 3.2%, compared with the statewide average for 1998 of approximately
3.1%, according to the Bureau of Labor Statistics.
The Fort Wayne Bank's primary service area will be Allen County, Indiana,
including Fort Wayne and its suburbs. Fort Wayne, Indiana is within a 250-mile
radius of 17% of the total United States population. Allen County covers 659
square miles and ranks second in population out of Indiana's 93 counties. As of
July 1998, Allen County had approximately 10,300 businesses and an unemployment
rate of approximately 3.0%. 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.
Allen County is a significant banking market in Indiana. Total deposits in Allen
County, including banks, thrifts and credit unions, were approximately $4.8
billion as of June 30, 1998, the latest date for which data are available.
The Company's address is 29 East Washington Street, P.O. Box 927,
Shelbyville, Indiana 46176 and its telephone number is (317) 398-9721.
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 Federal Deposit Insurance Corporation ("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, Inc., 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.
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Employees
As of December 31, 1998, the Bank employed 39 persons on a full-time basis and 7
persons on a part-time basis and the Company employed 6 persons on a part-time
basis and 0 persons on a full-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 Company and the Bank face strong competition for deposits, loans and other
financial services from numerous Indiana and out-of-state banks, thrifts, credit
unions and other financial institutions as well as other entities which provide
financial services, including consumer finance companies, securities brokerage
firms, mortgage brokers, equipment leasing companies, insurance companies,
mutual funds, and other lending sources and investment alternatives. Some of the
financial institutions and financial services providers with which the Bank
competes are not subject to the same degree of regulation as the Bank. Many of
the financial institutions aggressively compete for business in the Bank's
market areas. Many of these competitors have been in business for many years,
have established customer bases, have substantially higher lending limits than
the Bank, 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.
Taxation
Federal Taxation. The Company and the Bank will file a consolidated federal
income tax return on the accrual basis for each calendar year ending December
31. The consolidated federal income tax return has the effect of eliminating
intercompany distributions, including dividends, in the computation of
consolidated taxable income. Income of the Company 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 the Company 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 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
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operating loss carryovers, but alternative minimum tax paid that is attributable
to most preferences (although not to post-August 7, 1986 tax-exempt interest)
can be credited against regular tax due in later years.
On August 20, 1996, the "Small Business Job Protection Act of 1996" was passed
into law. One provision of this act repeals the special bad debt reserve method
for thrift institutions currently provided for in Section 593 of the Code The
provision requires thrifts to recapture any reserves accumulated after 1987 but
generally forgives taxes owed. Thrift institutions have been given six years to
account for the recaptured excess reserves, beginning with the first taxable
year after 1995, and are permitted to delay the timing of this recapture for one
or two years subject to whether they meet certain residential loan test
requirements.
Income of the Bank appropriated to bad debt reserves and deducted for federal
income tax purposes is not available for payment of cash dividends or other
distributions to the Company without the payment of federal income taxes by the
Bank on the amount of such income deemed removed from the reserves at the
then-current income tax rate. At December 31, 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
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued and is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a hedge of
foreign currency exposure. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Management has not yet fully evaluated
the effect of the new standard if any, on the financial statements.
The acquisition of SCB and the Bank by the Company was accounted for by using
the purchase method of accounting. Under the purchase method of accounting, all
of the assets and liabilities of SCB and the Bank 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 accreted into or amortized against
income over the expected economic lives of the related assets and liabilities.
The purchase price for the Predecessor and the Bank will exceed the net fair
value of the assets acquired and the liabilities assumed in the acquisition of
SCB and the Bank by at least $3.2 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.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Bank's computer
programs and those of third-party computer related providers may recognize a
date using "00" as the year 1900 rather than the year 2000. This situation could
result in system failures or miscalculations causing disruption of operations
that could affect the ability of the Bank to operate effectively and service
customers.
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I. THE BANK'S STATE OF READINESS
The Bank is preparing for the year 2000 by testing and evaluating both its
information technology (IT) and non-information technology systems. The Bank
does not have any mission critical processes that are dependent on non-IT
systems. The non-IT systems, such as the telephone system, are either currently
compliant or are expected to be compliant in the fiscal year 1999. The IT
systems used by the Bank have been or are being tested. The components of the IT
systems being examined are: personal computers (hardware and software), data
service bureau, and other service providers.
In 1998, a comprehensive project plan to address the Year 2000 issue as it
relates to the Bank's operation was developed, approved by the Board of
Directors and implemented. The scope of the plan includes phases of Awareness,
Assessment, Renovation, Validation, and Implementation as defined by federal
banking regulatory agencies. The Bank's project team consists of key members of
the technology staff, representatives of functional business units, and senior
management. The project team estimates that the Bank's Year 2000 readiness
project is 75% complete and that activities involved in assessing external risks
and operational issues are 90% complete overall. The following table provides a
summary of the current status of the five phases involved in Year 2000 readiness
and a projected timetable for completion as of December 31, 1998:
PERCENTAGE PROJECTED
PROJECT PHASE COMPLETED COMPLETION COMMENTS
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Awareness 100% Completed
Assessment 100% Completed
Renovation 90% March 31, 1999
Validation 75% March 31, 1999
Implementation 50% June 30, 1999
An assessment of the impact of the Year 2000 issue on the Bank's computer
systems has been completed. The scope of the project also includes other
operational and environmental systems since they may be impacted if embedded
computer chips control the functionality of those systems. From the assessment,
the Bank has identified and prioritized those systems deemed to be mission
critical or those that have a significant impact on normal operations.
The Bank relies on third party vendors and service providers for its data
processing capabilities and to maintain its computer systems. Formal
communications with these providers were initiated in 1998 to assess the Year
2000 readiness of their products and services. Their progress in meeting their
targeted schedules is being monitored for any indication that they may not be
able to address the problems in time. Thus far, responses indicate that most of
the significant providers currently have compliant versions available or are
well into the renovation and testing phases with completion schedule for the
first quarter of 1999.
Additionally, the Bank has implemented a plan to manage the potential risk
imposed by the impact of the Year 2000 issue on its major customers. Formal
communications were initiated, and the assessment was significantly completed by
December 31, 1998.
II. THE COSTS TO ADDRESS THE BANK'S YEAR 2000 ISSUES
The Bank has thus far primarily used and expects to continue to primarily use
internal resources to implement its readiness plan and to upgrade or replace and
test systems affected by the Year 2000 issue. The total cost to the Bank of
those Year 2000 compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
In total, the Bank estimates that its costs, excluding personnel expenses, for
Year 2000 remediation and testing of its computer systems will amount to less
than $60,000 over the eighteen month period from 1998 through 2000. Not included
in this estimate is the cost to replace fully depreciated systems during
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this period, which occurs in the normal course of business and is not directly
attributable to the Year 2000 issue.
The costs and the estimated timing in which the Bank plans to complete the Year
2000 readiness activities are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party readiness plans and other
factors. The Bank can make no guarantee that these estimates will be achieved,
and actual results could differ from such plans.
III. THE RISKS OF THE BANK'S YEAR 2000 ISSUES
The Bank is substantially dependent upon the services of Intrieve, Incorporated
of Cincinnati, Ohio. Intrieve is a provider of data processing services for
financial institutions throughout the United States. Intrieve is concentrating
on Year 2000 preparedness, including a recent migration to a new processing
system upon which testing is currently being conducted. A proxy test was
concluded in October 1998 with results soon to be released to client
institutions for their review. The Bank continues to monitor the Intrieve
efforts related to Year 2000 compliance due to the potential risk to the Bank in
the failure of Intrieve to realize Year 2000 preparedness.
The Bank has established parameters and processes for management to identify
material customers, evaluate their preparedness, assess their credit risk and
implement controls to manage the risk arising from their failure to properly
address Year 2000 technology issues. The Bank faces increased credit and
liquidity risk when customers encounter Year 2000 related problems. Customers
that must be evaluated and monitored are those that, if adversely impacted by
Year 2000 technology issues, represent a significant financial exposure to the
Bank in terms of either credit loss or liquidity. The organizations that have
been identified as material customers of the Bank will be monitored because of
their reliance on technology for their successful business operations.
Failure of borrowers, or servicers to address Year 2000 problems may increase
credit risk to the Bank through the inability of these parties to meet the terms
of their contracts and make timely payments of principal and interest to the
Bank. Liquidity risk may result if depositors, or lenders experience Year 2000
related business disruption or operational failures and are unable to provide
funds or fulfill funding commitments to the Bank.
IV. THE BANK'S CONTINGENCY PLAN
Realizing that some disruption may occur despite its best efforts, the Bank is
in the process of developing contingency plans for each critical system in the
event that one or more of those systems fail. While this is an ongoing process,
the Bank expects to have the plan substantially documented by March 31, 1999.
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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, Federal Board of Govenors of The
Federal Reserve Bank (the "Federal Reserve"), the OTS, the Federal Deposit
Insurance Corporation (the "FDIC"), the Indiana Department of Financial
Institution (the "Department"), the Securities and Exchange Commission (the
"Commission"), the Internal Revenue Service and state taxing authorities. The
effect of such statutes, regulations and policies can be significant, and cannot
be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations, including provisions added by the Federal Deposit
Insurance Corporation Improvements Act (the "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 is regulated as a
"non-diversified savings and loan holding company" within the meaning of Home
Owners Loan Act (the "HOLA"), and subject to regulatory oversight of the
Director of the OTS. As such, the Company is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is 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 QTL test, then such unitary holding
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company would become subject to the activities restrictions applicable to
multiple holding companies. (Additional restrictions on securing advances from
the Federal Home Loan Bank (the "FHLB") also apply.) At December 31, 1998, the
Bank's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Company were to acquire control of another savings association other than
through a merger or other business combination with the Bank, the Company would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test,
the activities of the Company and any of its subsidiaries (other than the Bank
or other subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association, (iv) holding or managing
properties used or occupied by a subsidiary savings association, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the Federal
Reserve as permissible for bank holding companies, unless the Director of the
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS before a multiple holding company may engage
in such activities.
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 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 Federal Deposit Insurance Act, as amended (the "FDI Act"). The Director of
the OTS is authorized to promulgate regulations to ensure the safe and
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sound operation of savings associations and may impose various requirements and
restrictions on the activities of savings associations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis.
The FHLB System consists of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings associations and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB. All FHLB advances must be fully secured by sufficient
collateral as determined by the FHLB. The Federal Housing Finance Board, an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At December 31, 1998, the Bank's investment in stock
of the FHLB of Indianapolis was $1,357,800. 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 period from July 1, 1998 to December 31, 1998, dividends paid by
the FHLB of Indianapolis to the Bank totaled approximately $57,000 for an annual
rate of 8.0%.
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
to 100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 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.
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The following is a summary of the Bank's regulatory capital and capital
requirements at December 31, 1998:
Tangible Core Total Risk
(Dollars in thousands) Capital Capital Based
-------- ------- -----------
Regulatory capital............ $9355 $9355 $10105
Minimum capital requirement... 1902 3804 6738
Excess capital................ $7453 $5551 $3367
===== ===== =====
Regulatory capital ratio...... 7.4% 7.4% 12.0%
Minimum capital ratio......... 1.5% 3.0% 8.0%
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
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that fail to comply with those liquidity requirements. The OTS eliminated the
requirement that each savings association maintain an average daily balance of
short-term liquid assets of 1% of the total of its net withdrawable deposit
accounts and short-term borrowings during the preceding calendar month. The
daily average liquidity as reported to the OTS for December, 1998 was 20.2%
which exceeded the then-applicable 5% liquidity requirement. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Real Estate Lending Standards. OTS regulations require savings associations to
establish and maintain written internal real estate lending policies. Each
association's lending policies must be consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its operations. The policies must establish loan portfolio
diversification standards; establish prudent underwriting standards, including
loan-to-value limits, that are clear and measurable; establish loan
administration procedures for the association's real estate portfolio; and
establish documentation, approval, and reporting requirements to monitor
compliance with the association's real estate lending policies. The
association's written real estate lending policies must be reviewed and approved
by the association's Board of Directors at least annually. Further, each
association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Loans to One Borrower. The Bank may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At December 31, 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 December 31, 1998, the Bank was in compliance with
its QTL requirement, with approximately 89.8% 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 thrift industries.
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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. On August 30, 1998, the Bank's annual deposit insurance
premium was increased to .10% 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.
Prompt Corrective Action. FDICIA establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system, federal depository institution regulators are required to take certain
mandatory supervisory actions, and may take certain discretionary supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. In addition, subject to a
narrow exception, FDICIA generally requires the federal depository institution
regulators to appoint a receiver or conservator for an institution that is
critically undercapitalized.
As mandated by FDICIA, the federal banking regulators have specified by
regulation the relevant capital measures at which an insured depository
institution is deemed well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Pursuant to the FDIC's regulations implementing the prompt
corrective action provisions of FDICIA, a bank will be deemed to be: (i) well
capitalized if the bank has a total risk-based capital ratio of 10% or greater,
Tier 1 risk-based capital ratio of 6% or greater and leverage ratio of 5% or
greater; (ii) adequately capitalized if the bank has a total risk-based capital
ratio of 8% or greater, Tier 1 risk-based capital ratio of 4% or greater and
leverage ratio of 4% or greater (3% for the most highly rated banks); (iii)
undercapitalized if the bank has a total risk-based capital ratio of less than
8%, or Tier 1 risk-based capital ratio of 4% or greater and leverage ratio of
less than 4% (less than 3% for the most highly rated banks); (iv) significantly
undercapitalized if the bank has a total risk-based capital ratio of less than
6%, Tier 1 risk-based capital ratio of less than 3% or leverage ratio of less
than 3%; and (v) critically undercapitalized if the bank has a ratio of tangible
equity to total assets of 2% or less. As of the last regulatory examination,
April 30, 1998, the Predecessor was considered
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to be "adequately capitalized". The level of capital at December 31, 1998, is
such that the Bank is considered "well capitalized". The Bank was not subject to
regulatory order, agreement or directive to meet and maintain a specific level
for any capital measure.
Subject to certain exceptions, these capital ratios are generally determined on
the basis of Call Reports submitted by each depository institution and the
reports of examination by each institution's appropriate federal depository
institution regulatory agency.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers include: requiring the submission of a capital
restoration plan (which must include a holding company guarantee of
performance); placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the holding company to
divest certain subsidiaries including the institution; requiring the institution
to divest certain subsidiaries; prohibiting the payment of principal or interest
on subordinated debt; and ultimately, appointing a receiver or conservator for
the institution.
In general, a depository institution may be reclassified to a lower category
than is indicated by its capital position if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a
less-than-satisfactory rating on its most recent examination report, to correct
the deficiency.
Insider Transactions. The Bank is subject to certain restrictions imposed by the
Federal Reserve Act ("FRA") on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries, and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. These restrictions limit
the aggregate amount of transactions with any individual affiliate to 10% of the
Bank's capital and surplus, limit the aggregate amount of transactions with all
affiliates to 20% of the Bank's capital and surplus, require that loans and
certain other extensions of credit be secured by collateral in certain specified
amounts and types, generally prohibit the purchase of low quality assets from
affiliates and generally require that certain transactions with affiliates,
including loans and asset purchases, be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the Bank as those prevailing at the time for comparable
transactions with nonaffiliated individuals or entities.
Also, the FRA prescribes certain limitations and reporting requirements on
extensions of credit by the Bank to its directors and executive officers, to
directors and executive officers of the Company and its subsidiaries, to
principal shareholders of the Company and its subsidiaries, to principal
shareholders of the Company and to "related interests" of such directors,
officers and principal shareholders. Among other things, the FRA, and the
regulations thereunder, require such loans to be made on substantially the same
terms as those offered to unaffiliated individuals, place limits on the amount
of loans the Bank may extend to such individuals and require certain approval
procedures to be followed. In addition, such legislation and regulations may
affect the terms upon which any person becoming a director or officer of the
Company or one of its subsidiaries or a principal shareholder of the Company may
obtain credit from banks with which the Bank maintains a correspondent
relationship.
Limitations on Rates Paid for Deposits. Regulations promulgated by the FDIC
pursuant to FDICIA limit the ability of insured depository institutions to
accept, renew or roll over deposits by offering rates of 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
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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 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
19
<PAGE>
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.
The FDIC includes, in its evaluations of a bank's capital adequacy, an
assessment of the bank's exposure to declines in the economic value of the
bank's capital due to changes in interest rates. On June 26, 1996, the FDIC,
along with the Office of the Comptroller of the Currency and the Federal
Reserve, issued a joint policy statement to provide guidance on sound practices
for managing interest rate risk. The statement sets forth the factors the
federal regulatory examiners will use to determine the adequacy of a bank's
capital for interest rate risk. These qualitative factors include the adequacy
and effectiveness of the bank's internal interest rate risk management process
and the level of interest rate exposure. Other qualitative factors that will be
considered include the size of the bank, the nature and complexity of its
activities, the adequacy of its capital and earnings in relation to the bank's
overall risk profile, and its earning exposure to interest rate movements. The
interagency supervisory policy statement describes the responsibilities of a
bank's board of directors in implementing a risk management process and the
requirements of the bank's senior management in ensuring the effective
management of interest rate risk. Further, the statement specifies the elements
that a risk management process must contain.
In August, 1996, the Federal Reserve and the FDIC issued final regulations
further revising their risk-based capital standards to include a supervisory
framework for measuring market risk. The effect of the new regulations is that
any bank holding company or bank which has significant exposure to market risk
must measure such risk using its own internal model, subject to the requirements
contained in the regulations, and must maintain adequate capital to support that
exposure.
The new regulations apply to any bank holding company or bank whose trading
activity equals 10% or more of its total assets, or whose trading activity
equals $1 billion or more. Examiners may require a bank holding company or bank
that does not meet the applicability criteria to comply with the capital
requirements if necessary for safety and soundness purposes.
The new regulations contain supplemental rules to determine qualifying and
excess capital, calculate risk-weighted assets, calculate market risk equivalent
assets and calculate risk-based capital ratios adjusted for market risk.
Safety and soundness guidance on the risks posed to financial institutions by
the Year 2000 Problem has been issued by the Federal Institutions Examination
Council, whose members include the OTS, the FDIC and the Federal Reserve Board.
The guidance underscores that Year 2000 preparation is not only an information
systems issue, but also an enterprise-wide challenge that must be addressed at
the highest level of a financial institution. The guidance sets out the
responsibilities of senior management and boards of directors in managing their
Year 2000 projects. Among the responsibilities of institution managers and
directors is that of managing the internal and external risks
20
<PAGE>
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.
ITEM 2. LEGAL PROCEEDINGS
Neither the Company, the Bank, nor the Bank's service corporation subsidiaries
is a party to any material pending legal proceeding.
ITEM 3. DESCRIPTION OF PROPERTIES
At December 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 St. Paul Office are either owned by the Bank or
the Company and the Morristown Office is leased.
The following table provides certain information with respect to the Bank's
offices as of December 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 $ 935,862 15,000
Shelbyville Rampart Office
34 Rampart Street 1995 $ 854,884 3,000
Morristown Office
127 East Main Street 1995 $ 47,901 1,800
St. Paul Office
105 County Line Road 1989 $ 27,566 1,476
</TABLE>
In the opinion of management, the Bank's properties are adequately covered by
insurance.
21
<PAGE>
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 $127,434 at December 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. The cost of these data processing
services is approximately $18,000 per month.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Registrant during
the fourth quarter of 1998.
Part II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
In conjunction with a public offering of common stock completed in the second
quarter of 1998, Blue River obtained approval for quotation on the National
Association of Securities Dealers Automated Quotation System Small-Cap Market
("NASDAQ") under the symbol "BRBI."
At December 31, 1998, there were 1,490,870 shares of Blue River common stock
outstanding.
The following table sets forth the high and low sale prices for Blue River
common stock for the quarters during the years indicated, as reported by NASDAQ.
Such over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
SALE PRICE PER SHARE
-----------------------
1998
-------
Quarter High Low
------ ---- ---
Second Quarter.............. 12.250 11.375
Third Quarter............... 11.875 8.000
Fourth Quarter.............. 10.000 6.875
Blue River did not declare any dividend on its shares of common stock during
1998. Future dividend payments by Blue River are subject to regulatory and legal
limitations and may be dependent upon dividends paid by the Bank.
22
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATION
Pages 27 through 46, inclusive, of Blue River's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated
herein by reference in regard to this item.
ITEM 7. FINANCIAL STATEMENTS
Pages 47 through 74, inclusive, of Blue River's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated
herein by reference in regard to this item.
ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
This information is omitted from this report pursuant to General
Instruction E. (3) of Form 10-KSB as Blue River intends to file with the
Commission its definitive Proxy statement pursuant to Regulation 14A of
The Securities Exchange Act of 1934, as amended, not later than 120 days
after December 31, 1998
ITEM 10. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General
Instruction E. (3) of Form 10-KSB as Blue River intends to file with the
Commission its definitive Proxy statement pursuant to Regulation 14A of
The Securities Exchange Act of 1934, as amended, not later than 120 days
after December 31, 1998
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is omitted from this report pursuant to General
Instruction E. (3) of Form 10-KSB as Blue River intends to file with the
Commission its definitive Proxy statement pursuant to Regulation 14A of
The Securities Exchange Act of 1934, as amended, not later than 120 days
after December 31, 1998
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is omitted from this report pursuant to General
Instruction E. (3) of Form 10-KSB as Blue River intends to file with the
Commission its definitive Proxy statement pursuant to Regulation 14A of
The Securities Exchange Act of 1934, as amended, not later than 120 days
after December 31, 1998
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following Exhibits are being filed as part of this Registration
Statement:
3(i)* Articles of Incorporation
3(ii) By-Laws
10.01** Amended and restated Employment Agreement dated August 11,
1997 between Registrant and Robert C. Reed
10.02** Registrant's 1998 Directors' Stock Option Plan
10.03** Registrant's 1998 Key Employees' Stock Option Plan
10.04*** Termination Agreement dated February 5, 1998 between
Registrant, the Bank and Rodney L Meyerholtz
13 The Annual Report to Shareholders of the Company for the year
ended December 31, 1998 (Except for the pages and information
thereof expressly incorporated by reference in this Form
10-KSB, the Annual Report to Shareholders is provided solely
for the information of the Securities and Exchange Commission
and is not deemed "filed" as part of this Form 10-KSB).
21 Subsidiaries of the Registrant
27 Financial Data Schedule
* Incorporated by reference to Registrant's Amendment No. 3 to the
Registration Statement on Form SB-2, File No. 333-48269 filed June 22,
1998.
** Incorporated by reference to Registrant's Amendment No. 1 to the
Registration Statement on Form SB-2, File No. 333-48269 filed June 8,
1998
*** Incorporated by reference to Registrant's Registration Statement on Form
SB-2, File No. 333-48269 filed March 19, 1998
(b) On December 29, 1998 the Company filed Form 8-K report the Bank's
intention to begin banking operations in Fort Wayne, Indiana through
First Community Bank of Fort Wayne.
24
<PAGE>
SIGNATURES
In accordance with Section 15 (d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf of the undersigned,
there unto duly authorized.
Blue River Bancshares, Inc.
(Registrant)
Date: March 30, 1999 By: /s/ Robert C. Reed
-------------------------------------
Robert C. Reed
President & Chief Executive Officer
Date: March 30, 1999 By: /s/ Stephen R. Cartwright
-------------------------------------
Stephen R. Cartwright
Vice President & Chief Credit Officer
Date: March 30, 1999 By: /s/ Bradley A. Long
-------------------------------------
Bradley A. Long
Vice President & Treasurer
Date: March 30, 1999 By: /s/ Steven R. Abel
-------------------------------------
Steven R. Abel
Chairman of the Board, Director
Date: March 30, 1999 By: /s/ D. Warren Robison
-------------------------------------
D. Warren Robison
Senior Vice President & Secretary,
Director
Date: March 30, 1999 By: /s/ Wendell L. Bernard
-------------------------------------
Wendell L. Bernard
Director
Date: March 30, 1999 By: /s/ Ralph W. Van Natta
-------------------------------------
Ralph W. Van Natta
Director
25
Exhibit 3(ii)
BY-LAWS
OF
BLUE RIVER BANCSHARES, INC.
ARTICLE I
Section 1. Name. The name of the corporation is Blue River Bancshares,
Inc.
Section 2. Registered Office and Registered Agent. The street address
of the Registered Office of the Corporation is One Indiana Square, Suite 2800,
Indianapolis, Indiana 46204-2017, and the name of its Registered Agent at that
office is Michael J. Messaglia.
Section 3. Seal. Unless otherwise required by law, the Corporation
shall not be required to use a seal. If the Board of Directors of the
Corporation determines that the Corporation shall use a seal, the seal shall be
circular in form and mounted upon a metal die, suitable for impressing the same
upon paper. About the upper periphery of the seal shall appear the words "Blue
River Bancshares, Inc." and about the lower periphery thereof shall appear the
word "Indiana." In the center of the seal shall appear the word "Seal."
Section 4. Certain References. All references in these By-Laws to the
Indiana Business Corporation Law shall mean and include the Indiana Business
Corporation Law in effect on the date that these By-Laws are adopted by the
Board of Directors of the Corporation or as such law may be amended thereafter
from time to time, and including any successor to such law. All references in
these By-Laws to the Articles of Incorporation of the Corporation shall mean and
include the Articles of Incorporation in effect on the date that these By-Laws
are adopted by the Board of Directors of the Corporation or as such Articles of
Incorporation may be amended thereafter from time to time.
ARTICLE II
Fiscal Year
The fiscal year of the Corporation shall begin each year on the first
day of January and end on the last day of December of the same year.
ARTICLE III
Capital Stock
Section 1. Number of Shares and Classes of Capital Stock. The total
number of shares and classes of capital stock which the Corporation shall have
authority to issue shall be as set forth in the Corporation's Articles of
Incorporation from time to time.
<PAGE>
Section 2. Consideration for Shares. The shares of stock of the
Corporation shall be issued or sold in such manner and for such amount of
consideration, received or to be received, as may be fixed from time to time by
the Board of Directors. Upon payment of the consideration fixed by the Board of
Directors, such shares of stock shall be fully paid and nonassessable.
Section 3. Payment for Shares. The consideration determined by the
Board of Directors to be required for the issuance of shares of capital stock of
the Corporation may consist of any tangible or intangible property or benefit to
the Corporation, including cash, promissory notes, services performed, contracts
for services to be performed or other securities of the Corporation.
If the Board of Directors authorizes the issuance of shares for
promissory notes or for promises to render services in the future, the
Corporation shall report in writing to the shareholders the number of shares
authorized to be so issued with or before the notice of the next shareholders
meeting.
The Corporation may place in escrow shares issued for a contract for
future services or benefits or a promissory note, or make other arrangements to
restrict the transfer of the shares, and may credit distributions in respect of
the shares against their purchase price, until the services are performed, the
note is paid, or the benefits received. If the services are not performed, the
note is not paid, or the benefits are not received, the shares escrowed or
restricted and the distributions credited may be cancelled in whole or in part.
When payment of the consideration for which a share was authorized to
be issued shall have been received by the Corporation, such share shall be
declared and taken to be fully paid and not liable to any further call or
assessment, and the holder thereof shall not be liable for any further payments
thereon. In the absence of actual fraud in the transaction, the judgment of the
Board of Directors as to the value of such property, labor, or services received
as consideration, or the value placed by the Board of Directors upon the
corporate assets in the event of a share dividend, shall be conclusive.
Section 4. Certificate for Shares. Each holder of capital stock of the
Corporation shall be entitled to a stock certificate, signed by the President or
a Vice President and the Secretary or any Assistant Secretary of the
Corporation, stating the name of the registered holder, the number of shares
represented by such certificate, and that such shares are fully paid and
nonassessable; provided, that if such shares are not fully paid, the
certificates shall be legibly stamped to indicate the percent which has been
paid, and as further payments are made, the certificate shall be stamped
accordingly.
If the Corporation is authorized to issue shares of more than one
class, every certificate shall state the kind and class of shares represented
thereby, and the relative rights, interests, preferences and restrictions of
such class, or a summary thereof; provided, that such statement may be omitted
from the certificate if it shall be conspicuously set forth upon the face or
back of the certificate that such statement, in full, will be furnished by the
Corporation to any shareholder upon written request and without charge.
2
<PAGE>
Section 5. Facsimile Signatures. If a certificate is countersigned by
the written signature of a transfer agent other than the Corporation or its
employee, the signatures of the officers of the Corporation may be facsimiles.
If a certificate is countersigned by the written signature of a registrar other
than the Corporation or its employee, the signatures of the transfer agent and
the officers of the Corporation may be facsimiles. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of its issue.
Section 6. Transfer of Shares. The shares of capital stock of the
Corporation shall be transferable only on the books of the Corporation upon
surrender of the certificate or certificates representing the same, properly
endorsed by the registered holder or by his duly authorized attorney or
accompanied by proper evidence of succession, assignment or authority to
transfer.
The Corporation may impose restrictions on the transfer or registration
of transfer of capital stock of the Corporation by means of these By-Laws, the
Articles of Incorporation or by an agreement with shareholders. Shareholders may
agree between or among themselves to impose a restriction on the transfer or
registration of transfer of shares. A restriction which is authorized by the
Indiana Business Corporation Law and which has its existence noted conspicuously
on the front or back of the Corporation's stock certificate is valid and
enforceable against the holder or a transferee of the holder of the
Corporation's stock certificate. If noted on the certificate the restriction is
enforceable against a person without knowledge of the restriction.
Section 7. Cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be cancelled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled, except in cases provided
for in Section 9 of this Article III.
Section 8. Transfer Agent and Registrar. The Board of Directors may
appoint a transfer agent and a registrar for each class of capital stock of the
Corporation and may require all certificates representing such shares to bear
the signature of such transfer agent and registrar. Shareholders shall be
responsible for notifying the transfer agent and registrar for the class of
stock held by such shareholder in writing of any changes in their addresses from
time to time, and failure so to do shall relieve the Corporation, its
shareholders, directors, officers, transfer agent and registrar of liability for
failure to direct notices, dividends, or other documents or property to an
address other than the one appearing upon the records of the transfer agent and
registrar of the Corporation.
Section 9. Lost, Stolen, or Destroyed Certificates. The Corporation may
cause a new certificate or certificates to be issued in place of any certificate
or certificates theretofore issued
3
<PAGE>
by the Corporation alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Corporation may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
give the Corporation a bond in such sum and in such form as it may direct to
indemnify against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of such new certificate. The Corporation, in its discretion, may
authorize the issuance of such new certificates without any bond when, in its
judgment, it is proper to do so.
Section 10. Registered Shareholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of such shares to receive dividends, to vote as such owner, to hold liable
for calls and assessments, and to treat as owner in all other respects, and
shall not be bound to recognize any equitable or other claims to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of the State of Indiana.
ARTICLE IV
Meetings of Shareholders
Section 1. Place of Meeting; Conference Telephone Meetings. Meetings of
shareholders of the Corporation shall be held at such place, within or outside
the State of Indiana, as may from time to time be designated by the Board of
Directors, or as may be specified in the notices or waivers of notice of such
meetings. A shareholder may participate in a shareholders meeting by means of a
conference telephone or similar communications equipment by which all persons
participating in the meeting can communicate with each other, and participating
by these means constitutes presence in person at the meeting.
Section 2. Annual Meeting. The annual meeting of shareholders for the
election of directors, and for the transaction of such other business as may
properly come before the meeting, shall be held on such day and at such time
within six (6) months following the close of the Corporation's fiscal year as
the Board of Directors may set by resolution. Failure to hold the annual meeting
within such time period shall not work any forfeiture or a dissolution of the
Corporation, and shall not affect otherwise valid corporate acts.
Section 3. Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by the Board of Directors or the
President and shall be called by the President or Secretary at the request in
writing of a majority of the Board of Directors or at the request of
shareholders holding of record not less than a majority of all of the shares
outstanding and entitled by the Articles of Incorporation to vote on the
business for which the meeting is being called. Such request by the shareholders
shall be in writing, signed by all of such shareholders (or their duly
authorized proxies), dated and delivered to the Corporation's secretary.
4
<PAGE>
Section 4. Notice of Meetings. A written or printed notice, stating the
place, day and hour of the meeting and, in the case of a special meeting or when
required by the Indiana Business Corporation Law, the Articles of Incorporation
or these By-Laws, the purpose or purposes for which the meeting is called, shall
be delivered or mailed by the Secretary, or by the officers or persons calling
the meeting, to each shareholder of record entitled by the Articles of
Incorporation and by the Indiana Business Corporation Law to vote at such
meeting, at such address as appears upon the records of the Corporation, at
least ten (10) days and no more than sixty (60) days before the date of the
meeting. Notice of any such meeting may be waived in writing by any shareholder,
if the waiver sets forth in reasonable detail the purpose or purposes for which
the meeting is called, and the time and place thereof. Attendance at any such
meeting in person or by proxy shall constitute a waiver of notice of such
meeting. Each shareholder who has in the manner above provided waived notice of
a shareholders meeting, who personally attends a shareholders meeting or who is
represented at a shareholders meeting by a proxy authorized to appear by an
instrument of proxy, shall be conclusively presumed to have been given due
notice of such meeting. Notice of any adjourned meeting of shareholders shall
not be required to be given if the time and place thereof are announced at the
meeting at which the adjournment is taken, except as may be expressly required
by law.
Section 5. Addresses of Shareholders. The address of any shareholder
appearing on the records of the Corporation or appearing on the records
maintained by the Transfer Agent if the Corporation has appointed a Transfer
Agent shall be deemed to be the latest address of such shareholder for the class
of stock held by such shareholder.
Section 6. Voting at Meetings.
(a) Quorum. The holders of record of a majority of the issued and
outstanding stock of the Corporation entitled to vote at the
meeting, present in person or by proxy, shall constitute a
quorum at all meetings of shareholders for the transaction of
business, except where otherwise provided by law, the Articles
of Incorporation or these By-Laws. In the absence of a quorum,
any officer entitled to preside at, or act as secretary of,
such meeting shall have the power to adjourn the meeting from
time to time until a quorum shall be constituted. At any such
adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at
the original meeting, but only those shareholders entitled to
vote at the original meeting shall be entitled to vote at any
adjournment or adjournments thereof unless a new record date
is fixed by the Board of Directors for the adjourned meeting.
(b) Voting Rights. Except as otherwise provided by law or by the
provisions of the Articles of Incorporation, every shareholder
5
<PAGE>
shall have the right at every shareholders' meeting to one (1)
vote for each share of stock having voting power, registered
in his name on the books of the Corporation on the date for
the determination of shareholders entitled to vote, on all
matters coming before the meeting, including, without
limitation, the election of directors. At any meeting of the
shareholders, every shareholder having the right to vote shall
be entitled to vote in person, or by proxy executed in writing
by the shareholder or a duly authorized attorney-in-fact and
bearing a date not more than eleven (11) months prior to its
execution, unless a longer time is expressly provided therein.
(c) Required Vote. When a quorum is present at any meeting, action
on a matter (other than the election of directors) is approved
if the votes cast favoring the action exceed the votes cast
opposing the action unless the Indiana Business Corporation
Law, the Articles of Incorporation or these By-Laws require a
greater number of affirmative votes. Unless otherwise provided
in the Articles of Incorporation, directors are elected by a
plurality of the votes cast by the shares entitled to vote in
the election at a meeting at which a quorum is present.
(d) Validity of a Vote, Consent, Waiver or Proxy Appointment. If
the name on a vote, consent, waiver or proxy appointment
corresponds to the name of a shareholder, the Corporation if
acting in good faith may accept the vote, consent, waiver or
proxy appointment and give it effect as the act of the
shareholder. The Corporation may reject a vote, consent,
waiver or proxy appointment if the authorized tabulation
officer, acting in good faith, has a reasonable basis for
doubt about the validity of the signature, or the signatory's
authority. If so accepted or rejected, the Corporation and its
officer are not liable in damages to the shareholder for any
consequences of the rejection. Any of the Corporation's
actions based on an acceptance or rejection of a vote,
consent, waiver or proxy appointment under this Section is
valid unless a court of competent jurisdiction determines
otherwise.
Section 7. Voting List. The transfer agent (or, if the Corporation has
no transfer agent, the Secretary) of the Corporation shall make before each
meeting of shareholders, a complete list of the shareholders entitled by the
Articles of Incorporation to vote at such meeting, arranged in alphabetical
order, with the address and number of shares so entitled to vote held by each
shareholder. Such list shall be produced and kept open at the time and place of
the meeting of shareholders and shall be subject to the inspection of any
shareholder during the holding of such meeting.
Section 8. Fixing of Record Date to Determine Shareholders Entitled to
Vote. The Board of Directors may prescribe a period not exceeding seventy (70)
days prior to meetings of the shareholders during which no transfer of stock on
the books of the Corporation may be made; or, in lieu of prohibiting the
transfer of stock may fix a day and hour not more than seventy (70) days prior
to the holding of any meeting of shareholders as the time as of which
shareholders
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entitled to notice of, and to vote at, such meeting shall be determined, and all
persons who are holders of record of voting stock at such time, and no others,
shall be entitled to notice of, and to vote at, such meeting. In the absence of
such a determination, such date and time shall be the close of business on the
tenth (10th) day prior to the date of such meeting. Any determination of
shareholders entitled to notice of, or to vote at, a shareholders meeting is
effective for any adjournment of the meeting unless the Board of Directors fixes
a new record date, which is only required if the meeting is adjourned to a date
more than one hundred twenty (120) days after the date fixed for the original
meeting.
Section 9. Consent to Action by Shareholders. Any action required or
permitted to be taken at a shareholders meeting may be taken without a meeting
if one (1) or more written consents describing the action taken are signed by
all the shareholders entitled to vote on the action, and delivered to the
Corporation for inclusion in the minutes or filing with the corporate records.
Action taken under this section is effective when the last shareholder entitled
to vote on the action signs the consent, unless the consent specifies a
different prior or subsequent effective date.
ARTICLE V
Board of Directors
Section 1. Election, Number and Term of Office. Directors shall be
elected at the annual meeting of shareholders or, if not so elected, at a
special meeting of shareholders called for that purpose, by the holders of the
shares of stock entitled by the Articles of Incorporation to elect directors.
The number of directors of the Corporation to be elected by the holders
of the shares of stock entitled by the Articles of Incorporation to elect
directors shall be six (6) unless changed by amendment of this Section.
All directors elected by the holders of such shares, except in the case
of earlier resignation, removal or death, shall hold office until their
respective successors are duly elected and qualified. Directors need not be
shareholders of the Corporation.
Section 2. Vacancies. Any vacancy occurring in the Board of Directors
caused by resignation, removal, death or other incapacity shall be filled by a
majority vote of the remaining members of the Board of Directors until the next
annual meeting of the shareholders. If the vote of the remaining members of the
Board shall result in a tie, such vacancy, at the discretion of the Board of
Directors, may be filled by vote of the shareholders at a special meeting called
for that purpose.
Any vacancy on the Board of Directors caused by an increase in the
number of directors shall be filled by a majority vote of the members of the
Board of Directors until the next annual or special meeting of the shareholders
at which directors are elected or, at the discretion of the
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Board of Directors, such vacancy may be filled by vote of the shareholders at a
special meeting called for that purpose. No decrease in the number of directors
shall have the effect of shortening the term of any incumbent director.
Section 3. Annual Meeting of Directors. The Board of Directors shall
meet each year immediately after the annual meeting of the shareholders, at the
place where such meeting of the shareholders has been held either within or
outside the State of Indiana, for the purpose of organization, election of
officers and consideration of any other business that may properly come before
the meeting. No notice of any kind to either old or new members of the Board of
Directors for such annual meeting shall be necessary.
Section 4. Regular Meetings. Regular meetings of the Board of
Directors, if any, shall be held at such times and places, either within or
outside the State of Indiana, as may be fixed by the directors. Such regular
meetings of the Board of Directors may be held without notice or upon such
notice as may be fixed by the directors.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by the President or by not less than a majority of the members of
the Board of Directors then serving. Notice of the date, time and place, either
within or outside the State of Indiana, of a special meeting shall be personally
delivered or telephoned to each director at least twenty-four (24) hours prior
to the time of the meeting, or sent by telegraph, telecopy or over-night courier
to each director at his usual place of business or residence at least
forty-eight (48) hours prior to the time of the meeting. Directors, in lieu of
such notice, may sign a written waiver of notice either before the time of the
meeting, at the meeting or after the meeting. Attendance by a director in person
at any such special meeting shall constitute a waiver of notice unless the
director at the beginning of the meeting (or promptly upon the director's
arrival) objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
Section 6. Conference Telephone Meetings. A member of the Board of
Directors may participate in a meeting of the Board by means of a conference
telephone or similar communications equipment by which all persons participating
in the meeting can communicate with each other, and participation by these means
constitutes presence in person at the meeting.
Section 7. Quorum. A majority of the actual number of directors elected
and qualified, from time to time, shall be necessary to constitute a quorum for
the transaction of any business except the filling of vacancies, and the act of
a majority of the directors present at the meeting, at which a quorum is
present, shall be the act of the Board of Directors, unless the act of a greater
number is required by the Indiana Business Corporation Law, by the Articles of
Incorporation or by these By-Laws. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors at which action on
any corporate matter is taken shall be conclusively presumed to have assented to
the action taken, unless (a) he objects at the beginning of the meeting (or
promptly upon his arrival) to holding the meeting or transacting
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business at the meeting, (b) his dissent or abstention from the action taken is
entered in the minutes of the meeting, or (c) he delivers written notice of his
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the Secretary of the Corporation immediately after adjournment
of the meeting. The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
Section 8. Consent to Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if one (1) or more written
consents describing the action taken are signed by all members of the Board of
Directors or such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or committee, or
filed with the corporate records reflecting the action taken. Action taken under
this section is effective when the last director signs the consent, unless the
consent specifies a different prior or subsequent effective date.
Section 9. Removal of Directors. Unless otherwise provided in the
Articles of Incorporation, any director may be removed with or without cause
only by the affirmative vote of the holders of at least sixty-six and 67/100
percent (66.67%) of the actual number of outstanding shares of the Corporation
entitled to vote for the election of directors at a meeting called for that
purpose.
Section 10. Resignations. Any director may resign at any time by giving
written notice to the Board of Directors, to the President or to the Secretary.
Any such resignation shall take effect upon receipt of such notice or at any
later time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 11. Distributions. The Board of Directors shall have power,
subject to any restrictions and limitations contained in the Indiana Business
Corporation Law or in the Articles of Incorporation, to declare and pay
dividends and distributions upon the outstanding capital stock of the
Corporation to its shareholders as and when they deem expedient.
Section 12. Fixing of Record Date to Determine Shareholders Entitled to
Receive Corporate Benefits. The Board of Directors may fix a record date,
declaration date and payment date with respect to any share dividend or
distribution to the Corporation's shareholders. If no record date is fixed for
the determination of shareholders entitled to receive payment of a distribution,
the end of the day on which the resolution of the Board of Directors declaring
such dividend is adopted shall be the record date for such determination.
Section 13. Interest of Directors in Contracts. Any contract or other
transaction between the Corporation and any corporation in which this
Corporation owns a majority of the capital stock or between the Corporation and
any corporation which owns a majority of the capital stock of the Corporation
shall be valid and binding, notwithstanding that the directors or officers of
this Corporation are identical or that some or all of the directors or officers
or both, are also directors or officers of such other corporation.
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Any contract or other transaction with the Corporation in which a
director of the Corporation has a direct or indirect interest is not voidable by
the Corporation solely because of the director's interest in the transaction, if
any one (1) of the following is true:
(a) The material facts of the transaction and the director's
interest were disclosed or known to the Board of Directors or
a committee of the Board of Directors and the Board of
Directors or committee authorized, approved or ratified the
transaction; or
(b) The material facts of the transaction and the director's
interest were disclosed or known to the shareholders entitled
to vote and they authorized, approved or ratified the
transaction; or
(c) The transaction was fair to the Corporation.
A transaction is authorized, approved or ratified if it receives the
affirmative vote of a majority of the directors on the Board of Directors or on
the committee who have no direct or indirect interest in the transaction, but it
cannot be authorized, approved or ratified by a single director. If a majority
of the directors who have no direct or indirect interest in the transaction vote
to authorize, approve or ratify the transaction, a quorum is present for the
purposes of this Section. The presence of or a vote cast by, a director with a
direct or indirect interest in the transaction does not affect the validity of
any transaction if it is otherwise authorized, approved or ratified as provided
in this Section.
Shares owned by or voted under the control of a director who has a
direct or indirect interest in the transaction, and shares owned by or voted
under the control of an entity in which the director has a direct or indirect
interest, may be counted in a vote of shareholders to determine whether to
authorize, approve or ratify a conflict of interest transaction under Subsection
(b).
For purposes of this Section, a director of the Corporation has an
indirect interest in a transaction if:
(i) Another entity in which the director has a material
financial interest or in which the director is a
general partner is a party to the transaction; or
(ii) Another entity of which the director is a director,
officer, partner, member, manager, owner or trustee
is a party to the transaction and the transaction is,
or is required to be, considered by the Board of
Directors of the Corporation.
This Section shall not be construed to invalidate any contract or other
transaction which would otherwise be valid under the common and statutory law
applicable thereto.
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Section 14. Committees. The Board of Directors may, by resolution
adopted by a majority of the actual number of directors elected and qualified,
from time to time, designate from among its members an executive committee and
one or more other committees, each of which, to the extent provided in the
resolution, the Articles of Incorporation or these By-Laws, may exercise all of
the authority of the Board of Directors of the Corporation. However, no such
committee shall have the authority to (a) authorize distributions (except a
committee may authorize or approve a reacquisition of shares if done according
to a formula or method, or within a range, prescribed by the Board of
Directors), (b) approve or propose to shareholders action that the Indiana
Business Corporation Law requires to be approved by shareholders, (c) fill
vacancies on the Board of Directors or any of its committees, (d) amend the
Articles of Incorporation, (e) adopt, amend or repeal the By-Laws, (f) approve a
plan of merger not requiring shareholder approval, or (g) authorize or approve
the issuance or sale or a contract for sale of shares, or determine the
designation and relative rights, preferences and limitations of a class or
series of shares, except the Board of Directors may authorize a committee to
take the action described in this subsection within limits prescribed by the
Board of Directors. No member of any such committee shall continue to be a
member thereof after he ceases to be a director of the Corporation.
ARTICLE VI
Officers
Section 1. Principal Officers. The principal officers of the
Corporation shall be a President, a Treasurer, a Secretary and such Vice
Presidents as may be determined from time to time by the Board of Directors. The
Corporation may also have, at the discretion of the Board of Directors, such
other subordinate officers as may be appointed in accordance with the provisions
of these By-Laws. The same individual may hold more than one office at any time,
and a single individual may hold all of the offices at any time.
Section 2. Election and Term of Office. The principal officers of the
Corporation shall be chosen annually by the Board of Directors at the annual
meeting thereof. Each such officer shall hold office until his successor shall
have been duly elected and qualified or until his earlier resignation, removal
or death.
Section 3. Removal. Any principal officer may be removed, either with
or without cause, at any time, by resolution adopted at any meeting of the Board
of Directors by a majority of the actual number of directors elected and
qualified from time to time.
Section 4. Subordinate Officers. In addition to the principal officers
enumerated in Section 1 of this Article VI, the Corporation may have one or more
Assistant Treasurers, one or
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more Assistant Secretaries and such other officers, employees and agents as the
Board of Directors may deem necessary, each of whom shall hold office for such
period, may be removed with or without cause, have such authority and perform
such duties as the President, any Vice President or the Board of Directors may
from time to time determine. The Board of Directors may delegate to any
principal officer the power to appoint and to remove any such subordinate
officers, employees or agents.
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors, to the President or to the Secretary.
Any such resignation shall take effect upon receipt of such notice or at any
later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 6. Vacancies. Any vacancy in any office for any cause may be
filled for the unexpired portion of the term in the manner prescribed in these
By-Laws for election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board, who shall
be chosen from among the directors, shall preside at all meetings of
shareholders and at all meetings of the Board of Directors. The Chairman shall
perform such other duties and have such other powers as, from time to time, may
be assigned to the Chairman by the Board of Directors.
Section 8. President. The President shall be the chief executive
officer of the Corporation and as such shall preside at all meetings of
shareholders and at all meetings of the Board of Directors. The President shall
have general supervision of the affairs of the Corporation, subject to the
control of the Board of Directors. The President shall be an ex-officio member
of all standing committees. In general, the President shall perform all duties
and have all the powers incident to the office of President, as herein defined,
and all such other duties and powers as, from time to time, may be assigned to
the President by the Board of Directors.
Section 9. Vice Presidents. The Executive Vice President, if one has
been appointed, and then the Vice Presidents in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President. They shall perform such other duties and have such other powers as
the President or the Board of Directors may from time to time assign.
Section 10. Treasurer. The Treasurer shall have charge and custody of,
and be responsible for, all funds and securities of the Corporation and shall
deposit all such funds in the name of the Corporation in such banks or other
depositories as shall be selected by the Board of Directors. He shall upon
request exhibit at all reasonable times his books of account and records to any
of the directors of the Corporation during business hours at the office of the
Corporation where such books and records shall be kept; shall render upon
request by the Board of Directors a statement of the condition of the finances,
as well as a recent balance sheet and income statement, of the Corporation at
any meeting of the Board of Directors and at the annual meeting of the
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shareholders; shall receive, and give receipt for, moneys due and payable to the
Corporation from any source whatsoever; and in general, shall perform all duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him by the President or the Board of Directors. The Treasurer
shall give such bond, if any, for the faithful discharge of his duties as the
Board of Directors may require.
Section 11. Secretary. The Secretary shall prepare and shall keep or
cause to be kept in the books provided for that purpose the minutes of the
meetings of the shareholders and of the Board of Directors; shall duly give and
serve all notices required to be given in accordance with the provisions of
these By-Laws and by the Indiana Business Corporation Law; shall be custodian of
the records and of the seal (if one is required) of the Corporation and see that
the seal is affixed to all documents, the execution of which on behalf of the
Corporation under its seal is required by law or the Board of Directors; shall
authenticate records of the Corporation; and, in general, shall perform all
duties incident to the office of Secretary and such other duties as may, from
time to time, be assigned to him by the President or the Board of Directors.
Section 12. Salaries. The salaries of the principal officers of the
Corporation shall be fixed from time to time by the Board of Directors, and the
salaries of any subordinate officers may be fixed by the President.
Section 13. Voting Corporation's Securities. Unless otherwise ordered
by the Board of Directors, the President and the Secretary, and each of them
singly, are severally appointed attorneys and agents of the Corporation, and
shall have full power and authority in the name and on behalf of the
Corporation, to attend, to act and to vote all stock, partnership interests,
memberships and other securities or ownership interests entitled to be voted at
any meetings of shareholders, security holders, partners, members or owners of
corporations, partnerships, limited liability companies or other entities in
which the Corporation may hold stock, securities, memberships or partnerships or
other ownership interests, in person or by proxy, as a shareholder, partner,
member, owner or otherwise, and at such meetings shall possess and may exercise
any and all rights and powers incident to the ownership of such stock,
securities memberships or partnership or other ownership interests and which as
the owner thereof the Corporation might have possessed and exercised, if
present, or to consent in writing to any action by any such other corporation,
partnership, limited liability company or other entity. The Board of Directors
by resolution from time to time may confer like powers upon any other person or
persons.
ARTICLE VII
Indemnification of Directors and Officers
Section 1. Definitions. For purposes of this Article, the following
terms shall have the following meanings:
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(a) "Liabilities" and "Expenses" shall mean monetary obligations
incurred by or on behalf of a director or officer in
connection with the investigation, defense or appeal of a
Proceeding or in satisfying a claim thereunder and shall
include, but shall not be limited to, attorneys' fees and
disbursements, judgments, fines and penalties, excise taxes
assessed with respect to an employee benefit plan and amounts
paid in settlement by or on behalf of a director or officer.
(b) "Other Enterprise" shall mean any corporation, partnership,
limited liability company, joint venture, trust, company,
employee benefit plan or other enterprise, whether for profit
or not, for which a director or officer is or was serving, at
the request of the Corporation, as a director, officer,
partner, member, manager, trustee, employee or agent.
(c) "Proceeding" shall mean any claim, action, suit or proceeding
(whether brought by or in the right of the Corporation or
Other Enterprise or otherwise), civil, criminal,
administrative or investigative, whether formal or informal,
and whether pending or threatened or in connection with an
appeal relating thereto, in which a director or officer has or
may become involved, as a party or otherwise, (i) by reason of
his being or having been a director or officer of the
Corporation (and, if applicable, an employee or agent of the
Corporation) or a director, officer, partner, member, manager,
trustee, employee or agent of an Other Enterprise or arising
out of his status as such, or (ii) by reason of any past or
future action taken or not taken by a director or officer in
any such capacity, whether or not he continues to be such at
the time he incurs Liabilities and Expenses under the
Proceeding. (d) "Standard of Conduct" shall mean that a
director or officer, based on facts then known to the director
or officer, discharged the duties as a director or officer,
including duties as a member of a committee, in good faith in
what he reasonably believed to be in or not opposed to the
best interests of the Corporation or Other Enterprise, as the
case may be, and, in addition, in any criminal Proceeding had
no reasonable cause to believe that his conduct was unlawful.
The termination of any Proceeding, by judgment, order,
settlement (whether with or without court approval) or
conviction or upon a plea of guilty, shall not create a
presumption that the director or officer did not meet the
Standard of Conduct. The termination of any Proceeding by a
consent decree or upon a plea of nolo contendere, or its
equivalent, shall create the presumption that the director or
officer met the Standard of Conduct.
Section 2. Indemnification. If a director or officer is made a party to
or threatened to be made a party to any Proceeding, the Corporation shall
indemnify the director or officer against Liabilities and Expenses incurred by
him in connection with such Proceeding in the following circumstances:
(a) If a director or officer has been wholly successful on the
merits or otherwise with respect to any such Proceeding, he
shall be entitled to indemnification for
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Liabilities and Expenses as a matter of right. If a Proceeding
is terminated against the director or officer by consent
decree or upon a plea of nolo contendere, or its equivalent,
the director or officer shall not be deemed to have been
"wholly successful" with respect to such Proceeding.
(b) In all other situations, a director or officer shall be
entitled to indemnification for Liabilities and Expenses as a
matter of right unless (i) the director or officer has
breached or failed to perform his duties as a director or
officer in compliance with the Standard of Conduct and (ii)
with respect to any action or failure to act by the director
or officer which is at issue in such Proceeding, such action
or failure to act constituted willful misconduct or
recklessness. To be entitled to indemnification pursuant to
this Section 2(b), the director or officer must notify the
Corporation of the commencement of the Proceeding in
accordance with Section 5 of this Article and request
indemnification. A review of the request for indemnification
and the facts and circumstances underlying the Proceeding
shall be made in accordance with one of the procedures
described below, and the director or officer shall be entitled
to indemnification as a matter of right unless, in accordance
with such procedure, it is determined beyond a reasonable
doubt that (i) the director or officer breached or failed to
perform the duties of the office in compliance with the
Standard of Conduct and (ii) the breach or failure to perform
constituted willful misconduct or recklessness. Any one of the
following procedures may be used to make the review and
determination of a director's or officer's request for
indemnification under this Section 2(b):
(A) by the Board of Directors by a majority vote of a
quorum consisting of directors who are not parties
to, or who have been wholly successful with respect
to, such Proceeding;
(B) if a quorum cannot be obtained under (A) above, by a
majority vote of a committee duly designated by the
Board of Directors (in the designation of which,
directors who are parties to such Proceeding may
participate), consisting solely of two or more
directors who are not parties to, or who have been
wholly successful with respect to, such Proceeding;
(C) by independent legal counsel selected by a majority
vote of the full Board of Directors (in which
selection, directors who are parties to such
Proceeding may participate); or
(D) by the shareholders of the Corporation, but shares
owned by or voted under control of directors who are
at the time parties to the proceeding may not be
voted on the determination.
Any determination made in accordance with the above procedures shall be
binding on the Corporation and the director or officer.
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(c) If several claims, issues or matters of action are involved, a
director or officer may be entitled to indemnification as to
some matters even though he is not entitled to indemnification
as to other matters.
(d) The indemnification herein provided shall be applicable to
Proceedings made or commenced after the adoption of this
Article, whether arising from acts, failures to act or
omissions which occurred before or after the adoption of this
Article.
Section 3. Prepaid Liabilities and Expenses. The Liabilities and
Expenses which are incurred or are payable by a director or officer in
connection with any Proceeding shall be paid by the Corporation in advance, with
the understanding and agreement between such director or officer and the
Corporation that, in the event it shall ultimately be determined as provided
herein that the director or officer was not entitled to be indemnified, or was
not entitled to be fully indemnified, the director or officer shall repay to the
Corporation such amount, or the appropriate portion thereof, so paid or
advanced.
Section 4. Exceptions to Indemnification. Notwithstanding any other
provisions of this Article to the contrary, the Corporation shall not indemnify
a director or officer:
(a) for any Liabilities or Expenses incurred in a suit or claim
against a director or officer for an accounting of profits
allegedly made from the purchase or sale of securities of the
Corporation brought pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and any
amendments thereto or the provisions of any similar federal,
state or local statutory law; or
(b) for any Liabilities or Expenses for which payment is actually
made to or on behalf of a director or officer under a valid
and collectible insurance policy, except in respect of any
excess beyond the amount of payment under such insurance
policy; or
(c) for any Liabilities or Expenses incurred in a suit or claim
against the director or officer arising out of or based upon
actions attributable to the director or officer in which the
director or officer gained any personal profit or advantage to
which he was not legally entitled.
Section 5. Notification and Defense of Proceeding. Promptly after
receipt by a director or officer of notice of the commencement of any
Proceeding, the director or officer will, if a request for indemnification in
respect thereof is to be made against the Corporation under this Article, notify
the Corporation of the commencement thereof, but the failure to so notify the
Corporation will not relieve the Corporation from any obligation which it may
have to the director or officer under this Article or otherwise. With respect to
any such Proceeding as to which the director or officer notifies the Corporation
of the commencement thereof:
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(a) the Corporation will be entitled to participate therein at its
own expense; and
(b) except as otherwise provided below, to the extent that it may
so desire, the Corporation, jointly with any other
indemnifying party similarly notified, will be entitled to
assume the defense thereof, with counsel reasonably
satisfactory to the director or officer. After notice from the
Corporation to the director or officer of its election to
assume the defense of the director or officer in the
Proceeding, the Corporation will not be liable to the director
or officer under this Article for any legal or other Expenses
subsequently incurred by the director or officer in connection
with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. The director or
officer shall have the right to employ counsel in such
Proceeding, but the Expenses of such counsel incurred after
notice from the Corporation of its assumption of the defense
thereof shall be at the expense of the director or officer
unless:
(i) the employment of counsel by the director or officer
has been authorized by the Corporation; or
(ii) the director or officer shall have reasonably
concluded that there may be a conflict of interest
between the Corporation and the director or officer
in the conduct of the defense of such Proceeding; or
(iii) the Corporation shall not in fact have employed
counsel to assume the defense of such Proceeding;
in each of which cases the Expenses of counsel employed by the
director or officer shall be paid by the Corporation. The
Corporation shall not be entitled to assume the defense of any
Proceeding brought by or in the right of the Corporation or as
to which the director or officer shall have made the
conclusion provided for in (ii) above; and
(c) the Corporation shall not be liable to indemnify a director or
officer under this Article for any amounts paid in settlement
of any Proceeding without the Corporation's prior written
consent. The Corporation shall not settle any action or claim
in any manner which would impose any liability, penalty or
limitation on a director or officer without the director's or
officer's prior written consent. Neither the Corporation nor a
director or officer will unreasonably withhold its or his
consent to any proposed settlement.
Section 6. Other Rights and Remedies. The rights of indemnification
provided under this Article are not exhaustive and shall be in addition to any
rights to which a director or officer
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may otherwise be entitled by contract or as a matter of law. Irrespective of the
provisions of this Article, the Corporation may, at any time and from time to
time, indemnify directors, officers, employees and other persons to the full
extent permitted by the provisions of the Indiana Business Corporation Law,
whether with regard to past or future matters.
Section 7. Continuation of Indemnity. All obligations of the
Corporation under this Article shall survive the sale or merger of the
Corporation or the termination of a director's or officer's service in any
capacity covered by this Article.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any director, officer, employee or other person or any
person who is or was serving at the request of the Corporation as a director,
officer, partner, member, manager, trustee, employee or agent of an Other
Enterprise against any liability asserted against such person and incurred by
such person in any capacity or arising out of his status as such, whether or not
the Corporation would have the power to indemnify such person against such
liability under the provisions of applicable law, this Article or otherwise.
Section 9. Benefit. The provisions of this Article shall inure to the
benefit of each director or officer and his respective heirs, personal
representatives and assigns and the Corporation and its successors and assigns.
Section 10. Severability. In case any one or more of the provisions
contained in this Article shall, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Article, but this Article shall be
construed as if such invalid, illegal or unenforceable provision or provisions
had never been contained herein.
ARTICLE VIII
Amendments
The power to make, alter, amend or repeal these By-Laws is vested in
the Board of Directors, but the affirmative vote of a majority of the actual
number of directors elected and qualified, from time to time, shall be necessary
to effect any alteration, amendment or repeal of these By-Laws.
18
EXHIBIT 13. THE ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1998
SELECTED FINANCIAL DATA
BLUE RIVER BANCSHARES & SUBSIDIARY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Six Months Nine Months Twelve Months
Ended Ended Ended
December 31 June 30 September 30
1998 1998 1997
----------- ----------- -------------
<S> <C> <C> <C>
OPERATIONS
Net Interest Income........................ $2,004 $2,314 $2,816
Non-Interest Income........................ 235 314 349
Provision for Loan Losses.................. 100 510 104
Non-Interest Expense....................... 1,834 2,051 2,253
--------- -------- --------
Net Income before Income Taxes............. 305 67 808
Income Taxes............................... 155 6 295
--------- -------- --------
Net Income................................. $150 $61 $513
--------- -------- --------
CONSOLIDATED BALANCE SHEET DATA
Total Assets............................... 133,526 121,702 90,609
Total Deposits............................. 89,529 75,591 64,633
Loans, Net................................. 88,362 88,557 76,038
Total Investment Securities................ 18,195 23,726 8,695
Shareholders' Equity....................... 16,474 15,867 7,171
Weighted Average Shares Outstanding........ 1,496,329 175,950 175,950
GENERAL YEAR END
Number of Employees........................ 39 FTE / 7 PTE 30 FTE / 4PTE 29FTE / 5 PTE
Number of Shares Outstanding............... 1,490,870 N/A N/A
PER COMMON SHARE DATA
Net Income Per Common Share................ $0.10 N/A N/A
Net Income Per Common Share - Assuming $0.10 N/A N/A
Dilution....
SELECTED PERFORMANCE RATIOS
Return on Average Assets................... 0.26% 0.08% 0.60%
Return on Average Equity................... 2.47% 1.19% 8.12%
Average Shareholders' Equity to Average 10.51% 6.98% 7.91%
Assets..........
Dividend Payout Ratio...................... --- 115.76% 13.71%
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information is intended to provide an analysis of the consolidated
financial condition of Blue River Bancshares, Inc. (the "Successor" or the
"Company") and Shelby County Bancorp ( the "Predecessor" or "SCB") as of
December 31, 1998 and the income statements for the Successor's six month period
ended December 31, 1998, the Predecessor's nine month period ended June 30, 1998
and the year ended September 30, 1997. This information should be read in
conjunction with the Consolidated Financial Statements and footnotes
incorporated by reference herein.
General
On June 26, 1998, Blue River Bancshares, Inc. acquired Shelby County Bancorp. As
of this date, Shelby County Savings Bank, FSB became a wholly - owned subsidiary
of Successor and was placed under new management, a new board of directors and
changed its name to "Shelby County Bank" (the "Bank"). Successor reported the
transaction as if it was effective on June 30, 1998.
Total assets as of December 31, 1998 were $133,526,000 up 38% from December 31,
1997. This growth was attributable to loan growth, increasing interest bearing
deposits, and investment increases. Deposits increased 26% from December 31,
1997 to December 31, 1998.
The Company's total assets as of June 30, 1998 were $121,702,000 compared with
$88,776,000 at June 30, 1997. This represents an increase of 37%. This increase
was attributable to loan growth based on a stable economic condition and
continuing loan demand. Total liabilities as of June 30, 1998 totaled
$105,835,000 which represents an increase of 29% from the comparable period June
30, 1997. The increase was attributable to an increase in deposits and an
increase in deferred taxes. Shareholder equity was $16,041,000 as of June 30,
1998, and increased 2.7% to $16,474,000 as of December 31, 1998.
RESULTS OF OPERATIONS
Net Income
As for the six month period ended December 31, 1998, the Company reported net
income of $150,000. This represents a decrease of $158,000 from the
Predecessor's corresponding six month period ended December 31, 1997. This
decrease is attributable to the general expenses associated with the changes
made in infrastructure, management and personnel associated costs.
Net income for the nine months ended June 30,1998 was $61,000 compared to
$381,000 for the nine months ended June 30, 1997. Total income received for the
1998 period did increase, however, the net income decline from the prior period
was attributable to a special loan loss provision of $375,000 and an
environmental charge of $150,000 prior to the acquisition of the Bank by the
Company.
27
<PAGE>
Net Interest Income
For the six months ended December 31, 1998, net interest income was $2,004,000
compared to $1,502,000 for the equivalent period ending December 31, 1997. This
25% increase is attributable to the general increase in interest on loans which
increased 9% between these periods; from non-loan interest income from
investments which increased 36%; and, interest bearing deposit income which
increased 62%.
Net interest income after the provision for loan losses increased 32% from
$1,445,000 for the six months ended December 31, 1997 to $1,904,000 for the six
months ended December 31, 1998.
Net interest income before the loan loss provision was $2,314,000 for the nine
month period ended June 30, 1998, a 10.85% increase over the corresponding nine
month period ending June 30, 1997. Net interest income after the provision for
the nine month period ending June 30, 1998 was $1,804,000, a decrease from the
prior period ending June 30, 1997 of 10.85%.
Interest Income
For the six month period ended December 31, 1998, the Company's total interest
income was $4,222,000, representing a 14.36% increase over the Predecessor's
equivalent period ended December 31, 1997. This increase is attributable to
growth in the loan portfolio, the investment portfolio and interest bearing
deposits.
The Company's total interest income for the nine month period ended June 30,
1998 increased $761,000 or 13.30% over the corresponding nine month period ended
June 30,1997. This is attributable to overall loan growth during the period.
Interest Expense
For the six months ended December 31, 1998, interest expense was $2,218,000 as
compared to $2,113,000 for the same period ended December 31, 1997. This
increase is due to growth in deposits, but offset by a decrease in rates offered
on certain deposit products.
Total interest expense for the nine months ended June 30,1998 was $3,407,000 as
compared to the equivalent nine month period ended June 30, 1997 for a total of
$2,897,000, a 14.97% increase. This increase was attributable to the general
growth in deposits and the introduction of a relatively high rate Money Market
deposit account.
28
<PAGE>
NET INTEREST INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Six Months Nine Months Twelve Months Percentage change from
Ended Ended Ended June 30, 1998 September 30,
December 31, June 30, September 30, to December 31, 1997 to June 30,
1998 1998 1997 1998 1998
------------ ----------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans.......... $3,608 $5,221 $6,066 (30.90)% (13.93)%
Interest on Investment
Securities.......................... 363 389 534 (6.57)% (27.15)%
Interest on Interest-earning $251 $111 $108 126.13% 2.78%
------- ------- ------- ------- -------
Deposits............................
Total Interest Income............... $4,222 $5,721 $6,708 (26.21)% (14.71)%
------- ------- ------- ------- -------
INTEREST EXPENSE
Interest on Deposits................ $1,662 $2,592 $2,997 (35.88)% (13.49)%
Interest on Borrowings.............. 556 815 895 (31.83)% (8.99)%
------- ------- ------- ------- -------
Total Interest Expense.............. $2,218 $3,407 $3,892 (34.91)% (12.45)%
------- ------- ------- ------- -------
Net Interest Income................. $2,004 $2,314 $2,816 (13.37)% (17.83)%
======= ======= ======= ======= =======
</TABLE>
29
<PAGE>
RATE VOLUME ANALYSIS OF CHANGE IN NET INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31, 1998
vs.
Nine Months Ended June 30, 1998 Attributable to the
Dollar Attributable Attributable difference
to to between a six month period
Change Volume Rate and a nine month period
------ ------------- ------------ ---------------------------
<S> <C> <C> <C> <C>
Interest and Fee Income on:
Loans................................... (1,613) 305 (178) (1,740)
Investment Securities................... (27) 81 21 (129)
Interest-Earning Deposits............... 141 173 5 (37)
------ ---- ----- -------
Total Interest Income................... (1,499) 559 (152) (1,906)
------ ---- ----- -------
Interest Expense on:
Deposits................................ (931) 260 (327) (864)
Borrowings.............................. (258) 54 (41) (271)
------ ---- ----- -------
Total Interest Expense.................. (1,189) 314 (368) (1,135)
------ ---- ----- -------
Net Interest Income..................... (310) 245 216 (771)
------ ---- ----- -------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 30, 1998
vs.
Twelve Months Ended September 30, 1997 Attributable to the
Dollar Attributable Attributable difference
to to between a six month period
Change Volume Rate and a nine month period
------ ------------- ------------ ---------------------------
<S> <C> <C> <C> <C>
Interest and Fee Income on:
Loans................................... (845) 603 78 (1,526)
Investment Securities................... (145) 41 (59) (127)
Interest-Earning Deposits............... 3 29 1 (27)
------ ---- ----- -------
Total Interest Income................... (987) 673 20 (1,680)
------ ---- ----- -------
Interest Expense on
Deposits................................ (404) 256 99 (759)
Borrowings.............................. (82) 158 (20) (220)
------ ---- ----- -------
Total Interest Expense.................. (486) 414 79 (979)
------ ---- ----- -------
Net Interest Income..................... (501) 259 (59) (701)
------ ---- ----- -------
</TABLE>
- -----------------------------------------
(1) Interest on non-accruing loans is not included
30
<PAGE>
DISTRIBUTION OF ASSETS. LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES
AND DIFFERENTIAL VARIANCE ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Six Months Ended December 31, 1998 Nine Months Ended June 30, 1998
---------------------------------- -------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities................... 12,717 363 5.69% 9,678 389 5.36%
Interest-Earning Deposits............... 12,634 251 3.99% 3,787 111 3.91%
Loans, net...(2)........................ 88,754 3,608 8.13% 81,606 5,221 8.53%
-------- ------ ----- ------- ------ -----
Total Earning Assets.................... 114,105 4,222 7.40% 95,071 5,721 8.02%
-------- ------ ----- ------- ------ -----
Interest Bearing Liabilities:
Passbook accounts....................... 8,479 128 3.01% 8,626 192 2.96%
NOW and money market accounts........... 26,224 427 3.26% 20,620 479 3.10%
Certificates of deposit................. 48,298 1,107 4.58% 42,911 1,921 5.97%
-------- ------ ----- ------- ------ -----
Total Deposits.......................... 83,001 1,662 4.00% 72,157 2,592 4.79%
Borrowings.............................. 19,612 556 5.67% 17,833 815 6.09%
-------- ------ ----- ------- ------ -----
Total Interest Bearing Liabilities...... 102,613 2,218 4.32% 89,990 3,407 5.05%
-------- ------ ----- ------- ------ -----
Net Interest Margin..................... 114,105 2,004 3.51% 95,071 2,314 3.25%
======== ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Twelve Months Ended September 30, 1997
Average
Balance Interest Yield/Rate
------- -------- ----------
<S> <C> <C> <C>
Earning Assets:
Investment Securities................... 8,654 534 6.17%
Interest-Earning Deposits............... 2,781 108 3.88%
Loans, net.....(2)...................... 72,195 6,066 8.40%
------- ------ -----
Total Earning Assets.................... 83,630 6,708 8.02%
------- ------ -----
Interest Bearing Liabilities:
Passbook accounts....................... 10,027 283 2.84%
NOW and money market accounts........... 14,468 315 2.18%
Certificates of deposit................. 40,536 2,399 5.91%
------- ------ -----
Total Deposits.......................... 65,031 2,997 4.61%
Borrowings.............................. 14,372 895 6.23%
------- ---- -----
Total Interest Bearing Liabilities...... 79,403 3,892 4.90%
------- ------ -----
Net Interest Margin..................... 83,630 2,816 3.38%
======= ====== =====
</TABLE>
- -------------------------------------------------------------------------------
(2) Includes principal balances of non-accruing loans. Interest on non-accruing
loans is not included.
31
<PAGE>
NON-INTEREST INCOME
The Company's non-interest income for the six month period ended December 31,
1998 was $235,000. This is a 14.89% increase over the $200,000 reported for the
Predecessor's corresponding period ended December 31, 1997.
Non-interest income was $314,000 for the nine month period ended June 30,1998.
This represents a 20.38% increase from $250,000 for the Predecessor's nine month
period ended June 30, 1997.
NON-INTEREST INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Six Months Nine Months Twelve Months Percentage Change from
Ended Ended Ended June 30, 1998 September 30,
December 31 June 30 September 30 to December 31 1997 to June 30,
1998 1998 1997 1998 1998
----------- ----------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts......... $116 $185 $249 (37.44)% (25.54)%
Other Service Charges, Commissions & Fees... 119 105 106 13.34% (0.94)%
Securities Gain/(Loss), Net................. 0 24 (6) (100.00)% 500.00%
Total Non-Interest Income................... $235 $314 $349 (25.21)% (9.97)%
===== ===== ===== ======== =======
</TABLE>
NON-INTEREST EXPENSE
For the six month period ending December 31, 1998, non-interest expense was
$1,834,000 or a 36.91% increase over the Predecessor's six month period ending
December 31, 1997. Salaries and employee benefits increased by 34.57% due to
management changes and restructuring resulting from the acquisition of the Bank
by the Company. Premises and equipment increased 26.52% which is attributable to
charges associated with increased depreciation due to the acquisition of
computer equipment and furniture and fixtures. Advertising was increased for the
period due to the change of the Bank's name, image and recognition matters.
Other charges included one time costs associated with the name change, signs,
internal documents, etc. Lastly, the increase in other expense includes charges
for goodwill in the amount of $107,000 associated with the acquisition of the
Bank by the Company.
32
<PAGE>
Non-interest expense for the nine month period ended June 30, 1998, increased to
$2,051,000 from $1,628,000 for the Predecessor's equivalent period ended June
30, 1997. This 26% increase was attributable in part to an increase in deposit
insurance and professional fees related to the acquisition of the Bank by the
Company.
NON-INTEREST EXPENSE
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Six Months Nine Months Twelve Months Percentage change from
Ended Ended Ended June 30, September
1998 30,
December 31, June 30, September 30, to December 1997 to
31, June,
1998 1998 1997 1998 1998
------------ ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits........ $730 $730 $960 (0.04)% (23.93)%
Premises and Equipment................ 181 196 269 (7.54)% (27.23)%
Advertising and Public Relations...... 133 77 162 72.47% (52.40)%
Legal and Professional Services....... 154 307 129 (49.88)% 138.17%
Data Processing....................... 163 213 255 (23.45)% (16.50)%
FDIC Insurance Assessment............. 81 91 75 (11.13)% 21.52%
Bank Fees and Other Charges........... 32 48 84 (33.51)% (42.71)%
Directors Fees........................ 35 66 71 (46.97)% (7.04)%
Goodwill Amortization................. 107 0 0 N/A N/A
Environmental Charges................. 0 146 3 (100.00)% 4759.33%
Other................................. 218 177 245 23.59% (28.01)%
---- ---- ---- ------ --------
Total................................. $1,834 $2,051 $2,253 (10.57)% (8.98)%
======= ======= ======= ======== =======
</TABLE>
PROVISION FOR INCOME TAXES
The provision for income taxes was $154,620 for the six months ended December
31, 1998 compared to $6,000 for the nine months ended June 30, 1998 and $294,720
for the year ended September 30, 1997. The effective tax rate for the six months
ended December 31, 1998 was 50.7 % compared to 8.9% for the nine months ended
June 30, 1998 and 36.5% for the year ended September 30, 1997. The effective tax
rate was greater than the statutory tax rate for the six months ended due to the
non-deductibility of goodwill amortization. The effective tax rate was lower
than the statutory tax rate for the nine months ended due to income from tax
exempt sources, including municipal investments.
CAPITAL RESOURCES AND CAPITAL ADEQUACY
The Company and the Bank are subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on financial statements.
Capital amounts and classification are also subject to qualitative judgments by
regulators involving capital components, risk weightings and other factors.
33
<PAGE>
Management believes that as of December 31, 1998, the Company meets all capital
adequacy requirements to which it is subject. The following table sets forth the
actual and minimum capital amounts and ratios as of December 31, 1998:
<TABLE>
<CAPTION>
Tangible Core Capital Total Risk-Based
Capital Capital
--------- ------------- -----------------
<S> <C> <C> <C>
For Capital Adequacy Purposes
- -----------------------------
Bank Amount.............................. 9,355 9,355 10,105
Required Amount.......................... 1,902 3,804 6,738
------ ------ -----
Excess / (Deficit)....................... 7,453 5,551 3,367
Bank Ratio............................... 7.38% 7.38% 12.00%
Required Ratio........................... 1.50% 3.00% 8.00%
----- ----- -----
Ratio Excess / (Deficit) 5.88% 4.38% 4.00%
To Be Well Capitalized Under Prompt
Corrective Action Provisions
- ----------------------------
Tier 1 (Core) Tier 1 Risk-Based Total Risk-Based
Capital Capital Capital
------------- ----------------- ----------------
Bank Amount.............................. 9,355 9,355 10,105
Required Amount.......................... 6,341 7,610 8,422
------ ------ -----
Excess / (Deficit)....................... 3,014 1,746 1,683
Bank Ratio............................... 7.38% 11.11% 12.00%
Required Ratio........................... 5.00% 6.00% 10.00%
----- ----- ------
Ratio Excess / (Deficit) 2.38% 5.11% 2.00%
</TABLE>
USE OF FUNDS
Investment Securities
Investment securities is the second major category of earning assets for the
Bank. This portfolio, is used to manage the Bank's interest rate sensitivity and
liquidity as other components of the balance sheet change. Management's
objective is to maximize, within quality standards, its net interest margin
while providing a stable source of liquidity through the scheduled stream of
maturities and interest income.
The Bank holds certain investment securities as "available for sale". Available
for sale securities are stated at their current fair value. Unrealized gains and
losses associated with available for sale securities, net of taxes, are excluded
from earnings and reported as a net amount in shareholders' equity until
realized.
The Bank has the ability and does hold securities classified as "held to
maturity" until their respective maturities. Accordingly, such securities are
stated at cost and are adjusted for amortization of premiums and accretion of
discounts.
Realized gains or losses from the sale of securities are reflected in income on
specific identification basis. Interest income and the amortization of the
premium and discount arising at the time of acquisition are included in income.
Investment securities comprise 13% of total earning assets at December 31, 1998.
The "held to maturity" portfolio is managed to provide a stable source of
liquidity through scheduled maturities and interest income payments. The
34
<PAGE>
"available for sale" portfolio is managed to maximize investment yields and to
provide liquidity to react timely to the needs of the Bank.
Total investment securities were $20.3 million as of December 31, 1998.
Weighted average yields of the investment securities portfolio were 5.91% at
December 31, 1998 and 5.90% at June 30, 1998.
Investment securities consist primarily of U.S. government agency and
mortgage-backed securities with both fixed and adjustable interest rates and
municipal bonds. The mortgage-backed securities are subject to both prepayment
and interest rate risk.
INVESTMENT SECURITIES PORTFOLIO
(dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1998
Investment Securities Held to Maturity
Mortgage-Backed Securities.................. 210 2 208
Municipals.................................. 222 3 225
---- -- ---
Total Investment Securities Held to Maturity 432 3 2 433
---- -- -- ---
Investment Securities Available for Sale
Mortgage-Backed Securities.................. 8,179 13 23 8,168
FHLMC Stock ............................... 1,473 547 2,020
U.S. Government Agencies.................... 4,402 19 1 4,420
Municipals.................................. 3,074 81 1 3,154
------ --- -- ------
Total Investment Securities Available for
Sale........................................ 17,128 659 25 17,762
------- ---- --- ------
Total Investments........................... 17,560 662 27 18,195
======= ==== === ======
</TABLE>
35
<PAGE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(dollars in thousands)
As of December 31, 1998
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Fair Fair
Cost Value Cost Value
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities........................... 210 208 8,179 8,168
FHLMC Stock.......................................... 1,473 2,020
U.S. Government Agencies
Due within One Year.................................. 401 400
1 - 5 Years.......................................... 3,130 3,145
5 - 10 Years......................................... 871 875
Total U.S. Government Agencies....................... 4,402 4,420
------- ------
Obligations of State and Political subdivisions
Due within One Year..................................
1 - 5 Years.......................................... 108 109 1,556 1,594
5 - 10 Years......................................... 114 115 1,182 1,220
Due after Ten Years.................................. 336 340
------- ------
Total Obligations of State and Political Subdivision. 222 225 3,074 3,154
---- ---- ------- ------
Total Investments.................................... 432 433 17,128 17,762
==== ==== ======= ======
</TABLE>
INVESTMENT SECURITIES WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION>
Due within 1 to 5 5 to 10 Due After
One Year Years Years 10 Years Total
<S> <C> <C> <C> <C> <C>
December 31, 1998 4.89 5.82 6.04 6.17 5.91
----
June 30, 1998 6.83 5.48 6.19 6.37 5.90
----
September 30, 1997 6.32 6.04 6.05 6.37 6.16
----
</TABLE>
36
<PAGE>
LOANS
Total net loans at December 31, 1998 were $88.4 million, a 11.02% increase over
the Predecessor's net loans as of December 31, 1997 of $79.6 million. Consumer
instalments and commercial loans increased approximately 13%, while mortgage
loans increased approximately 10% for the one year period ended December 31,
1998. Home equity lines increased approximately 37% during this same period.
The Bank will continue to maintain a competitive approach toward high quality
loans of all types in its marketplace.
At December 31, 1998, the Bank did not have any significant outstanding loan
concentration in similar industries that could cause an adverse impact during an
economic downturn in any one industry segment.
LOAN PORTFOLIO AT YEAR-END
(dollars in thousands)
Successor as of
December 31,
1998
---------------
Real estate mortgage loans:
One-to-four family...................... $53,894
Commercial.............................. 21,248
Home equity loans....................... 2,148
Consumer loans............................ 6,736
Commercial loans.......................... 5,051
Less:
Deferred loan fees, net................... 35
Allowance for loan losses................. (750)
--------
Net loans................................. $88,362
========
COMPOSITION OF LOAN BY TYPE
Successor as of
December 31,
1998
Real estate mortgage loans: ---------------
One-to-four family.................. 60.50%
Commercial.......................... 23.85%
Home equity loans................... 2.41%
Consumer loans...................... 7.56%
Commercial loans.................... 5.68%
------
Total............................... 100.00%
======
37
<PAGE>
Lending Activities At December 31, 1998
Percent
Amount of Total
(Dollars in thousands)
Mortgage loans:
One to four family......... 53,894 60.50%
Commercial................. 21,248 23.85%
Home Equity................ 2,148 2.41%
Consumer Loans............... 6,736 7.56%
Commercial Loans............. 5,051 5.67%
------- ------
Total Gross Loans 89,077
Type of Security:
One-to-four family........... 57,438
Non-residential.............. 18,367
Multi-family................. 3,340
Autos........................ 3,482
Deposits..................... 266
Other security............... 4,225
Unsecured.................... 1,959
-------
Total Gross Loans............ 89,077
=======
<TABLE>
<CAPTION>
Due During the Years Ended December 31,
2001 to 2003 to 2008 and
Mortgage loans: 1999 2000 2002 2007 Following
---- ---- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
One to four family................... 53,894 2,423 49 428 3,274 47,720
Commercial........................... 21,249 2,244 564 516 2,252 15,673
Home Equity.......................... 2,148 0 0 13 0 2,135
Consumer Loans......................... 6,736 1,431 748 2,116 2,424 17
Commercial Loans....................... 5,050 3,126 103 627 1,194 0
------ ------ ----- ----- ----- ------
Total Gross Loans...................... 89,077 9,224 1,464 3,700 9,144 65,545
====== ====== ===== ===== ===== ======
</TABLE>
LOAN DISTRIBUTION
(Dollars in Thousands)
Due After December 31, 1999
Fixed Rates Variable Rates Total
----------- -------------- -----
Real estate mortgage loans:
One-to-four family........ 47,729 3,742 51,471
Commercial................ 13,670 5,335 19,005
Home equity loans......... 1,129 1,019 2,148
Consumer loans.............. 5,305 0 5,305
Commercial loan............. 1,924 0 1,924
------ ------ ------
Total............... 69,757 10,096 79,853
====== ====== ======
38
<PAGE>
LOAN ACTIVITY
For The Six Months Ended December 31, 1998
Gross loans receivable at beginning of period.. 89,334
Originations:
First Mortgage loans:
Residential................................ 5,217
Non-residential............................ 3,770
Total first mortgage loans............. 8,987
Consumer loans:
Installment loans.......................... 4,439
Loans secured by deposits.................. 79
Total consumer loans................... 4,518
Commercial loans............................... 2,748
Total originations..................... 16,253
Purchases:
First mortgage loans....................... 0
Total originations and purchase........ 16,253
Repayments and other deductions................ (16,510)
Gross loans receivable at end of period........ 89,077
LOAN QUALITY
Management of the Bank and the Board of Directors of the Bank have established a
formalized, written loan policy and specific lending authority for each loan
officer based upon the loan officer's experience and performance. The Bank also
has a loan committee comprised of outside directors which meets weekly. This
Committee approves loans in excess of individual lending officer authorities and
recommends credits above their authority to the full Board of Directors for
approval.
The Committee also monitors loan administration, loan review and monitors the
overall quality of the Bank's loan portfolio.
A loan review program is maintained. The Bank has outsourced this function in
order to improve independence and to maintain a high level of expertise. The
provider reports to the loan committee on matters of credit quality and
documentation issues.
The Bank's Board of Directors meets monthly to review the overall administration
of the loan portfolio, as well as many other matters. The Board reviews problem
loans, delinquency reports and discusses lending activities at each Board
meeting.
The Bank maintains a watchlist of loans which do not meet the Bank's established
criteria. These are not under-performing loans, but simply monitored as a
precautionary matter. This management report also contains loans which are
considered to be under-performing or non-performing, loans criticized by
examiners or any other case where the loan has characteristics requiring special
attention.
Under-performing assets are defined as: (1) in non-accrual status loans where
the ultimate collectability of interest is uncertain but the principal is
considered collectible; (2) loans past due ninety days or more as to principal
or interest (and where continued accrual has not been specifically approved);
and (3) loans which have been renegotiated to provide a reduction or deferral of
interest or principal because of deterioration in the financial condition of the
borrower. The Company has adopted Statement of Financial Accounting Standards
No. 114, "Accounting by
39
<PAGE>
Creditors for Impairment of a Loan," as amended by Statement of Financial
Accounting Standard No. 118, on January 1, 1995. At December 31, 1998, the Bank
had reported $812,000 of impaired loans.
UNDER-PERFORMING ASSETS
(dollars in thousands)
Successor Six Months
Ended December 31,
1998
Non-Accruing Loans........................... $23
Renegotiated Loans........................... 0
Ninety (90) Days Past Due.................... 789
-----
Total Under-Performing Assets................. $812
Under-Performing Assets as a Percentage
of Total Loans................................ 0.91%
Past Due Loans (90 Days or More)
Commercial.................................... $60
Mortgage...................................... 687
Installment................................... 42
-----
Total......................................... $789
=====
Loans are charged off when they are deemed uncollectible. Total loans charged
off, net of recoveries, were $126,000 for the nine months ended June 30,1998,
and $125,000 for the six month period ending December 31, 1998.
40
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES Successor Predecessor Predecessor
(dollars in thousands) Six Months Ended Nine Months Ended Twelve Months Ended
December 31 June 30 September 30
1998 1998 1997
---------------- ----------------- -------------------
<S> <C> <C> <C>
Beginning Allowance for Loan Losses...... $776 $392 $326
Loans Charged Off:
Mortgage................................. 0
Other.................................... 132 133 39
------- ------- -------
Total Charged-Off Loans.................. 132 133 39
------- ------- -------
Recoveries on Charged-Off Loans
Mortgage................................. 0
Other.................................... 6 8 1
------- ------- -------
Total Recoveries on Charged-Off Loans.... 6 8 1
------- ------- -------
Provision for Loan Losses................ 100 510 104
Ending Allowance for Loan Losses......... $750 $776 $392
------- ------- -------
Average Loans Outstanding................ $89,246 $82,077 $63,705
Net Charged-Off Loans to Average Loans... 0.28% 0.20% 0.06%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
Successor as
of
December 31
1998
------------
Mortgage Loans................... $324
Consumer & Commercial Loans...... 426
-----
Total ........................... $750
=====
This analysis, as well as the general condition of the portfolio, is used to
make the final determination of the adequacy of the allowance for loan losses on
a quarterly basis.
41
<PAGE>
SOURCES OF FUNDS
The Bank's primary funding source is its base of core customer deposits, which
includes interest and non-interest bearing demand deposits, savings accounts,
money market accounts and certificates of deposit. Other sources of funds have
been through advances from the Federal Home Loan Bank-Indianapolis as well as
funds on deposit. The following table presents information with respect to the
average balances of these funding sources.
The Bank's average total core deposits were $83 million for the six month period
ending December 31, 1998. The Bank experienced increases in all categories of
average deposits during the six month period ending December 31, 1998 except for
savings accounts. The Bank's total funding sources for the nine month period
ending June 30, 1998, were on an average of $90.0 million and for the six months
ended December 31, 1998, an average of $102.4 million. An average increase of
$1.5 million in FHLB advances were attributed to some of this growth in total
funding sources
FUNDING SOURCES - AVERAGE BALANCES
(dollars in thousands)
Successor for
six months ended
December 31
1998
----------------
Core Deposits:
Non-Interest Bearing Demand
Savings Accounts..................... 8,479
Money Market and NOW Accounts........ 26,224
Other Time Deposits.................. 48,298
--------
Total Core Deposits.................. 83,001
FHLB Advances........................ 19,383
--------
Total Funding Sources................ 102,384
========
42
<PAGE>
FUNDING SOURCES - YIELDS
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor Predecessor
Six Months Nine Months Twelve Months Percentage change from
Ended Ended Ended June 30, 1998 September 30,
December 31 June 30 September 30 to December 1997 to June
31
1998 1998 1997 1998 1998
----------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand
Savings Accounts................. 3.01% 2.96% 2.82% 1.63% 5.10%
Money Market and NOW Accounts.... 3.26% 3.10% 3.08% 5.30% 0.42%
Other Time Deposits.............. 4.99% 5.99% 5.92% -16.70% 1.04%
----- ----- ----- ------- -----
Total Core Deposits.............. 4.24% 4.80% 4.93% -11.66% -2.74%
FHLB Advances.................... 5.55% 5.95% 6.42% -6.73% -7.36%
----- ----- ----- ------- ------
Total Funding Sources............ 4.49% 5.03% 5.21% -10.74% -3.56%
===== ===== ===== ======= ======
</TABLE>
(Dollars in thousands, except for opening balance amounts)
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31 % of Average
Balance 1998 Deposits Rate
------- ----------- -------- --------
<S> <C> <C> <C> <C>
Withdrawable:
Savings accounts........................... 100 8,675 9.69% 2.80%
Non-interest bearing checking.............. 100 126 0.14% 0.00%
Now accounts............................... 25 16,543 18.48% 1.87%
Money Market Accounts...................... 25 12,472 13.93% 4.85%
------- ------ -----
Total withdrawable......................... 37,816 42.24% 3.05%
------- ------ -----
Certificates (original terms):
12 Months or less.......................... Various 10,671 11.92% 2.65%
13 to 36 Months............................ 500 2,006 2.24% 5.72%
37 Months and greater...................... 500 15,214 16.99% 6.81%
IRA's (original terms):
12 Months or less.......................... Various 352 0.39% 5.43%
13 to 36 Months............................ 500 715 0.80% 5.70%
37 Months and greater...................... 500 3,015 3.37% 6.48%
Jumbo certificates......................... 100,000 19,740 22.05% 5.96%
Total certificates......................... 51,713 57.76% 5.54%
------- ------ -----
Total deposits............................. 89,529 100.00% 4.48%
======= ====== ======
</TABLE>
CERTIFICATES OF DEPOSITS, BY RATE
(in thousands)
Successor as of
December 31, 1998
Under 5% 5,294
5.01 % to 6.00 % 33,054
6.01 % to 7.00 % 10,143
7.01% to 8.00% 1,918
8.01 % and over 1,304
------
51,713
======
43
<PAGE>
CERTIFICATES OF DEPOSITS, BY RATE AND TERM
(in thousands)
<TABLE>
<CAPTION>
Amounts at December 31, 1998 Maturing in:
Greater Than Three
One Year or Less Two Years Three Years Years Total
---------------- --------- ----------- ------------------- -----
<S> <C> <C> <C> <C> <C>
Under 5 %........................ 5,116 66 100 12 5,294
5.01 % - 6.00 %.................. 23,196 3,322 1,763 4,773 33,054
6.01 % - 7.00 %.................. 200 8,741 707 495 10,143
7.01 % - 8.00 %.................. 840 417 302 359 1,918
8.01 % and over.................. 699 605 0 0 1,304
------- ------- ------ ------ ------
30,051 13,151 2,872 5,639 51,713
======= ======= ====== ====== ======
</TABLE>
TIME DEPOSIT OF $100,000 AND OVER
(dollars in thousands)
Three months or less.................................. 5,394
Greater than three months through six months.......... 5,977
Greater than six months through twelve months......... 1,342
Over twelve months.................................... 7,027
Total................................................. 19,740
FHLB ADVANCES
(dollars in thousands)
At or for the Six
Months Ended December 31, 1998
FHLB Advances
Outstandings at end of period......................... 26,500
Average balance for period............................ 19,383
Maximum amount outstanding at any month-end
during the period..................................... 26,500
Weighted average interest rate during the period...... 5.50%
Weighted average interest rate at end of period....... 5.46%
44
<PAGE>
LIQUIDITY AND RATE SENSITIVITY
The primary function of liquidity and interest rate sensitivity management is to
provide for and assure an ongoing flow of funds that is adequate to meet all
current and future financial needs of the Bank. Such financial needs include
funding credit commitments, satisfying deposit withdrawal requests, purchasing
property and equipment and paying operating expenses. The funding sources of
liquidity are principally the maturing assets and other borrowings. The purpose
of liquidity management are to match sources of funds with anticipated customer
borrowings and withdrawals and other obligations along with ensuring a
dependable funding base. Rate sensitivity analysis places each of the Bank's
balance sheet components in its appropriate maturity category according to its
repricing frequency, thus allowing management to measure the exposure to changes
in interest rates.
The Bank's Asset/Liability Committee, which sets forth guidelines under which
the Bank manages deposits and its investments and loan portfolios, is
responsible for monitoring the Bank's investment portfolio. The objective of
this committee is to provide for the maintenance of an adequate net interest
margin and adequate level of liquidity to keep the Bank sound and profitable
during all stages of an interest rate cycle. An external investment consultant
is utilized to provide the Company with information necessary to monitor,
analyze and track the Bank's investment portfolio.
At December 31, 1998, 79 million or 88.8 percent of the loan portfolio are fixed
rate loans, excluding non-accruing loans. Variable rate loans, excluding
non-accruing loans, amounted to 10 million or 11.2 percent of the loan portfolio
at December 31, 1998. Fixed and variable rate loans with scheduled maturities
greater than one year amounted to $70 million and $10 million, respectively. In
the investment securities category, $6 million or 28.4 percent of the portfolio
matures within one year. The Bank's average loan-to-deposit ratio, another
indication of liquidity, was 107% at December 31, 1998.
Management also monitors the Bank's balance between interest rate sensitive
assets and liabilities to ensure that changes in interest rates will not
adversely affect earnings. Management of these sensitive items is important to
protect the net interest margin and assure earnings stability during periods of
adverse fluctuations in market interest rates.
Interest rate sensitivity occurs when assets and liabilities are subject to rate
and yield changes within a desisgnated time horizon. An interest rate
sensitivity gap ("GAP) is determined by the differential of interest-earning
assets and interest-bearing liabilities. For an instituion with a negative GAP
for a given period, the amount of its interest-bearing liabilities maturing or
otherwise repricing within such period exceeds the amount of the
interest-earning assets repricing within the same period. Accordingly, in a
rising interest rate environment, institutions with a negative GAP will
generally experience greater increases in costs of their interest-bearing
liabilities than in yields on their interest earning assets. Conversely, the
yields on interest-earning assets of institutions with a negative GAP will
generally decrease less than the cost of their interest-bearing liabilities
during declining interest rate environments. Changes in interest rates will
generally have the opposite effect on institutions with a positive GAP.
Management's objective in interest rate sensitivity management is to reduce the
Bank's vulnerability to future interest rate fluctuations while providing for
growth of the net interest margin.
The cumulative GAP ratio of the Bank on December 31, 1998, was 3.15 percent for
interest rate sensitive assets and liabilities of ninety days or less and 25.41
percent for interest rate sensitive assets and liabilities for one year or less.
Management continues to maximize its net interest margin while managing interest
rate risk within prudent boundaries. Based upon the current balance sheet
structure of the Bank, any future decrease in interest rates could have a
positive impact on the Bank's net interest margin and earnings. In the event of
an increase in general interest rates, management believes that such a decline
would have a minimal effect on the Bank's earnings.
45
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1 - 90 Days 91 - 365 Days 1 - 5 Years Beyond 5 Years Total
----------- ------------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities.................. 3,498 1,057 5,154 9,845 19,554
Interest-Bearing Deposits.............. 18,129 18,129
Loans (excluding non-accruing)......... 2,839 8,519 14,311 63,408 89,077
------- -------- -------- ------- -------
Total Earning Assets................... 24,466 9,576 19,465 73,253 126,760
Interest-Bearing Liabilities:
Savings and Time Deposits.............. 17,190 29,472 30,417 12,450 89,529
Borrowed Funds......................... 11,500 10,000 5,000 26,500
------- -------- -------- -------
Total Interest-Bearing Liabilities..... 28,690 39,472 35,417 12,450 116,029
Interest Rate Sensitivity Gap Per Period (4,224) (29,896) (15,952) 60,803 10,731
======= ======== ======== ======= =======
Cumulative Interest Rate Gap........... (4,224) (34,120) (50,072) 10,731 10,731
======= ======== ======== ======= =======
Cumulative interest sensitivity gap as a
percentage of total assets.............. -3.15% -25.41% -37.29% 7.99% 7.99%
</TABLE>
NET PORTFOLIO VALUE
(dollars in thousands)
$ Amount $ Change % Change NPV Ratio Change
+ 400 bp $3,437 $(8,610) -71% 2.89% - 637 bp
+ 300 bp 5,726 (6,320) -52% 4.71% - 455 bp
+ 200 bp 8,034 (4,013) -33% 6.45% - 282 bp
+ 100 bp 10,212 (1,835) -15% 8.01% - 125 bp
0 bp 12,047 9.26%
- 100 bp 13,562 1,516 13% 10.25% + 99 bp
- 200 bp 15,287 3,240 27% 11.33% + 207 bp
- 300 bp 17,473 5,426 45% 12.67% + 341 bp
- 400 bp $19,617 $7,570 63% 13.93% + 466 bp
EFFECTS OF INFLATION
The assets and liabilities of a banking entity are unlike companies with
investments in inventory, plant and equipment. Assets are primarily monetary in
nature and differ from the assets of most non-financial services companies. The
performance of a bank is affected more by changes in interest rates than by
inflation.
Because of the relatively low rate of inflation over the past years, the impact
upon the predecessor and successor balance sheet and levels of income and
expense has been minimal.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Blue River Bancshares, Inc. and Subsidiary
Shelbyville, Indiana
We have audited the accompanying consolidated balance sheet of Blue River
Bancshares, Inc. and subsidiary (the "Company") as of December 31, 1998, and the
related statements of earnings, shareholders' equity, and cash flows for the six
month period ended December 31, 1998. 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998,
and the results of its operations and its cash flows for the six month period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 15, 1999
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Shelby County Bancorp and Subsidiary
Shelbyville, Indiana
We have audited the accompanying consolidated statements of earnings,
shareholders' equity and cash flows of Shelby County Bancorp and subsidiary (the
"Company") for the nine month period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Shelby County Bancorp and subsidiary for the nine month period ended June 30,
1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
January 15, 1999
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shelby County Bancorp and Subsidiary:
We have audited the accompanying consolidated statements, of earnings,
shareholders' equity and cash flows of Shelby County Bancorp and subsidiary for
the year ended September 30, 1997. 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
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, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Shelby County Bancorp and subsidiary for the year ended September 30,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
November 21, 1997
49
<PAGE>
BLUE RIVER BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET (SUCCESSOR)
AS OF DECEMBER 31, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents:
Cash and due from banks $ 1,103,619
Interest-bearing deposits 18,128,740
-------------
Total cash and cash equivalents 19,232,359
Securities available for sale - at fair value (amortized cost: $17,128,318) 17,762,460
Securities held to maturity - at amortized cost (fair value: $433,415) 432,649
Loans receivable, net of allowance for loan losses of $750,022 88,362,224
Stock in FHLB of Indianapolis, at cost 1,357,800
Accrued interest receivable 759,486
Income taxes receivable 239,970
Premises and equipment, net 1,914,880
Real estate owned 282,938
Prepaid expenses and other assets 120,854
Goodwill, net 3,059,982
-------------
Total assets $ 133,525,602
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 89,529,242
Advances from FHLB 26,500,000
Accrued interest on deposits and FHLB advances 195,444
Deferred income taxes 76,001
Accrued expenses and other liabilities 751,133
-------------
Total liabilities 117,051,820
-------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: 2,000,000 shares authorized, none issued
Common stock, no par value: 15 million shares authorized, 1,500,000 shares issued;
1,490,870 shares outstanding 16,319,093
Treasury stock, no par value: 9,130 shares at cost (94,533)
Accumulated deficit (130,594)
Accumulated other comprehensive income, net of deferred taxes 379,816
-------------
Total shareholders' equity 16,473,782
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,525,602
=============
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
BLUE RIVER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor Predecessor
----------------- -------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
Through Through Through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $3,608,238 $5,221,212 $6,065,982
Mortgage-backed securities and investment
securities 305,388 332,054 474,817
Interest-bearing deposits 251,271 111,294 108,161
Dividends from FHLB and other 57,050 56,630 59,049
----------- ----------- -----------
Total interest income 4,221,947 5,721,190 6,708,009
----------- ----------- -----------
INTEREST EXPENSE:
Interest expense on deposits 1,661,739 2,592,320 2,996,545
Interest expense on FHLB advances 555,905 815,040 895,844
----------- ----------- -----------
Total interest expense 2,217,644 3,407,360 3,892,389
----------- ----------- -----------
NET INTEREST INCOME 2,004,303 2,313,830 2,815,620
PROVISION FOR LOAN LOSSES 100,000 510,000 104,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,904,303 1,803,830 2,711,620
----------- ----------- -----------
NON-INTEREST INCOME:
Service charges and fees 115,713 185,412 249,383
Other 119,158 128,800 99,951
----------- ----------- -----------
Total non-interest income 234,871 314,212 349,334
----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 729,818 730,310 960,375
Premises and equipment 180,960 195,751 268,952
Federal deposit insurance 80,865 91,142 74,721
Data processing 162,820 212,922 255,402
Advertising and promotion 133,351 77,117 161,625
Bank fees and charges 31,511 48,125 84,296
Other 408,255 695,410 447,483
Goodwill amortization 106,709
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,834,289 2,050,777 2,252,854
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 304,885 67,265 808,100
INCOME TAX EXPENSE 154,620 6,000 294,720
----------- ----------- -----------
NET EARNINGS $ 150,265 $ 61,265 $ 513,380
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.10 $ 0.35 $ 2.92
DILUTED EARNINGS PER COMMON SHARE $ 0.10 $ 0.34 $ 2.83
WEIGHTED AVERAGE SHARES OUTSTANDING 1,496,329 175,950 175,950
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
BLUE RIVER BANCSHARES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SUCCESSOR)
FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income, net Total
Comprehensive Common Treasury Retained of Deferred Shareholders'
Income Stock Stock Earnings Taxes Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 18,000 $ (116,790) $ (98,790)
Net loss (161,639) (161,639)
Redemption of initial capitalization (18,000) (18,000)
Proceeds from issuance of common
stock, net of offering costs 16,319,093 16,319,093
Balance at June 30, 1998 16,319,093 (278,429) 16,040,664
---------- ----------- --------- ----------- ---------- ------------
Net income $ 150,265 150,265 150,265
----------
Other comprehensive income:
Unrealized gains on securities, net of
reclassification adjustment 379,816 $ 379,816 379,816
----------
Other comprehensive income 379,816
----------
Comprehensive income $ 530,081
==========
Purchase of treasury stock $(106,003) (106,003)
Re-issuance of treasury stock 11,470 (2,430) 9,040
------------ --------- ----------- ---------- ------------
Balance at December 31, 1998 $ 16,319,093 $ (94,533) $ (130,594) $ 379,816 $16,473,782
============ ========= =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (PREDECESSOR)
FOR THE PERIOD FROM OCTOBER 1, 1996 TO JUNE 30, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income, net Total
Comprehensive Common Retained of Deferred Shareholders'
Income Stock Earnings Taxes Equity
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $1,358,123 $ 4,744,525 $ 330,230 $ 6,432,878
Net income $ 513,380 513,380 513,380
----------
Other comprehensive income:
Unrealized gain on securities, net of
reclassification adjustment 295,438 295,438 295,438
----------
Other comprehensive income 295,438
----------
Comprehensive income $ 808,818
==========
Dividends ($.40 per share) (70,374) (70,374)
---------- ---------- --------- ----------
Balance at September 30, 1997 1,358,123 5,187,531 625,668 7,171,322
Net income $ 61,265 61,265 61,265
Other comprehensive income:
Unrealized gain on securities, net
of reclassification adjustment 219,031 219,031 219,031
----------
Other comprehensive income 219,031
----------
Comprehensive income $ 280,296
==========
Dividends ($.25) per share (43,987) (43,987)
Employee Stock Options exercised
including tax benefit 420,900 420,900
---------- ---------- --------- ----------
Balance at June 30, 1998 $1,779,023 $ 5,204,809 $ 844,699 $ 7,828,531
========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
BLUE RIVER BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor Predecessor
----------------------- ---------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
Through Through Through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 150,265 $ 61,265 $ 513,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 193,839 121,731 157,211
Gain on sale of securities available for sale (23,809) (5,807)
Provision for loan losses 100,000 510,000 104,000
Deferred income taxes (9,435) (239,304) 132,000
Changes in assets and liabilities:
Accrued interest receivable (44,368) 35,664 (28,549)
Other assets (670) (151,673) 30,746
Other liabilities (242,062) 236,476 (467,155)
------------ ------------ ------------
Net cash provided by operating activities 147,569 550,350 435,826
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition of Shelby County Bancorp (10,480,938)
Loans funded net of collections 956,942 (13,468,623) (10,142,418)
Maturities of securities available for sale 90,000 327,275 488,863
Maturities of securities held to maturity 250,000 448,255
Purchase of FHLB stock (358,900) (78,700) (300,100)
Purchase of premises and equipment (257,181) (93,888) (47,758)
Disposals of premises and equipment 34,853
Proceeds from sale of securities available for sale 4,701,772 4,533,477
Purchase of securities available for sale (9,172,670) (4,679,695) (5,201,233)
------------ ------------ ------------
Net cash used in investment activities (18,972,747) (13,291,859) (10,186,061)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from FHLB advances and other borrowings 7,618,317 2,409,293 8,000,000
Dividends paid (43,988) (70,374)
Net increase (decrease) in deposits 13,938,290 10,219,966 (652,753)
Purchase of treasury stock (96,963)
Repayment of FHLB advance and other borrowings (1,585,236) (13,731)
Proceeds from issuance of common stock 65,550
------------ ------------ ------------
Net cash provided by financing activities 21,459,644 11,065,585 7,263,142
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,634,466 (1,675,924) (2,487,093)
Cash and cash equivalents at beginning of period 16,597,893 2,436,183 4,923,276
------------ ------------ ------------
Cash and cash equivalents at end of period $ 19,232,359 $ 760,259 $ 2,436,183
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 2,431,000 $ 3,387,000 $ 3,899,397
Income taxes paid $ 82,000 $ 376,000 $ 312,000
Loans transferred to real estate owned $ 110,000 $ 102,000 $ 36,727
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
BLUE RIVER BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998, NINE MONTHS ENDED JUNE 30, 1998, AND YEAR
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Blue River Bancshares, Inc. (the "Company")
conform to generally accepted accounting principles and prevailing
practices within the banking and thrift industry. A summary of the more
significant accounting policies follows:
Basis of Presentation - The consolidated financial statements include the
accounts of Blue River Bancshares, Inc. (the "Successor"), Shelby County
Bancorp (the "Predecessor") and its wholly-owned subsidiary Shelby County
Bank (formerly, Shelby County Savings Bank, FSB - the "Bank") and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
On June 26, 1998, the Successor completed an initial public offering. The
Successor issued 1,500,000 common shares at an offering price of $12 per
share. The Successor received approximately $16.2 million in net proceeds
from the offering.
Acquisition of Shelby County Bancorp - On February 5, 1998, the Successor,
the Predecessor and the Bank entered into an Agreement of Affiliation and
Merger as amended and restated on March 12, 1998 and further amended on
June 2, 1998, pursuant to which the Successor would acquire the Bank
pursuant to the merger of the Predecessor into the Successor. On June 26,
1998, the effective date of the merger, pursuant to the merger agreement
each outstanding share of common stock of the Predecessor was converted
into the right to receive $56.00 per share from the Successor. The merger
has been accounted for by the purchase method of accounting. Accordingly,
the excess of the purchase price over the fair value of the net assets
acquired has been allocated to goodwill. For financial reporting purposes,
the Successor reported the transaction as if it was effective June 30,
1998. The statement of earnings and statement of cash flows for the four
day period from June 26, 1998 to June 30, 1998, of the Successor was not
material.
55
<PAGE>
The consideration given and the assets acquired and liabilities assumed
were comprised of the following:
Cash $ 10,626,000
Acquisition costs 202,934
------------
Total purchase price $ 10,828,934
------------
Net cost of acquisition $ 10,828,934
Less Shelby County Bancorp shareholders' equity
at date of acquisition 7,828,531
------------
Excess consideration over book value 3,000,403
------------
Adjustments to reflect fair value:
Investment securities held to maturity 14,406
Loans 554,374
Deposits (737,602)
Other liabilities (421,407)
Other assets 28,082
Tax effect of above adjustments 395,859
------------
Total fair value adjustments (166,288)
------------
Total goodwill $ 3,166,691
============
Description of Business - The Bank provides financial services to
south-central Indiana through its main office in Shelbyville and three
other full service branches in Shelbyville, Morristown, and St. Paul,
Indiana. The Bank is subject to competition from other financial
institutions and is regulated by certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. Estimates most susceptible to change in the near
term include the allowance for loan losses and the fair value of
securities, loans and deposits.
Cash and Cash Equivalents - All highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.
Securities - Securities are required to be classified as held to maturity,
available for sale or trading. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity. Debt and equity securities not classified as either held to
maturity or trading securities are classified as available for sale. Only
those securities classified as held to maturity are reported at amortized
cost, with those available for sale reported at fair value with unrealized
gains and losses included in shareholders' equity. Premiums and discounts
are amortized over the contractual lives of the related securities using
the level yield method. Gain or loss on sale of securities is based on the
specific identification method.
56
<PAGE>
Revenue Recognition - Interest on real estate, commercial and installments
loans is accrued over the term of the loans on a level yield basis. The
recognition of interest income is discontinued when, in management's
judgment, the interest will not be collectible in the normal course of
business.
Nonrefundable loan origination fees, net of certain direct loan
origination costs, are deferred and recognized as a yield adjustment over
the life of the underlying loan. Any unamortized fees on loans sold are
included as part of the gain/loss on sale of loans at time of sale.
The Company discontinues accruing interest on loans that are more than 90
days past due on commercial and consumer loans and 120 days past due on
mortgage loans. Income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments returns to
normal, in which case the loan is returned to accrual status.
Provision for Losses - A provision for estimated losses on loans and real
estate owned is charged to operations based upon management's evaluation
of the potential losses. Such an evaluation, which includes a review of
all loans for which full collectibility may not be reasonably assured
considers, among other matters, the estimated net realizable value of the
underlying collateral, as applicable, economic conditions, historical loan
loss experience and other factors that are particularly susceptible to
changes that could result in a material adjustment in the near term. While
management endeavors to use the best information available in making its
evaluations, future allowance adjustments may be necessary if economic
conditions change substantially from the assumptions used in making the
evaluations.
FHLB Stock - Federal law requires a member institution of the Federal Home
Loan Bank ("FHLB") 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.
Real Estate Owned - Real estate owned represents real estate acquired
through foreclosure or deed in lieu of foreclosure and is recorded at the
lower of cost or fair value less estimated costs to sell. When property is
acquired, it is recorded at the lower of cost or estimated fair value at
the date of acquisition, with any resulting write-down charged against the
allowance for loan losses. Any subsequent deterioration of the property is
charged directly to real estate owned expense. Costs relating to the
development and improvement of real estate owned are capitalized, whereas
costs relating to holding and maintaining the property are charged to
expense as incurred.
Premises and Equipment - Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives that range from 2 to 50 years.
Goodwill - The excess of cost over the fair value of assets acquired in
connection with the purchase of the Predecessor is being amortized using
the straight line method over 15 years. Amortization expense for the six
month period ended December 31, 1998 was approximately $107,000.
Management reviews intangible assets for possible impairment if there is a
significant event that detrimentally affects operations. Impairment is
measured using estimates of the future earnings potential of the entity or
assets acquired.
Income Taxes - The Company and its wholly-owned subsidiary file
consolidated income tax returns. Deferred income tax assets and
liabilities reflect the impact of temporary differences between amounts
57
<PAGE>
of assets and liabilities for financial reporting purposes and the basis
of such assets and liabilities as measured by tax laws and regulations.
Earnings per Common Share - Earnings per share of common stock are based
on the weighted average number of basic shares and dilutive shares
outstanding during the year.
The following is a reconciliation of the weighted average common shares
for the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------- ----------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
Basic earnings per share:
Weighted average common shares 1,496,329 175,950 175,950
========== ======== ========
Diluted earnings per share:
Weighted average common shares 1,496,329 175,950 175,950
---------- -------- --------
Dilutive effect of stock options 5,650 5,332
---------- -------- --------
Weighted average common
and incremental shares 1,496,329 181,600 181,282
========== ======== ========
</TABLE>
Comprehensive Income - Effective January 1, 1998 the Company adopted
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income. This statement establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, losses) in a full set of general purpose
financial statements. The adoption of this statement required the
reclassification of prior periods.
In accordance with SFAS No. 130, reclassification adjustments have been
determined for all components of other comprehensive income reported in
the consolidated statements of changes in shareholders' equity. Amounts
presented within those statements for the successor's six month period
ended December 31, 1998; and the predecessor's nine month period ended
June 30, 1998 and year ended September 30, 1997 are as follows:
58
<PAGE>
<TABLE>
<CAPTION>
Successor Predecessor
-------------------- --------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
Other comprehensive income before tax:
Net unrealized holding gains $ 634,142 $ 388,860 $ 498,204
Less: reclassification adjustment for
gains realized in net income (23,809) (5,807)
---------- --------- ---------
Other comprehensive income before tax 634,142 365,051 492,397
Income tax expense related to items of
other comprehensive income (254,326) (146,020) (196,959)
---------- --------- ---------
Other comprehensive income, net of tax $ 379,816 $ 219,031 $ 295,438
========== ========= =========
</TABLE>
The Comprehensive income represents unrealized gains and losses of the
Subsidiary Bank as investment unrealized gains and losses at the Holding
Company were immaterial.
59
<PAGE>
Segment Information - Effective January 1, 1998 the Company adopted
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information. This
statement redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a
company's operating segments. In accordance with SFAS No. 131, the Company
has disclosed all required information relating to its one operating
segment.
New Accounting Pronouncements - In June 1998, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities was issued and is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999.
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a hedge of foreign
currency exposure. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Management has not yet fully
evaluated the effect, if any, of the new standard on the consolidated
financial statements.
60
<PAGE>
2. SECURITIES
Securities at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------------- Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities $ 8,178,651 $ 13,032 $ (23,162) $ 8,168,521
FHLMC preferred stock 1,473,168 546,561 2,019,729
Corporate bonds 1,150,136 15,224 1,165,360
Municipal bonds 3,074,335 80,794 (1,159) 3,153,970
U.S. treasury and agency securities 3,252,028 3,304 (452) 3,254,880
----------- --------- --------- ------------
Total available for sale $17,128,318 $ 658,915 $ (24,773) $ 17,762,460
=========== ========= ========= ============
Securities held to maturity:
Mortgage-backed securities $ 210,310 $ 414 $ (2,187) $ 208,537
Municipal bonds 222,339 2,539 224,878
----------- --------- --------- ------------
Total held to maturity $ 432,649 $ 2,953 $ (2,187) $ 433,415
=========== ========= ========= ============
</TABLE>
The carrying value of mortgage-backed securities, corporate bonds, and U.S.
treasury and agencies at December 31, 1998 are shown below by their contractual
maturity date. Actual maturities will differ because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Mortgage-backed securities
Due in one year or less $ 305,731 $ 308,954
Due after one year through five years 4,399,068 4,396,477 $ 147,807 $ 146,435
Due after five years through ten years 992,750 994,399
Due after ten years 2,477,020 2,468,692 62,503 62,102
Corporate bonds:
Due after one year through five years 1,031,322 1,043,590
Due after five years through ten years 118,814 121,770
Municipal bonds:
Due after one year through five years 1,555,638 1,593,544 108,164 109,450
Due after five years through ten years 1,182,955 1,220,121 114,175 115,428
Due after ten years 335,743 340,304
U.S. treasury and agency securities:
Due in one year or less 400,803 400,376
Due after one year through five years 2,098,620 2,101,306
Due after five years through ten years 756,686 753,198
FHLMC preferred stock 1,473,168 2,019,729
----------- ----------- --------- ---------
Total $17,128,318 $17,762,460 $ 432,649 $ 433,415
=========== =========== ========= =========
</TABLE>
61
<PAGE>
3. LOANS RECEIVABLE
Loans receivable at December 31, 1998 by major categories are as follows:
Real estate mortgage loans:
One-to-four family $ 52,259,679
Commercial 16,716,418
Home equity loans 2,147,624
Residential construction 1,391,642
Commercial participation purchased 5,431,117
Consumer loans 6,735,970
Commercial loans 4,394,768
------------
89,077,218
Deferred loan origination costs, net 35,028
Allowance for loan losses (750,022)
------------
$ 88,362,224
============
62
<PAGE>
Activity in the allowance for loan losses for the periods indicated were
as follows:
<TABLE>
<CAPTION>
Successor Predecessor
----------------- ---------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
Beginning balance $ 776,502 $ 391,677 $ 325,900
Provision for loan losses 100,000 510,000 104,000
Charge-offs (132,764) (133,551) (39,369)
Recoveries 6,284 8,376 1,146
--------- --------- ---------
Ending balance $ 750,022 $ 776,502 $ 391,677
========= ========= =========
</TABLE>
As of December 31, 1998, loans which were impaired in accordance with SFAS
No.'s 114 and 118 totaled approximately $842,000. Specific reserves for
credit losses allocated to these loans totaled approximately $126,000. The
Bank's policy for recognizing income on impaired loans is to accrue
interest until a loan is classified as impaired. For loans which receive
the classification of impaired during the current period, interest accrued
in excess of 90 days past the due date is charged against current
earnings. No interest is accrued after a loan is classified as impaired.
All payments received for loans which are classified as impaired are
utilized to reduce the principal balance outstanding.
For the period from July 1, 1998 to December 31, 1998, the average balance
of impaired loans was approximately $400,000; additionally, no interest
income was earned on these loans during the six month period ended
December 31, 1998.
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 consists of the following:
Land $ 251,766
Buildings and improvements 1,130,778
Furniture and equipment 619,466
-----------
2,002,010
Less accumulated depreciation (87,130)
-----------
$ 1,914,880
===========
63
<PAGE>
5. DEPOSITS
Deposits at December 31, 1998 are as follows:
Weighted
Average
Amount Rate
Passbook savings accounts $ 8,675,431 2.80 %
Interest - bearing demand deposits accounts 16,669,255 1.87 %
Money market accounts 12,471,991 4.85 %
----------- -----
Total transaction accounts 37,816,677 3.05 %
----------- -----
Certificate accounts:
Under 12 months 29,803,617 5.55 %
12 to 23 months 13,297,486 6.88 %
24 to 35 months 2,904,975 6.22 %
36 to 59 months 1,627,862 6.05 %
Over 60 months 4,078,625 7.06 %
----------- -----
51,712,565 6.10 %
----------- -----
$89,529,242 4.81 %
=========== =====
A summary of certificate accounts by scheduled maturities at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
3.01% - 4% $ 50,734 $ 50,734
4.01% - 5% 5,064,865 $ 65,523 $ 100,181 $ 11,797 5,242,366
5.01% - 6% 23,196,213 3,321,723 1,763,071 $ 1,207,107 3,421,139 $ 144,347 33,053,600
6.01% - 7% 200,188 8,741,125 707,299 300,476 194,603 10,143,691
7.01% - 8% 839,752 417,454 302,493 100,831 257,903 1,918,433
8.01% - 9% 698,757 604,984 1,303,741
------------ ------------ ----------- ----------- ----------- --------- ------------
$ 30,050,509 $ 13,150,809 $ 2,873,044 $ 1,608,414 $ 3,627,539 $ 402,250 $ 51,712,565
============ ============ =========== =========== =========== ========= ============
</TABLE>
A summary of interest expense for the periods indicated is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------ -------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
Account type:
Passbook savings accounts $ 127,657 $ 191,691 $ 283,217
Interest-bearing demand deposits accounts 142,218 231,036 313,997
Money market accounts 284,087 242,986
Certificates 1,107,777 1,926,607 2,399,331
----------- ----------- -----------
$ 1,661,739 $ 2,592,320 $ 2,996,545
=========== =========== ===========
</TABLE>
64
<PAGE>
6. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31, 1998 are as follows:
Weighted
Average
Interest
Fiscal Year Maturity Amount Rates
1999 $21,500,000 5.98 %
2000 5,000,000 5.00 %
------------ -----
$26,500,000 5.78 %
============ =====
The advances from the Federal Home Loan Bank ("FHLB"), are collateralized
by qualifying mortgage loans and investments (as defined) equal to 160% of
FHLB advances.
7. STOCK OPTION PLANS
Successor
The Company has adopted separate stock option plans for Directors of the
Company and the Bank (the "1997 Directors' Stock Option Plan") and the
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 Key
Employee Stock Option Plan and the 1997 Directors' Stock Option Plan,
respectively. The option exercise price per share is the greater of $12.00
per share or the fair market value of a share on the date of grant, and
the stock options are exercisable at any time within the maximum term of
five years for incentive stock options and ten years for non-qualified
stock options of the employee stock option plan and fifteen years under
the directors' Stock Option Plan from the grant date. The options are
nontransferable and are forfeited upon termination of employment.
The following is an analysis of the activity for the six month period
ended December 31, 1998:
Weighted
Average
Options Shares Price
Outstanding at July 1, 1998 105,000 $ 12
Granted 1,500 $ 12
--------
Outstanding at December 31, 1998 106,500
--------
As of December 31, 1998, options outstanding have an exercise price of $12
and a weighted average remaining contractual life of approximately 14
years. 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
65
<PAGE>
method of SFAS 123, the Company's net income and net income per share for
the six month period ended December 31, 1998 would have decreased to the
pro forma amounts indicated below:
Net income (loss):
As reported $ 150,265
Proforma $ (30,533)
Net income (loss) per share:
As reported $ 150,265
Basic earnings per share $ 0.10
Dilutive earnings per share $ 0.10
Proforma earnings per share
Basic earnings per share $ (0.02)
Dilutive earnings per share $ (0.02)
The weighted average fair value of options granted was $2.82 per share in
1998. 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 5.4%,
annualized volatility of 31% 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.
Predecessor
The Predecessor had a stock option plan whereby 17,250 shares of
authorized but unissued common stock were reserved for future issuance
upon the exercise of stock options. Stock options for the purchase of
12,075 shares had been granted to certain officers and directors at $10
per share, the fair value at the date of approval of the plan. The options
could 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 fair value at the date the options were
granted. The options could have been 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 fair value at the date the options were granted. The
options could have been exercised at any time until expiration in August
2006. Unexercised options remaining at September 30, 1996 totaled
approximately 13,800. 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. All 13,800
options were exercised June 1998.
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. As only 1,725 options were issued during the year ended
September 30, 1996 and no stock options were awarded subsequent to
September 30, 1996, the adoption of SFAS 123 had no impact on the
Predecessor's financial position or results of operations.
66
<PAGE>
8. INCOME TAXES
An analysis of the income tax provision is as follows:
Successor Predecessor
----------------- ------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
Current:
Federal $ 139,447 $ 203,224 $ 86,196
State 24,608 42,080 76,524
--------- --------- ---------
164,055 245,304 162,720
Deferred (9,435) (239,304) 132,000
--------- --------- ---------
$ 154,620 $ 6,000 $ 294,720
========= ========= =========
A reconciliation between the effective tax rate and the statutory tax rate
is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
----------------- ------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
U.S. Federal statutory rate 34.0 % 17.6 % 34.0 %
State income tax, net of federal
income tax benefit 5.6 6.4 5.6
Nondeductible goodwill 13.9
Tax exempt interest (3.3) (14.3) (0.7)
Other, net 0.5 (0.8) (2.4)
------ ------ ------
Effective tax rate 50.7 % 8.9 % 36.5 %
====== ====== ======
</TABLE>
The significant components of the Bank's net deferred tax liability as of
December 31, 1998 are as follows:
Accrued expenses not currently deductible $402,000
Excess purchase price over net assets acquired allocated
for financial reporting purposes to deposits 295,000
Allowance for loan losses 275,000
Investment securities available for sale (816,000)
Excess purchase price over net assets acquired allocated
for financial reporting purposes to loans (150,000)
Depreciation (53,000)
Other (29,000)
--------
Net deferred tax liability $(76,000)
========
Under the Internal Revenue Code, prior to 1997, the Bank was allowed a
special bad debt deduction for additions to tax bad debt reserves
established for the purpose of absorbing losses. Subject to
67
<PAGE>
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 of (2) loss experience method. The Bank generally computed
its annual addition to its tax bad debt reserves using the percentage of
taxable income prior to 1997.
Under Legislation enacted in 1996, beginning in fiscal 1997, the Bank is
no longer allowed a special bad debt deduction using the percentage of
taxable income method. Beginning in 1997, the 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 the Bank's net
deferred tax liability.
Approximately $1,100,000, for which no provision for Federal income taxes
has been made, represents allocations of earnings to tax bad debt
deductions prior to 1987 for federal income tax purposes. Reduction of
amounts so allocated for purposes other than tax bad debt losses will
create taxable income, which will be subject to the then current corporate
income tax rate. It is not contemplated that amounts allocated to bad debt
deductions will be used in any manner to create taxable income.
9. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has loan, deposit and
other transactions with executive officers, directors and principal
shareholders, and with organizations and individuals with which they are
financially or otherwise closely associated. All of the transactions were
entered into on substantially the same terms as those prevailing at the
time for comparable transactions with other parties. These loans do not
involve more than normal risk of collection or present other unfavorable
features. As defined, total loans to executive officers, directors and
principal shareholders were approximately $828,000 and loans to an
affiliated company were $498,000 at December 31, 1998.
10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory
agency, the OTS, requires that the Bank maintain minimum ratios of
tangible capital (as defined in the regulations) of 1.5%, core capital (as
defined) of 3%, and total risk-based capital (as defined) of 8%. The Bank
is also subject to prompt corrective action capital requirement
regulations set forth by the Federal Deposit Insurance Corporation
("FDIC"). The FDIC requires the Bank to maintain minimum cpaital amounts
and ratios of weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 1998,
management believes that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized", the
Bank must maintain minimum total risk based, Tier 1 risk based,
68
<PAGE>
and Tier 1 leverage ratios as set forth in the table.
<TABLE>
<CAPTION>
As of December 31, 1998
Actual Capital Required Capital
Amount Ratio Amount Ratio
-------------------- -------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 9,355,000 7.4 % $1,902,000 1.5 %
Core capital 9,355,000 7.4 % 3,804,000 3.0 %
Total risk-based capital 10,105,000 12.0 % 6,738,000 8.0 %
FDICIA regulations to be classified
well-capitalized:
Tier 1 leverage capital 9,355,000 7.4 % 6,344,000 5.0 %
Tier 1 risk based capital 9,355,000 11.1 % 5,053,000 6.0 %
Total risk-based capital 10,105,000 12.0 % 8,422,000 10.0 %
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company has an employee 401(K) plan established for substantially all
full-time employees, as defined. The Company has elected to match
contributions equal to 50% of the employee contributions, up to a maximum
of 6% of an individual's total eligible salary, as defined. Contributions
totaled approximately $9,000 during the six month period ended December
31, 1998 (successor).
12. COMMITMENTS
In the normal course of business, the Bank makes various commitments to
extend credit which are not reflected in the accompanying consolidated
financial statements. At December 31, 1998, the Bank had loan commitments
approximating $2,345,000 excluding undisbursed portions of loans in
process. Outstanding letters of credit were $654,000 at December 31, 1998.
In the event of nonperformance by the other parties to the financial
instruments, the Bank's exposure to credit loss for commitments to extend
credit is represented by the contract amount of those instruments. The
Bank uses the same credit policies and collateral requirements in making
commitments as it does for on-balance sheet financial instruments.
69
<PAGE>
13. PARENT COMPANY FINANCIAL INFORMATION
Condensed Balance Sheet as of December 31, 1998:
ASSETS
Cash and cash equivalents $ 1,441,016
Securities available for sale 771,680
Investment in subsidiary 12,726,367
Other 1,778,402
-----------
Total assets $16,717,465
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 243,683
Shareholders' equity 16,473,782
-----------
Total liabilities and shareholders' equity $16,717,465
===========
Condensed Statements of Earnings are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------ ---------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
through through through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
Interest income, net of interest expense $ 144,223 $ 9,953 $ 7,133
Non-interest income 21,000 33,178 242,135
Non-interest expense (326,984) (395,174) (119,631)
--------- -------- --------
Income (loss) before income taxes
and equity in undistributed
earnings of Shelby County Bank (161,761) (352,043) 129,637
Income tax expense (benefit) (64,704) (89,668) 46,443
--------- -------- --------
Income (loss) before equity in undistributed
earnings of Shelby County Bank (97,057) (262,375) 176,080
Equity in undistributed earnings
of Shelby County Bank 247,322 323,640 337,300
--------- -------- --------
Net income $ 150,265 $ 61,265 $ 513,380
========= ======== ========
</TABLE>
70
<PAGE>
Condensed Statements of Cash Flows are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------ ------------------------------------
Period from Period from Period from
July 1, 1998 October 1, 1997 October 1, 1996
Through Through Through
December 31, 1998 June 30, 1998 September 30, 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 150,265 61,265 $ 513,380
Adjustments to reconcile net cash provided
by (used in) operating activities:
Equity in undistributed earnings of subsidiary (247,322) (323,640) (337,300)
Depreciation and amortization 25,744 17,905 23,697
Decrease in other assets (49,869) 52,858 22,942
Decrease in other liabilities (133,184) 86,413
------------ -------- ---------
Net cash flows from operating activities (254,366) (105,199) 222,719
------------ -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition of Shelby County
Bancorp (10,480,938)
Loans funded net of collections 31,752 (16,831) (350,155)
Purchase of available for sale securities (771,680)
Net investment in subsidiary (2,490,850)
Purchase of premises and equipment (62,334) (10,573)
------------ -------- ---------
Net cash from investing activities (13,774,050) (16,831) (360,728)
------------ -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
FHLB advances and other borrowings (301,393) (13,731)
Repurchase of stock (96,963) (10,236)
Proceeds from issuance of common stock 65,550
Dividends paid (43,988) (70,374)
------------ -------- ---------
Net cash from financing activities (398,356) 11,326 (84,105)
------------ -------- ---------
Net decrease in cash and cash equivalents (14,426,772) (110,704) (222,114)
Cash and cash equivalents at beginning of period 15,867,788 156,228 378,342
------------ -------- ---------
Cash and cash equivalents at end of period $ 1,441,016 $ 45,524 $ 156,228
============ ======== =========
Supplemental cash flow information - interest paid $ 12,000 $ 2,000 $ 26,000
============ ======== =========
</TABLE>
14. 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,
71
<PAGE>
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 Company 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 the Company 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 December 31, 1998:
Cash and Cash Equivalents - For these instruments, the carrying amount
is a reasonable estimate of fair value.
Investment Securities - For investment securities, fair values are
based on quoted market prices, if available. For securities where
quoted prices are not available, fair value is estimated based on
market prices of similar securities.
Loans - The fair value of loans is estimated by discounting future cash
flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits - The fair value of non-interest bearing demand deposits and
savings and NOW accounts is the amount payable as of the reporting
date. The fair value of fixed-maturity certificates of deposit is
estimated using rates currently offered for deposits of similar
remaining maturities.
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.
FHLB Advances - The fair values of the FHLB advances approximate
carrying values as the interest rates are variable and adjust to market
rates.
Accrued Interest Payable - The fair value of these financial
instruments approximates carrying value.
Off-Balance Sheet Financial Instruments - Loan commitments and standby
letters of credit are generally of a short-term nature and, therefore,
their carrying amount is a reasonable estimate of their fair value.
72
<PAGE>
The estimated carrying and fair values of the Company's financial
instruments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
<S> <C> <C>
ASSETS
Cash and cash equivalents $19,232,000 $19,232,000
Investment securities held to maturity 433,000 433,000
Investment securities available for sale 17,762,000 17,762,000
Loans receivable, net 88,362,000 88,704,000
Stock in FHLB of Indianapolis 1,358,000 1,358,000
LIABILITIES
Deposits 89,529,000 89,955,000
FHLB advances 26,500,000 26,500,000
Accrued interest payable 195,000 195,000
</TABLE>
Exhibit 21
Subsidiaries of the Registrant:
Shelby County Bank
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ISSUER'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,103,619
<INT-BEARING-DEPOSITS> 18,128,740
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 432,649
<INVESTMENTS-MARKET> 17,762,460
<LOANS> 89,077,218
<ALLOWANCE> 750,022
<TOTAL-ASSETS> 133,525,602
<DEPOSITS> 89,529,242
<SHORT-TERM> 27,522,578
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 16,319,093
<OTHER-SE> 154,689
<TOTAL-LIABILITIES-AND-EQUITY> 133,525,602
<INTEREST-LOAN> 3,608,238
<INTEREST-INVEST> 362,435
<INTEREST-OTHER> 251,271
<INTEREST-TOTAL> 4,221,946
<INTEREST-DEPOSIT> 1,661,739
<INTEREST-EXPENSE> 555,904
<INTEREST-INCOME-NET> 2,004,303
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,834,290
<INCOME-PRETAX> 304,884
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,265
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<YIELD-ACTUAL> 3.51
<LOANS-NON> 23,128
<LOANS-PAST> 788,788
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 776,502
<CHARGE-OFFS> 132,764
<RECOVERIES> 6,284
<ALLOWANCE-CLOSE> 750,022
<ALLOWANCE-DOMESTIC> 750,022
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
