IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS DOCUMENT IS A COPY OF
THE FORM 10-KSB IS FILED ON MARCH 30, 2000 PURSUANT TO A RULE 201
TEMPORARY HARDSHIP EXEMPTION
Form 10-KSB for Blue River Bancshares, Inc. filed on March 30, 2000
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, 1999.
[ ] 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 Shares, No Par Value
------------------------------------------------
(Title of class)
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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<PAGE>
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 year ended December 31, 1999:
$4,223,000.
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 29, 2000 was
$6,829,150.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,496,800.
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, 1999). The Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held May 4, 2000 is incorporated by reference into
Part III hereof, and the Annual Report of Shareholders for the year ended
December 31, 1999 is incorporated by reference into Part II hereof.
Transitional Small Business Disclosure Format: Yes ___ No X
Total number of sequentially numbered pages - 67
Exhibit index on sequentially numbered pages - 21-22
<PAGE>
Form 10-KSB Table of Contents
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Part I Page
- ------ ----
Item 1 - Description of Business . . . . . . . . . . . . . . . . . 4
Item 2 - Description of Property . . . . . . . . . . . . . . . . . 18
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 18
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . 18
Part II
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Item 5 - Market for Common Equity and Related Stockholder Matters . . 19
Item 6 - Management's Discussion and Analysis or Results of Operation. 19
Item 7 - Financial Statements . . . . . . . . . . . . . . . . . . . 19
Item 8 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . 20
Part III
- --------
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . 20
Item 10 - Executive Compensation . . . . . . . . . . . . . . . . . . . . 20
Item 11 - Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 12 - Certain Relationships and Related Transactions . . . . . . . . 20
Item 13 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 21
3
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Part I.
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ITEM 1. DESCRIPTION OF BUSINESS
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General
Blue River Bancshares, Inc. (the "Successor" or "Company") was organized on
March 18, 1997 for the purpose of acquiring or forming a bank to be
headquartered in Shelbyville, Indiana. On February 5, 1998, the Company entered
into 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. The Bank received regulatory approval in 1999 and
commenced operations of two locations in September 1999. These operations are
conducted as First Community Bank of Fort Wayne.
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 (Fort Wayne), 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.
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
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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. 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 restricted, 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 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
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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, 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.
Market Area
Shelby County is in the top one-third out of 92 counties in the State of Indiana
in terms of personal income and population growth from 1990 through 1995 based
on estimates of the Ball State University's Bureau of Business Research.
Following the Merger, the Bank's primary service area will continue to be Shelby
County which is located approximately 25 miles southeast of Indianapolis,
Indiana. Management of the Company believes that this community has an expanding
and diverse economic base, which includes a wide range of small to medium-sized
businesses engaged in manufacturing, services and retail. The Company intends
for the Bank to market extensively to companies in the Shelby County area with
annual sales of up to $2.0 million. The Shelby County Chamber of Commerce has
indicated that approximately 990 of the estimated 1,100 companies in Shelby
County have annual sales of $2.0 million or less. As of December 31, 1999, the
unemployment rate for Shelby County was 2.5%, compared with the statewide
average of approximately 2.7%, according to Stats Indiana.
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 third in population out of Indiana's 92 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 $3.4
billion as of June 30, 1999, 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
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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.
Employees
As of December 31, 1999, the Bank employed 57 persons on a full-time basis and
10 persons on a part-time basis and the Company employed 6 persons on a
part-time basis. None of the Bank's employees are represented by a collective
bargaining group.
Management of the Bank considers its employee relations to be good.
Competition
The 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
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recaptured into income unless (i) the Bank no longer qualifies as a bank under
the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) excess
dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. A savings institution
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid that is attributable to most
preferences (although not to post-August 7, 1986 tax-exempt interest) can be
credited against regular tax due in later years.
On August 20, 1996, the "Small Business Job Protection Act of 1996" was passed
into law. One provision of this act repeals the special bad debt reserve method
for thrift institutions currently provided for in Section 593 of the Code. The
provision requires thrifts to recapture any reserves accumulated after 1987 but
generally forgives taxes owed. Thrift institutions have been given six years to
account for the recaptured excess reserves, beginning with the first taxable
year after 1995, and are permitted to delay the timing of this recapture for one
or two years subject to whether they meet certain residential loan test
requirements.
Income of the Bank appropriated to bad debt reserves and deducted for federal
income tax purposes is not available for payment of cash dividends or other
distributions to 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, 1999, 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, ("SFAS 133") Accounting for Derivative Instruments
and Hedging Activities, was issued. This statement was amended by Statement of
Financial Accounting Standards No. 137 ("SFAS 137"), Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133.
SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. 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.
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 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 approximately $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.
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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 Governors 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 establish supervisory standards applicable to the
operation, management and lending activities of the Bank, including internal
controls, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation and loan-to-value ratios for loans secured by real
property. The Bank will continue to comply with these requirements, and in some
cases may apply more restrictive standards.
The following references to statutes and regulations are intended to summarize
material effects of certain government regulation on the business of the Company
and the Bank. Any change in government regulation may have a material adverse
effect on the Company, the Bank and their operations.
Regulation of the Company under HOLA
As the holding company for the Bank, the Company will be regulated as a
"non-diversified savings and loan holding company" within the meaning of Home
Owners Loan Act (the "HOLA"), and subject to regulatory oversight of the
Director of the OTS. As such, the Company will be registered with the OTS and
thereby subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
will be subject to certain restrictions in its dealings with the Company and
with other companies affiliated with the Company.
In general, the HOLA prohibits a savings and loan holding company, without prior
approval of the Director of the OTS, from acquiring control of another savings
association or savings and loan holding company or retaining more than 5% of the
voting shares of a savings association or of another holding company which is
not a subsidiary. The HOLA will restrict the ability of a director or officer of
the Company, or any person who owns more than 25% of the Company's common stock,
from acquiring control of another savings association or savings and loan
holding company without obtaining the prior approval of the Director of the OTS.
OTS regulations generally do not restrict the permissible business activities of
a unitary savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings association subsidiary of
such a holding company fails to meet the QTL test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. (Additional restrictions on securing advances from
the Federal Home Loan Bank (the "FHLB") also apply.) At December 31, 1999, 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
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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
deposits is approximately $13,000.
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 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
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its aggregate unpaid residential mortgage loans, home purchase contracts, or
similar obligations at the beginning of each year. At December 31, 1999, the
Bank's investment in stock of the FHLB of Indianapolis was $2,153,000. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate-related collateral to 30% of a member's capital and
limiting total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Indianapolis and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings
associations and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. For the year ended December 31, 1999, dividends paid by the FHLB of
Indianapolis to the Bank totaled approximately $114,000, for an annual rate of
7.74%.
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, 3% for savings associations with
a composite rating of 1. Core capital is generally defined as common
shareholders' equity (including retained income), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, certain non-withdrawable accounts, qualifying supervisory
goodwill, purchased mortgage servicing rights and purchased credit card
relationships (subject to certain limits) less nonqualifying intangibles. Under
the tangible capital requirement, a savings association must maintain tangible
capital (core capital less all intangible assets except purchased mortgage
servicing rights which may be included after making the above-noted adjustment
in an amount up to 100% of tangible capital) of at least 1.5% of total assets.
Under the risk-based capital requirements, a minimum amount of capital must be
maintained by a savings association to account for the relative risks inherent
in the type and amount of assets held by the savings association. The risk-based
capital requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories (0-
100%). A credit risk-free asset, such as cash, requires no risk-based capital,
while an asset with a significant credit risk, such as a non-accrual loan,
requires a risk factor of 100%. Moreover, a savings association must deduct from
capital, for purposes of meeting the core capital, tangible capital and
risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 1999, the Bank was in compliance with all capital
requirements imposed by law.
In 1994 and 1997 the OTS proposed new regulations affecting risk based capital
standards and regulatory treatment of recourse obligations. However, final rules
were never issued. On March 8, 2000, the OTS again proposed new regulations in
this area. Until a final rule is issued, the impact on the savings association
can not be determined.
The following is a summary of the Bank's regulatory capital and capital
requirements at December 31, 1999:
<TABLE>
<CAPTION>
Total Risk-Based
Tangible Capital Core Capital Capital
<S> <C> <C> <C>
For Capital Adequacy Purposes
Bank Amount.................................. $ 11,134 $ 11,134 $ 11,869
Required Amount.............................. 2,257 4,515 8,578
--------- --------- ---------
Excess/(Deficit)............................. 8,877 6,619 3,291
========= ========= =========
Bank Ratio................................... 7.40% 7.40% 11.07%
Required Ratio............................... 1.50% 3.00% 8.00%
--------- --------- ---------
Ratio Excess/(Deficit)....................... 5.90% 4.40% 3.07%
========= ========= =========
</TABLE>
If an association is not in compliance with the capital requirements, the OTS is
required to prohibit asset growth and to impose a capital directive that may
restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
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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 level of liquid assets that must be
held by a savings association is an amount equal to 4% of the associations' net
withdrawable accounts plus short-term borrowings based upon the average daily
balance of such liquid assets for each quarter of the associations's fiscal
year. The OTS may impose monetary penalties upon savings associations that fail
to comply with those liquidity requirements. The OTS eliminated the requirement
that each savings association maintain an average daily balance of short-term
liquid assets of 1% of the total of its net withdrawable deposit accounts and
short-term borrowings during the preceding calendar month. The daily average
liquidity of the Bank for December, 1999 as 20.1% 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, 1999, 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.
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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, 1999, the Bank was in compliance with
its QTL requirement, with approximately 87% of its assets invested in QTLs.
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. 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 .13% of total
assessable deposits. On June 1, 1998, the Bank's annual deposit insurance
premium was increased to .16% of total assessable deposits. On June 1, 1999 the
Bank's annual assessment resulted in a decrease to .12%. 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, 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
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<PAGE>
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. At December 31, 1999, the Bank was
categorized as "well capitalized," and it was not subject to regulatory order,
agreement or directive to meet and maintain a specific level for any capital
measure.
Subject to certain exceptions, these capital ratios are generally determined on
the basis of Call Reports submitted by each depository institution and the
reports of examination by each institution's appropriate federal depository
institution regulatory agency.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers include: requiring the submission of a capital
restoration plan (which must include a holding company guarantee of
performance); placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the holding company to
divest certain subsidiaries including the institution; requiring the institution
to divest certain subsidiaries; prohibiting the payment of principal or interest
on subordinated debt; and ultimately, appointing a receiver or conservator for
the institution.
In general, a depository institution may be reclassified to a lower category
than is indicated by its capital position if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a
less-than-satisfactory rating on its most recent examination report, to correct
the deficiency.
Insider Transactions. The Bank is subject to certain restrictions imposed by the
Federal Reserve Act ("FRA") on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries, and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. These restrictions limit
the aggregate amount of transactions with any individual affiliate to 10% of the
Bank's capital and surplus, limit the aggregate amount of transactions with all
affiliates to 20% of the Bank's capital and surplus, require that loans and
certain other extensions of credit be secured by collateral in certain specified
amounts and types, generally prohibit the purchase of low quality assets from
affiliates and generally require that certain transactions with affiliates,
including loans and asset purchases, be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the Bank as those prevailing at the time for comparable
transactions with nonaffiliated individuals or entities.
Also, the FRA prescribes certain limitations and reporting requirements on
extensions of credit by the Bank to its directors and executive officers, to
directors and executive officers of the Company and its subsidiaries, to
principal shareholders of the Company and its subsidiaries, to principal
shareholders of the Company and to "related interests" of such directors,
officers and principal shareholders. Among other things, the FRA, and the
regulations thereunder, require such loans to be made on substantially the same
terms as those offered to unaffiliated individuals, place limits on the amount
of loans the Bank may extend to such individuals and require certain approval
procedures to be followed. In addition, such legislation and regulations may
affect the terms upon
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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 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
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<PAGE>
loans and leases and mandating specific changes to reduce regulatory impositions
on depository institutions and holding companies.
The Riegle-Neal Act substantially changed the geographic constraints applicable
to the banking industry. Effective September 29, 1995, the Riegle-Neal Act
allows bank holding companies to acquire banks located in any state in the
United States without regard to geographic restrictions or reciprocity
requirements imposed by state law, but subject to certain conditions, including
limitations on the aggregate amount of deposits that may be held by the
acquiring holding company and all of its insured depository institution
affiliates. Effective June 1, 1997 (or earlier if expressly authorized by
applicable state law), the Riegle-Neal Act allows banks to establish interstate
branch networks through acquisitions of other banks, subject to certain
conditions, including certain limitations on the aggregate amount of deposits
that may be held by the surviving bank and all of its insured depository
institution affiliates. The establishment of de novo interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997.
Effective March 14, 1996, Indiana "opted in" to the interstate branching
provisions of the Riegle-Neal Act. The Indiana legislation authorizes, subject
to certain approval and other requirements, Indiana-chartered banks to establish
branches in states other than Indiana and out-of-state banks to establish
branches in Indiana. Indiana and out-of-state banks are authorized to establish
branches either by acquisition or de novo.
FDIC regulations, which became effective April 1, 1996, impose certain
limitations (and in certain cases, prohibitions) on (i) "golden parachute"
severance payments by troubled depository institutions, their subsidiaries and
affiliated holding companies to institution-affiliated parties (primarily
directors, officers, employees or principal shareholders of the institution),
and (ii) indemnification payments by a depository institution, their
subsidiaries and affiliated holding companies, regardless of financial
condition, to institution-affiliated parties. The FDIC regulations impose
limitations on indemnification payments which could restrict, in certain
circumstances, payments by the Company or the Bank to their respective directors
or officers otherwise permitted under Indiana state law.
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 was issued by the Federal Institutions Examination
Council, whose members include the OTS, the FDIC and the Federal Reserve Board.
The guidance underscored that Year 2000 preparation was not only an information
systems issue, but also an enterprise-wide challenge that must
16
<PAGE>
be addressed at the highest level of a financial institution. The guidance set
out the responsibilities of senior management and boards of directors in
managing their Year 2000 projects. Among the responsibilities of institution
managers and directors were that of managing the internal and external risks
presented by providers of data-processing products and services, business
partners, counterparties and major loan customers. Under the guidance, senior
management have provided 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 allocated sufficient
resources to ensure that high priority was given to seeing that remediation
plans were fulfilled, and that the project received the quality personnel and
timely support it required. The guidance did 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.
Financial Modernization Legislation: The Gramm-Leach-Bliley Act. On November 12,
1999, the President signed the Gramm-Leach-Bliley Act into law. Effective as of
March 11, 2000, the Gramm-Leach-Bliley Act:
* allows bank holding companies meeting management, capital and CRA
standards to engage in substantially broader range of nonbanking activities then
was previously permissible, including insurance underwriting and agency, and
underwriting and making merchant banking investments in commercial and financial
companies;
* allows insurers and other financial service companies to acquire banks;
* removes various restrictions that previously applied to bank holding
company ownership of securities firms and mutual fund advisory companies and;
* establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
In order for a bank holding company to engage in the broader range of activities
that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository
institutions must be well capitalized and well managed and (2) it must file a
declaration with the Federal Reserve Board that it elects to be a "financial
holding company". In addition, to commence any new activity permitted by the
Gramm-Leach-Bliley Act, each insured depository institution of the financial
holding company must have received at least a "satisfactory" rating in its most
recent examination under the Community Reinvestment Act.
The Gramm-Leach-Bliley Act also allows a national bank to own a financial
subsidiary engaged in certain of the nonbanking activities authorized for
financial holding companies. The national bank must meet certain requirements,
including that it and all of its depository institution affiliates be well
capitalized and well managed. Also, to commence any activity or acquire any
company engaged in any new activity, the national bank must have at least a
"satisfactory" Community Reinvestment Act examination rating. In addition, it
must obtain approval of the OCC.
The Gramm-Leach Bliley Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally prohibit
financial institutions, including the Company, from disclosing nonpublic
personal financial information to third parties unless customer have the
opportunity to "opt out" of the disclosure. Regulations governing the privacy
requirements of the Act have been proposed. Until the final rules have been
issued, it is difficult to determine the impact of the regulations on the
activities of the Company.
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.
FORWARD LOOKING STATEMENTS
Statements in this report which express "belief", "intention", "expectation", or
"prospects" as well as other statements which are not historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve risks
and uncertainties which may cause actual results to differ materially from those
in such statements. Some of the factors that may generally cause actual results
to differ materially from projection, forecasts, estimates and expectations
include competitive factors, pricing pressures, change in legal and regulatory
requirements and various economic conditions.
17
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
At December 31, 1999, the Bank conducted its business from its main office at 29
East Washington Street, Shelbyville, Indiana, three branch offices in the Shelby
County market, and two offices in Fort Wayne Indiana. All six 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.
The Morristown Office, and both Fort Wayne offices are leased. The following
table provides certain information with respect to the Bank's offices as of
December 31, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Description and Address Year Opened or Net Book Value of Approximate Square
Acquired Property, Furniture & Footage
Fixtures
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shelbyville Main Office 1975 $ 1,635,780 15,000
29 East Washington Street
- ---------------------------------------------------------------------------------------------------------
Shelbyville Rampart Office 1995 $ 816,974 3,000
34 Rampart Office
- ---------------------------------------------------------------------------------------------------------
Morristown Office 1995 $ 72,849 1,800
127 East Main Street
- ---------------------------------------------------------------------------------------------------------
St. Paul Office 1989 $ 49,000 1,476
105 County Line Road
- ---------------------------------------------------------------------------------------------------------
Fort Wayne Hollows Office 1999 $ 146,406 3,579
- ---------------------------------------------------------------------------------------------------------
Fort Wayne St. Joe Office 1999 $ 412,939 3,200
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In the opinion of management, the Bank's properties are adequately covered by
insurance.
The Bank has four ATMs, one at each of the following offices: Shelbyville Main
Office, the Rampart Office, Morristown and the other which is located at its
Fort Wayne St. Joe 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 $187,000 at December 31, 1999.
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 $31,000 per month.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Neither the Company, the Bank, nor the Bank's service corporation subsidiaries
is a party to any material pending legal proceeding.
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 1999.
18
<PAGE>
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, the Company obtained approval for quotation on the National
Association of Securities Dealers Automated Quotation System Small-Cap Market
("NASDAQ") under the symbol "BRBI." During 1999, the Company satisfied all
requirements for continued inclusion on, and was traded on, NASDAQ.
As of March 20, 2000, there were 64 shareholders of record of Blue River common
stock.
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.
<TABLE>
<CAPTION>
1999 1998
---- ----
Quarter High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 9.000 $ 7.000 N/A N/A
Second Quarter 7.875 6.500 $ 12.250 $ 11.375
Third Quarter 7.000 4.500 11.875 8.000
Fourth Quarter 6.000 3.500 10.000 6.875
</TABLE>
The Company did not declare any dividend on its shares of common stock during
1999 or 1998. Future dividend payments by Blue River are subject to regulatory
and legal limitations and may be dependent upon dividends paid by the Bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
- --------------------------------------------------------------------------------
Pages 24 through 41 inclusive, of Blue River's Annual Report to
Shareholders for the year ended December 31, 1999 is incorporated
herein by reference in regard to this item.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
Pages 42 through 66, inclusive, of Blue River's Annual Report to
Shareholders for the year ended December 31, 1999 is incorporated
herein by reference in regard to this item.
19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS 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 14 A of
The Securities Exchange Act of 1954, as amended, not later than 120 days
after December 31, 1999
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 14 A of
The Securities Exchange Act of 1954, as amended, not later than 120 days
after December 31, 1999
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 14 A of
The Securities Exchange Act of 1954, as amended, not later than 120 days
after December 31, 1999
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 14 A of
The Securities Exchange Act of 1954, as amended, not later than 120 days
after December 31, 1999
20
<PAGE>
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* Employment Agreement dated January 4, 1999 between
Registrant and Jay R. Powell
10.03**** Registrant's 1997 Directors' Stock Option Plan
10.04**** Registrant's 1997 Key Employees' Stock Option Plan
13 The Annual Report to Shareholders of the Company for the
year ended December 31, 1999 (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 Form 10-QSB, filed May 17, 1999.
** Incorporated by reference to Registrant's Form 10-KSB, filed March 31,
1999.
*** Incorporated by reference to Registrant's Amendment No. 4 to the
Registration Statement on Form SB-2, File No. 333-48269 filed on June 22,
1998.
**** Incorporated by reference to Registrant's Amendment No. 2 to the
Registration Statement on Form SB-2, File No. 333-48269 filed on June 8,
1998.
(b) The Company did not file a form 8-K in 1999.
21
<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 28, 2000 By: /s/ Robert C. Reed
--------------------------------
Robert C. Reed,
President & CEO
Date: March 28, 2000 By: /s/ David E. Morrison
--------------------------------
David E. Morrison
Vice President and
Chief Credit Officer
Date: March 28, 2000 By: /s/ Bradley A. Long
--------------------------------
Bradley A. Long
Vice President & Treasurer
Date: March 28, 2000 By: /s/ Steven R. Abel
--------------------------------
Steven R. Abel,
Chairman of the Board, Director
Date: March 28, 2000 By: /s/ D. Warren Robison
--------------------------------
D. Warren Robison,
Senior Vice President &
Secretary, Director
Date: March 28, 2000 By: /s/ Wendell L. Bernard
--------------------------------
Wendell L. Bernard, Director
Date: March 28, 2000 By: /s/ Ralph W. Van Natta
--------------------------------
Ralph W. Van Natta, Director
Date: March 28, 2000 By: /s/ Peter G. DePrez
--------------------------------
Peter G. DePrez, Director
22
EXHIBIT 13. THE ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1999
SELECTED FINANCIAL DATA
BLUE RIVER BANCSHARES & SUBSIDIARY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Successor Sucessor Predecessor
Year Ended Six Months Ended Nine Months Ended
December 31, 1999 December 31, 1998 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net Interest Income 4,223 2,004 2,314
Non-Interest Income 611 235 314
Provision for Loan Losses 360 100 510
Non-Interest Expense 4,907 1,834 2,051
Net Income/(Loss) before Income Taxes (433) 305 67
Income Tax Expense/(Benefit) (118) 155 6
Net Income/(Loss) (315) 150 61
CONSOLIDATED BALANCE SHEET DATA
Total Assets 153,449 133,526 121,702
Total Deposits 102,701 89,529 75,591
Loans, Net 111,114 88,362 88,557
Total Investment Securities 26,741 18,195 23,726
Shareholders' Equity 15,337 16,474 15,867
Weighted Average Shares Outstanding 1,494,221 1,496,329 175,950
GENERAL YEAR END
Number of Employees 57 FTE / 10 PTE 39 FTE / 7 PTE 30 FTE / 4 PTE
Number of Shares Outstanding 1,496,800 1,490,870 N/A
PER COMMON SHARE DATA
Net Income/(Loss) Per Common Share $ (0.21) $0.10 N/A
Net Income/(Loss) Per Common Share - Assuming $ (0.21) $0.10 N/A
Dilution
SELECTED PERFORMANCE RATIOS
Return on Average Assets (0.22)% 0.26% 0.08%
Return on Average Equity (1.95)% 2.47% 1.19%
Average Shareholders' Equity to Average Assets 11.43% 10.51% 6.98%
Dividend Payout Ratio N/A N/A 115.76%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<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, 1999 for the Successor and the income statements for the
Successor's year ended December 31, 1999, the Successor's six month period ended
December 31, 1998, and the Predecessor's nine month period ended June 30, 1998.
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 the Successor and was placed under new management, a new board of
directors and changed its name to "Shelby County Bank" (the "Bank"). The
Successor reported the transaction as if it was effective on June 30, 1998.
Total assets as of December 31, 1999 were $153,449,000, a 15% increase
from December 31, 1998 level of $133,526,000. This growth was primarily the
result of an increase in net loans receivable of $22,752,000, an increase in
investment securities available-for-sale of $6,469,000, and offset by a decrease
in cash and cash equivalents of $11,949,000. Total assets have increased
$31,747,000 from June 30, 1998, an increase of 26%.
Total liabilities at December 31, 1999 were $138,072,000 compared to
$117,052,000 at December 31, 1998. This 18% increase was comprised of an
increase in deposits of $13,172,000 and an increase in advances from the Federal
Home Loan Bank of Indianapolis ("FHLB") of $8,109,000. When compared to June 30,
1998, deposits have increased $27,110,000 and FHLB advances have increased
$15,727,000.
Total equity at December 31, 1999 was $15,377,000, a decrease of
$1,097,000 from December 31, 1998. A significant factor in this reduction is the
decline in the fair value of the Company's available for sale investment
portfolio, with a reduction in equity of $818,000 resulting from reflecting the
reduction, net of deferred taxes against the equity of the Company. This
decrease was caused by the commencement of monetary tightening enacted by the
Federal Reserve through increases to short term interest rates, namely fed funds
and the discount rate and realization of certain gains in available-for-sale
securities previously unrealized.
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. Shareholders 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
For the year ended December 31, 1999, the Company reported a net loss of
($315,000), compared to net income of $150,000 reported for the six months ended
December 31, 1998. This decrease results from continued development of
infrastructure to support the Company's future growth and earnings objectives,
including costs associated with the Company's expansion of its community banking
market. The Company opened two new branches in Fort Wayne, Indiana, doing
business as First Community Bank of Fort Wayne. The branches commenced
operations in September of 1999.
Net interest income before provision for loan losses improved to
$4,223,000 for the year ended December 31, 1999 compared to $2,004,000 for the
six month period ended December 31, 1998. This $2,219,000 favorable variance is
the result of a $193,000 favorable volume (growth) variance, an ($84,000)
unfavorable rate variance, and a $2,110,000 calendar variance. The unfavorable
rate variance contains the impact of efforts to reduce interest rate
sensitivity, including acquiring adjustable-rate mortgage-backed investment
securities, while concentrating efforts on extending terms on certificates of
deposits acquired to fund additional loan
24
<PAGE>
growth. Provision for loan losses was increased from $100,000 for the six month
period ended December 31, 1998 to $360,000 for the year ended December 31, 1999.
The Company has sought to increase its allowance for loan losses to continue to
provide adequate coverage to compensate for the risks associated with
non-residential lending as well as the loan portfolio growth experienced in
1999.
Non-interest income improved to $611,000 compared to the $235,000
recognized during the six months ended December 31, 1998. Of this improvement,
$232,000 was the result of net gains recognized in investment securities trades.
Most of the investment gains were derived from Freddie Mac preferred stock which
had appreciated significantly and afforded opportunities to re-invest in other
securities at much higher yields, while also providing a gain on sale.
Non-interest expenses increased from $1,834,000 for the six months ended
December 31, 1998 to $4,907,000 for the year ended December 31, 1999.
Contributing to this increase was the Company's cost of expansion into the Fort
Wayne market, as well as continued improvement in human resources and physical
plant to provide infrastructure necessary to pursue growth and product
expansion. Total non-interest expenditures related to the Fort Wayne operations
totaled $685,000 for the year ended December 31, 1999.
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.
Net Interest Income
For the year ended December 31, 1999, net interest income before
provision for loan losses increased $2,219,000 to $4,223,000 from $2,004,000 for
the six months ended December 31, 1998. Interest income improved $5,546,000
compared to increased interest expense of $3,328,000.
Net interest income after the provision for loan losses increased
$1,959,000 from $1,904,000 for the six month period ended December 31, 1998 to
$3,863,000 for the year ended December 31, 1999. This increase is impacted by an
increase in provision for loan losses to $360,000 for the year ended December
31, 1999 from $100,000 for the six months ended December 31, 1998 to cover
increased diversification in the portfolio, as well as overall portfolio growth
in the year ended December 31, 1999.
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 33.42% 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 month period 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 year ended December 31, 1999, interest income was $9,768,000
compared to $4,222,000 for the six month period ended December 31, 1998. The
increase in interest income was derived from two main sources: balance sheet
growth and a reduction in excess liquidity by diverting assets from
interest-bearing deposits into loans and investment securities. Interest income
and fees from loans increased $4,337,000, income from investment securities
increased $1,193,000, and dividends from FHLB stock increased $57,000, while
income from interest-bearing deposits decreased ($41,000) from the six months
ended December 31, 1998. The favorable variance in interest income results from
a $622,000 favorable variance due to growth, a $46,000 favorable variance due to
improved pricing (rates), and a $4,878,000 variance due to comparing a twelve
month period to a six month period.
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.
25
<PAGE>
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
Interest expense increased $3,327,000 to $5,545,000 from $2,218,000 for
the six month period ended December 31, 1998. Interest expense on deposits
increased $2,728,000 from $1,662,000 for the six month period ended December 31,
1998 to $4,389,000. This increase results from a $383,000 variance due to
balance sheet increases, $154,000 due to increased cost of funding (rates), and
$2,191,000 from the time differential. Costs associated with certificates of
deposits were increased due to three main factors: an increase in general market
rates during the last half of 1999, the Company's efforts at extending the
maturities of its funding sources as a means of managing interest rate
sensitivity, and promotional efforts targeted at growth with particular emphasis
on gaining the attention of new customers during the initial operating periods
of the Fort Wayne locations. The Company did offset some of the funding cost
increases by reducing rates paid on some of its savings and transaction products
during 1999. Additionally, the Company is increasing its efforts at gathering
more transaction-based products to lower funding costs while also providing
increased fee income opportunities.
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
of $2,897,000 for a total increase of 17.60%. This increase was attributable to
the general growth in deposits and the introduction of a relatively high rate
Money Market deposit account.
26
<PAGE>
NET INTEREST INCOME
<TABLE>
<CAPTION>
Predecessor
Successor Nine Percentage change from
Successor Six Months Months -----------------------------------
Year Ended Ended Ended December 31, 1998 June 30, 1998
December 31, December 31, June 30, to December 31, to December 31,
1999 1998 1998 1999 1998
------------ ------------ ------------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Income
Interest on Loans............... $ 7,945 $ 3,608 $5,221 120.21% (30.89)%
Interest on Investment Securities 1,613 363 389 344.35% (6.68)%
Interest on Interest-bearing
Deposits...................... 210 251 111 (16.33)% 126.13%
------- ------- ------ -------
Total Interest Income........... 9,768 4,222 5,721 131.36% (26.20)%
------- ------- ------ -------
Interest Expense
Interest on Deposits............ 4,389 1,662 2,592 164.08% (35.88)%
Interest on Borrowings.......... 1,156 556 815 107.91% (31.78)%
------- ------- ------ -------
Total Interest Expense.......... 5,545 2,218 3,407 150.00% (34.90)%
------- ------- ------ -------
Net Interest Income............. $ 4,223 $ 2,004 $2,314 110.73% (13.40)%
======= ======= ====== =======
</TABLE>
RATE VOLUME ANALYSIS OF CHANGE IN NET INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1999
vs.
Six Months Ended December 31, 1998
-----------------------------------------------------------------
Attributable to the difference
Dollar Attributable to Attributable to between a twelve month period
Change Volume Rate and a six month period
----------------- ------------------- ------------------- -----------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest Income on:
Loans........................ $ 4,336 $ 335 $ 32 $ 3,969
Investment Securities........ 1,250 400 27 823
Interest-Bearing Deposits.... (41) (114) (13) 86
-------- ------ ------- ---------
Total Interest Income........ 5,545 621 46 4,878
-------- ------ ------- ---------
Interest Expense on:
Deposits..................... 2,727 382 154 2,191
Borrowings................... 600 47 (24) 577
-------- ------ ------- ---------
Total Interest Expense....... 3,327 429 130 2,768
-------- ------ ------- ---------
Net Interest Income.......... $ 2,218 $ 192 $ 84 $ 2,110
-------- ------ ------- ---------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31, 1998
vs.
Nine Months Ended June 30, 1998
----------------------------------------------------------------
Attributable to the difference
Dollar Attributable to Attributable to between a six month period
Change Volume Rate and a nine month period
------------------ ------------------- ------------------- ----------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest Income on:
Loans........................ $(1,613) $ 305 $ (178) $ (1,740)
Investment Securities........ (27) 81 21 (129)
Interest-Bearing 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>
27
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST
RATES AND DIFFERENTIAL VARIANCE ANALYSIS
<TABLE>
<CAPTION>
Successor Successor
Year Ended December 31, 1999 Six Months Ended December 31, 1998
--------------------------------------------- -------------------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Investment Securities......... $ 26,615 $1,574 5.91% $ 12,717 $ 363 5.69%
Interest-Bearing Deposits..... 6,940 249 3.59% 12,634 251 3.99%
Loans, Net(1)................. 96,951 7,945 8.19% 88,754 3,608 8.13%
-------- ------ ----- ------- ----- ----
Total Earning Assets.......... 130,506 9,768 7.48% 114,105 4,222 7.40%
-------- ------ ----- ------- ----- ----
Interest Bearing Liabilities:
Passbook accounts............. 7,744 188 2.43% 8,479 128 3.01%
NOW and money market accounts. 33,745 1,112 3.30% 26,224 427 3.26%
Certificates of deposit....... 60,500 3,089 5.11% 48,298 1,107 4.58%
-------- ------ ----- ------- ----- ----
Total Deposits................ 101,989 4,389 4.30% 83,001 1,662 4.00%
Borrowings.................... 21,244 1,156 5.44% 19,612 556 5.67%
-------- ------ ----- ------- ----- ----
Total Interest Bearing Liabilities $123,233 5,545 4.50% $102,613 2,218 4.32%
-------- ----- ----- ------- ----- ----
Net Interest Margin........... $4,223 3.24% $2,004 3.51%
====== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Nine Months Ended
June 30,
1998
-------------------------------------------
Average
Balance Interest Yield/Rate
------------ ------------ -----------
<S> <C> <C> <C>
Interest Earning Assets:
Investment Securities......... $ 9,678 $ 389 5.36%
Interest-Bearing Deposits..... 3,787 111 3.91%
Loans, Net(1)................. 81,606 5,221 8.53%
------ ----- ----
Total Earning Assets.......... 95,071 5,721 8.02%
------ ----- ----
Interest Bearing Liabilities:
Passbook accounts............. 8,626 192 2.96%
NOW and money market accounts. 20,620 479 3.10%
Certificates of deposit....... 42,911 1,921 5.97%
------ ----- ----
Total Deposits................ 72,157 2,592 4.79%
Borrowings.................... 17,833 815 6.09%
------ ----- ----
Total Interest Bearing Liabilities $89,990 3,407 5.05%
------ ----- ----
Net Interest Margin........... $2,314 3.25%
===== ====
</TABLE>
- ---------------
(1) Includes principal balances of non-accruing loans. Interest on non-accruing
loans is not included.
28
<PAGE>
NON-INTEREST INCOME
The Company's non-interest income for the year ended December 31, 1999 was
$611,000. This represents an increase of $376,000 from the six months ended
December 31, 1998. Of the increase, $232,000 was derived from the net gain on
sales of investment securities and a pool of residential mortgage loans. The
most significant gain transaction was derived from the sale of FHLMC preferred
stock in three trades throughout the year, with full liquidation of the
portfolio achieved in November 1999. The gains derived from the sales of this
stock was utilized, in part, to offset portfolio losses recognized to shorten
the duration of assets, further improving the Company's interest rate
sensitivity. The residential portfolio sale was executed less as an additional
action taken by the Company's management to divest itself of long-term assets
which contain substantial risk to the Bank's interest rate sensitivity and
earnings potential when stressed for additional increases in market rates. The
Company was able to sell $5.6 million in residential mortgage loans while
recognizing a $2,000 gain. The Bank's income from service charges and other fees
increased $93,000 to $208,000 for the year ended December 31, 1999.
The Company's non-interest income for the six month period ended December
31, 1998 was $235,000. This is a 17.50% 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 25.60% increase from $250,000 for the Predecessor's nine
month period ended June 30, 1997.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Successor Successor Predecessor Percentage Percentage
Year Six Months Nine Months Change from Change from
Ended Ended Ended December 31, 1998 June 30, 1998
December 31, December 31, June 30, to December 31, to December 31,
1999 1998 1998 1999 1998
------------- ------------- -------------- ------------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $ 209 $ 116 $ 185 80.17% (37.44)%
Other Service Charges and Fees... 170 119 103 42.86% 13.34%
Securities Gain, net............. 230 0 24 N/A N/A
Gain on sale of loans, net....... 2 0 0 N/A N/A
------ ----- ----- ------ ------
Total Non-Interest Income........ $ 611 $ 235 $ 314 160.00% (25.21)%
===== ===== ===== ====== ======
</TABLE>
29
<PAGE>
NON-INTEREST EXPENSE
For the year ended December 31, 1999, non-interest expense was
$4,907,000, an increase over the six month period ended December 31, 1998 of
$3,072,000. Salaries and employee benefits increased by $1,241,000 over the six
month period ended December 31, 1998. Included in the salary and benefits
increase is $354,000 in salaries associated with the new Fort Wayne offices. The
Company has continued to recruit and hire qualified resources to enable
expansion of product offerings to resemble a commercial banking enterprise and
to diversify beyond traditional thrift industry products and services. Premises
and equipment increased $423,000 resulting from the geographic expansion,
renovation of the main Shelbyville facility and improved computer hardware and
office equipment. Advertising, promotional expenditures and supplies were all
increased for the period due to the introduction of the First Community Bank of
Fort Wayne logo and other branding. Advertising and promotions increased
$104,000 over the six months ended December 31, 1998. Stationery and supplies
increased to $155,000 for the year ended December 31, 1999 compared to $46,000
for the six months ended December 31, 1998. The first part of 1999 contained
additional supplies expense required to replace out-of-date stock with the
Predecessor's logo to that of the Successor company. Federal deposit insurance
costs were increased $102,000 over the six month period ended December 31, 1998.
Data processing expenditures increased from $163,000 for the six months ended
December 31, 1998 to $385,000 for the year ended December 31, 1999 resulting
from additional technology acquired from the Bank's primary processor as well as
increased variable costs related to more accounts and transactions being
processed on behalf of the Successor compared to that of the Predecessor.
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.
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
<TABLE>
<CAPTION>
Predecessor
Successor Successor Nine Percentage Percentage
Year Six Months Months Change from Change from
Ended Ended Ended December 31, June 30,
December 31, December 31, June 30, 1998 to 1998 to
1999 1998 1998 December 31,1999 December 31, 1998
------------- ------------- ------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits...... $ 1,971 $ 730 $ 730 170.00% (0.04)%
Premises and Equipment.............. 604 181 196 233.70% (7.54)%
Advertising and Public Relations.... 238 133 77 78.95% (72.47)%
Legal and Professional Services..... 479 154 307 211.04% (49.88)%
Data Processing..................... 385 163 213 136.20% (23.45)%
FDIC Insurance Assessment........... 183 81 91 125.93% (11.13)%
Bank Fees and Other Charges......... 71 32 48 121.88% (33.51)%
Directors Fees...................... 117 35 66 234.29% (46.97)%
Goodwill Amortization............... 206 107 -- 92.52% N/A
Environmental Charges............... -- -- 146 N/A N/A
Other............................... 653 218 177 199.54% 23.59%
------- ------- ------- ------ --------
Total............................... $ 4,907 $ 1,834 $ 2,051 167.56% (10.57)%
======= ======= ======= ====== ========
</TABLE>
30
<PAGE>
PROVISION FOR INCOME TAXES
The income tax benefit was ($118,000) for the year ended December 31,
1999 compared to a provision of $155,000 for the six months ended December 31,
1998 and provision of $6,000 for the nine months ended June 30, 1998. The
effective tax rate for the year ended December 31, 1999 was (27.1)% compared to
50.7% for the six months ended December 31, 1998 and 8.9% for the nine months
ended June 30, 1998.
The effective tax was lower than the statutory tax rate for the year
ended December 31, 1999 due to the add back of non-deductible goodwill
amortization which decreased the Company's income tax benefit from its pre-tax
loss. 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 the financial statements. Management has set as an objective
to maintain capital levels required to qualify for "well-capitalized" status.
Capital amounts and classification are also subject to qualitative
judgments by regulators involving capital components, risk weights and other
factors. The risk weights assigned to various financial instruments are taken
into consideration in setting operating parameters related to the mix of loans
and investments with the objective to maximize earnings attained through the use
of available equity capital.
Management believes that as of December 31, 1999, the Company meets all
capital adequacy requirements to which it is subject as well as objectives set
by the Company's management and Board of Directors. The following table sets
forth the actual and minimum capital amounts and ratios as of December 31, 1999:
<TABLE>
<CAPTION>
Total Risk-Based
Tangible Capital Core Capital Capital
---------------- ------------- ----------------
<S> <C> <C> <C>
For Capital Adequacy Purposes
Bank Amount........................................ $ 11,134 $ 11,134 $ 11,869
Required Amount.................................... 2,257 4,515 8,578
-------- -------- --------
Excess/(Deficit)................................... $ 8,877 $ 6,619 $ 3,291
======== ======== ========
Bank Ratio......................................... 7.40% 7.40% 11.07%
Required Ratio..................................... 1.50% 3.00% 8.00%
-------- -------- --------
Ratio Excess/(Deficit)............................. 5.90% 4.40% 3.07%
======== ======== ========
</TABLE>
To Be Well Capitalized Under Prompt Corrective Action Provisions
<TABLE>
<CAPTION>
Tier 1 (Core) Tier 1 Risk-Based Total Risk-Based
Capital Capital Capital
------------- ----------------- ----------------
<S> <C> <C> <C>
Bank Amount................................. $ 11,134 $ 11,134 $ 11,869
Required Amount............................. 7,524 6,433 10,722
-------- -------- --------
Excess/(Deficit)............................ $ 3,610 $ 4,701 $ 1,147
======== ======== ========
Bank Ratio.................................. 7.40% 10.38% 11.07%
Required Ratio.............................. 5.00% 6.00% 10.00%
-------- -------- --------
Ratio Excess/(Deficit)...................... 2.40% 4.38% 1.07%
======== ======== ========
</TABLE>
31
<PAGE>
USE OF FUNDS
Investment Securities
Investment securities are 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.
Additionally, investment securities receive favorable treatment for the purpose
of computing the Bank's risk-based capital ratios. Government issued and
government agency issued bonds, as well as certain agency-backed mortgage backed
securities contain low risk weight factors and can be used to mitigate the l00%
risk weight associated with commercial and consumer lending products.
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 has adopted an
investment policy which sets certain guidelines related to the portfolio mix,
duration, and maximum allowable investments within certain investment
categories.
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
interest income.
Investment securities comprise 17.4% of total assets and 18.32% of total
earning assets at December 31, 1999. The Company has classified the majority of
its investment purchases as available-for-sale to maintain liquidity.
Additionally, the Company has concentrated efforts on acquiring investments with
favorable risk-based capital treatment, as well as increasing its holdings in
adjustable rate mortgage-backed securities to reduce interest rate sensitivity.
The available-for-sale investment portfolio was $24,232,000 at fair
value, with a cost basis of $24,962,000. The held-to-maturity portfolio
currently is comprised of bonds totaling $357,000. The Company also owns
$2,153,000 of stock in the Federal Home Loan Bank of Indianapolis. This equity
position is required as a member bank of the FHLB system, and the credit policy
of the FHLB states that the member bank must own sufficient stock to serve as
collateral against funding provided through advances held by the Bank.
Weighted average yields of the investment securities portfolio were 6.11%
at December 31, 1999 and 5.91% at December 31, 1998, and 5.90% at June 30, 1998.
Investment securities held in the Bank's portfolio consist primarily of
U.S. government agency issued debt securities, mortgage-backed securities with
both fixed and adjustable interest rates, municipal bonds, and corporate debt
issues. The mortgage-backed securities are subject to both prepayment and
interest rate risk. Management has recently increased the ratio of
adjustable-rate mortgage-backed securities to reduce the interest rate risk
associated with these investments. Mortgage-backed securities not only contain
favorable characteristics related to risk-based capital, but also assist in the
management of the Bank's Qualified Thrift Lender (QTL) ratio.
32
<PAGE>
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1999
Investment Securities Held to Maturity
Mortgage-Backed Securities........................... $ 141 $ 3 $ 137
Municipals........................................... 216 5 212
-------- ----- ------ --------
Total Investment Securities Held to Maturity......... 357 -- 8 349
-------- ----- ------ --------
Investment Securities Available for Sale
Mortgage-Backed Securities........................... 13,015 $ 10 80 12,945
U.S. Government Agencies............................. 8,228 -- 546 7,682
Municipals........................................... 2,284 1 54 2,231
Corporate Bonds...................................... 1,435 -- 61 1,374
-------- ----- ------ --------
Total Investment Securities Available for Sale...... 24,962 11 741 24,232
-------- ----- ------ --------
Total Investments.................................... $ 25,319 $ 11 $ 749 $ 24,581
======== ===== ====== ========
</TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
As of December 31, 1999
<TABLE>
<CAPTION> Held to
Maturity Available for Sale
----------------------- ----------------------
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-Backed Securities.................................. $ 141 $ 137 $13,015 $12,945
U.S. Government Agencies
Due within One Year......................................... -- -- -- --
1 -- 5 Years.............................................. -- -- 1,983 1,915
5 -- 10 Years............................................. -- -- 2,748 2,564
Due after ten years......................................... -- -- 3,497 3,203
------ ------ ------- -------
Total U.S. Government Agencies.............................. -- -- 8,228 7,682
Obligations of State and Political Subdivisions
Due within One Year......................................... -- -- -- --
1 -- 5 Years.............................................. -- -- 840 826
5 -- 10 Years............................................. 216 212 1,111 1,085
Due after Ten Years......................................... -- -- 333 320
------ ------ ------- -------
Total Obligations of State and Political Subdivision........ 216 212 2,284 2,231
------ ------ ------- -------
Corporate Bonds
Due within One Year......................................... -- -- 225 223
1 -- 5 Years.............................................. -- -- 394 386
5 -- 10 Years............................................. -- -- 816 765
Due after Ten Years......................................... -- -- -- --
------ ------ ------- --------
Total Corporate Bonds....................................... -- -- 1,435 1,374
------ ------ ------- -------
Total Investments........................................... $ 357 $ 349 $24,962 $24,232
------ ------ ------- -------
</TABLE>
INVESTMENT SECURITIES WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION>
Due within
One Year 1 to 5 Years 5 to 10 Years Due After 10 Years Total
---------- ------------ -------------- ------------------ ------
<S> <C> <C> <C> <C> <C>
December 31, 1999.................. 6.11% 6.39% 5.99% 5.89% 6.11%
-----
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%
-----
</TABLE>
33
<PAGE>
LOANS
Total net loans at December 31, 1999 were $111,114,000, a 25% increase
over December 31, 1998. The Company has continued to diversify its loan
portfolio, reducing its concentration of fixed-rate residential mortgage loans.
At December 31, 1999, 41.94% of the loan portfolio was comprised of residential
mortgages, compared to 60.50% at December 31, 1998. This percentage change was
achieved through portfolio growth of $22,752,000 and a reduction in residential
mortgage outstandings of $6,969,000. Commercial loans secured by commercial real
estate properties increased $10,492,000 to $31,740,000, accounting for 28.37% of
the total net loans at December 31, 1999. Consumer loans increased for the
twelve months ended December 31, 1999 to $18,716,000 compared to $6,736,000 at
December 31, 1998. Much of this growth was attributed to the Company's expansion
into indirect lending efforts. Due to increasing funding costs and the
lower-yielding nature of this line of business, the Company has significantly
pared back such efforts during the latter stages of 1999, thereby slowing the
rate of growth in consumer lending. The Company has continued to pursue
opportunities to expand its portfolio of home equity loan products, with credits
outstanding increasing to $5,156,000 at December 31, 1999, an increase of
$3,008,000 from December 31, 1998. The Company continues to concentrate retail
lending efforts to this product due to lower credit risks involved in loans
secured by the borrowers primary residence. Commercial lending products have
increased to $9,355,000 compared to $5,051,000 at December 31, 1998. The
Company's entry into the Fort Wayne market is intended to create increased
opportunities to provide lending products to small to medium-sized business
enterprises. This type of lending affords the Company greater opportunity to
provide credit which contains provision for variable rate structure, further
enhancing the ability to mitigate interest rate risk. The Company has expanded
its credit analysis and review efforts to compensate for higher potential credit
risks associated with consumer and commercial credits.
Total net loans at December 31, 1998 were $88.4 million, an 11.02%
increase over the Predecessor's net loans as of December 31, 1997 of $79.6
million. Consumer installments 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 markets. Additional expertise has been
acquired in the Fort Wayne market to provide sufficient resources to fuel
growth, while managing risks.
At December 31, 1999, 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
<TABLE>
<CAPTION>
Successor as of
December 31, 1999
-----------------
(Dollars in thousands)
<S> <C>
Real Estate Mortgage Loans:
One-to-four Family.......................................................... $46,925
Commercial.................................................................. 31,740
Home Equity Loans........................................................... 5,156
Consumer Loans................................................................ 18,716
Commercial Loans.............................................................. 9,355
Less:
Deferred Loan Fees, net....................................................... 77
Allowance for Loan Losses..................................................... (855)
--------
Net Loans..................................................................... $111,114
========
</TABLE>
COMPOSITION OF LOAN BY TYPE
<TABLE>
<CAPTION>
Successor as of
December 31, 1999
-----------------
<S> <C>
Real Estate Mortgage Loans:
One-to-four Family............................................................ 41.93%
Commercial.................................................................... 28.37%
Home Equity Loans............................................................. 4.61%
Consumer Loans................................................................ 16.73%
Commercial Loans.............................................................. 8.36%
----
Total......................................................................... 100.00%
======
</TABLE>
34
<PAGE>
LENDING ACTIVITIES
<TABLE>
<CAPTION>
Successor as of
December 31,
1999
-----------------------
Percent
Amount of Total
------ --------
(Dollars in thousands)
<S> <C> <C>
Mortgage Loans:
One to four Family................................................................ $ 46,925 41.93%
Commercial........................................................................ 31,740 28.37%
Home Equity....................................................................... 5,156 4.61%
Consumer Loans...................................................................... 18,716 16.73%
Commercial Loans.................................................................... 9,355 8.36%
--------- ------
Total Gross Loans................................................................... $ 111,892 100.00%
========= ======
Type of Security:
One-to-four Family.................................................................. $ 53,885
Non-residential..................................................................... 29,182
Multi-Family........................................................................ 2,807
Autos............................................................................... 11,205
Deposits............................................................................ 415
Other Security...................................................................... 12,070
Unsecured........................................................................... 2,328
---------
Total Gross Loans................................................................... $ 111,892
=========
</TABLE>
<TABLE>
<CAPTION>
Due During the Years Ended December 31,
-------------------------------------------------------------------------------
2002 to 2004 to 2009 and
2000 2001 2003 2008 Following
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One to four family............... $ 46,925 $ 4,507 $ 122 $ 2,131 $ 4,664 $ 35,501
Commercial....................... 31,740 11,357 3 1,718 5,666 12,996
Home Equity...................... 5,156 2,691 5 33 168 2,259
Consumer Loans..................... 18,716 954 1,340 3,169 7,833 5,420
Commercial Loans................... 9,355 4,958 216 1,141 1,841 1,199
--------- ------- ------- ------- ------- --------
Total Gross Loans.................. $ 111,892 $24,467 $ 1,686 $ 8,192 $20,172 $ 57,375
========= ======= ======= ======= ======= ========
</TABLE>
LOAN DISTRIBUTION
<TABLE>
<CAPTION>
Due After December 31, 2000
---------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(Dollars in thousands)
<S> <C> <C> <C>
Real Estate Mortgage Loans:
One-to-four Family............................................................ $ 40,726 $ 1,692 $ 42,418
Commercial.................................................................... 16,271 4,112 20,383
Home Equity Loans............................................................. 2,465 -- 2,465
Consumer Loans.................................................................. 17,762 -- 17,762
Commercial Loan................................................................. 4,397 -- 4,397
--------- ---------- ----------
Total........................................................................... $ 81,621 $ 5,804 $ 87,425
========= ========== ==========
</TABLE>
35
<PAGE>
LOAN ACTIVITY
<TABLE>
<CAPTION>
Successor
For The Year Ended
December 31, 1999
<S> <C>
Gross Loans Receivable at Beginning of Period........................................... $ 89,077
Originations:
First Mortgage Loans:
Residential........................................................................... 13,853
----------
Total First Mortgage Loans.............................................................. 13,853
Consumer Loans:
Installment Loans..................................................................... 21,141
Loans Secured by Deposits............................................................. 326
----------
Total Consumer Loans.................................................................... 21,467
Commercial Loans and Commercial Real Estate............................................. 34,086
----------
Total Originations...................................................................... 69,406
Purchases:
First Mortgage Loans.................................................................. 0
----------
Total Originations and Purchases........................................................ 69,406
Repayments and other Deductions......................................................... (40,951)
Sales................................................................................... (5,640)
----------
Gross Loans Receivable at End of Period................................................. 111,892
==========
</TABLE>
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 formed two committees to review credits which exceed the lending
authority of the sponsoring officer. The first committee is the Officers Loan
Committee and is comprised of six officers of the Bank with the highest lending
authority. This Committee approves loans in excess of individual lending officer
authorities and recommends credits above the limit authorized by the Board of
Directors to the second committee which is the Directors Loan Committee, which
is chaired by the Chairman of the Board of Directors. This committee is
comprised of five directors, the Chief Credit Officer, and Chief Operating
Officer.
The Directors Loan 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. Particular attention is focused on the largest
aggregate borrowers, and additionally to any credits recommended for
reclassification. The reviews are conducted quarterly with a written report
provided to management and the Loan Commitees to provide documentation of
actions necessary to correct documentation deficiencies.
The Bank's Directors Loan Committee 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 meeting.
The Bank maintains a watch list of loans which do not meet the Bank's
established criteria. These are not under-performing loans, but simply monitored
as a precautionary matter, many based upon documentation deficiencies. 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 borrower has exhibited characteristics requiring special
attention.
Under-performing assets are defined as: (1) loans in non-accrual status
where the ultimate collection 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. At December 31, 1999, the Bank reported $860,000 of impaired loans.
The Bank maintains a reserve for loan losses to cover losses incurred when loans
are defaulted upon. Loans are charged off when they are deemed uncollectible.
36
<PAGE>
UNDER-PERFORMING ASSETS
<TABLE>
<CAPTION>
Successor Year
Ended December 31, 1999
-----------------------
(Dollars in thousands)
<S> <C>
Non-Accruing Loans............................................................. $ 492
Renegotiated Loans............................................................. 0
Ninety (90) Days Past Due...................................................... 279
------
Total Under-Performing Assets.................................................. $ 771
------
Under-Performing Assets as a Percentage of Total Loans......................... 0.69%
Past Due Loans (90 Days or More)
Commercial..................................................................... $ 0
Mortgage....................................................................... 256
Installment.................................................................... 23
------
Total.......................................................................... $ 279
======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Successor Successor Predecessor
Year Ended Six Months Ended Nine Months Ended
December 31, December 31, June 30,
1999 1998 1998
----------------- ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning Allowance for Loan Losses............ $ 750 $ 776 $ 392
Loans Charged Off:
Mortgage....................................... 37
Other.......................................... 219 132 133
------- ------- -------
Total Charged-Off Loans........................ 257 132 133
------- ------- -------
Recoveries on Charged-Off Loans:
Other.......................................... 2 6 8
------- -------
Total Recoveries on Charged-Off Loans.......... 2 6 8
------- -------
Provision for Loan Losses...................... 360 100 510
------- ------- -------
Ending Allowance for Loan Losses............... $ 855 $ 750 $ 776
------- ------- -------
Average Loans Outstanding...................... $97,693 $89,246 $82,077
Net Charged-Off Loans to Average Loans......... 0.26% 0.28% 0.20%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Successor
December 31,
1999
---------------------
(Dollars in thousands)
<S> <C>
Mortgage.............................................................................. $ 311
Consumer & Commercial Loans........................................................... 544
-----
Total................................................................................. $ 855
=====
</TABLE>
37
<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 FHLB and occasional use of certificates of
deposits. In addition, the Bank participates in bidding for temporary
investments available through the local government bodies within the market
areas in which the Bank provides banking services, typically with maturities of
less than sixty days with denominations in excess of $1 million. The following
table presents information with respect to the average balances of these funding
sources.
The Bank's average total deposits were $101,989,000 for the year ended
December 31, 1999, compared to $83,001,000 for the six month period ended
December 31, 1998. The Bank's funding provided by money-market and
interest-bearing demand accounts increased $7,521,000 compared to 1998. Funding
in certificates of deposits increased by $12,202,000 from 1998 to an average of
$60,500,000 for the year ended December 31, 1999. The Bank did experience a
decline in savings and non-interest bearing accounts of $735,000 in 1999.
Efforts have intensified and officer calling programs have been initiated to
find commercial entities to which account analysis demand deposit products will
be targeted. The management of the Bank wishes to expand this product offering
to lower funding costs as well as provide additional fee income related to such
products. The Bank has initiated offering a no-cost checking product to retail
customers to enable retail customers to migrate from competitors, providing the
base product to which the Bank's efforts will be to increase the number of
deposit and loan products owned by customers within our markets. The Bank
intends to develop solid relationships with its customers to develop customer
loyalty, by providing low-cost, simple product offerings and providing superior
customer service.
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 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
<TABLE>
<CAPTION>
Successor
Year ended
December 31,
1999
----------------------
(Dollars in thousands)
<S> <C>
Core Deposits:
Non-Interest Bearing Demand Savings Accounts.............................. $ 7,744
Money Market and NOW Accounts............................................. 33,745
Other Time Deposits....................................................... 60,500
--------
Total Core Deposits....................................................... 101,989
FHLB Advances............................................................. 21,244
--------
Total Funding Sources..................................................... $123,233
========
</TABLE>
38
<PAGE>
FUNDING SOURCES--YIELDS
<TABLE>
<CAPTION>
Successor Successor Predecessor Percentage change from
Year Six Months Nine Months
Ended Ended Ended December 31, 1998 June 30, 1998
December 31, December 31, June 30, to December 31, to December 31,
1999 1998 1998 1999 1998
------------- ------------- -------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand
Savings Accounts............... 2.43% 3.01% 2.96% (19.27)% 1.69%
Money Market and NOW Accounts.... 3.30% 3.26% 3.10% 1.23% 5.16%
Other Time Deposits.............. 5.11% 4.99% 5.99% 2.40% (16.69)%
---- ---- ---- ---- -----
Total Core Deposits.............. 4.30% 4.24% 4.80% 1.42% (11.67)%
FHLB Advances.................... 5.44% 5.55% 5.95% (1.98)% (6.72)%
---- ---- ---- ---- -----
Total Funding Sources............ 4.50% 4.49% 5.03% 0.22% (10.74)%
==== ==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
Minimum Balance at % of Weighted
Opening Balance December 31, 1999 Deposits Average Rate
------------------ ------------------- -------------- --------------
(Dollars in thousands, except for opening balance amounts)
<S> <C> <C> <C> <C>
Withdrawable:
Savings Accounts...................... $ 5 $ 7,335 7.14% 2.17%
Non-interest Bearing Checking......... 25 1,564 1.52% 0.00%
Now Accounts.......................... 50 17,733 17.27% 1.61%
Money Market Accounts................. 10,000 20,085 19.56% 5.00%
----------- ------ ----
Total Withdrawable.................... 46,717 45.49% 3.15%
----------- ------ ----
Certificates (Original Terms):
12 Months or Less..................... Various 15,652 15.24% 5.58%
13 to 36 Months....................... 500 9,914 9.65% 5.81%
37 Months and Greater................. 500 2,909 2.83% 5.80%
IRA's (Original Terms):
12 Months or Less..................... Various 1,570 1.53% 6.35%
13 to 36 Months....................... 500 1,639 1.60% 5.84%
37 Months and Greater................. 500 718 0.70% 5.65%
Jumbo Certificates.................... 100,000 23,582 22.96% 6.15%
----------- ------ ----
Total Certificates.................... 55,984 54.51% 5.90%
----------- ------ ----
Total Deposits........................ $ 102,701 100.00% 4.65%
=========== ====== ====
</TABLE>
CERTIFICATES OF DEPOSITS, BY RATE
Successor as of
December 31, 1999
-----------------
(In thousands)
Under 5%........................... $ 10,257
5.01% to 6.00%..................... 19,890
6.01% to 7.00%..................... 24,191
7.01% to 8.00%..................... 1,046
8.01% and over..................... 600
---------
$ 55,984
=========
CERTIFICATES OF DEPOSITS, BY RATE AND TERM
<TABLE>
<CAPTION>
Amounts at December 31, 1999 Maturing in:
Greater Than Three
One Year or Less Two Years Three Years Years Total
------------------ -------------- -------------- --------------------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Under 5%................. $ 8,690 $ 1,297 $ -- $ 270 $10,257
5.01%-- 6.00%............ 9,273 3,478 3,169 3,970 19,890
6.01%-- 7.00%............ 18,093 2,469 3,051 578 24,191
7.01%-- 8.00%............ 399 300 100 247 1,046
8.01% and over........... 600 -- -- -- 600
--------- -------- -------- -------- -------
$ 37,055 $ 7,544 $ 6,320 $ 5,065 $55,984
========= ======== ======== =======
</TABLE>
39
<PAGE>
TIME DEPOSIT OF $100,000 AND OVER
(Dollars in thousands)
Three Months or Less................................... $ 6,734
Greater than Three Months Through Six Months........... 9,663
Greater than Six Months Through Twelve Months.......... 3,436
Over Twelve Months..................................... 3,749
-------
Total.................................................. $23,582
=======
FHLB ADVANCES
At or for the Year
Ended December 31, 1999
-----------------------
(Dollars in thousands)
FHLB Advances Outstandings at End of Period............. $ 34,609
Average Balance for Period.............................. 21,244
Maximum Amount Outstanding at any Month-End During the
Period................................................ 34,609
Weighted Average Interest Rate During the Period........ 5.44%
Weighted Average Interest Rate at End of Period......... 5.55%
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,
payments on loans issued by the Bank, net deposit growth, and other borrowings.
The purpose of liquidity management is to match sources of funds with
anticipated customer borrowings and withdrawals and other obligations along with
ensuring a dependable funding base. Alternative sources of liquidity include
acquiring jumbo certificates resulting from local government bidding,
liquidation of marketable investment securities, sales and/or securitization of
pools of loans, and additional draws against available credit at the Federal
Home Loan Bank.
Rate sensitivity analysis places each of the Bank's balance sheet
components in its appropriate maturity and/or repricing frequency, thus allowing
management to measure the exposure to changes in interest rates. The Bank is
required to provide quarterly reporting to the Office of Thrift Supervision
(OTS) in the form of Schedule CMR, which accompanies the Bank's filing of the
Thrift Financial Report (TFR). This data is modeled by the OTS and is reported
back to the Bank representing the Bank's NPV (net portfolio value), which
reflects the economic value of the Bank's balance sheet when discounted against
current market rates and assumptions regarding prepayments and other factors
influencing cash flows of the financial instruments contained therein. The base
value is then shocked against assumed changes in market interest rates with
particular attention to the scenario of rates increasing 200 basis points. This
information is reviewed by management to determine appropriate action to be
taken to reposition the balance sheet to reduce the sensitivity of the
institution. The results of the OTS modeling and managements strategies are then
presented to the Board of Directors to establish the Bank's status with regard
to its Asset/Liability and Interest Rate Sensitivity policies.
The Bank's Asset/Liability Committee, which sets forth guidelines under
which the Bank manages funding sources, its investments and loan portfolios, is
responsible for monitoring the Bank's sensitivity measures. The objective of
this committee is to provide for the maintenance of an adequate net interest
margin, appropriate NPV levels, and adequate level of liquidity to keep the Bank
sound and profitable during all stages of an interest rate cycle. The Chief
Financial Officer has been authorized by the Board of Directors to perform the
daily management functions related to asset/liability management and investment
trading activities for the Bank.
At December 31, 1999, $24,467,000 or 21.8% of the loan portfolio is due
to mature or reprice within one year, compared to $9,224,000 or 14.1% of the
portfolio at December 31, 1998. In the investment securities category,
$10,893,000 or 43.0% of the portfolio matures or reprices within one year,
compared to $707,000 or 4.5% at December 31, 1998.
Management's objective in interest rate sensitivity is to reduce the
Bank's vulnerability to future interest rate fluctuations while providing for
growth and stability of net interest margin.
40
<PAGE>
In order to improve the sensitivity measures, management acted in the
4th Quarter to reduce dependency on short-term jumbo certificates acquired via
local government and traded several fixed-rate investment securities for
adjustable rates while the yield curve presented opportunities for such trades
without significant losses to recognize.
The cumulative GAP ratio of the Bank on December 31, 1999 was (5.40)
percent for interest rate sensitive assets and liabilities of ninety days or
less and (32.71) 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 an
increase would have a minimal effect on the Bank's earnings.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
1 - 90 Days 91 - 365 Days 1 - 5 Years Beyond 5 Years Total
------------- --------------- ------------- ----------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities.................... $ 166 $ 6,417 $ 7,847 $ 10,888 $ 25,318
Interest-Bearing Deposits................ 1,498 1,498
Loans (excluding non-accruing)........... 19,499 5,075 21,882 64,944 111,400
-------- --------- -------- -------- ---------
Total Earning Assets..................... 21,163 11,492 29,729 75,832 138,216
Interest-Bearing Liabilities:
Savings and Time Deposits................ 19,846 40,886 32,685 7,720 101,137
Borrowed Funds........................... 9,609 12,500 12,500 34,609
-------- --------- -------- -------- ---------
Total Interest-Bearing Liabilities...... 29,455 53,386 45,185 7,720 135,746
Interest Rate Sensitivity Gap Per Period. (8,292) (41,894) (15,456) 68,112 2,470
Cumulative Interest Rate Gap............. $(8,292) $(50,186) $(65,642) $ 2,470 $ 2,470
-------- --------- -------- -------- ---------
Cumulative Interest Sensitivity Gap as
a Percentage of Total Assets.......... (5.40)% (32.71)% (42.78)% 1.61% 1.61%
</TABLE>
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
$ Amount $ Change % Change NPV Ratio Change
---------------------------- ---------- --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp.............................. 4,032 (6,954) -63% 2.88% -447 bp
+200 bp.............................. 6,428 (4,558) -41% 4.49% -286 bp
+100 bp.............................. 8,832 (2,155) -20% 6.03% -132 bp
0 bp............................. 10,986 7.35%
- -100 bp.............................. 13,121 2,135 19% 8.60% +125 bp
- -200 bp.............................. 14,324 3,338 30% 9.26% +191 bp
- -300 bp.............................. 15,686 4,700 43% 9.99% +264 bp
</TABLE>
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.
41
<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, 1999,
and the consolidated statements of earnings, shareholders' equity, and cash
flows for the year ended December 31, 1999 and the six months 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1999, and the results of their operations and their cash flows for the year
ended December 31, 1999, and the six months ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 15, 2000
42
<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 months 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 auditing standards generally
accepted in the United States of America. 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 months ended June 30,
1998, in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
January 15, 1999
43
<PAGE>
BLUE RIVER BANCSHARES, INC.
Consolidated Balance Sheet (Successor)
as of December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks............................................................................ $ 5,784,728
Interest-bearing deposits.......................................................................... 1,498,262
-------------
Total cash and cash equivalents............................................................... 7,282,990
Securities available for sale--at fair value (amortized cost: $24,961,624)............................ 24,231,789
Securities held to maturity--at amortized cost (fair value: $348,613)................................. 356,660
Loans receivable, net of allowance for loan losses of $854,985...................................... 111,114,378
Stock in FHLB of Indianapolis, at cost............................................................... 2,153,000
Accrued interest receivable.......................................................................... 1,042,686
Income taxes receivable.............................................................................. 12,857
Deferred income taxes................................................................................ 745,975
Premises and equipment, net.......................................................................... 3,133,948
Real estate owned.................................................................................... 379,110
Prepaid expenses and other assets.................................................................... 142,060
Goodwill, net........................................................................................ 2,853,905
-------------
Total assets.................................................................................. $ 153,449,358
=============
Liabilities and Shareholders' Equity:
Liabilities:
Deposits........................................................................................... $ 102,701,034
Advances from FHLB................................................................................. 34,608,800
Accrued interest on deposits and FHLB advances..................................................... 180,764
Accrued expenses and other liabilities............................................................. 581,536
-------------
Total liabilities............................................................................. 138,072,134
-------------
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;
1,496,800 shares outstanding.................................................................... 16,258,736
Accumulated deficit................................................................................ (443,611)
Accumulated other comprehensive income, net of deferred taxes...................................... (437,901)
-------------
Total shareholders' equity.................................................................... 15,377,224
-------------
Total Liabilities and Shareholders' Equity........................................................... $ 153,449,358
=============
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
BLUE RIVER BANCSHARES, INC.
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------- ----------------
Period from Period from
Year July 1, 1998 October 1, 1997
Ended Through Through
December 31, 1999 December 31, 1998 June 30, 1998
-------------------------------------------- ----------------
<S> <C> <C> <C>
Interest Income:
Loans receivable............................... $ 7,945,606 $3,608,238 $5,221,212
Mortgage-backed securities and investment
securities.................................. 1,498,360 305,388 332,054
Interest-bearing deposits...................... 209,938 251,271 111,294
Dividends from FHLB and other.................. 114,368 57,050 56,630
------------ ---------- ----------
Total interest income..................... 9,768,272 4,221,947 5,721,190
------------ ---------- ----------
Interest Expense:
Interest expense on deposits................... 4,389,244 1,661,739 2,592,320
Interest expense on FHLB advances.............. 1,156,275 555,905 815,040
------------ ---------- ----------
Total interest expense.................... 5,545,519 2,217,644 3,407,360
------------ ---------- ----------
Net Interest Income.............................. 4,222,753 2,004,303 2,313,830
Provision for Loan Losses........................ 360,000 100,000 510,000
------------ ---------- ----------
Net Interest Income After Provision for Loan
Losses......................................... 3,862,753 1,904,303 1,803,830
------------ ---------- ----------
Non-Interest Income:
Service charges and fees....................... 208,497 115,713 185,412
Other.......................................... 170,359 119,158 128,800
Gain on Sale of Securities, net................ 229,891
Gain on Sale of Loans, net..................... 2,143
------------ ---------- ----------
Total non-interest income................. 610,890 234,871 314,212
------------ ---------- ----------
Non-Interest Expense:
Salaries and employee benefits................. 1,971,018 729,818 730,310
Premises and equipment......................... 604,249 180,960 195,751
Federal deposit insurance...................... 183,129 80,865 91,142
Data processing................................ 384,694 162,820 212,922
Advertising and promotion...................... 237,426 133,351 77,117
Bank fees and charges.......................... 70,420 31,511 48,125
Professional fees.............................. 479,064 154,012 249,420
Directors fees................................. 117,150 34,800 65,900
Stationary and supplies........................ 155,187 46,137 53,525
Other.......................................... 498,177 173,306 326,565
Goodwill amortization.......................... 206,077 106,709
------------ ---------- ----------
Total non-interest expense................ 4,906,591 1,834,289 2,050,777
------------ ---------- ----------
Income (Loss) Before Income Taxes................ (432,948) 304,885 67,265
Income Tax Expense (Benefit)..................... (117,501) 154,620 6,000
------------ ---------- ----------
Net Earnings (Loss).............................. $ (315,447) $ 150,265 $ 61,265
============ ========== ==========
Basic Earnings (Loss) Per Common Share........... $ (0.21) $ 0.10 $ 0.35
Diluted Earnings (Loss) Per Common Share......... $ (0.21) $ 0.10 $ 0.34
Weighted Average Shares Outstanding.............. 1,494,221 1,496,329 175,950
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
BLUE RIVER BANCSHARES, INC.
Consolidated Statements of Shareholders' Equity (Successor)
for the Period from January 1, 1998 to December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
(Loss), Net Total
Comprehensive Common Retained of Deferred Shareholders'
Income (Loss) Stock Earnings Taxes Equity
--------------- ----------- ---------- ------------ ------------
<S> <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 common stock...... (106,003) (106,003)
Re-issuance of common stock... 9,040 9,040
------------ ---------- --------- -----------
Balance at December 31, 1998.... 16,222,130 (128,164) 379,816 16,473,782
Net loss...................... $(315,447) (315,447) (315,447)
-----------
Other comprehensive loss:
Unrealized losses on Securities,
net of reclassification
adjustment................ (817,717) (817,717) (817,717)
-----------
Other comprehensive loss...... (817,717)
-----------
Comprehensive loss.............. $(1,133,164)
===========
Purchase of common stock...... (6,158) (6,158)
Re-issuance of common stock... 42,764 42,764
------------ ---------- --------- -----------
Balance at December 31, 1999.... $ 16,258,736 $ (443,611) $(437,901) $15,377,224
============ =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
BLUE RIVER BANCSHARES, INC.
Consolidated Statements of Shareholders' Equity (Predecessor)
for the Period from October 1, 1997 to June 30, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income, Net Total
Comprehensive Common Retained or Deferred Shareholders'
Income Stock Earnings Taxes Equity
------------- ----- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 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 tatements.
47
<PAGE>
BLUE RIVER BANCSHARES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------ ----------------
Year Period from Period from
Ended July1, 1998 October 1, 1997
December 31, Through Through
1999 December 31, 1998 June 30, 1998
------------------ ------------------ ----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................... $ (315,447) $ 150,265 $ 61,265
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization................. 470,097 193,839 121,731
Net amortization of premiums and discounts.... 328,716 193,839 121,731
Gain on sale of loans......................... (2,143)
Gain on sale of securities available for sale (229,891) (23,809)
Provision for loan losses..................... 360,000 100,000 510,000
Deferred income taxes......................... (291,515) (9,435) (239,304)
Changes in assets and liabilities:
Accrued interest receivable................... (283,200) (44,368) 35,664
Other assets.................................. 109,735 (670) (151,673)
Other liabilities............................. (169,597) (242,062) 236,476
------------- ------------ ------------
Net cash from operating activities....... (23,245) 147,569 550,350
------------- ------------ ------------
Cash Flows from Investing Activities:
Payment for acquisition of Shelby County Bancorp (10,480,938)
Loans funded net of collections............... (29,367,350) 956,942 (13,468,623)
Proceeds from sale of loans................... 5,639,634
Maturities of securities available for sale... 7,442,767 90,000 327,275
Maturities of securities held to maturity..... 72,455 250,000
Purchase of FHLB stock........................ (795,200) (358,900) (78,700)
Purchase of premises and equipment............ (1,483,140) (257,181) (93,888)
Proceeds from sale of securities available for sale 23,405,417 4,701,772
Purchase of securities available for sale..... (38,494,410) (9,172,670) (4,679,695)
------------ ------------ ------------
Net cash used in investment activities... (33,579,827) (18,972,747) (13,291,859)
------------ ------------ -------------
Cash Flows from Financing Activities:
Proceeds from FHLB advances and other borrowings 133,756,800 7,618,317 2,409,293
Dividends paid................................ (43,988)
Net increase in deposits...................... 13,508,297 13,938,290 10,219,966
Purchase of common stock...................... (6,158) (96,963)
Repayment of FHLB advance and other borrowings (125,648,000) (1,585,236)
Proceeds from issuance of common stock........ 42,764 65,550
------------ ------------ ------------
Net cash provided by financing activities 21,653,703 21,459,644 11,065,585
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (11,949,369) 2,634,466 (1,675,924)
Cash and cash equivalents at beginning of period 19,232,359 16,597,893 2,436,183
------------ ------------ ------------
Cash and cash equivalents at end of period.... $ 7,282,990 $ 19,232,359 $ 760,259
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Interest paid................................. $ 5,531,000 $ 2,431,000 $ 3,387,000
Income taxes paid............................. $ 145,000 $ 82,000 $ 376,000
Loans transferred to real estate owned........ $ 512,000 $ 110,000 $ 102,000
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
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.
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. During
September 1999, two additional full service branches were opened in Fort Wayne,
Indiana.
49
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
1. Summary of Significant Accounting Policies -- (Continued)
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.
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.
50
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
1. Summary of Significant Accounting Policies -- (Continued)
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 40 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 year ended
December 31, 1999 was approximately $206,000 and for the six months 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 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
Year July 1, 1998 October 1, 1997
Ended Through through
December 31, 1999 December 31, 1998 June 30, 1998
------------------------------------------- ----------------
<S> <C> <C> <C>
Basic Earnings per Share:
Weighted Average Common Shares.................. 1,494,221 1,496,329 175,950
---------- ---------- --------
Diluted Earnings per Share:
Weighted Average Common Shares 1,494,221 1,496,329 175,950
Dilutive Effect of Stock Options................ 5,650
---------- ---------- --------
Weighted Average Common and Incremental
Shares.......................................... 1,494,221 1,496,329 181,600
---------- ---------- --------
</TABLE>
51
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
1. Summary of Significant Accounting Policies -- (Continued)
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 year ended December 31, 1999 and six
month period ended December 31, 1998 and the predecessor's nine month period
ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------- ---------------------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, through through
1999 December 31, 1998 June 30, 1998
------------------ ------------------ ---------------------
<S> <C> <C> <C>
Other comprehensive income (loss) before tax:
Net unrealized holding gains (losses)............ $(1,132,971) $ 634,142 $ 388,860
Less: reclassification adjustment for
gains realized in net income................... (229,891) (23,809)
----------- ---------- ----------
Other comprehensive income (loss) before tax..... (1,362,862) 634,142 365,051
Income tax benefit (expense) related to items of
other comprehensive income (loss).............. 545,145 (254,326) (146,020)
---------- ---------- ----------
Other comprehensive income (loss), net of tax.... $ (817,717) $ 379,816 $ 219,031
=========== ========== ==========
</TABLE>
The comprehensive income (loss) represents unrealized gains and losses
of the Subsidiary Bank as investment unrealized gains and losses at the Holding
Company were immaterial.
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. The Company has determined that it operates as a single
segment which is Community banking. 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, ("SFAS
133") Accounting for Derivative Instruments and Hedging Activities, was issued.
This statement was amended by Statement of Financial Accounting Standards No.
137 ("SFAS 137"), Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS 133. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. 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.
Reclassification -- Certain amounts in the six months Period ended
December 31, 1998 and the nine month period ended June 30, 1998 have been
reclassified to conform to the 1999 presentation.
52
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
2. Securities
Securities at December 31, 1999 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 ........ $13,015,061 $ 10,419 $ (81,045) $12,944,435
Corporate bonds ................... 1,435,175 (60,302) 1,374,873
Municipal bonds ................... 2,283,602 643 (53,143) 2,231,102
U.S. treasury and agency securities 8,227,786 (546,407) 7,681,379
----------- ----------- ----------- -----------
Total available for sale ............ $24,961,624 $ 11,062 $ (740,897) $24,231,789
=========== =========== =========== ===========
Securities held to maturity:
Mortgage-backed securities ........ $ 140,743 $ $ (3,484) $ 137,259
Municipal bonds ................... 215,917 (4,563) 211,354
----------- ----------- ----------- -----------
Total held to maturity .............. $ 356,660 $ 0 $ (8,047) $ 348,613
=========== =========== =========== ===========
</TABLE>
The carrying value of mortgage-backed securities, corporate bonds, and
U.S. treasury and agencies at December 31, 1999 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 ............... $ 0 $ 0 $ 140,743 $ 137,259
Due after one year through five years . 3,221,336 3,223,497
Due after five years through ten years 1,426,128 1,413,512
Due after ten years ................... 8,367,597 8,307,426
Corporate bonds:
Due after one year through five years . 224,824 223,438
Due after one year through five years.. 393,832 386,408
Due after five years through ten years. 816,519 765,027
Municipal bonds:
Due after one year through five years . 839,741 825,854
Due after five years through ten years 1,110,928 1,084,746 215,917 211,354
Due after ten years ................... 332,933 320,502
U.S. treasury and agency securities:
Due after one year through five years 1,983,213 1,915,178
Due after five years through ten years 2,747,604 2,564,016
Due after ten years ................... 3,496,969 3,202,185
----------- -----------
Total ................................... $24,961,624 $24,231,789 $ 356,660 $ 348,613
=========== =========== =========== ===========
</TABLE>
53
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
3. Loans Receivable
Loans receivable at December 31, 1999 by major categories are as
follows:
Real estate mortgage loans:
One-to-four family ............... $ 45,479,316
Commercial ....................... 28,898,936
Home equity loans ................ 5,156,341
Residential construction ......... 1,443,764
Commercial participation purchased 4,092,601
Commercial participation sold .... (1,250,000)
Consumer loans ..................... 18,715,754
Commercial loans ................... 9,355,497
-------------
111,892,209
Deferred loan origination costs, net 77,154
Allowance for loan losses .......... (854,985)
-------------
$ 111,114,378
=============
Activity in the allowance for loan losses for the periods indicated were as
follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------------- ----------------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, Through through
1999 December 31, 1998 June 30, 1998
-------------- ------------------ ----------------
<S> <C> <C> <C>
Beginning balance......................... $ 750,022 $ 776,502 $ 391,677
Provision for loan losses................. 360,000 100,000 510,000
Charge-offs............................... (256,703) (132,764) (133,551)
Recoveries................................ 1,666 6,284 8,376
---------- ---------- ----------
Ending balance............................ $ 854,985 $ 750,022 $ 776,502
========== ========== ==========
</TABLE>
As of December 31, 1999, loans which were impaired in accordance with
SFAS No.'s 114 and 118 totaled approximately $860,000. Specific reserves for
credit losses allocated to these loans totaled approximately $97,000. 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 year ended December 31, 1999, the average balance of impaired
loans was approximately $300,000; additionally, no interest income was earned on
these loans during the year ended December 31, 1999.
54
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Nine Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
4. Premises and Equipment
Premises and equipment at December 31, 1999 consists of the following:
Land and improvements ....... $ 262,366
Buildings and improvements .. 1,822,799
Furniture and equipment ..... 1,393,299
-----------
3,478,464
Less accumulated depreciation (344,516)
-----------
$ 3,133,948
5. Deposits
Deposits at December 31, 1999 are as follows:
Weighted
Average
Amount Rate
------ --------
Passbook Savings Accounts ................. $ 7,334,889 2.17%
Non-interest Bearing Checking ............. 1,563,698 0.00%
Interest - Bearing Demand Deposits Accounts 17,733,379 1.61%
Money Market Accounts ..................... 20,085,052 5.00%
------------ ----
Total Transaction Accounts ......... 46,717,018 3.15%
------------ ----
Certificate Accounts:
Under 12 Months ......................... 19,085,024 5.64%
12 to 23 Months ......................... 9,408,419 5.39%
24 to 35 Months ......................... 7,913,012 5.73%
36 to 59 Months ......................... 3,055,705 5.63%
Over 60 Months .......................... 16,521,856 6.63%
------------ ----
55,984,016 5.90%
------------ ----
$102,701,034 4.65%
============ ====
A summary of certificate accounts by scheduled maturities at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
------------ ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
3.01% - 4%............ $ 15,516 $ 15,516
4.01% - 5%............ 8,674,324 $ 1,297,215 $ 666 $ 269,723 10,241,928
5.01% - 6%............ 9,273,442 3,477,912 $ 3,168,810 3,293,303 675,974 19,889,441
6.01% - 7%............ 18,093,324 2,469,336 3,050,918 577,621 24,191,199
7.01% - 8%............ 398,453 300,000 100,000 $ 247,479 1,045,932
8.01% - 9%............ 600,000 600,000
------------ ------------ ----------- ----------- ----------- --------- -----------
$ 37,055,059 $ 7,544,463 $ 6,319,728 $ 3,871,590 $ 945,697 $ 247,479 $55,984,016
============ ============ =========== =========== =========== ========= ===========
</TABLE>
55
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
5. Deposits -- (Continued)
A summary of interest expense for the periods indicated is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
Period From Period from
July 1, 1998 October 1, 1997
Year Ended Through through
December 31, 1999 December 31, 1998 June 30, 1998
----------------- ------------------ ----------------
<S> <C> <C> <C>
Account type:
Passbook Savings Accounts........................ $ 188,140 $ 127,657 $ 191,691
Interest-Bearing Demand Deposits Accounts........ 277,972 142,218 231,036
Money Market Accounts............................ 833,974 284,087 242,986
Certificates..................................... 3,089,158 1,107,777 1,926,607
---------- ---------- ----------
$4,389,244 $1,661,739 $2,592,320
========== ========== ==========
</TABLE>
6. Federal Home Loan Bank Advances
Federal Home Loan Bank advances at December 31, 1999 are as follows:
Weighted
Average
Interest
Amount Rates
------ --------
Fiscal Year Maturity
2000................................... $22,108,800 5.84%
2001................................... 7,500,000 6.63%
2002................................... 2,500,000 5.37%
2004................................... 2,500,000 5.44%
---------
$34,608,800 5.95%
===========
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 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 or as a
director.
56
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
7. Stock Option Plans -- (Continued)
The following is an analysis of the activity for the year ended December
31, 1999 and the stock options outstanding at the end of the respective years:
Weighted
Average
Options Shares Rates
------------------------------- --------- --------
Outstanding at July 1, 1998.................... 105,000 $ 12
Granted........................................ 1,500 $ 12
-------
Outstanding at December 31, 1998............... 106,500 $ 12
Granted........................................ 15,000 $ 12
Forfeited or expired........................... (6,000) $ 12
--------
Outstanding at December 31, 1999............... 115,500 $ 12
=======
As of December 31, 1999 and 1998, options outstanding had an exercise
price of $12 and a weighted average remaining contractual life of approximately
13 and 14 years, respectively. Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," provides for, at the
option of the Company, a fair value method of accounting for stock options and
similar equity instruments. The Company has elected to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost for the plans been determined
based on the fair value at the grant dates for awards under the plan consistent
with the fair value method of SFAS 123, the Company's net income (loss) and net
income (loss) per share for the year ended December 31, 1999 and the six months
ended December 31, 1998 would have decreased to the pro forma amounts indicated
below:
Net Income (loss): 1999 1998
---- ----
As reported................................ $(315,447) $ 150,265
Pro forma.................................. $(352,664) $ 132,185
Net Income (loss) per share:
As reported................................ $(315,447) $ 150,265
Basic earnings (loss) per share......... $ (0.21) $ 0.10
Dilutive earnings (loss) per share...... $ (0.21) $ 0.10
Pro forma earnings (loss) per share
Basic earnings (loss) per share......... $ (0.24) $ 0.09
Dilutive earnings (loss) per share...... $ (0.24) $ 0.09
The weighted average fair value of options granted was $2.75 and $2.82
per share in 1999 and 1998, respectively. 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
5.2% and 5.4% in 1999 and 1998, respectively, annualized volatility of 30% and
0% in 1999 and 1998, respectively, 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. 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. SFAS 123 had no impact on
the Predecessor's financial position or results of operations.
57
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
8. Income Taxes
An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------------ ----------------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, through Through
1999 December 31, 1998 June 30, 1998
------------------ ------------------- ----------------
<S> <C> <C> <C>
Current:
Federal.......................... $120,295 $139,447 $ 203,224
State............................ 53,719 24,608 42,080
--------- -------- ----------
174,014 164,055 245,304
Deferred........................... (291,515) (9,435) (239,304)
--------- -------- ----------
$(117,501) $154,620 $ 6,000
========= ======== ==========
</TABLE>
A reconciliation between the effective tax rate and the statutory tax rate
is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------------ ---------------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, through Through
1999 December 31, 1998 June 30, 1998
------------------ ------------------- ---------------
<S> <C> <C> <C>
U.S. Federal Statutory Rate............. (34.0)% 34.0% 17.6%
State Income Tax, Net of Federal Income
Tax Benefit........................... (5.4) 5.6 6.4
Nondeductible Goodwill.................. 16.2 13.9
Tax Exempt Interest..................... (4.1) (3.3) (14.3)
Other, Net.............................. 0.2 0.5 (0.8)
----- ---- -----
Effective Tax Rate...................... (27.1)% 50.7% 8.9%
===== ==== =====
</TABLE>
58
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
8. Income Taxes -- (Continued)
The significant components of the Bank's net deferred tax asset as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Accrued Expenses Not Currently Deductible .................................... $ 242,976
Excess Purchase Price Over Net Assets Acquired Allocated for
Financial Reporting Purposes to Deposits ................................... 35,472
Allowance for Loan Losses .................................................... 319,194
Investment Securities Available for Sale ..................................... 315,141
Excess Purchase Price Over Net Assets Acquired Allocated for
Financial Reporting Purposes to Loans ...................................... 8,952
Depreciation ................................................................. (44,924)
Other ........................................................................ (130,836)
---------
Net Deferred Tax Asset ....................................................... $ 745,975
=========
</TABLE>
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 certain limitations, the
allowable bad debt deduction was computed based on one of two alternative
methods: (1) a percent of taxable income before such deduction or (2) loss
experience method. The Bank generally computed its annual addition to its tax
bad debt reserves using the percentage of taxable income prior to 1997.
Beginning in fiscal 1997, the Bank is no longer allowed a special bad
debt deduction using the percentage of taxable income method and 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. As defined, total loans to
executive officers, directors and principal shareholders were approximately
$720,000 and loans to an affiliated company were $367,000 at December 31, 1999.
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.
59
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
10. Regulatory Capital Requirements -- (Continued)
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 capital amounts and ratios of weighted assets (as defined), and of Tier
1 capital (as defined) to average assets (as defined). As of December 31, 1999,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1999, 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, and Tier 1 leverage ratios
as set forth in the table below:
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------------------------------
Actual Capital Required Capital
--------------------------------- -----------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital............................... $ 11,134,000 7.4% $ 2,257,000 1.5%
Core capital................................... 11,134,000 7.4% 4,515,000 3.0%
Total risk-based capital....................... 11,869,000 11.1% 8,578,000 8.0%
FDICIA regulations to be classified "well capitalized":
Tier 1 leverage capital........................ 11,134,000 7.4% 7,524,000 5.0%
Tier 1 risk based capital...................... 11,134,000 10.4% 6,433,000 6.0%
Total risk-based capital....................... 11,869,000 11.1% 10,722,000 10.0%
</TABLE>
11. Employee Benefit Plans
The Company (Successor) 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 $42,000 for the year ended December 31, 1999 and $9,000
for the six month period ended December 31, 1998.
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, 1999, the Bank had loan commitments approximating
$1,407,000 excluding undisbursed portions of loans in process. Outstanding
letters of credit totaled approximately $652,000 at December 31, 1999.
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.
60
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
13. Parent Company Financial Information
Condensed Balance Sheet as of December 31, 1999:
Assets
Cash and cash equivalents ..................... $ 948,666
Securities available for sale ................. 1,060,023
Investment in subsidiary ...................... 13,405,377
Other ......................................... 468,275
-----------
Total assets ............................. $15,882,341
===========
Liabilities and Shareholders' Equity
Other liabilities ............................. $ 505,117
Shareholders' equity .......................... 15,377,224
-----------
Total liabilities and shareholders' equity $15,882,341
===========
Condensed Statements of Earnings are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, Through Through
1999 December 31, 1998 June 30, 1998
------------------ ------------------ ----------------
<S> <C> <C> <C>
Interest income, net of interest expense.... $ 134,606 $ 144,223 $ 9,953
Non-interest income.......................... 39,771 21,000 33,178
Non-interest expense......................... (512,862) (326,984) (395,174)
---------- ---------- ----------
Income (loss) before income taxes and equity in
undistributed earnings of Shelby County Bank (338,485) (161,761) (352,043)
Income tax expense (benefit)................. (135,394) (64,704) (89,668)
---------- ---------- ----------
Income (loss) before equity in undistributed
Earnings of Shelby County Bank............. (203,091) (97,057) (262,375)
Equity in undistributed earnings (loss) of Shelby
County Bank................................ (112,356) 247,322 323,640
----------- ---------- ----------
Net income (loss)............................ $ (315,447) $ 150,265 $ 61,265
=========== ========== ==========
</TABLE>
61
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
13. Parent Company Financial Information -- (Continued)
Condensed Statements of Cash Flows are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------- ---------------
Year Period from Period from
Ended July 1, 1998 October 1, 1997
December 31, Through Through
1999 December 31, 1998 June 30, 1998
------------------ ------------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income......................................... $ (315,447) $ 150,265 61,265
Adjustments to reconcile net cash from operating
activities:
Equity in undistributed earnings (loss) of subsidiary 112,356 (247,322) (323,640)
Depreciation and amortization................... 72,681 25,744 17,905
(Increase) Decrease in other assets............. (208,478) (49,869) 52,858
Increase (Decrease) in other liabilities........ 261,435 (133,184) 86,413
------------ ------------ ---------
Net cash from operating Activities............ (77,453) (254,366) (105,199)
------------- ------------ ----------
Cash Flows from Investing Activities: (10,480,938)
Payment for acquisition of Shelby County Bancorp... 335,234 31,752 (16,831)
Loans funded net of collections.................... (1,408,233) (771,680)
Purchase of available for sale securities.......... 694,533
Maturities of securities........................... 1,127 (2,490,850)
Net investment in subsidiary....................... (74,164) (62,334)
------------- ------------ ---------
Purchase of premises and equipment................. (451,503) (13,774,050) (16,831)
------------- ------------ ---------
Net cash from investing activities............
Cash Flows from Financing Activities: (301,393)
FHLB advances and other borrowings................. (6,158) (96,963) (10,236)
Repurchase of stock................................ 42,764 65,550
Proceeds from issuance of common stock............. (43,988)
------------ ------------ ---------
Dividends paid..................................... 36,606 (398,356) 11,326
------------ ------------ ---------
Net cash from financing activities............ (492,350) (14,426,772) (110,704)
Net decrease in cash and cash equivalents............ 1,441,016 15,867,788 156,228
------------ ------------ ---------
Cash and cash equivalents at beginning of period..... $ 948,666 $ 1,441,016 $ 45,524
============ ============ =========
Cash and cash equivalents at end of period........... $ 0 $ 12,000 $ 2,000
============ ============ =========
Supplemental cash flow information - interest paid...
</TABLE>
During the year ended December 31, 1999, Blue River Bancshares, Inc. (the
parent) contributed $1,509,196 to Shelby County Bank in the form of premises and
equipment and investment securities.
62
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
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, 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, 1999:
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 -- The 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 -- The fair values of
commitments to extend credit are based on fees currently charged to enter into
similar agreements with similar maturities and interest rates.
63
<PAGE>
BLUE RIVER BANCSHARES, INC.
Notes to Consolidated Financial Statements as of December 31, 1999
and for the Year Ended December 31, 1999, Six Months Ended December
31, 1998, and Nine Months Ended June 30, 1998
14. Fair Value of Financial Instruments -- (Continued)
The estimated carrying and fair values of the Company's financial
instruments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents..................................................... $ 7,283,000 $ 7,283,000
Investment securities held to maturity........................................ 357,000 349,000
Investment securities available for sale...................................... 24,232,000 24,232,000
Loans receivable, net......................................................... 111,114,000 108,329,000
Stock in FHLB of Indianapolis................................................. 2,153,000 2,153,000
Liabilities
Deposits...................................................................... 102,701,000 102,478,000
FHLB advances................................................................. 34,609,000 34,330,000
Accrued interest payable...................................................... 181,000 181,000
</TABLE>
64
<PAGE>
SHAREHOLDER INFORMATION
Stock Information
The Company's common stock is traded on the Nasdaq SmallCap Market under
the symbol "BRBI".
The Company had 64 Shareholders of Record as of March 20, 2000.
Sale Price Per Share
1999 1998
---- ----
Quarter High Low High Low
--------------- ------ ------ ------ -----
First Quarter............ $ 9.000 $ 7.000 N/A N/A
Second Quarter........... 7.875 6.500 $12.250 $11.375
Third Quarter............ 7.000 4.500 11.875 8.000
Fourth Quarter........... 6.000 3.500 10.000 6.875
Annual Report on Form 10-KSB
A copy of the company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission, is available without charge by writing:
Bradley A. Long
Chief Financial Officer
Blue River Bancshares, Inc.
29 E. Washington Street
Shelbyville, IN 46176
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or
changes in name and address should be directed to the stock transfer agent and
registrar by writing:
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004
Investor Information
Stockholders, investors, and analysts interested in additional
information may contact Terry Smith, Director of Investor Relations, Blue River
Bancshares, Inc.
Independent Auditor Legal Counsel
DELOITTE & TOUCHE LLP KRIEG, DEVAULT,
111 Monument Circle ALEXANDER &
Suite 2000 CAPEHART, LLP
Indianapolis, IN 46204 One Indiana Square
Suite 2800
Indianapolis, IN 46204
Corporate Offices
BLUE RIVER BANCSHARES, INC.
29 E. Washington St.
Shelbyville, IN 46176
888-842-2265
65
<PAGE>
Directors and Officers
Board of Directors Board of Directors
Blue River Bancshares, Inc. Shelby County Bank
--------------------------- -------------------
Steven R. Abel Steven R. Abel
Owner Owner
Hoosier Appraisal Service Hoosier Appraisal Service
Chairman of the Board Chairman of the Board
Robert C. Reed Robert C. Reed
Vice Chairman, President Vice Chairman, President
& CEO & CEO
Wendell L. Bernard Wendell L. Bernard
Owner Owner
Bernard Realty Bernard Realty
D. Warren Robison D. Warren Robison
Owner Owner
Hale Abstract Hale Abstract
Ralph W. Van Natta Ralph W. Van Natta
Owner Owner
Shelby Travel Shelby Travel
Peter G. DePrez Peter G. DePrez
Attorney Attorney
Brown, Linder & DePrez Brown, Linder & DePrez
Officers
Blue River Bancshares, Inc.
---------------------------
Steven R. Abel
Chairman of the Board
Robert C. Reed
Vice Chairman, President & CEO
D. Warren Robison
Senior Vice President
Secretary to the Board
Bradley A. Long
Vice President, Chief Financial Officer
David E. Morrison
Vice President, Community Banking
Jay R. Powell
Vice President, Community Banking
Terry A. Smith
Vice President, Human Resources & Marketing
Rita A. Sturgill
Vice President, Auditor
Officers
Shelby County Bank
------------------
Steven R. Abel
Chairman of the Board
Robert C. Reed Rita A. Sturgill
President Vice President
Chief Executive Officer Auditor
Bradley A. Long Ronald L. Lanter
Senior Vice President Vice President
Chief Financial Officer Lending
David E. Morrison Joyce E. Ford
Senior Vice President Vice President
Chief Credit Officer Mortgage
Terry A. Smith
Vice President
Marketing Director
Jay R. Powell
Vice President
Community Banking
66
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ISSUER'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,784,728
<INT-BEARING-DEPOSITS> 1,498,262
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,691,624
<INVESTMENTS-CARRYING> 356,660
<INVESTMENTS-MARKET> 24,231,789
<LOANS> 111,969,363
<ALLOWANCE> 854,985
<TOTAL-ASSETS> 153,449,358
<DEPOSITS> 102,701,034
<SHORT-TERM> 34,608,800
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 16,289,509
<OTHER-SE> (912,285)
<TOTAL-LIABILITIES-AND-EQUITY> 153,449,358
<INTEREST-LOAN> 7,945,606
<INTEREST-INVEST> 1,612,728
<INTEREST-OTHER> 209,938
<INTEREST-TOTAL> 9,768,272
<INTEREST-DEPOSIT> 4,389,244
<INTEREST-EXPENSE> 1,156,275
<INTEREST-INCOME-NET> 4,222,753
<LOAN-LOSSES> 360,000
<SECURITIES-GAINS> 229,891
<EXPENSE-OTHER> 4,906,591
<INCOME-PRETAX> (432,948)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315,447)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
<YIELD-ACTUAL> 3.23
<LOANS-NON> 492,294
<LOANS-PAST> 278,615
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 750,022
<CHARGE-OFFS> 256,703
<RECOVERIES> 1,666
<ALLOWANCE-CLOSE> 854,985
<ALLOWANCE-DOMESTIC> 854,985
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
