FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20552
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-24501
BLUE RIVER BANCSHARES, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
Indiana 35-2016637
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
29 East Washington Street
Shelbyville, Indiana 46176
-------------------- -----
(Address of principal executive (Zip Code)
office)
Issuer's telephone number, including area code:
(317) 398-9721
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
As of September 30, 2000, there were 1,549,913 shares of the Registrant's Common
Stock issued outstanding.
Transitional Small Business Disclosure Format.
(Check one): Yes No X
--- ---
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
INDEX
-----
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statement of Financial Condition (Unaudited)
as of September 30, 2000 3
Consolidated Statement of Operations (Unaudited)
three months period ended September 30, 2000 and 1999 4
Consolidated Statement of Operations (Unaudited)
nine months period ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited)
nine months period ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
PART II. OTHER INFORMATION: 16
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 17
2
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited)
AS OF SEPTEMBER 30, 2000
------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
------
Cash and due from banks $ 4,908,015
Interest-bearing deposits with banks 3,781,737
Investment securities available for sale 26,023,825
Investment securities held to maturity 328,289
Loans receivable, net 114,741,020
Stock of FHLB Indianapolis 2,153,000
Accrued interest receivable 1,130,935
Deferred and refundable income taxes 1,504,070
Premises and equipment, net 2,992,831
Prepaid expenses and other assets 647,728
Goodwill, net 2,694,596
-------------
TOTAL ASSETS $ 160,906,046
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $ 127,274,608
FHLB advances 17,500,000
Accrued expenses and other liabilities 570,033
Accrued interest payable 1,092,501
-------------
Total liabilities 146,437,142
-------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, without par value: 1,549,913 shares
issued and outstanding 16,568,618
Accumulated deficit (1,757,282)
Unrealized loss on available for sale securities, net of income taxes (342,432)
-------------
Total shareholders' equity 14,468,904
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 160,906,046
=============
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
-------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
----------------
Loans receivable $ 2,622,745 $ 2,058,918
Securities 538,229 351,071
Interest-bearing deposits 31,392 35,323
Dividends from FHLB 46,002 29,811
----------- -----------
Total interest income 3,238,368 2,475,123
----------- -----------
INTEREST EXPENSE:
-----------------
Interest expense on deposits 1,658,416 1,110,444
Interest expense on FHLB and other borrowings 384,461 266,102
----------- -----------
Total interest expense 2,042,877 1,366,546
----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,195,491 1,108,577
PROVISION FOR LOAN LOSSES 1,312,931 75,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES (117,440) 1,033,577
----------- -----------
NON-INTEREST INCOME:
--------------------
Service charges and fees 69,082 51,516
Gain/(loss) on sale of available-for-sale securities (34,452) 1,247
Other 35,804 15,564
----------- -----------
Total non-interest income 70,434 68,327
----------- -----------
NON-INTEREST EXPENSE:
---------------------
Salaries and employee benefits 611,211 570,267
Premises and equipment 182,996 165,499
Federal deposit insurance 29,165 30,488
Data processing 127,899 92,436
Advertising and promotion 37,561 82,093
Bank fees and charges 19,082 22,963
Directors fees 28,500 28,831
Professional fees 205,689 95,827
Stationery, supplies and printing 15,173 55,568
Goodwill amortization 53,104 53,103
Other 138,412 170,473
----------- -----------
Total non-interest expense 1,448,792 1,367,548
----------- -----------
LOSS BEFORE INCOME TAXES (1,495,798) (265,644)
INCOME TAX BENEFIT (578,049) (87,777)
----------- -----------
NET LOSS $(917,749) $(177,867)
=========== ===========
BASIC AND DILUTIVE LOSS PER SHARE $(0.59) $(0.12)
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
----------------
Loans receivable $ 7,421,048 $ 5,773,195
Securities 1,559,844 901,835
Interest-bearing deposits 143,857 190,357
Dividends from FHLB 131,651 75,221
----------- -----------
Total interest income 9,256,400 6,940,608
----------- -----------
INTEREST EXPENSE:
-----------------
Interest expense on deposits 4,432,191 2,989,799
Interest expense on FHLB and other borrowings 1,314,378 835,246
----------- -----------
Total interest expense 5,746,569 3,825,045
----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 3,509,831 3,115,563
PROVISION FOR LOAN LOSSES 1,587,931 165,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,921,900 2,950,563
----------- -----------
NON-INTEREST INCOME:
--------------------
Service charges and fees 186,993 173,482
Gain/(loss) on sale of available-for-sale securities (34,452) 249,500
Other 154,321 95,263
----------- -----------
Total non-interest income 306,862 518,245
----------- -----------
NON-INTEREST EXPENSE:
---------------------
Salaries and employee benefits 1,726,895 1,348,095
Premises and equipment 583,756 418,539
Federal deposit insurance 83,632 154,026
Data processing 358,113 265,651
Advertising and promotion 202,246 150,899
Bank fees and charges 62,233 57,209
Directors fees 82,800 82,831
Professional fees 538,147 407,931
Stationery, supplies and printing 69,411 119,290
Goodwill amortization 159,310 152,974
Other 460,394 350,955
----------- -----------
Total non-interest expense 4,326,937 3,508,400
----------- -----------
LOSS BEFORE INCOME TAXES (2,098,175) (39,592)
INCOME TAX BENEFIT (784,450) 44,911
----------- -----------
NET LOSS $(1,313,725) $(84,503)
============ ===========
BASIC AND DILUTIVE LOSS PER SHARE $(0.86) $(0.06)
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,313,725) $ (84,503)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 381,886 593,054
Provision for loan losses 1,587,931 165,000
Loss/(Gain) on sale of available-for-sale securities 34,452 (248,252)
Loss/(Gain) on sale of loans 9,998
Changes in assets and liabilities:
Accrued interest receivable (88,249) (464,545)
Other assets (935,442) (493,124)
Other liabilities 900,234 141,898
------------- -----------
Net cash from operating activities 577,085 (390,472)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net of principal repayments (6,973,948) (21,016,871)
Investment in FHLB stock (129,900)
Principal maturities collected on securities 2,922,514 3,482,226
Capital expenditures (74,366) (1,289,459)
Proceeds from sale of loans 1,687,848 5,639,634
Purchases of available-for-sale securities (14,114,386) (31,697,672)
Proceeds from sale of available-for-sale securities 9,551,642 2,964,336
------------- -----------
Net cash used in investing activities (7,000,696) (42,047,706)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from FHLB advances and other borrowings 79,675,000 53,800,000
Payment of FHLB advances and other borrowings (96,783,800) (57,900,000)
Net increase in deposits 24,629,237 31,769,965
Proceeds from issuance of Common Stock 309,936 47,441
------------- -----------
Net cash from financing activities 7,830,373 27,717,406
------------- -----------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 1,406,762 (14,720,772)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 7,282,990 19,232,359
------------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 8,689,752 $4,511,587
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,835,000 $3,023,000
Income taxes paid 0 196,000
</TABLE>
See notes to consolidated financial statements (unaudited)
6
<PAGE>
BLUE RIVER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------
1. BASIS OF CONSOLIDATION AND PRESENTATION
The unaudited consolidated financial statements include the accounts of
Blue River Bancshares, Inc. (the Company") and its wholly-owned
subsidiary Shelby County Bank (the "Bank"). Summary of significant
accounting policies is set forth in Note 1 of the Notes to the
Consolidated Financial Statements of the Company included in the
December 31, 1999 Annual Report to Shareholders.
The accompanying consolidated interim financial statements at September
30, 2000, the three month periods ended September 30, 2000 and 1999, and
the nine month periods ended September 30, 2000 and 1999, are unaudited
and have been prepared in accordance with instructions to Form 10-QSB.
In the opinion of management, the financial statements include all the
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows for such periods.
2. ALLOWANCE FOR LOAN LOSS
Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
Balance, beginning of period $ 854,985 $ 750,022
Add:
Provision for loan losses 1,587,931 165,000
Recoveries of loans previously charged off 1,660 1,325
Less: Gross charge-offs:
Residential real estate loans (337,365) (37,481)
Consumer/Commercial loans (191,823) (96,845)
----------- ---------
Balance, end of period $ 1,915,388 $ 782,021
=========== =========
Net charge-offs to total average loans outstanding 0.46% 0.19%
Allowance to total average loans outstanding 1.65% 0.83%
</TABLE>
The allowance for loan losses at September 30, 2000 was $1,915,000, an
increase of $1,060,000 from December 31, 1999. The Company has increased
its allowance for loan losses due to overall portfolio growth and to
recognize the incremental inherent risks in diversifying the portfolio
into non-residential lending. Historically, such loans do exhibit higher
charge-off rates than do residential mortgages. An analysis of the
allowance for loan losses is performed quarterly by management to assess
the appropriate levels of allowance for loan losses. This analysis is
performed to recognize specific reserves allocated to classified assets,
assess portfolio growth, and to monitor trends in loan delinquencies and
charge-offs. The Bank has previously reported that Robert C. Reed was
removed as Vice-Chairman of Blue River and as the President and Chief
Executive Officer of Blue River and the Bank as the result of an
internal review of certain matters at the Bank involving Mr. Reed. As a
result of the internal investigation, all loans related to Mr. Reed have
been reviewed. This loan review included establishing specific reserves
allocated to
7
<PAGE>
specific borrowers based upon the risks of each credit relationship.
The risk levels were established based upon the borrowers' debt
servicing capabilities, the Bank's collateral position on the loans,
and adherence to customary documentation standards. Based upon that
review, the Bank determined that it was appropriate to increase the
allowance for loan losses by $819,000 and to charge-off $444,000 in
loans. In order to facilitate the increase in allowance, while
absorbing the effect of the charged-off loans, the Bank charged
$1,263,000 against earnings in the form of provisions for loan loss.
3. COMPREHENSIVE INCOME
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
are presented within those statements for the nine month periods ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
<S> <C> <C>
Other comprehensive income before tax:
Net unrealized gains/(losses) on available-for-sale
securities $ 124,027 $ (877,806)
Less: reclassification adjustment for (gains)/losses
realized in net income 34,452 (248,252)
--------- -----------
Other comprehensive income/(loss) before income taxes 158,479 (1,126,058)
Income tax expense/(benefit) related to items of other
comprehensive income 63,010 (447,710)
--------- -----------
Other comprehensive income/(loss), net of tax $ 95,469 $ (678,348)
========= ===========
</TABLE>
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In June
2000, the FASB issued SFAS No. 138, which amends certain provisions of
SFAS 133 to clarify four areas causing difficulties in implementation.
The amendment included expanding the normal purchase and sale exemption
for supply contracts, permitting the offsetting of certain intercompany
foreign currency derivatives and thus reducing the number of third party
derivates, permitting hedge accounting for foreign-currency denominated
assets and liabilities, and redefining interest rate risk to reduce
sources of ineffectiveness. We have appointed an individual to implement
SFAS 133 for the Company. We will adopt SFAS 133 and the corresponding
amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended by
SFAS 138, is not expected to have a material impact on Blue River's
consolidated results of operations, financial position or cash flows.
8
<PAGE>
5. SEGMENT INFORMATION
In accordance with SFAS No. 131, the Company has disclosed all required
information relating to its one operating segment, Community Banking.
6. SHAREHOLDERS' EQUITY
In April 2000, the Company sold 49,913 shares of its common stock in a
private placement at an offering price of $6.00 per share. The Company
raised $299,570 in net proceeds. The offering was conducted by the
Company and no commission was paid on the sale of the shares. The
proceeds will be used for general corporate purposes and in part to
replenish the capital contributed by the Company in connection with the
establishment of First Community Bank of Fort Wayne.
7. RECENT DEVELOPMENTS
On June 27, 2000, Robert C. Reed, Vice-Chairman of the Company and
President and Chief Executive Officer of the Company and the Bank, was
placed on administrative leave pending the completion of an internal
review of certain matters relating to unreconciled items at the Bank
involving Mr. Reed. On June 28, 2000, the Bank informed the Office of
Thrift Supervision that Mr. Reed had been placed on administrative
leave.
On July 10, 2000 the Office of Thrift Supervision issued a letter which
formally designated the Bank to be in "troubled condition" based upon
the preliminary findings of the OTS' then ongoing examination of the
Bank. The OTS expressed supervisory concern relating to the Bank's
management, operating losses, interest rate risk sensitivity, internal
controls and loan documentation. Pursuant to the letter, the Bank is
subject to the following restrictions: (i) no increase in total assets
during any quarter in excess of an amount equal to interest credited on
deposits during the quarter without prior written approval of the OTS,
(ii) prior OTS approval of all executive compensation and agreements and
the hiring of any executive officer, director or consultant or changing
the responsibilities of any current executive officer, (iii) prior
notice to the OTS of all transactions between the Bank and its
affiliates, (iv) prior OTS approval of all transactions between the Bank
and third parties outside the normal course of business and (v) no
golden parachute payments by the Bank, unless permissible pursuant to
applicable law.
The growth restrictions imposed by the OTS may have a material adverse
effect on the Bank's operations. The Company and the Bank are taking
action to address the concerns set forth in the letter.
9
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements throughout this section regarding the Company's and the
Bank's financial position, business strategy and plans and objectives of
management for future operations are forward-looking statements rather than
historical or current facts. When used in this section, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company and the Bank or their respective management,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of management of the Company and the Bank as well as assumptions
made by and information currently available to management of the Company and the
Bank. Such statements are inherently uncertain, and there can be no assurance
that the underlying assumptions will prove to be valid. Actual results could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors, including but not limited to competitive factors and
pricing pressures, changes in legal and regulatory requirements, technological
change, product development risks and general economic conditions, including,
but not limited to, changes in interest rates, loss of deposits and loans to
other savings and financial institutions, substantial changes in financial
markets, substantial changes in real estate values and the real estate market
and unanticipated results in pending legal proceedings. Such statements reflect
the current view of the Company and the Bank with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to
the operations, results of operations, growth strategy and liquidity of the
Company and the Bank.
FINANCIAL CONDITION:
--------------------
Total assets at September 30, 2000, were $160,906,000, an increase of $7,457,000
from total assets of $153,449,000 at December 31, 1999, and an increase of
$959,000 from September 30, 1999. Investment securities at September 30, 2000
were $26,352,000, an increase of $1,764,000 from $24,588,000 at December 31,
1999, and a decrease of $16,177,000 from September 30, 1999. The Bank's
investment portfolio is used to maintain adequate liquidity and to reduce the
Bank's interest rate sensitivity. The Bank's current investment strategy also
includes acquiring securities with favorable risk-based capital treatment to
continue to enhance the capital adequacy of the Bank as well as repricing
opportunities which results in less volatility in fair value caused by changing
market rates. Total net loans receivable increased from $111,114,000 at December
31, 1999 to $114,741,000 at September 30, 2000, and increased $11,290,000 from
September 30, 1999.
Total liabilities at September 30, 2000 were $146,437,000, an increase of
$8,365,000 compared to $138,072,000 at December 31, 1999 and an increase of
$2,249,000 from September 30, 1999. Deposits at September 30, 2000 were
$127,275,000 compared to $102,701,000 at December 31, 1999, an increase of
$24,574,000, and an increase of $6,355,000 from September 30, 1999.
Shareholders' equity at September 30, 2000 was $14,469,000, a decrease of
($908,000) compared to December 31, 1999, and a decrease of $1,289,000 from
September 30, 1999. This decrease is the result of an operating loss offset by a
reduction in net unrealized losses on available for sale securities. This
decrease was partially offset by the net cash proceeds of approximately $300,000
from a private placement completed in the second quarter.
10
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
Residential mortgages $45,832,991 $ 46,205,206
Commercial loans secured by real estate 34,513,746 25,168,348
Commercial and agriculture 16,697,037 10,534,927
Consumer loans 16,879,571 19,808,517
Home equity loans 2,733,063 2,515,792
Less allowance for loan losses (1,915,388) (782,021)
------------- -------------
Total loans receivable, net $ 114,741,020 $ 103,450,769
============= =============
</TABLE>
Residential mortgages at September 30, 2000 were $45,833,000, a decrease of
($372,000) from $46,205,000 at September 30, 1999. Commercial loans and
Commercial loans secured with real estate were $51,211,000 at September 30, 2000
compared to $35,703,000 at September 30, 1999. Consumer and home equity loans
decreased ($2,711,000) to $19,613,000 at September 30, 2000. The Company has
structured its loan portfolio to resemble that of a commercial bank rather than
that of a traditional thrift which is consistent with the Company's Business
Plan. Non-residential loans typically present shorter maturities than do
residential loans, offering higher yields, with less interest rate risk due to
their shorter duration.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
Non-performing loans consists of the following:
Non-accrual loans $686,429 $1,387,852
Real estate owned - net 12,672 12,672
-------- ----------
Total non-performing loans $699,101 $1,400,524
======== ==========
Non-performing loans to total loans 0.60% 1.34%
</TABLE>
The Bank stops accruing interest on loans that become delinquent in excess of 90
days. At September 30, 2000 loans in non-accruing status were $686,000, a
decrease of $701,000 from September 30, 1999. The Bank's real estate owned,
containing properties foreclosed upon, is unchanged when compared to $13,000 at
September 30, 1999.
11
<PAGE>
Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
Balance, beginning of period $ 854,985 $ 750,022
Add:
Provision for loan losses 1,587,931 165,000
Recoveries of loans previously charged off 1,660 1,325
Less: Gross charge-offs:
Residential real estate loans (337,365) (37,481)
Consumer/Commercial loans (191,823) (96,845)
----------- ---------
Balance, end of period $ 1,915,388 $ 782,021
=========== =========
Net charge-offs to total average loans outstanding 0.46% 0.19%
Allowance to total average loans outstanding 1.65% 0.83%
</TABLE>
The allowance for loan losses at September 30, 2000 was $1,915,000, an increase
of $1,060,000 from December 31, 1999. The Company has increased its allowance
for loan losses due to overall portfolio growth and to recognize the incremental
inherent risks in diversifying the portfolio into non-residential lending.
Historically, such loans do exhibit higher charge-off rates than do residential
mortgages. An analysis of the allowance for loan losses is performed quarterly
by management to assess the appropriate levels of allowance for loan losses.
This analysis is performed to recognize specific reserves allocated to
classified assets, assess portfolio growth, and to monitor trends in loan
delinquencies and charge-offs. The Bank has previously reported that Robert C.
Reed was removed as Vice-Chairman of Blue River and as the President and Chief
Executive Officer of Blue River and the Bank as the result of an internal review
of certain matters at the Bank involving Mr. Reed. As a result of the internal
investigation, all loans related to Mr. Reed have been reviewed. This loan
review included establishing specific reserves allocated to specific borrowers
based upon the risks of each credit relationship. The risk levels were
established based upon the borrowers' debt servicing capabilities, the Bank's
collateral position on the loans, and adherence to customary documentation
standards. Based upon that review, the Bank determined that it was appropriate
to increase the allowance for loan losses by $819,000 and to charge-off $444,000
in loans. In order to facilitate the increase in allowance, while absorbing the
effect of the charged-off loans, the Bank charged $1,263,000 against earnings in
the form of provisions for loan loss. The allocated allowances to loans made by
Mr. Reed increased $783,000 over June 30, 2000 levels. Of the $1,263,000 charged
against quarterly earnings, $1,227,000 resulted from the $444,000 in charged-off
loans and the $783,000 in allocated reserves attributed to Mr. Reed.
RESULTS OF OPERATIONS: Three Months Period Ended September 30, 2000
--------------------------------------------------------------------
During the three month period ended September 30, 2000, net earnings decreased
to a net loss of ($918,000) compared to a net loss of ($178,000) during the
three month period ended September 30, 1999. Net income before taxes declined
($1,230,000) to a net loss before tax of ($1,496,000) compared to a net loss
before tax of ($266,000) for the three months ended September 30, 1999. This
difference is comprised mostly of the increase in provision for loan losses of
$1,238,000 recorded in the three months ended September 30, 2000. (See
discussion of provision for loan losses above).
Net interest income before provision for loan losses improved $87,000 compared
to the three months ended September 30, 1999. This gain in net interest income
was offset by an increase in non-interest expenses of $81,000 over the three
month period ended September 30, 1999. Non-interest income was increased $2,000
over the three month period ended September 30, 1999, however; this increase was
reduced by ($34,000) in securities losses realized to restructure the Bank's
balance sheet and to reduce interest rate sensitivity and improve capital
ratios.
12
<PAGE>
Interest income increased $763,000 from $2,475,000 for the three month period
ended September 30, 1999 to $3,238,000 for the three month period ended
September 30, 2000. Interest income from loans was $2,623,000 for the three
month period ended September 30, 2000, an increase of $564,000 over the same
period in 1999. The increase in loan interest income consists of a favorable
volume variance of $352,000 due to an increase in average loan balances and a
favorable rate variance of $212,000. Interest income on investment securities
increased $187,000 to $538,000 for the three month period ended September 30,
2000, resulting from a favorable volume variance of $147,000 due to a larger
average investment portfolio balance and a favorable rate variance of $40,000
due to higher yields. Interest income on interest bearing deposits decreased
($4,000) to $31,000 for the three month period ended September 30, 2000,
resulting from an unfavorable variance of ($14,000) due to smaller balances and
a favorable rate variance of $10,000 due to higher yields. Income from stock
held in the Federal Home Loan Bank of Indianapolis increased $16,000 to $46,000
due to increased holdings. Interest expense for the three month period ended
September 30, 2000 was $2,043,000 compared to $1,367,000 for the three month
period ended September 30, 1999. Interest expense on deposit accounts increased
from $1,100,000 for the three month period ended September 30, 1999 to
$1,658,000 for the three month period ended September 30, 2000. The increase in
interest expense on deposits consists of a $323,000 increase due to increased
deposit balances and a $235,000 increase due to increased market rates and a
higher average level of certificates of deposit balances compared to 1999.
Interest expense on advances from the Federal Home Loan Bank ("FHLB") increased
to $384,000 for 2000 compared to $266,000 for 1999. The increase in balances
related to FHLB advances accounts for an increase of $44,000 and a $74,000
unfavorable rate variance due to increased rates associated with short-term
borrowings.
Total non-interest income was $70,000 for the three month period ended September
30, 2000, compared to $68,000 for the same period in 1999. However, included in
the 2000 non-interest income was a ($34,000) loss recognized from the sale of
available-for-sale securities.
Non-interest expense totaled $1,449,000 for the three month period ended
September 30, 2000 compared to $1,368,000 for the same period in 1999. Salaries
and benefits costs increased $41,000 over 1999. Premises and equipment costs
have increased $17,000 over 1999 with additional leases and depreciation of
equipment in Fort Wayne, increased lease costs related to the remodeled and
expanded Morristown facility, and increased depreciation for remodeling and
equipment at the Main office. Data processing expenses have increased over 1999
by $35,000, much of this increase is due to increased volumes of accounts and
transactions and improvements in technology used to increase efficiencies within
the Bank. Advertising and promotional expenditures decreased ($45,000) compared
to 1999. Professional fees increased $110,000 over the three month period ended
September 30, 1999, including a portion of expenses incurred to conduct the
internal investigation involving Mr. Reed. Stationery and supplies expenses were
reduced ($40,000) from 1999, due in part to increased costs in 1999 related to
the acquiring of items necessary to operate First Community Bank.
RESULTS OF OPERATIONS: Nine Months Period Ended September 30, 2000
-------------------------------------------------------------------
During the nine month period ended September 30, 2000, net loss increased to a
net loss of ($1,314,000) compared to a net loss of ($85,000) during the nine
month period ended September 30, 1999. This increase includes an increase in net
interest income before provision for loan losses of $394,000, a decrease in
non-interest income of ($211,000), an increase in non-interest expenses of
$819,000, and an increase in provision for loan losses of $1,423,000.
Non-interest income in 1999 included $249,000 in securities gains. Non-interest
expenses have increased in several key areas related to the Company's growth
strategies. Salaries and benefits costs have increased $379,000 over 1999, in
part due to additional staffing retained to operate the two Fort Wayne
facilities. Premises and equipment costs have increased $165,000 over 1999 with
additional leases and depreciation of equipment in Fort Wayne, increased lease
costs related to the remodeled and expanded Morristown facility, and increased
depreciation for remodeling and equipment at the Main office. Data processing
expenses have increased over 1999 by $92,000, much of this increase is due to
increased volumes of accounts and transactions, and also additional monthly
charges due to additional branch automation equipment and communications lines
required to conduct business in the Fort Wayne facilities. Advertising and
promotional expenditures increased $51,000 over 1999 as the Company has pursued
growth both in Shelby County and the Fort Wayne markets. Professional fees have
increased $130,000 over 1999, with much of this increase related to the internal
investigation.
Net interest income was $1,922,000, after provision for loan losses, for the
nine month period ended September 30, 2000, compared to $2,951,000 for the nine
month period ended September 30, 1999, a decrease of ($1,029,000). This
reduction is due primarily to the increase in provision for loan losses of
$1,423,000. Net interest income before provision for loan losses increased
$394,000 to $3,510,000 compared to $3,116,000 for the nine month periods ended
September 30, 2000 and 1999, respectively.
13
<PAGE>
Interest income increased $2,316,000 from $6,940,000 for the nine month period
ended September 30, 1999 to $9,256,000 for the nine month period ended September
30, 2000. Interest income from loans was $7,421,000 for the nine month period
ended September 30, 2000, an increase of $1,648,000 over the same period in
1999. The increase in loan interest income consists of a favorable variance of
$1,276,000 due to higher average loan balances and a favorable rate variance of
$351,000, and a $21,000 favorable calendar variance. Interest income on
investment securities increased $658,000 to $1,560,000 for the nine months ended
September 30, 2000, resulting from a favorable variance of $519,000 due to a
larger portfolio and a favorable rate variance of $136,000 due to higher yields
and a $3,000 favorable calendar variance. Interest income on interest bearing
deposits decreased ($46,000) to $144,000 for the nine months ended September 30,
2000, resulting from an unfavorable variance of ($117,000) due to smaller
balances and a favorable rate variance of $70,000 due to higher yields and a
$1,000 favorable calendar variance. Income from stock held in the Federal Home
Loan Bank of Indianapolis increased $56,000 to $132,000 due to increased
holdings. Interest expense for the nine month period ended September 30, 2000
was $5,747,000 compared to $3,825,000 for the nine month period ended September
30, 1999. Interest expense on deposit accounts increased from $2,990,000 for the
nine month period ended September 30, 1999 to $4,432,000 for the nine month
period ended September 30, 2000. The increase in interest expense on deposits
consists of a $917,000 increase due to increased deposit balances and a $847,000
increase due to increased interest rates and a higher level of certificates of
deposit balances compared to 1999 and an $11,000 unfavorable calendar variance.
Interest expense on advances from the Federal Home Loan Bank ("FHLB") increased
to $1,314,000 for 2000 compared to $835,000 for 1999. The increase of $479,000
was due to a $310,000 volume variance due to an increase in average balances, a
$166,000 unfavorable rate variance due to increased rates associated with
short-term borrowings, and a $3,000 unfavorable calendar variance. The calendar
variance results from an extra day in 2000 due to leap year.
Total non-interest income was $307,000 for the nine month period ended September
30, 2000, compared to $518,000 for the same period in 1999. However, included in
the 1999 non-interest income was $249,000 in gains recognized from the sale of
available-for-sale securities.
Non-interest expense totaled $4,327,000 for the nine month period ended
September 30, 2000 compared to $3,508,000 for the same period in 1999. Salaries
and benefits costs have increased $379,000 over 1999, in part due to additional
staffing retained to operate the two Fort Wayne facilities. Premises and
equipment costs have increased $165,000 over 1999 with additional leases and
depreciation of equipment in Fort Wayne, increased lease costs related to the
remodeled and expanded Morristown facility, and increased depreciation for
remodeling and equipment at the Main office. Data processing expenses have
increased over 1999 by $92,000, much of this increase is due to increased
volumes of accounts and transactions, and also additional monthly charges due to
additional branch automation equipment and communications lines required to
conduct business in the Fort Wayne facilities. Advertising and promotional
expenditures increased $51,000 over 1999 as the Company has pursued growth both
in Shelby County and the Fort Wayne markets. Professional fees have increased
$130,000 over 1999, with much of this increase related to the internal
investigation.
14
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
The Company is subject to regulation as a savings and loan holding company, and
is subject to certain restrictions in its dealings with the Bank. The Bank is
subject to the regulatory requirements applicable to a federal savings bank.
Current capital regulations require savings institutions to have minimum
tangible capital equal to 1.5% of total assets and a core capital ratio equal to
3.0% of total assets. Additionally, savings institutions are required to meet a
risk based capital ratio equal to 8.0% for risk-weighted assets, as defined. At
September 30, 2000, the Bank satisfied all capital requirements.
The following is a summary of the Bank's regulatory capital and capital
requirements at September 30, 2000 based on capital regulations currently in
effect for savings institutions.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
Regulatory capital $10,157 $10,157 $11,614
Minimum capital requirement 2.347 4,694 9,289
------- ------- -------
Excess capital $ 7,810 $ 5,463 $ 2,325
======= ======= =======
Regulatory capital ratio 6.49% 6.49% 10.00%
Required capital ratio 1.50% 3.00% 8.00%
----- ----- -----
Ratio excess 4.99% 3.49% 2.00%
===== ===== =====
</TABLE>
Liquidity measures the Bank's ability to meet its savings withdrawals and
lending commitments. Management believes that the Bank's liquidity is adequate
to meet current requirements. The Bank maintains liquidity of at least 4% of net
withdrawable assets. At September 30, 2000, its regulatory liquidity ratio was
11.71%.
15
<PAGE>
V. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Neither the Company nor the Bank are engaged in any legal
proceedings of a material nature at the present time. From time
to time, the Bank is a party to legal proceedings wherein it
enforces its security interest in mortgage loans made by it.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(1) Exhibit 27--Financial Data Schedule
(2) The Company filed a Form 8-K on September 27, 2000.
* * * * *
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereto duly authorized.
Blue River Bancshares, Inc.
Date: November 6, 2000 By: /s/ Bradley A. Long
----------------------------
Bradley A. Long, Vice President,
Chief Financial Officer and Treasurer
